Shelf Drilling Ltd

OSE:SHLF

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Shelf Drilling Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Greg O'Brien, CEO. Please go ahead.

[Gregory Brien, executive]

Thank you, and welcome, everyone, to Shelf Drilling's Fourth Quarter 2024 Earnings Call. Joining me on the call today is Douglas Stewart. This morning, we published our Q4 financial results and our latest fleet status report. In addition to our press release and the 2024 financial statements for both Shelf Drilling and Shelf Drilling North Sea, we also published a presentation with highlights from the quarter. A recording of this call will be made available on our website within the next few days.

Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for 2025 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future of forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements.

Also note that we may use non-GAAP financial measures in the call today. If we do, you will find supplemental disclosure for these measures and an associated reconciliation in our financial reports.

I'll provide an overview of the company's performance for the fourth quarter and touch upon the full year 2024, including some recent developments and achievements, and also provide our latest views on the market environment. I will then hand over to Douglas to walk you through our Q4 financial results and provide guidance for 2025 before we open the call for Q&A.

Our #1 priority is the health and safety of our employees and contractors. Our safety performance is a key measure of our success and is fundamental to who we are as a company. We are constantly looking for ways to improve the safety on our rigs and in 2024, rolled out a focused effort to understand and improve on human factors or human behavior to eliminate incidents from our operations, supported by technology, including AI. For full year 2024, our total recordable incident rate was 0.18 with 10 recordable incidents across our fleet. While the incident rate increased slightly year-over-year, the number of high severity and high potential severity incidents decreased as compared to the previous year. Notably, in 2024, 28 rigs operated without a recordable incident, including the entire Saudi and India divisions, a clear indication that our vision of incident-free operations is achievable.

We had another very strong year of operational performance with our fleet-wide uptime reaching 99.3%, an outstanding achievement given the increased number of premium rigs in our fleet. Our Saudi division's performance was particularly impressive given the challenges faced in 2024 with our 2 rigs, the High Island V and High Island IX, finishing the year with 0 downtime. We finished the year on a strong note with the Shelf Drilling Barsk commencing its contract with Equinor in Norway in mid-November. The rig has been initially serving as an accommodation and support unit and is expected to begin its drilling campaign next month, which will keep it busy through 2026 and likely beyond.

In addition, the High Island V commenced its 2 year contract in Nigeria in December and is performing very well. This rig had already mobilized from Saudi Arabia to Nigeria, along with the Shelf Drilling Achiever, which commenced its 3 year contract in October 2024. Since our inception, we have focused on having the right assets in the right locations, which has resulted in a significant transformation of our fleet over time. We continue to believe that having a blend of standard and premium jack-ups is the right approach to serving our customers and that most of our standard rigs will continue to operate efficiently and generate cash flow for many years to come. However, we constantly evaluate market dynamics and opportunities and capital requirements for our rigs that can result in the disposal of certain of our less competitive units.

In December, we signed an agreement to sell the Main Pass I for $11 million for non-drilling purposes, and we closed this transaction in January. We will likely sell 2 to 3 additional units in 2025 for similar applications, which can generate near-term cost savings and cash flow and also improve regional rig supply and demand balances. The Trident VIII insurance claim process is almost complete. We have now collected $48 million of the $50 million claim and expect to receive the remaining portion in the first half of this year.

The rig has been moved from West Africa to the UAE and will be sold for recycling in the near-term. On the contracting front, we continue to see strong demand for jack-ups in West Africa and Southeast Asia with contracting momentum exhibited in both in regions since last year. On the back of awards for the Shelf Drilling Achiever and Main Pass IV in Q4 in Nigeria, we announced last month that the Shelf Drilling Scepter had secured a 1 year extension of its contract in West Africa, keeping the rig contracted into July 2026.

