Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript

[Operator]

Good day, everyone, and welcome to the Odfjell Drilling Fourth Quarter Conference Call. At this time, I would like to turn the conference over to Atle Saeboe. Please go ahead, sir.

[Atle Saeboe]

Thank you. Together with me here I have the Investor Relation Officer, Eirik Knudsen, and we also have Simen Lieungh on us with telephone line. We will today take you through the highlights and material events in the fourth quarter, segment reporting, the financial information, before we end this call with a short summary and then open for a Q&A session.Moving over to Page 3. The key summary for the fourth quarter is that all 4 MODU drilling units is in operation. We had a quarter with a good operational performance, drilling & Technology with improved financial performance. Well Service maintains sound margins. And there was clear signs of market improvement in all our business segments.If you move over to Page 4, which is the highlights and material events in Q4. We start with the MODU drilling units. On the 21st November last year, Odfjell Drilling entered into an drilling and well alliance formed by Aker BP. The agreement has a total duration of 5 years fixed plus 5 optional years. On the 22nd December 2017, Odfjell Drilling received the first call-off under the alliance with Aker BP. The call-off covers a 12-month contract for Deepsea Stavanger and will start as soon as the unit returns to Norway after completing its contract with Total in South Africa, expected to be in second quarter 2019.Statoil exercised, in December 2017 and January this year, respectively, 2 of 4 of the options in Deepsea Bergen's drilling contract. The first option is for 2 wells with an expected duration of 80 days and the second option is for 3 wells with an expected duration of 75 days, taking the Deepsea Bergen operations into the mid-second half of 2018.Then we continue with the Well Services, which was awarded a contract with KOC in January this year to provide tubular running services, downhole drilling tools and drill pipe, pressure control and wellbore cleanup equipment for all of KOC's drilling and workover operations. Well Services was one of the 3 successful bidders selected to provide these services, both onshore and offshore.The firm duration of this important contract is 5 years, based on call-off services. The contract commenced in January this year.And I move over to Page 6, which shows that we continued our good operations on all units in fourth quarter 2017. And year-to-date, we achieved an average utilization of approximately 97% on all units. Deepsea Bergen has some challenges with topdrive and Deepsea Aberdeen [indiscernible] resulting in reduced utilization in the fourth quarter.I will take you through the contract status for each of the rig on the following slide.If we then start with Deepsea Stavanger, finalized on the 22nd of February this year, a very successful operation with Wintershall. The unit has drilled a well-based contract approximately 50% faster than anticipated by Wintershall when we commenced contract in March last year. The unit thereafter immediately started on this current operation with Aker BP, and we expect to be in operation for Aker BP until maybe October this year. We will thereafter start mobilization for the Total contract in South Africa and expected duration for this contract, including mob and demob period is 6 to 7 months.Finally, the unit will return to Norway and continue under the alliance with Aker BP for an additional 12 months period. Both Deepsea Atlantic and Deepsea Aberdeen are working on fixed contracts with Statoil and BP until February 2019 and March 2022, respectively, with additional optional periods.Deepsea Bergen is currently drilling for OMV on the Norwegian Continental Shelf. Contract has commenced November last year. We expect the operation to conclude in the first quarter 2018. As previously announced, Statoil will thereafter take the rig for 5 wells drill wells plus 2 times 3 wells options. Thereafter, OMV has a final option for the well, taking operations potentially to mid-2019.The firm MODU contract backlog is USD 1 billion at the end of December last year with additional price option of approximately USD 0.4 billion.And we move over to Page 8, the Drilling & Technology segment. And we have secured long-term operations on the U.K. and Norwegian Continental Shelf for BP, TAQA, Statoil and Wintershall. In addition, Odfjell Drilling has further been awarded a platform drilling contract with EnQuest for drilling and maintenance on the Magnus platform on the U.K. Continental Shelf. The contract includes 3 firm wells plus 2 optional wells and commenced in fourth quarter 2017.We further continue to prepare for startup on the Mariner and Johan Sverdrup fields to commence in second half of 2018. Platform drilling operations are secured by medium- to long-term contracts with a contract backlog of USD 1.1 billion, value of USD 0.8 billion is prized options.Then we move on to Page 9, which is the Well Services area. The Well Services is operating in more than 20 countries worldwide, including North Sea market, Mainland Europe, Middle East and Southeast Asia. The product portfolio includes tubular running services, rental services and well intervention services. The lateral service line is still representing relatively small share of Well Services' revenue, however, the product line is growing and the market outlook is promising for this area.Then I move over to Page 10, which is the backlog of the company. At the end of December '17, the order backlog was USD 2.6 billion, where USD 1.3 billion is from contracts.The revenue from frame agreements in call-off contracts in Well Services and revenue from technology and MODU management is not included in the backlog. This is only for the mobile drilling area and platform drilling that is included into total USD 2.6 billion backlog.Then I move over to Page 11, which is the market outlook. Following the drop in the oil price in 2014, drilling and oil service market has suffered a severe decrease in the total activity level. Downturn has resulted in major impairment across the sector, and oil companies have been forced to reduce costs and establish more efficiency -- efficient operations. The efficiency programs carried out by oil companies have led to a substantial cost reduction in field development and production. We are currently observing a recovery in the oil price, with levels more sound and sustainable for the drilling and oil service market. This, in combination with more favorable cost structure, has resulted in increased appetite for exploration and production activities by the oil companies.Although the global drilling and oil service market is still at a low level, some regions have seemed to recover at a higher pace than others. In harsh environments, a substantial number of mature units has been permanently withdrawn from the market over the last couple of years. In addition, new-builds have proven to be significantly more efficient than mature units. The ultra-deep water market remains challenging due to an oversupply of new-build rigs in recent years.Based