ADNOC Drilling Company P.J.S.C. (ADNOCDRILL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to ADNOC Drilling's Third Quarter 2024 Earnings Webcast and Conference Call. My name is Max Cominelli, Vice President of Investor Relations. Before handing the floor over to our main speakers, I would like to draw your attention to the disclaimer that you will find on the second slide, which I encourage you to read carefully. The text contains important information that advise caution on the interpretation and limits of historical data and forward-looking statements. I would like to remind you that this presentation and the recording of this call will be available on our website shortly after the end of the call. Today's presenters are our Chief Executive Officer, Abdulrahman Alseiari; and our Chief Financial Officer, Youssef Salem. As always, after the presentation, we will have a Q&A session where we will be happy to answer your questions. I will now hand over the call to our CEO, Mr. Abdulrahman, who will lead you through the strategic developments and the key highlights of the quarter.

[Foreign Language] Good afternoon. I'm pleased to share that we have delivered record-breaking results in the first 9 months of the year, while advancing our ESG strategy. Sustainability continues to be a driving force in ADNOC Drilling's growth as we stay committed to maximizing value of our clients and shareholders. In the third quarter, we outperformed our energy intensity targets and stayed on track with our greenhouse gases reduction goals. This success is due to our new hybrid rigs that we have introduced and efforts to improve our camp's grid connectivity. Additionally, ADNOC Drilling exceeded the target of total recordable incident rate, achieving a frequency of 0.55 compared to a target of 0.63, showing our focuses on maintaining high HSE standard. At the end of September, our fleet was 140 rigs, up from 124 a year ago, bringing us closer to our target of 142 by year-end. Financially, we have delivered outstanding results with third quarter revenue growth of 32% year-on-year, surpassing $1 billion. EBITDA grew faster than revenue, achieving an industry-leading margin of 50%. Our focus on profitability led to a 30% increase in the net profit year-on-year. In August, we distributed an interim dividend of $394 million for the first half of 2024, a 10% increase year-on-year, in line with our new progressive dividend policy. During the third quarter, ADNOC Drilling was included in the MSCI indexes. Our increased free float of 16.5% offers greater liquidity and accessibility for more investors. Thanks to the increased visibility of a strong 9-month results, we have updated our 2024 guidance on key metrics. Our CFO will provide more details later. We have also explored new growth opportunities, including Enersol's 3 acquisitions, which brought in over 120 patented technologies. Additionally, our joint venture, Turnwell, has made significant progress by accelerating its 144 unconventional oil and gas well program after successfully delivering the first wells. Next slide. Since the joint venture started, Enersol has successfully announced 3 acquisitions for a total investment of over $0.5 billion. These transactions enhanced ADNOC Drilling's technological capabilities and strengthened the company's position in advanced technology and intellectual property. In the third quarter, Enersol completed the acquisition of majority in Gordon Technologies, increasing its stake to 67.2%, which boosts our capabilities in advanced measurement-while-drilling technologies. Enersol also announced the acquisition of 51% in NTS Amega, expanding our advanced manufacturing and tool repair capabilities; and 100% stake in EV Global, a leader in vision-based diagnostics and analytical services for the oil and gas sector. Enersol now holds a suite of patent technologies across various markets with more to come, [Foreign Language]. Moving on the Turnwell, the company has made significant progress. The efficient start-up of its operation has led the client to accelerate the time line of the Phase 1. Now this is a great opportunity to further position us as a partner of choice for delivering transformational projects and unlocking the UAE's world-class unconventional resources. Finally, we are making progress in expanding our regional presence and growing our drilling and oilfield services activities beyond the UAE, with the contract extension in Jordan and the prequalification processes in both Kuwait and Oman. We believe that our focus on unconventional resources, regional expansion and developing a strong technology-driven service portfolio will support our future growth. With these initiatives underway, I'm optimistic about ADNOC Drilling's future as we continue to advance the UAE's energy ambitions. I will now hand over to our CFO, Youssef, who will provide more details on our operational and financial performance for the period.