In addition, we are now mobilizing the Shelf Drilling Victory and the High Island II to West Africa as we expect both rigs to commence new programs by the middle of 2025. The backdrop in West Africa and Southeast Asia has given us the confidence to search for and the need to access additional premium jack-ups as we face the possibility of missing out on opportunities in both regions. As a result, we, along with Arabian Drilling Company, the largest onshore and offshore drilling contractor in Saudi Arabia, recently announced a strategic alliance to deploy ADC's available premium rigs outside of the Middle East.

Our initial focus will be on contracting 1 to 3 rigs in West Africa and Southeast Asia. We are very excited about the prospects for this alliance as we will leverage ADC's high-specification modern jack-ups and our extensive international presence and diverse customer base. As of December 31, our contract backlog was $2.1 billion across 31 rigs. This includes approximately $600 million associated with 4 of our rigs suspended that remained in Saudi Arabia at the end of the year. For all of 2024, we added approximately $900 million in new contract awards at a weighted average day rate of $129,000 per day, which included $500 million of new backlog in the fourth quarter alone.

Briefly touching upon the financials. Adjusted revenue for the quarter was $225 million and adjusted EBITDA was $85 million, representing an increase of 23% over the previous quarter, excluding the acceleration of mobilization revenue in Q3 for 2 suspended rigs in Saudi. The sequential increase in EBITDA was mostly driven by higher revenue in Nigeria and Norway following the commencement of new contracts in Q4. Douglas will provide more details on our Q4 and full year 2024 results as well as the outlook for 2025.

The medium- to long-term outlook for global oil and gas demand is forecasted to remain strong as development in emerging economies is expected to drive continued growth. Shallow water production is expected to remain a critical component of a diversified and reliable energy mix required to address the increasing demand for decades to come. Brent crude oil prices, a key driver of jack-up rig demand have been relatively stable in the last 2 years, averaging $80 a barrel in 2024 and trading in the mid-70s in recent weeks. Global jack-up market utilization in 2024 was adversely impacted by the 34 rig suspensions in Saudi Arabia, although strong incremental demand in other regions continues to absorb some of this rig capacity. Adjusting for the suspended rigs in Saudi Arabia that still remain idle, the year ended with marketed utilization of 88%.

Turning to specific regions where we operate. 2 operators in Qatar have indicated that there will soon be multi-rig tenders, some of which will be against incumbent rigs and mostly for gas development. We currently have 1 rig contracted in Qatar into early 2026, and we expect to leverage its presence in country and our operational performance for these opportunities. In addition, a 4 rig tender was recently launched for operations in the neutral zone between Kuwait and Saudi Arabia. It's positive to see incremental requirements reemerge in the Middle East.

In India, ONGC recently relaunched its highly anticipated tender for 4 standard specification rigs with bids due later in March. Awards are expected before the end of Q2 with contracts scheduled to commence in Q4 2025. We will participate in this tender with 2 of our rigs that recently completed their previous contracts, the J.T. Angel and Parameswara. The slowdown in tendering in 2024 will result in a short-term reduction in the number of working rigs in India, we remain very optimistic on the long-term activity outlook given the strong desire and motivation for both operators and the government to reverse the recent trend of declining production.

Capital flows in Egypt improved during 2024, which has positively impacted oil and gas development activity in the country. As a result, Petrobel, the joint venture between the Egyptian state-owned operator and ENI, recontracted the Trident 16 for a 3-month program with the rig commencing operations in February. We are in discussions with this customer and others to keep the rig working beyond the current term.

As mentioned earlier, we continue to see an elevated level of activity in West Africa, increasingly driven by the indigenous producers, followed by the IOCs. Operators in Nigeria are tendering for contracts from 1 well up to multiple years, offering our fleet in the region a good balance of long-term backlog coverage and short-term opportunities. Our local presence and scale and long-term track record provide a competitive advantage in this market. We are mobilizing 2 additional rigs from the Middle East to West Africa to capitalize on the growing rig demand and near-term commencements.