on the preference of new and more efficient units, combined with a high reactivation cost, we believe that scrapping of all the mid-water and harsh environment drilling units will continue over the next few years. In combination with a more healthy market environment, we believe this will bring the harsh environment market back into balance with subsequently improved day rates, leading to an increasing demand for our units.Well Services is still facing fierce competition for its services globally. We currently observe an increased tender activity in the European and Middle East markets. However, the oversupply of equipment will, in the short- to medium-term, continue to keep pressure on prices and give a time-lag effect on bottom line improvement. In this period, Well Services has maintained its low capital expenditure to enhance utilization of the existing equipment base.The slowdown in the North Sea market has led to an ongoing low activity level for development and upgrade projects. The group has reduced the cost level substantially throughout the organization and is well positioned to take part in the market recovery.Now from second half 2017, we are back in with positive margins within this platform segment and expect more scale effects to be materialized in the periods to come.Then let's move over to...[Audio Gap]On Page 13, we have the group summary financials. The group operating revenue was USD 171 million in the fourth quarter compared to USD 149 million in the fourth quarter 2016. The operating revenue increased due to increased activity in all our segments from '16 to '17. The group EBITDA was USD 67 million compared to USD 78 million in the same period in 2016. The decrease in group EBITDA was mainly due to the change in contracts for the mobile offshore drilling units. The EBITDA margin was 29% compared to 53% in fourth quarter 2016.The depreciation was USD 40 million compared to USD 127 million dollar in same period 2016. And the '16 number was impacted by the impairment writedown of USD 80 million of the mobile fleet. The net financial expenses were USD 15 million compared to USD 21 million in third quarter '16.This quarter, the tax income was USD 3 million compared to a tax expense of USD 6 million in fourth quarter '16. The tax income is mainly related to utilized tax losses resulting from the sale of shares. Profit for the period was USD 14 million compared to a negative figure of USD 75 million in fourth quarter '16. These are the blended figures for the capital-intensive mobile drilling segments and the human capital-intensive platform drilling segments.Let's move over to each of the 3 business segments and look at the figures there. We start with the mobile drilling units, which had an operating revenue of USD 118 million in fourth quarter last year compared to USD 108 million in '16.There was increase in utilization for Deepsea Stavanger compared to last year as the rig was idle in fourth quarter 2016. However, this increase in activity was offset by lower revenue for Deepsea Bergen due to lower day rates and waiting period between contracts. EBITDA was USD 58 million compared to USD 69 million in fourth quarter '16.As mentioned, the increase in EBITDA or Deepsea Stavanger did not fully compensate for the decrease in EBITDA for Deepsea Bergen. The EBITDA margin was 49% in the quarter.And as mentioned, the change in depreciation is due to the impairment write-down of USD 80 million carried out in fourth quarter 2016.Then we move over to the Drilling & Technology segment on Page 15. The operating revenue was USD 32 million compared to USD 21 million in fourth quarter '16, and this increase in revenue is primarily due to award of additional U.K. contracts and increased number of strings in operation compared to 2016. The EBITDA was USD 3 million in the fourth quarter of '17, same as the fourth quarter of '16.The EBITDA margin was 11% in fourth quarter '17 and 14% in 2017 as for the total year. This is compared to 0 EBITDA in 2016.And we move over to Page '16, which is for the Well Services. The operating revenue was USD 27 million compared to USD 24 million in fourth quarter '16. The increase of revenue for the OWS segment in 2017 is explained by higher activity level in the Norwegian and continental Europe markets. The EBITDA was USD 9 million compared to USD 11 million in same quarter 2016. The EBITDA margin was 32% compared to 44% in fourth quarter '16, and it was 32.6% for the full year 2017. The decrease in both EBITDA and EBIT in fourth quarter was mainly due to higher costs or mobilization of new contracts and increased third-party rental of equipment.On Page 17. The group eliminations and reconciliations have been included for your information, including the corporate overhead of USD 4 million in fourth quarter '17, which is at the same level as 2016.Then I move over to Page 18, which is the summary statement of financial position. As you can see, the group's gross interest-bearing debt was USD 1,234,000,000 at the end of December '17, which is USD 178 million lower than the year-end 2016. At the year-end, we have USD 166 million in cash and cash equivalents. And the equity ratio at the end of December '17 is 36%. This is compared to 32% at the year-end '16.Then I move over to Page 19, which is the summary statement of cash flow. And as you can see, the net cash from operation in fourth quarter was USD 70 million. The net cash used in investing activity was USD 2 million, and net cash used in financing activities was USD 61 million, which relates to installment on existing credit facilities. Cash and cash equivalents is USD 166 million at the end of December '17. This is compared to USD 182 million at the end of 2016.And I go to Page 20, which is the summary of the fourth quarter '17. If you start looking at the MODU segment, the fleet is secured by medium- to long-term contracts. We have secured contract visibility for Deepsea Bergen, and we have received the first call-off under the alliance with Aker BP for Deepsea Stavanger. The market is improving, and we observe an increasing demand for the ODL fleet of mobile drilling units.If we look at the Drilling & Technology, we can recognize an improved financial performance in the fourth quarter compared to previous periods. Adjusted engineering capacity to increase utilization and reduce cost. And the platform portfolio secured with medium- to long-term contracts, mobilization of Johan Sverdrup and the Mariner in second half of 2018.When we come to Well Services, it's an increased tender activity in the European and Middle East markets. There is an oversupply still of equipment keeping prices at low levels. However, turning point has passed. And we also recently entered into a new long-term call-off agreement with KOC in Kuwait.We move over to the key financials. We are in a pretty good situation, with an earnings visibility through USD 2.6 billion in order backlog. And we have a book equity ratio at the end of the year of 36% and a cash position of USD 166 million by end of December.So this should put us in a pretty good situation to meet the future.This concludes our presentation, and we will now open for Q&A session. So please everybody.

