Odfjell Drilling Ltd

OTC:ODFJF

Earnings Call Transcript

[James Crothers, executive]

Good afternoon, everybody, and welcome to the Odfjell Drilling Q4 2024 and Preliminary Full Year 2024 Results Presentation. My name is James Crothers, and I'm the Investor Relations Officer at the company. And I'm joined today by our Chief Executive Officer, Kjetil Gjersdal; and our Chief Financial Officer, Frode Syslak.

Before we begin, your attention is brought to the important information slide of our presentation, which we encourage participants to read in full. Note that this presentation is only a summary of the quarter, and the quarterly report should be read separately, both that report and today's presentation are available on our website, www.odfjelldrilling.com.

Our call today will begin with a brief summary of the quarter with Kjetil taking us through some of the key highlights. We'll then move on to discussing our operations during Q4 and move on to our financial review with Frode. We'll then summarize the presentation and close the call.

Following the presentation, we will open the Q&A session [Operator Instructions] We have a lot to talk about today, so I wouldn't delay any more, and I'll hand over to Kjetil, who will take us through the key highlights.

[Kjetil Gjersdal, executive]

Thank you, James, and a very good afternoon to everybody. We are delighted to present our Q4 results, which indicates the direction our EBITDA is heading. Operationally, our fleet performed well despite what was a challenging and stormy winter season, we achieved a financial utilization of 96%.

When combined with our managed fleet, delivered EBITDA of $92 million from a revenue of $204 million. Our revenue and EBITDA generation reflect new records for the business since we did the spin-off from Odfjell Technology in 2022. In addition, we have more than doubled our quarterly dividend for the quarter, increasing from $0.06 per share to $0.125 per share, resulting in a total dividend in Q4 of $30 million. Later on, Frode will discuss our dividend in a bit more detail in his section.

But what I would say at this point is that we remain very well positioned to further increase shareholder distributions in the quarters to come. Post period, we also secured more backlog for our fleet, resulting in firm contract backlog at $1.9 billion with $100 million of priced option in addition. This is a result of the extension of the existing contract we had with Equinor for the use of Deepsea Atlantic. And this contract extension was secured at a very healthy day rate of around $500,000 per day, which I think is a great data point for our sector these days.

During the period, we also worked with our lenders to secure an agreement, which results in a reduction in quarterly installments on the Deepsea Nordkapp term loan facility, resulting in deferment of $34 million to Q1 2029. And finally, our balance sheet and liquidity remained strong with the company now having a leverage ratio of 1.6 and an equity ratio of 63%.

Moving on to our operations. As per previous quarters, the Deepsea Aberdeen, Deepsea Atlantic and Deepsea Stavanger were all working with Equinor. The Deepsea Atlantic was working on various exploration projects, while the Deepsea Aberdeen remained on Breidablikk field. The Stavanger, in addition to working on exploration campaigns for Equinor also commenced a carbon storage well towards the end of the period, reflecting the first time Odfjell Drilling has worked on such a well.

Carbon storage wells are drilled in a similar manner to conventional wells, and we see signs that there could be an incremental demand coming from carbon storage campaigns for our rigs in the future. In addition to the work done by Stavanger, Deepsea Nordkapp also has a carbon storage well scheduled for Q1.

Returning to our operations, the Deepsea Nordkapp remained working with Aker BP on various exploration projects and the Deepsea Yantai was also in Norway working with the Orlen Group. The Deepsea Mira and the Deepsea Bollsta were both operating offshore in Namibia for Total and Chevron, respectively. And the Deepsea Bollsta since completed its work for Chevron and will begin mobilizations to Norway shortly. And finally, the Hercules was in yard in Norway from mid-November last year.

Looking ahead, our fleet remains well secured for the next 2 years with all units set to transition on to higher day rates in the first half of '25. As you can see from the chart, you can see several day rate milestones happening soon and already, the Deepsea Aberdeen, for instance, will be moving from $345,000 per day to around $447,000 and the Nordkapp will also be moving up from $343,000 to $416,000.

Later in the year, we also see significant day rate increases on the Deepsea Atlantic and the Stavanger. And as a reminder, rates shown on this slide reflect clean day rates and do not include any bonuses, fewer incentives or any add-on sales, which in the past are adding, I would say, meaningful to these rates.

