Odfjell Drilling Ltd

OTC:ODFJF

Earnings Call Transcript

[James Crothers, executive]

Good afternoon all, and welcome to Odfjell Drilling Q1 2023 Results Call. My name is James Crothers, Investor Relations Officer, and I'm joined today by our Chief Executive Officer, Kjetil Gjersdal; and Chief Financial Officer, Frode Syslak.

As you'll have seen from our note this morning and today, this has been a busy quarter for us, we're delighted you've joined the call or tuned into the webcast. Your attention is brought to the important information slide of our presentation, which would invite participants to read in full potentially by downloading from the website.

Our call today will be focused largely on our Q1 results with Kjetil on further taking you through the key highlights from the quarter before Kjetil goes through an operational review, Frode will then review our financials from the period before updating everybody on our ongoing refinancing.

With that, I'll pass it over to Kjetil, who will summarize the quarter.

[Kjetil Gjersdal, executive]

Thank you, James, and good afternoon, everybody. As many of you have seen from our report issued this morning, quarter or our business has been focused on several key activities, which we will discuss later in this presentation.

Looking specifically at how we operated this quarter, however, we are pleased with what has been a strong year operational period. Our financial utilization has remained high at 97.9%, largely in line with prior quarters despite the partial weather during the winter months that we now experienced during the first quarter. And we are quite proud of our continuous strong operation, which has been very consistent. And also during this period, we have significantly increased our order backlogs further securing future cash flow for the company. And we will discuss a little bit later. The LOIs recently signed for the Deepsea Atlantic or something that we are proud of securing in particular, given the strong rates, which are reflective of the continuously improving market, but also of the value of our company as operators.

So summarizing, this has been a good operationally focused quarter for us, positioning the company well for the rest of the year. So moving over to the operational review. Also the key financial results. We are delivering good financial results in line with our expectations during the period. We're achieving a revenue of $171 million and an EBITDA of $73 million.

This quarter is the first quarter of having 2 management rigs on contract throughout the whole period. And we were pleased to see the impact that this had on our results. And we do anticipate all 4 managed units to be operational by the second half of the year.

Our cash position remains strong, but it is reduced from prior quarters, and this is due to the previously announced letter of indemnity, which saw us paying $31 million in regards to the ruling by the Norwegian tax authority. But we would like to remind shareholders that we regard it to be more likely than not that this will be refunded to us.

Net debt remains largely unchanged. However, looking at our equity ratio and leverage ratio, stakeholders can see that we continue to focus on deleveraging the company.

And in summary, our results reflects the robustness of our business and our continued focus on financial discipline and cost control. Our strategy remains focused on preparing our business for the future. And if we would then move over to the operational review. And first to our backlog. As I said earlier, we've had typically a busy quarter operationally.

But if you look at our own fleet in the backlog, the Deepsea Atlantic, Deepsea Aberdeen and Deepsea Stavanger were all on contract with Equinor during the period, working on the Johan Sverdrup Phase 2 fields, Breidablikk and the Stavanger on various exploration drilling projects along the coast of Norway. The Deepsea Nordkapp remained on contract with Aker BP working at the Alvheim area. And as you can see, our own fleet has a firm backlog now secured until the end of 2023 and for some of our rigs significantly beyond this.

And if we look towards our managed fleet, the Deepsea Yantai was briefly idle at the beginning of the year at the yard, but has since been working with Wellesley Petroleum during the majority of the quarter. The Deepsea Bollsta completed its first period of operations since we've taken over the unit and was working with Shell offshore Namibia.

And the Bollsta currently contracted to remain in Namibia for much of the rest of the year. The Deepsea Mira is currently and route to Namibia, I believe, is currently selling down the West Coast of Africa, and we are preparing for the upcoming commencement with Total for the Mira. The Hercules remains on Hanøytangen where it's undergoing its previously announced SPS and the preparation for its planned contract with ExxonMobil during Q2. And as some of you might have noticed, we had a very fresh press release sent out today, announcing that the Hercules will begin a contract in Namibia directly followed by its Canadian operations. So quite happy to announce that earlier today.

We will then move on to a little bit in-depth info about the Deepsea Atlantic LOIs. And this was, of course, a key development during the quarter for us. This will see the Deepsea Atlantic operating in the North Sea for a cumulative period of 23 months at a combined value total contract value of $290 million. And it's important to notice that this total contract value does not include integrated services, upgrades or mobilization fees.

And further to the contract value, we also agreed that there will be provisions for additional performance bonuses and fuel incentives. And further to this 23-month firm period, there are also 4 higher-priced 1-well options, and there are 3 additional unpriced optional periods of approximately 1 year each at the back end of this contract.