[Operator]

[Operator Instructions] We have a question from Ole Hansen, private investor.

[Ole Hansen]

Yes, I have a question for Mr. Simen Lieungh. I would like to take it in Danish, if it's okay. [Foreign Language]

[Simen Lieungh, C.E.O. & President]

Okay. Question was, what about the consolidation in rig market for 2018. I'll answer in English, if that's okay. I think it's difficult to say. We are seeing already the oil consolidations that Transocean, Songa, everyone knows that and SKO has done what they have done. And they still are absolutely same movement in the market and attempts to try to find different structures in the rig market. So without possibly being specific, there is no secret that we are quite frequently approached as a company. We are not the biggest. We have an attractive fleet and have attractive position. I think within the semi-harsh market, within the ultra-deep water market, within the jackup market, I think we're going to see quite a lot more restructuring of the market, that includes different structures within the existing companies. And it also, in my book, includes that companies will start to fight together and make more efficient operations. I'm quite frequently asked from investors, what about drilling? And I am saying that, we are, in a way -- we are quite optimistic in the market. We have a good position. We will try to find structure going forward that not necessarily is a structure we see today. So there is no secret. We are looking for more rigs, more capacity. We do have a good position in that part of the market. We believe that the market will change. We believe that the market commercially will change. And we also believe that there will be changes regarding consolidations and so forth. I cannot be more specific in that. There is lot of kind of words here. But as you see, I am saying that there is going to be a lot of changes. Any more questions?