Next slide. This chart shows what our backlog looks like in terms of yearly revenue while also showing average secured day rate per rig, and an indicative OpEx cost per rig. As you can see on the OpEx line, this is largely flat with cost increases covered through our contracts. As is demonstrated, you can see a significantly increasing margin with increasing yearly revenue and a well-controlled OpEx.

Our CapEx expectations are unchanged from prior quarters. We have 2 SPS's still ahead of us with Deepsea Stavanger and Deepsea Aberdeen anticipated to begin their SPS programs in Q2 '25 with a CapEx cost of approximately $50 million each and 2 to 4 weeks of downtime.

Detailed planning for the yard stays is ongoing with the majority of the SPS scope being completed while in operation. We feel we are ready and well prepared with both programs progressing as planned. Following the completion of these SPS programs, however, we do not have any material CapEx cost ahead of us until late 2028.

And then we turn to the market, I would say that our market view remains largely unchanged from prior quarters. Demand from Norway remains well balanced between supply and demand with tenders currently outstanding for future work. As many of you will be aware, we are seeing a clear trend from our clients that they have -- they are renewing their focus on oil and gas and presenting an interest in maintaining and also increasing their current production. And needless to say, this will require a lot of drilling in the years to come.

We expect this trend to continue and result in increasing work for our sector. Incremental demand we expect to come from new developers who are also seeking to grow in the basin, while demand from carbon storage, as mentioned, is unknown at this point, but could create some further demand.

Internationally, we do not see as strong a market as Norway with a few shorter-term contracts potentially available in '25. We expect longer-term contracts to increase as new exploration projects mature into development in the coming years.

On the other side of the market, we now expect supply likely to reduce with some retirement of vessels in our sector expected and no new builds likely to happen. There are a few stranded or incomplete vessels in our sector also, which we do not believe is likely to create any meaningful competition in the near future.

Ultimately, with our own fleet largely coming off contract in '27, we see good interest from clients to secure Tier 1 assets in this period. And with that, I will now pass on to Frode to go through our financial review.

[Frode Syslak, executive]

Thank you, Kjetil. As always, I will begin with a summary of the income statement. Operating revenue in Q4 '24 was $204 million compared to $192 million in Q4 '23. Operating revenue from the own fleet was $158 million, while the external fleet was $45 million.

For the year, the revenue was $775 million and the EBITDA $345 million. We are starting to see the effects of higher day rates in Q4 with an EBITDA for the owned fleet of $87 million, a margin of 55%. The EBITDA for the external fleet was $9 million with a margin of 20%.

Less corporate overhead and other adjustments, the group EBITDA was $93 million. In other words, a strong quarter despite that we saw a slight cost increase in Q4 related to some downtime and minor repairs on Deepsea Nordkapp, as is also reflected in the lower financial utilization of that rig. These are one-off effects.

The company delivered a net profit of $15 million in Q4. As you can see, this is somewhat lower than the $24 million in net profit in Q4 '23, and there are 2 main reasons behind this. Number one, there was a positive tax impact from our relocation of the rig ownership to Malta in Q4 '23. And secondly, in Q4 '24, we have a one-off effect with a write-down of the value of the small BOP that we took off Deepsea Atlantic in relation to the BOP upgrade.

For the full year, the net profit was $65 million. Moving to Page 12 and the balance sheet. Net debt is reduced further this quarter by $28 million to $504 million. The leverage ratio is at a very comfortable level of 1.6. Equity ratio of 63% based on total assets of around $2.2 billion. The available liquidity is $217 million, including undrawn RCF of $99 million. We'll take a closer look at the cash flow for Q4 as we now move to the next slide.

Q4 saw $108 million of cash generated from operations. Net interest paid was $22 million, including semiannual interest payment on the bond. CapEx for the quarter was $43 million. Net cash flow from financing activities and minor FX adjustments was minus $28 million. Of this, the net drawing on the RCF was $5 million for the period. Dividends paid in Q4 were $14 million related to Q3 results. And as said, we ended the quarter with a total available liquidity of $217 million.

Moving then to Page 14 for a quick look at our debt. As you can see, we have no final maturities until 2028. Also worth noting here is that annual repayments are reduced significantly in the years to come when compared to 2024 particularly so for 2025 and '26 following the agreement we did in Q4 to defer installments totaling $34 million until first quarter of 2029.