Thank you, Mr. Abdulrahman. Good day, everyone, and thank you for joining today's earnings call. In the third quarter, we continue to deliver on our ambitions to become the largest integrated drilling services company by rig fleet size in the world. We ended the quarter with a fleet of 140 rigs, consisting of 95 land rigs, 35 offshore jack-ups and 10 island rigs. We expect to add 2 jack-ups by year-end to close the year with a fleet of 142 rigs. Moreover, among the 11 hybrid land rigs that entered the rig fleet count in the first half of 2024, 5 were operational at the end of the second quarter, while the remaining 6 rigs started operations during the first part of the third quarter of 2024. The impressive fleet growth we had in the last few years leaves us strongly optimistic on our goal of supporting ADNOC in achieving a production capacity of 5 million barrels per day. With regards to drilling activity, we drilled 175 wells in Q3 '24, an increase from 148 in Q2 '24, driven by new rigs commencing operations. Moreover, our integrated drilling services rigs have seen a 19% overall improvement in Q3 compared to the 2023 benchmark. Our operational efficiency strategy through IDS has resulted in cumulative savings of close to $400 million to ADNOC since its inception in 2019. OFS performed IDS on 50 rigs in Q3 '24 compared to 41 rigs in Q3 '23. And the segment offered at least one discrete service to 48 rigs between onshore and offshore in the third quarter. All in all, oilfield services are offered to around 70% of the rigs, and this coverage is expected to increase over time as we further increase the number of IDS and discrete on account of enhanced efficiency. Bottom line, we continue to look towards an uptick in the volume of OFS activity during the year, in line with the planned phasing of IDS rigs ramp-up and the continued progress on unconventionals. Moving on to our decarbonization initiatives. Next slide, please. We continue to make substantial progress in reducing emissions from our camps. As you know, the Madinat Zayed camp has been connected to the grid since February, and we are on track to connect the Tarif, Habshan and Bu Hasa camps. Moreover, we are happy to say that the 16 newbuild hybrid rigs are now all operational. These rigs will support us in monitoring and optimizing energy intensity, and they're equipped with battery energy storage systems, enhancing efficiency by storing energy for peak usage times, thereby reducing overall fuel consumption and emissions. We also successfully installed solar mobile power on AD51, taking a significant step towards integrating renewable energy into our operations. Overall, we are pursuing highly ambitious decarbonization initiatives with the aim of reducing the carbon footprint and enhancing operational efficiencies. And we believe that Enersol will play a key role in driving these efforts as we continue to acquire best-in-class, tech-enabled OFS companies that provide solutions and technologies aligned with our goals. Moving on to financials on the next slide, please. I'm pleased to say that ADNOC Drilling delivered yet another record quarter, with the company achieving its highest quarterly revenue, EBITDA and net profit. Our strong performance in the quarter was mainly driven by the full operation impact of land and jack-up rigs commissioned in stages from the third quarter of last year until the third quarter of 2024. ADNOC Drilling revenue reached over $1 billion and EBITDA was $510 million in Q3, marking growth of 32% and 34% year-on-year, respectively, with an industry-leading EBITDA margin of 50% in the third quarter. Moreover, net profit grew 30% year-on-year to $335 million in Q3 with a margin of 33%. Sequentially, revenue grew 10%, EBITDA 8% and net profit increased 14% in Q3 '24. The company accrued $28 million in taxes in the third quarter, which reflects the introduction of a 9% income tax last January. In this regard, we continue to invoice our clients for the reimbursements. I want to point out the share of profits from joint ventures in our P&L. This includes ADNOC Drilling 51% of Enersol's net profit in the OFS segment. And since the third quarter, also 55% of Turnwell net profit from unconventional business, mainly in OFS segment and a bit in the Onshore segment. For Enersol, we account for our share of profits from the joint venture in the OFS segment EBITDA using the equity method. In the first 9 months of 2024, Enersol contributed $4 million through that line to ADNOC Drilling, thanks to the investment in Gordon Technologies. Gordon is now 67% owned by Enersol following a 2-step investment, totaling to $205 million for ADNOC Drilling, with $117 million invested in the third quarter when the transaction to reach 67% was completed. Turnwell, our unconventional business, made its first contribution to our P&L in the third quarter with about $33 million in revenue. This was split between $27 million in the OFS segment and $6 million in the Onshore segment. Starting from Q3 '24, we account for Turnwell's profit through an effective consolidation, which I will discuss later. At the end of the third quarter, cash from operations was about $315 million, slightly down from $337 million in the same period last year due to changes in working capital from increasing activity levels. Cash CapEx for the third quarter, including prepayments and excluding accruals, was $197 million, totaling $544 million for the first 9 months. For full year 2024, we expect CapEx to be between $800 million and $900 million as the company continues its rig acquisition program. The balance sheet is healthy with a net debt of around $2.2 billion at the end of September, resulting in a leverage ratio of 1.2x EBITDA. Now let's look at revenue for the various segments. Next slide, please. Starting with the Onshore segment, revenue increased by a strong 29% year-on-year to $487 million in the third quarter, thanks to new rigs starting operations. Sequentially, Onshore revenue rose over 10% due to the higher activity from new rigs commencing operations since the beginning of the quarter and the positive impact from unconventional business related to land