We have secured a short-term contract for the High Island II in Nigeria and are in dialogue with multiple operators regarding follow-on work for this rig. For the Shelf Drilling Victory, we hope to be in a position to confirm the program for this rig in the coming weeks. The demand pipeline in Southeast Asia also remains strong with new opportunities in Vietnam, Thailand and Indonesia. Operators in Vietnam, in particular, are seeking rigs with factory-style offline drilling capabilities found on several of our rigs. While there is near-term pressure on day rates due to rigs competing from the Middle East, we are confident that the unique capabilities of our rigs and our successful track record in the region will be critical in our marketing efforts.

In the North Sea, 2 of our 3 rigs are contracted well into 2026. The program for the Shelf Drilling Fortress in the U.K. is now expected to finish in May, and we are actively marketing this rig for opportunities both inside and outside of the North Sea. The activity outlook in late 2025 and into 2026 in both the U.K. and the Netherlands remains solid.

The recent rumors of a few additional potential rig suspensions in Saudi Arabia, along with payment challenges and short-term suspensions in Mexico have contributed to the short-term uncertainty in the jack-up market. However, we believe that Saudi Aramco is at or very near the baseline level of jack-ups that will require for its operations. In addition, the recent reports that Pemex is committed to a payment plan for its suppliers should help address concerns over any long-term rig demand impact in Mexico.

We are focused on execution, successfully securing a series of market opportunities that represent near-term priorities for Shelf Drilling and working with Arabian Drilling to capitalize on opportunities to create value for both companies. While there are some short-term headwinds, we continue to see strong long-term fundamentals in the jack-up market. Supply will likely be flat to shrinking in the years ahead and demand is concentrated in low-cost, short-cycle basins and in countries with a strong desire to produce hydrocarbons for the foreseeable future. We believe utilization will stabilize and improve as we progress through 2025 and be strong for years to come.

I will now hand it over to Douglas for his remarks.

[Douglas Stewart, executive]

Thanks, Greg. Reported revenue for Q4 2024 of $229 million included $3 million for amortization of an intangible liability related to the 5 rigs we purchased in 2022. As such, we'll continue to focus on and refer to adjusted revenue, which excludes the impact of this noncash item.

For the fourth quarter of 2024, adjusted revenue was $225 million. This included $212 million of day rate revenue, $5 million of mobilization and bonus revenue and $8 million of recharges and other revenue. Adjusted revenue for Q4 decreased by $39 million or 15% compared to Q3 2024. This was primarily due to the one-time acceleration in Q3 2024 of $45 million in mobilization revenue in respect of 2 suspended rigs in Saudi Arabia related to future years.

It is worth noting that without this acceleration, adjusted revenue would have increased from $219 million in the third quarter of 2024 to $225 million in the fourth quarter of 2024, due to higher revenue in Nigeria and Norway following the contract commencements of the Shelf Drilling Achiever in October of '24 and the Shelf Drilling Barsk in November of '24, respectively, as well as a full quarter of operations of the Shelf Drilling Perseverance in Vietnam.

With the commencement of these 3 new contracts, effective utilization increased to 80% in Q4 from 77% in Q3 and average day rate increased to $88,000 per day in Q4 from $82,000 per day in Q3. On the cost side, operating and maintenance expenses were $130 million for the fourth quarter, decreasing $3 million from $133 million in Q3, primarily due to lower mobilization costs for the Shelf Drilling Achiever ahead of its new long-term contract in Nigeria as well as lower operating costs for the Baltic, which we sold in September of 2024.

G&A expenses of $16 million in Q4 decreased from $17 million in Q3, primarily due to a decrease in compensation and benefit expense, partially offset by an increase in provision for credit losses. Adjusted EBITDA was $85 million in Q4, representing a margin of 38% compared to $114 million and 43% in the previous quarter. The decrease in adjusted EBITDA quarter-over-quarter was mainly driven by the one-time acceleration of $45 million of mob revenue in the third quarter, as mentioned earlier.