And what all this means is that as a result of this, we could see the Deepsea Atlantic fully signed up between its upcoming SPS program true to its next one in 2029. And this is something that we're quite pleased with. This is an excellent result for our company and will deliver increased and predictable cash flow from the unit in the foreseeable future.

And as a result of the length requirements and value of these contracts, we have taken the decision together with the clients to upgrade the Deepsea Atlantic with a new subsea blowout preventer BOP. This will increase the capability and value of the unit of -- ahead of a busy operational period for its crew. This new BOP will cost $40 million, which will be partly funded by way of an interest free contribution of $20 million from the client, which will be deductible over the next 5 years beginning in 2024.

And now with this BOP change, we will now have similar BOP equipment on all of our 3 GBS rigs. And we also have an additional BOP for us to use in SPS rotation program. So this is part of our sort of strategic technical handling of these units going forward. And in addition to that backlog, I would also like to mention the recently announced 6 months of additional firm backlog on the Deepsea Aberdeen, extending the firm backlog to second quarter '25. The scope is on Svalin, it's the name of the -- this project. The Svalin scope is slated in from Q4 '23, with the effect of increased day rates during this period compared to the originally planned Breidablikk contract.

Okay. And then we will look at the market, tuning in to how we see the outlook for the sector. And just to start with that, we remain positive in our views about the market. Supply and demand dynamics, which we have seen throughout much of this year, that remains which is creating opportunities for us and also impacting day rates positively.

And as mentioned, our LOI's for the Deepsea Atlantic point to a strengthening market, and we see but this trend is continuing. In Norway and in the U.K., we continue to see a steady flow of tender opportunities, which we believe would uniquely suit our fleet. And we do continue to see a preference from operators for Tier 1 units, which provide more efficient and predictable operations. However, as you will know, we have seen a number of Tier 1 units leaving Norway for international opportunities, which is, of course, affecting the overall supply demand picture.

And on that point, from our perspective, we've also seen multiple new opportunities in West Africa, Australia, Brazil and Canada. And these are providing strong alternatives for our rigs to be deployed into. And in Namibia, particularly, we have seen more discoveries from operators, which points to new hydrocarbon province opening.

And this region will be very exciting to see what comes out of that during '23 operations and testing operations going on there. We have seen the supply for Tier 1 semi subs reducing slowly and demand increasing. And this is resulting in a strengthening yet still sensible market. We are seeing big discipline amongst drillers. This is evidenced by the chart on the left here, which shows a concentration of similar bids.

And to summarize, although there is some short-term volatility now and then, we do see a continuously improving market, and we do see a potential shortage of Tier 1 rigs maybe as early as '24, but definitely in 2025.

With that, I will now pass over to you, Frode, who will take us through our financial results from the quarter before updating you all on our refinancing.

[Frode Syslak, executive]

Thank you, Kjetil. I will begin with the income statement. As can be seen, operating revenue for the group was $ 171 million compared to $155 million in Q1 '22.

As regards to the segment, operating revenue for the owned fleet in the quarter was $134 million, while the external fleet was $36 million, reflecting increased activity for the external fleet. EBITDA was $73 million in Q1 '23, whereof EBITDA for the owned fleet was $70 million. The EBITDA for the external fleet was $5 million, while corporate and other adjustments was $2 million negative in the quarter.

Moving to Page 12 and the balance sheet. We see continued deleveraging of the balance sheet with net interest-bearing that's largely unchanged as of the end of the quarter and a reduced leverage ratio of 2.4x on net debt to EBITDA basis. The company is robust with an equity ratio of 55% based on total assets of $2.2 billion and a sound cash position of $138 million after the one-off tax indemnity payment of $31 million made in Q1.

Turning to our cash flow and CapEx on Page 13. You can see that the total CapEx in Q1 was $14 million. Approximately $4 million of total CapEx is related to the new BOP on Deepsea Atlantic. A further $3 million has been spent on green rig initiatives across the group and a further $2 million has been incurred as part of our planned SPS programs. We also record various fleet CapEx of $5 million in total. Before we conclude the financial section, I wanted to just briefly touch on our refinancing process. As we have guided earlier, the company fully intends to refinance well in advance of maturity dates, we are following our plan and making material progress on the topic with well-advanced discussions with lenders. We have keen interest from existing as well as new banks. In addition to a significant portion of our financing anticipated to be bank debt, we are also looking into diversifying the debt capital sources.

As you know, we continue to enjoy strong credit metrics with a continued focus on deleveraging and with a stronger and stronger order backlog, driving further cash flow visibility. And we, of course, look forward to providing further color on the refinancing in due course.

With that, I would like to pass back to Kjetil for a quick wrap up.