Together with increasing day rates and reduced CapEx commitments, this agreement further adds to the strong distribution capacity of the company. Our balance sheet is robust with a very comfortable debt level today, which will continue to decrease going forward. With our first call date on our bond being in November '25, we, of course, will evaluate what is the best timing to extend debt maturities, lower interest cost, and flatten the repayment profile more, with that to further increase the free cash available to equity holders.

That said, it's important to bear in mind that our distribution capacity increases significantly also without any near- or medium-term adjustments to the debt profile. Moving then to the dividend section. As we promised, we have increased our dividend compared to previous levels and are happy to announce a cash dividend of $30 million or $0.125 per share, being the first step in increasing our dividend. This substantial increase highlights our strong financial performance and visibility of future cash flow. With the SPS program nearing completion and our rigs continuing going on to higher contracted day rates, we're in a strong financial position to return more capital to our shareholders going forward.

We're being asked today whether further dividend increases will pend on completion of the SPS's on Deepsea Stavanger and Deepsea Aberdeen, which are currently scheduled for April and May. To answer that question, I can confirm that there is both capacity and ambition to declare a further dividend increase when we announce our Q1 results in May. And with that, I'll pass the word back to Kjetil to sum up the presentation.

[Kjetil Gjersdal, executive]

Thank you, Frode. And yes, to summarize, I think these are rock-solid set of results for our company. We have achieved a record EBITDA and revenue since we did the spin-off from -- with OTL, driven primarily by higher day rates and good operational performance despite the challenging weather conditions that we have had here in Norway in the last couple of months.

We have more than doubled our dividend and are very well placed to further increase shareholder distributions going forward. We have a well-secured backlog at increasing day rates with our most recent fixture in the 500s. And finally, our balance sheet remains very strong. And we really feel that our forward outlook is quite exceptional with increasing cash generation, deleveraging and shareholder return well secured. As I said, this is a rock solid set of results, but it's really just a start for us, and we are very excited about what we have ahead of us.

[James Crothers, executive]

Great. Thank you, Kjetil and Frode. [Operator Instructions]. Operator, Sergey, can you please open the Q&A session whenever you're ready.

[Operator]

[Operator Instructions]

We'll take our first question from Fredrik Stene from Clarksons Securities.

[Fredrik Stene, analyst]

I had a positive surprise, I think, on the dividend side today. So congratulations to all shareholders, I guess. But with that out of the way, I would like to touch a bit more on the market. I think the commentary that you gave, Kjetil around the outlook, particularly on the Norwegian -- in the Norwegian sector was promising. It seems like there's been somewhat an attitude change maybe towards further exploration and making sure that the NCS has a long life ahead.

With that as a backdrop, you have already contracted full owned fleet for the next 2 years. How do you think it's possible that we could get meaningful contract announcements for work in 2027 and beyond already this year? I guess the impression that there could be quite meaningful discussions ongoing already. So any thinking commentary around that would be helpful. And also if you have any thinking about day rate developments beyond what you have already fixed for '25 and '26?

[Kjetil Gjersdal, executive]

Yes. Now what I can say, Fredrik, is I sort of agree on your sort of summary from sort of the focus that we experienced from our key clients. They are very clear on their ambitions to at least uphold or increase production going forward. And we know with the production decline set to happen if we don't do anything, I think it kind of supports that story.

I'm not going to promise any contract extensions from '27 and onwards this year. But what I can say is that we have meaningful interest from clients looking to secure Tier 1 assets from '27 and further on, and although those are early talks that -- we see that as supportive to our story. And we think with pressure now on internationally on '25, we are very happy and glad that we have backlog that we have taking us through '25 and '26. And we think that to have capacity available in '27 is a good place to be actually.

On the day rates, I think we're not to expect any further day rate increase in '25. I think that's sort of a takeaway from the whole market. But I think once we enter '26 and we start to see interest picking up and more tenders coming, I won't rule out that we can start to roll upwards.

[Fredrik Stene, analyst]

Okay. That's very helpful. And finally, just on the contracting side before I leave it to the next one. When you're exploring new opportunities, obviously, the Stavanger, you contracted for 5 years. So that was a very long contract. How do you think about contract length and staggering the roll-offs of your different rigs as you're looking into those 2027 plus opportunities? Any preferred contract length? Or would you chase rates instead or be kind of happy with a longer contract at the rate that's fair for longer-term work?