[Ole Hansen]

Yes, please. Yes, I have another question for Simen Lieungh. And I would like to ask in Danish and he can respond in English, if it's okay.

[Simen Lieungh, C.E.O. & President]

Yes.

[Ole Hansen]

I would like to -- yes. [Foreign Language]

[Simen Lieungh, C.E.O. & President]

Well, I think, first of all, I would like to say that, that's -- we're very satisfied and proud that we were the one that Aker BP wanted to use as their prime contractor for semi-submersibles in a very, very, I will say, demanding area. We do have full respect for Maersk. And I think Aker BP, and ourselves and Maersk, we together with Halliburton, will really form a strong 4-party cooperation. We will cooperate on certain things. We will cooperate on certain things. We will cooperate on smarter and more, I would say, effective and safer way to work. We will, obviously, sit around on the same table and discuss future roles and ways of working through digitalization, through sharing of data, through more effective cooperation, less bureaucracy, more kind of a lean approach, if you know what I mean, taking off nonvalue-creating activities, which is probably huge potential. Aker BP has quite aggressive and optimistic view on the market. They have a lot to do. I think we all can learn from each other. So clearly, as you say, this is 5 year first now cooperation with optional 5 more. We are very positive to that approach. I think the tendency within client base now is maybe to go deeper and longer with fewer. So it's quite important to be part of those fewer, so then you will also be involved in more forward leaning and more, I would say, smarter way to work. Because there will be a lot of investments going forward and new ways of looking what to do as a standalone operator without no cooperation with these [ decisions ] regarding -- for example, the digitalization. Nobody can do all this alone. There must be a cooperation between the parties. And what Aker BP has done here, they have decided to go with the one they want to work with, and they want to develop their way of working to be #1 in the market base. That's their clear ambition. So to be part of that team is very, very positive, both for us, Halliburton and Maersk. More questions?

[Ole Hansen]

Yes, I have one last question, please.

[Simen Lieungh, C.E.O. & President]

One?

[Ole Hansen]

Yes. [Foreign Language]

[Simen Lieungh, C.E.O. & President]

Ole, it's difficulty really impossible to answer that question, clearly, my friend. First of all, we have seen, for a long time, that Maersk has announced that it will do some change in the structure. Let's see what kind of end game that brings to the market and take it from there. I cannot comment at any more.

[Operator]

Magnus Scherman with Reorg Research.

[Magnus Scherman]

Could you expand a little bit on what type of assets you are looking to consolidate?

[Simen Lieungh, C.E.O. & President]

I am saying, I'm consolidating, so here we are looking for more capacity within the segment. We try to be viewed as one of the top 3, meaning in a harsh environment area with high spec [indiscernible] assets, primarily. We also consider other assets, but we are -- we do have several interesting areas where we currently are evaluating what we're going to do about them. And we're not going to do everything. We will do things very controlled. We have learned through the crisis that we are not part of the rushing into a lot of speculative building. We were disciplined. We kept our fleet warm through the crisis, at least the first part of the crisis. We are currently sold out regarding assets. We see an increased market buildup regarding activity level. We will continue to try to expand our fleet in the way we want to expand it. And I won't comment details on that. That could be, by close corporation, could be by consolidations, could be acquisitions. It could be everything, really. We do have the time to do the right things, and we will do step-by-step.

[Operator]

[Operator Instructions] And there are no further questions. [Operator Instructions] And there are no further questions, I would like to turn the conference back over to our presenters for any additional or closing remarks.

[Atle Saeboe]

Okay. Then I will -- thank you all for participating in the call for the fourth quarter results.

[Simen Lieungh, C.E.O. & President]

Thank you.

[Eirik Knudsen]

Thank you very much.

[Operator]

And that concludes our presentation. Thank you for your participation. And you may now disconnect.