[Kjetil Gjersdal, executive]

Thank you, Frode. If you go to the summary slide. And in summary, this quarter has been strong operationally and has driven positive financial results. We've had a number of key highlights during the quarter, including the Deepsea Atlantic and Deepsea Stavanger and with a later announcement of Deepsea Aberdeen and Hercules. We look forward to the impact of this contract wins beginning to impact our balance sheet with the rate across our fleet increasing.

Looking ahead, we remain very well placed to drive further stakeholder value and look forward to updating on some of our key workflows, in particular, our planned refinancing in due course.

So with that summary, I will now pass it back to you, James, to wrap up and open up the Q&A.

[James Crothers, executive]

Thank you very much, both. With that, I'll pass back to our operator, Kevin. Kevin, hopefully, you can help us with the Q&A.

[Operator]

[Operator Instructions] Our first question on the phones comes from Fredrik Stene of Clarkson Securities.

[Fredrik Stene, analyst]

Kjetil and team, good quarter. I have 2 questions for you today. First, on the Atlantic and the BOP that you're installing there. Firmly committed until mid-2026 now with the new contract from late Q1. When you have these discussions with Equinor about the upgrade for this BOP.

Are you able to -- or is that also based on now increased likelihood or probability that these options that are tied to the contract -- sorry, the time to the rig will be exercised, is the longer-term decision than just from '24 to mid-'26?

[Kjetil Gjersdal, executive]

Well, Fredrik, first of all, I think we never said that the discussions were with Equinor. And -- but the discussions we have with these clients that we are discussing these LOIs with. The BOP has been part of those discussions and the technical requirements that our clients have for the upcoming projects, we agreed that it could be -- or it was a good idea to take a move in this direction.

And the sort of technical spec on this BOP is, to some extent, required for some of the operations that our clients have upcoming.

[Fredrik Stene, analyst]

Okay. And I was just reading the fleet stat report. So just looking at the name Equinor and that happened to come part of that. Second question, turning to the Hercules. Now the contract here in Namibia, which will be the destination after Canada, it's not too long, just over 100 days. But I guess based on the commentary that you had around Namibia with the Mira and the Bollsta from beforehand, there seems to be quite a lot of possibilities here to keep these rigs working for longer. At this stage, are you having that kind of visibility on the Hercules as well? And I guess where I'm going is what's the likelihood of this rig returning to Norway after this shorter contract? Or do you think that it's more likely that it will stay in Namibia for the foreseeable future?

[Kjetil Gjersdal, executive]

Yes. I think it's -- what I can say, it's possible that both things can happen. We do have discussions with the client in Namibia for further work. They do have plans and they do have ambitions for further work out though the scope announced today. However, that has not been firmed up in any way. So '23 is a year where we will have a get a lot of answers from that region.

And I think there will be a lot of exploration drilling. There will be a lot of testing. And once these results come up, I think a lot of the operators will make decisions for further scope in Namibia going forward. But we do see -- also see that there are opportunities for taking rigs back to Norway. So I guess, Fredrik, my answer is that we're keeping all options open and we will continue to pursue the opportunities that we like the most.

[Fredrik Stene, analyst]

Perfect. And just a follow-up on that before I before I stop. One of your peers that also have a harsh environment semi sub exposure was saying that the rate of mobilization or total contract value is required to take rigs back into Norway now that they've first been moved out would be substantial.

So do you have any color you can give on kind of what rate would be needed to take rigs back to the NPS at this point? Are we looking at similar rates as what is recurring now? Or are you looking at a step up well into the 400s or even closer to 500s to really be incentivized to move them [Technical Difficulty]

[Operator]

[Operator Instructions] Pardon, we have the questions coming from Tommy Johannessen of SB1 Markets.

[Tommy Johannessen, analyst]

Yes. Can I just ask on the recent talks with oil companies where we've seen the oil price drop and market turmoil, are you seeing or expect to see any changes in tendering, like delays, et cetera? Or is it pretty much the same as 3 to 6 months ago?

[Operator]

Any ladies and gentlemen, we're experiencing a momentary interruption in today's conference. Please standby, we'll be with you In just a second.

[Kjetil Gjersdal, executive]

Thanks very much. And James, we're back on the line, James, maybe we can continue the Q&A.

[James Crothers, executive]

Sorry about that, guys. I think we might have cut off the end of our question, but perhaps we can go to the next question, operator. Hello, are you there Kevin?

Can you hear us -- apologies. Can you hear us again on the line? We're back on the Zoom call. Can you hear us again now?

[Kjetil Gjersdal, executive]

Yes. Thanks, James. We're just -- Kevin is just joining us, and we'll be back in a Kevin, if we could have the next question, please.

[Operator]

We had the question from Tommy Johannessen.