[Kjetil Gjersdal, executive]

We would love a very long contract with very high day rate. But I think we have some key clients that we are working with, but we also see interest from other potential clients. We like long-term relationships, I have to admit, because we see historically that if we do a good job, they will return for more. We -- I think we will keep an open mind on that one and just follow closely what's out there. But I mean, to jump around from sort of 2 wells to 1 well to 3 wells is not the preferred manner for us. We like to have I would say, sort of a minimum length of at least a year at a time, preferably be longer if the day rate is okay as well.

[Operator]

[Operator Instructions] It appears there are currently no further questions over the phone. So over to you, James, for any webcast questions.

[James Crothers, executive]

Yes. Thank you very much, Sergey. So we have a few questions coming in. I really appreciate that. Thank you very much for your interest.

The first question comes in, what are your thoughts around timing of further dividend hikes? Do you expect to stay here in 2025 or increase further when cash flow increases after the SPS's are finished in Q2?

I think we answered that, but Frode, maybe you would want to reiterate that question.

[Frode Syslak, executive]

Yes, you're right. I think we talked about on the dividend slide. There is ample room to increase and the ambition to increase again when we report our Q1 results in May.

[James Crothers, executive]

Great. Thank you very much. I suppose in a similar vein, what's the capital allocation priorities of the company? The investors here suggests, I assume dividend is the main priority, but is there any appetite for increased owned or external fleet?

[Kjetil Gjersdal, executive]

Yes, I can answer that. I think we've been pretty steady in our comps there earlier, and we will stick to that message. It would need something that supports our story. What I can say, we won't do anything to speculate on any deal that sort of might create the revenue or something. It would have to be something that's supportive to our dividend story.

We are following the opportunities that are out there. And if sort of it ticks the right boxes, that being price of asset, contract length, day rate and so on, we are absolutely into looking for that, but we will stay disciplined. It's hard to -- it's not easy to find those opportunities, but it's not impossible either. So we are constantly looking at that. And if it's the right deal to make, we'll definitely follow up on that.

[James Crothers, executive]

Thank you very much. We have another question in here saying, what is the impairment in Q4 amounted to? Frode, maybe you want to take that question?

[Frode Syslak, executive]

Yes. That question relates to the one-off write-down we did in Q4. That's related to the small BOP that we took off Deepsea Atlantic as part of the BOP upgrade. We did an evaluation in Q4 of the secondhand value of that small BOP and did a write-down of approximately $10 million. And the book value of that small BOP is now around $5 million.

[James Crothers, executive]

Great. Thank you. We've had a few questions in regards to the difference from the Board's perspective between dividends and share buybacks. Is there anything that perhaps we might want to add to that?

[Kjetil Gjersdal, executive]

Yes. We do discuss that with the Board, and it's not like this that we firmly rule out buybacks but for now, we have agreed that cash dividend is the preferred way at this time, but we are constantly evaluating that. And it might be that at some stage, we will introduce buybacks as well or probably a combination with buybacks and cash dividends. But we, for now, are concentrating on cash dividends.

[James Crothers, executive]

We've had a few questions, I suppose, more generally about how we see the Norwegian market. We spoke a bit about that already, Kjetil, but again, perhaps you might sort of give another sort of high-level view as to how you see Norwegian sort of market going forward.

[Kjetil Gjersdal, executive]

No. I can just reiterate what I said that we see a client portfolio who is very ambitious on the targets, both on their production targets and both upholding current production and also increasing it. And to do that, they're going to be in need of our services and our repair services. So that's the main reason that we are quite optimistic.

I don't think you will see like a boom coming out of this that you sort of will increase the rig fleet in Norway with 5-plus rigs or something like that. But I think it supports a very solid balanced market with a good balance between supply and demand going forward. So we are -- yes, that's the reason that we stay quite optimistic about the Norwegian sector.

[James Crothers, executive]

Great. Thank you very much. I'm very conscious of time. So I've got a few more questions that have come through, but perhaps I'll take them offline and answer them directly. And I think we'll probably just leave the Q&A session there just because we are running a little bit longer than normal. So I'll wrap up the call now.

Thank you all for joining and for your interest in the company. Our next conference call and results will be on the 14th of May. And as always, though, if you would like to speak about anything to add a bit more color on today's results or if you have any further questions, please do just get in touch with me directly, my contact details are on the website and the back of the presentation. Thank you very much. Operator, you can now close the call.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.