Of the $85 million in adjusted EBITDA in Q4, SDNS generated $17 million of adjusted EBITDA, while the rest of the business generated $68 million of adjusted EBITDA. When looking at full year 2024, we had adjusted revenue of $972 million, and the business generated an adjusted EBITDA of $351 million, including $364 million from the parent company and a negative $13 million from SDNS. This compares to a guidance range of $320 million to $345 million set in the prior quarter.

The positive variance between our actual results and the upper portion of our guidance range was mainly driven by higher utilization and uptime during Q4, primarily in West Africa, lower maintenance and operating expenses across our fleet during the quarter as well as lower corporate G&A expenses, all of which contributed to mitigating the impact of the High Island II and the High Island IV suspensions in Saudi Arabia during the quarter.

Income tax expense of $7 million in Q4 brought the full year tax expense to $32 million or 3.2% of 2024 revenues. Net interest expense of $36 million in Q4 was in line with the prior quarter. Other net represented a gain of $5 million in Q4 from an expense of $2 million in Q3, mainly driven by gains from foreign currency exchange.

Noncash depreciation and amortization expenses totaled $48 million in Q4, down from $53 million in Q3, mainly due to lower amortization of deferred costs for the suspended rigs in Saudi Arabia. The quarterly net income attributable to controlling interest was $24 million in the fourth quarter and included a $31 million gain on the Trident VIII insurance recovery.

Turning to capital expenditures and deferred costs. We spent $31 million in the fourth quarter of 2024, including $10 million at SDNS, this compared to $35 million of CapEx and deferred costs in the prior quarter. The decrease was mainly due to lower planned maintenance and shipyard costs for the High Island IX in Saudi and lower contract preparation expenditures in Nigeria for the Shelf Drilling Mentor and Main Pass IV, which started their new contracts in late Q3 and Q4, respectively. This was partially offset by higher spending on fleet spares and higher contract preparation spending for the Shelf Drilling Barsk in Norway, which commenced its new contract in Q4 2024.

As a result, our full year 2024 capital spending was $152 million, including $48 million at SDNS. Capital spending for the year at SDNS comprised of anticipated investments in fleet spares buildup. Excluding SDNS, actuals included the cost to redeploy the Shelf Drilling Achiever and the Main Pass IV to West Africa for new contracts after they were both suspended in Saudi Arabia earlier in '24 and contract preparation costs for the Shelf Drilling Perseverance in Vietnam and the Shelf Drilling Barsk in Norway. Actual spending levels came in at the lower end of the guidance range of $145 million to $170 million communicated in early 2024.

Our consolidated cash balance as of December 31, 2024, was $152 million as compared to $220 million at the end of September. Cash at the parent level decreased from $193 million to $131 million, mainly due to interest and amortization payments made in Q4 2024 and a $30 million payment to the former SDNS shareholders for the then remaining 40% shares in SDNS, which was partly offset by $44 million cash collected in relation to the Trident VIII insurance claim. Cash at Shelf Drilling North Sea decreased from $27 million at the end of September to $21 million at the end of December 2024. As of year-end, our total consolidated liquidity was $277 million. This included $152 million of cash and $125 million of undrawn revolving credit facility.

Turning to 2025. We included financial guidance for the full year 2025 in our release this morning. Fully consolidated adjusted EBITDA is estimated to be between $330 million and $380 million. At the SDNS level, we anticipate full year EBITDA to come in between $85 million and $100 million. With the 5 rigs expected to operate for most of the year, the run rate EBITDA is expected to be significantly higher than in 2024. We expect revenues and effective utilization to improve in the second half of 2025 as rigs mobilizing from the Middle East to West Africa are expected to return to service.

Total capital spending in 2025 is estimated to be between $110 million and $140 million. This includes $25 million to $30 million spending at the SDNS level with the SDNS rigs expected to remain in their current locations in 2025. This implies an expected spending level across the rest of the business in the $100 million range. The largest components include the redeployment cost for the Shelf Drilling Victory and High Island II to West Africa from Saudi Arabia as well as 2 major out-of-service projects contemplated in India.