[Tommy Johannessen, analyst]

Yes. My question was regarding E&P companies behavior given the recent drop in oil price and market term. Are you seeing any changes there compared to over, say, the last 3 to 6 months in tendering? Are you seeing any delays or you expect to see any? Or is it pretty much the same?

[Kjetil Gjersdal, executive]

Yes. I would say it's pretty much the same. It's not like it's on and off or it's more a constant flow of interest. And of course, these projects have some lead time and so on. So I won't say that we've seen any clear trend that is declining due to the drop of oil price now.

[Tommy Johannessen, analyst]

Okay. And regarding your -- both you and some of your peers are pretty busy SPS schedules going forward. Can you just talk a little bit about how you expect that to impact the market and also what you see as the main risk regarding your SPS schedule?

[Kjetil Gjersdal, executive]

Sorry, Tommy, could you repeat that, there was a little bit [indiscernible] on the line.

[Tommy Johannessen, analyst]

Yes. it was regarding the SPS schedule, both you and some of your peers are pretty busy SPS schedules going forward. So I just want to -- if you could talk a little bit about how do you expect that to impact the market and also what you see as the main risks regarding your SPS schedule?

[Kjetil Gjersdal, executive]

Yes. So we've been working quite a while for preparing our SPSs. And we have started very much earlier due to the pure right intensity and the schedule that we have ahead of us. So we are actually quite comfortable. We aim to have overview of all the work packages and POs in place quite some time before the rig reaches key side. And that takes down the risks in this project. What I would say, if you were to approach this in a more, I would say, the way we used to do it 10, 15 years ago where you took the rig to [indiscernible] and opened up and started checking the equipment, then you will have a problem in this market. There is definitely longer lead times on critical parts and it's definitely a price increase on the same, I would say, between 35% and 65%.

So we do need to approach these SPSs with different tactics than you have before. But if you do that, we feel comfortable that we are able to handle the risk and execution of these projects.

[Operator]

And we can go back to Fredrik Stene of Clarksons Securities.

[Fredrik Stene, analyst]

And again, I think the line dropped on my last follow-up with regards to the rigs that were -- that has gone out of Norway. So just wanted your opinion or color on what you think will be required to see these rigs come back to Norway? Do you think you would have moved them up at a similar rate of what we're seeing now in where they're working in the, call it, semi-harsh or benign environment?

Or do you think that we need to see a step up well above $400,000, maybe even closer to $500,000 per day incentive or capacity to return to the NPL?

[Kjetil Gjersdal, executive]

I won't use specific numbers, Fredrik. But of course, you want to see long contracts at the decent day rate level. I mean -- and they need to at least match perhaps be better than the ones that are available internationally before it can get attracted to take it home. But I would like to say the Norwegian market, we have a long and good relationship with some key clients here.

And of course, it is natural for us to have conversations around their needs and what they see going forward. And if you have a rig with an AOC in place, it's quite easy to take it out, but it's also quite easy to take it back. So -- but it needs to be a strong contract. It needs to be competitive contracts, and we won't sort of come back just for coming back. It needs to be something that makes sense for our business.

[Operator]

[Operator Instructions] As we have no further questions on the phone, I will hand the call back to James for any webcast questions.

[James Crothers, executive]

Thank you very much. So well, turn to this question first. So the external fleet is increasing with some high-spec assets. Can you put some more color on how these deals -- how are they structured? And how are you thinking about these rigs in the long term?

And I suppose from the same submitter, how does the company see the future of Odfjell drilling as a company? And is there room for consolidation, consolidation on the NCS?

[Frode Syslak, executive]

Yes, I can -- this is Frode. I can talk to the first part of that question. With regards to economics from these external fleet management contracts. There is a combination of fixed daily fee, which is relatively low during nonoperational phases, but it's increasing significantly during operational basis.

And with addition to that, there are certain EBITDA for performance-related incentives. As regards to purchase options in these contracts, there are no explicit purchase options available for the company.

[James Crothers, executive]

Great. And the next question, do you expect the banks to allow for dividend following a refinancing that still has the banks in the capital structure?

[Frode Syslak, executive]

I think this is a topic that we need to reverse with more details on at the later stages. But with the strength of the company, we certainly expect flexibility to an extent with regards to dividend payments going forward.

[James Crothers, executive]

Okay. Great. Thank you. We have no further submitted questions. So with that, perhaps I'll close the call.

Thank you for everyone for joining the call and for your continued interest in the company. If you have any further questions or would like to get in touch, please do so can touch with me directly, you might mail address as shown on our presentation or by the websites. As a reminder, our next interaction will be the AGM on the 20th of June and/or Q2 half yearly report will be on the 23rd of August.

I look forward to speaking to many of you then. Thank you. Thank you, everyone, for joining the call and for remaining for the technical difficulties as well. And thank you, operator. You can conclude the call now. Thank you very much.