Our results in the last quarter of 2024 show how we responded to the unexpected short-term challenges faced last year as we secured new backlog, $500 million in the quarter alone, repositioned certain assets, realized efficiencies and preserved cash. In Q4, several of our rigs started new long-term contracts at attractive day rates, and we remain confident in our ability to redeploy in 2025 additional assets that were suspended in '24.

The recent announced alliance with Arabian Drilling is a testament to the confidence we have in the markets where we operate and to our unique operating platform, which we believe will allow us to create additional opportunities in these regions. Despite the short-term challenges, the medium- to long-term outlook for our industry continues to be very positive, and we believe Shelf Drilling is well positioned to drive value for its stakeholders.

We'd now like to open the call for questions.

[Operator]

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Matthew Farwell from [ FA Advisors. ]

[Unknown Analyst]

I was wondering if you could elaborate a little bit more about sort of how the revenue flows or how the profitability of the partnership with the Arabian Drilling will occur?

[Douglas Stewart, executive]

Greg, do you want me to take that?

[Gregory Brien, executive]

Sure.

[Douglas Stewart, executive]

Great. So this will be determined on a contract-by-contract basis. So it's a little bit early to do that. But the typical structure will involve a type of management fee for Shelf, a type of bareboat charter for ADC and sharing in the profits. But it will depend on each contract, but that's kind of how the thinking is today.

[Unknown Analyst]

Okay. Great. Can you break out the backlog between SDNS and SDL?

[Douglas Stewart, executive]

Yes. Give me -- shortly, I'll get back to that. Why don't you ask the next question, I'll come back to you on the backlog split. We've got that here.

[Unknown Analyst]

Okay, sure. Can we expect any revenues from the suspended rigs that are mobilizing to West Africa in the second quarter? I know you're guiding to an improvement in revenues in the second half, but I'm wondering if you can provide a little bit more color there.

[Douglas Stewart, executive]

Yes. I think from a day rate perspective, day rate revenue, that would be second half as we'd indicated, that would be Q3 the earliest.

[Gregory Brien, executive]

It's possible that one or both of the rigs could start before the end of Q2. I mean, obviously, the earlier, the better. And part of the reason we've gone ahead with the mobilization process. But clearly, the goal is to get them both there, both contracted and started working and the hope is we have continuous activity in second half of the year. So yes, some contribution in Q2 is possible, but we're more optimistic about H2.

[Unknown Analyst]

And so you pushed out the Term Loan A extension to March 31. Is there a possibility that, that could be extended further? Or do you expect to pay that down by the end of the quarter?

[Douglas Stewart, executive]

So yes, you're exactly right. We extended to the end of March. We're in discussions and we're considering extending that for additional term. Basically, under our -- the Shelf Drilling bonds, 2029 bonds, there's capacity for super senior debt of $175 million, the greater of that and 10.5% of our total assets. Here's the key point. At maturity of the term loan, that capacity ratchets down to the greater of $150 million and 9% of TLA. So the thinking behind this is as we consider extending is preserving that capacity of super senior debt going forward.

And we'll come back to you on the backlog question.

[Operator]

[Operator Instructions] And now we're going to take our next question, and the question comes from the line of Gregg Brody from Bank of America.

[Gregg Brody, analyst]

Greg, as you think about managing your cost structure this year with some rigs not working and some being mobilized, how do you -- how should we think about operating costs to -- sort of warms that cost? How do we -- help us think through that?

[Gregory Brien, executive]

Yes. I think as we think about it, let me talk about it in 2 pieces. On the G&A side, we've been very focused on bringing that down, and that was trending around shall we say $70 million, but we're pushing it towards the lower end of $60 million-ish. And so we're very focused on maintaining a cost structure that's commensurate with activity on the ground. On the OpEx side, I think it's fair to look at Q4 2024 as you can see that we brought costs down sequentially, and we'll continue to look at doing that. But that's -- it's a decent proxy for the year.

[Gregg Brody, analyst]

And then you gave us some excellent color on the regional dynamics. Maybe a little additional color on Saudi Arabia. I think you said there's some rumors of rigs -- additional rigs being suspended. What can you tell us happening -- what's happening there and just the mindset of the Kingdom from here?

[Gregory Brien, executive]

Yes. We had 3 different rounds of cuts in 2024. And I think that was a bit of a surprise to everybody, including some folks within Saudi Aramco, there continued to be changes. And I think the fact that activity continued to move caused folks to continue to speculate, and that hasn't really stopped. But it seems like in the last week to 10 days, there's been a lot of chatter. It's really just that. It's chatter and rumor. We don't know anything more that's in the public domain. I think there have been a number of research notes speculating something like 2 to up to 5 incremental offshore rigs in the last 2 weeks. That seems to be kind of the consensus rumor.

The third round from October, November, when we got -- when we had 2 more rigs that were impacted the High II and High IV, that round ended up being a little bit smaller than we were told it was going to be by a couple of rigs. So that's the only thing that we could point to that would seem consistent with some of the chatter in the last couple of weeks that the rig count was kind of mid-50s before all this started 3 years ago. We're high-50s today. So still, call it, a couple of rigs higher than where we were before the big offshore expansion kicked off.

You do have to believe that going much lower would start to have an impact on oil supply and kind of medium-term oil production capacity there. So we think we're in good shape. We only have 2 rigs left in operation. One is up for renewal, so we're having live discussions on that rig. But yes, that's kind of all we know at this point.

[Gregg Brody, analyst]

And you touched on the High Island V, which is up for renewal. Is your expectations that likely stays working? And for the few rigs that are left in country, what do you expect to happen once the suspensions roll off?

[Gregory Brien, executive]

So the 2 rigs that are still in operations, High Island IX is on a long-term contract. High Island V is up for renewal at the end of May. We are in discussions on that rig. We do believe that there's a desire for both those rigs to continue working. We'd like to see that happen, too. There are a number of other rigs up for renewal with other contractors. I think -- there's a fair amount of dialogue ongoing now regarding renewals, but we think we're in pretty good shape. We'd like to see the rig get renewed. So hopefully, we'll have some clarity in the next month or 2.

We had 4 other suspended rigs at the end of the year. 2, we have just started the mobilization process to get to West Africa. So expect to have those rigs working here pretty soon, next few months. The last 2, we're debating options, to be honest. We mentioned that we would consider selling a few additional idle standard jack-ups for non-drilling purposes. We now have -- we have 3 rigs that have just come off in India, one is about to finish and those last 2 in Saudi. We're kind of looking at options for each of those units. We obviously see contract opportunities in India. So no explicit plans on each individual asset. We may look to dispose a couple of additional rigs this year, which again, we think helps supply and demand globally, but also on a regional basis depending on where those rigs are taken out.

[Operator]

[Operator Instructions] And now we're going to take our next question, just give us a moment. And the question comes from the line of Antonio Segura from BCP Securities Inc.

[Antonio Segura, analyst]

And I wanted to ask about the Shelf Drilling North Sea and wanted to understand if its shares are still listed or delisted in the Oslo Stock Exchange.

[Gregory Brien, executive]

Yes, that company is still listed. We completed the merger in October. Shelf Drilling is a 100% shareholder of Shelf Drilling North Sea. But the company is still listed, we produce financial statements on a regular basis. We'll continue to do that. So yes [Technical Difficulty]

[Operator]

[Operator Instructions]

[Douglas Stewart, executive]

Operator, this is Douglas Stewart. Just going to close the loop on the last question regarding the backlog that was raised by a caller. The backlog of $2.1 billion that we show, it's $300 million at the SDNS level and $1.8 billion at SDL, excluding SDNS.

[Operator]

Thank you. [Operator Instructions] Dear speakers, there are no further questions. I would now like to hand the conference over to your speaker, Greg O'Brien, for any closing remarks.

[Gregory Brien, executive]

Very good. Thanks for the time, everybody. Appreciate the interest, and we'll talk to you in next few months. Thanks.

[Operator]

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.