drilling. The Offshore Jack-up segment had a very strong quarter with revenue growing 46% year-on-year to $290 million due to higher activity from jack-ups. Sequentially, revenue grew 2%, driven by an additional calendar day in Q3, marginally offset by some maintenance in the third quarter. The Offshore Island segment saw a slight revenue decrease of 4% year-on-year and 2% sequentially to $52 million due to a one-off mobilization revenue from an island rig for the Hail and Ghasha project last year. In the oilfield services segment, revenue rose 36% year-on-year to $197 million, mainly driven by the increased activity in directional drilling and drilling fluids. Sequentially, revenue increased 25% due to increased activity in drilling fluids and the contribution of the unconventional business. As already mentioned, the overall volume of activity of this segment is expected to increase. This is in line with the planned phasing and driven by IDS rigs ramp-up and the unconventional business. Over to the next slide, please. Now let's see how revenue performance impacted EBITDA. For the Onshore segment, EBITDA increased 27% year-on-year and 14% quarter-on-quarter, reaching $241 million with a margin of 49%. This impressive growth was underpinned by growth in operations and operational efficiencies. In the Offshore Jack-up segment, EBITDA saw a remarkable 51% year-on-year increase to $198 million with a margin expansion to 68%. This margin expansion shows how the growth leads to improved operational efficiency. Sequentially, EBITDA rose 4%, thanks to higher revenue and margin increased on higher operational efficiency. The Offshore Island segment experienced a reduction of EBITDA to $32 million from $37 million in Q3 2023 with a margin of 62% due to reactivation costs for island rigs assigned to the Hail and Ghasha project. Sequentially, EBITDA declined by 3%. In the Oilfield Services segment, EBITDA increased 70% year-on-year to $39 million with an EBITDA margin improvement of almost 4 percentage points to 20%, driven by higher revenue. Sequentially, EBITDA rose by 5% due to higher revenue and contributions from Enersol and Turnwell, and was partially offset by the activity mix. Additionally, the unconventional business contributed around $33 million to revenue in the third quarter 2024, with $27 million in the OFS segment and $6 million in the Onshore segment. Next slide, please. For the second consecutive quarter, we are pleased to upgrade our 2024 guidance, driven by increased operational visibility and strong performances across our business segments. This shows our ability to execute strategic initiatives effectively. For full year 2024, we now project revenue between $3.8 billion to $3.9 billion, up from the previous range of $3.7 billion to $3.85 billion, driven by an increase in our Onshore segment revenue guidance to $1.7 billion to $1.8 billion. Similarly, we increased EBITDA guidance to $1.85 billion to $1.95 billion, and net income guidance to $1.2 billion to $1.3 billion. For the medium-term guidance, we've added conventional to the EBITDA margin target to be more granular in light of the effective consolidation of Turnwell for Phase 1 of the unconventionals. For more details, please refer to the first slide in the appendix, which provides an illustrative view of how Turnwell accounting should reflect in our P&L. In essence, ADNOC Drilling expects from unconventional Phase 1 to generate cumulative net income margins of 9% to 10%, broadly in line with the OFS segment. Moving on to the CapEx front. We expect it to gradually decrease in 2025, primarily composed of the bulk of the $210 million CapEx for the 3 new island rigs arriving in 2026, additional rig and OFS equipment driven by the accelerated unconventional program, OFS equipment for growth in OFS IDS and discrete services market share. This CapEx is expected to drive growth towards the top end of the medium-term revenue growth guidance. Moreover, we expect to have additional inorganic growth investments in our JV Enersol up to $560 million in the rest of 2024 and 2025, as $205 million have been invested in the first 9 months of 2024. Overall, the positive adjustment in guidance reflects the increased visibility into our operations, especially with the new land rigs starting in the third quarter and contributions from the initial phase of our unconventional operations. Looking ahead to the fourth quarter, we expect sequential growth around mid-single digits as we continue to ramp up our operations. This is implicit in our updated guidance and is based on the expectation that the 2 new jack-ups will join our fleet in November, and will start operations and contributing to revenue towards the end of the year. Thank you. I now hand over to Mr. Abdulrahman for closing remarks.

Thank you, Youssef, and the team. To recap, ADNOC Drilling had a record-breaking quarter with strong financial results and updated guidance. Our inclusion in the MSCI indexes helps broaden our investor base, improving market visibility and liquidity. We are making significant progress with Enersol acquisitions and accelerating our entry into the unconventional segment. These developments, along with our regional expansion goal, position ADNOC Drilling for new opportunities and future growth. We remain committed to our ESG agenda by pursuing ambitious sustainability goals. These achievements pave the way for further growth, ensuring ADNOC Drilling continues to lead in the operational excellence, innovation and value creation. Thank you for joining us today. And I will now hand over to the moderator to open the Q&A session. Thank you very much, [Foreign Language].

[Operator Instructions] Our first question for today comes from Sashank Lanka from Bank of America.

Congratulations on another strong set of results. I have 2 questions, both related to the unconventional growth strategy. The first one is you do guide for around $1.7 billion revenue from Phase 1. You also did announce recently about an accelerated Phase 1 program. You've realized about $33 million revenues in Q3. So just wondering what the trajectory of revenue realization will be over the next 4, 5 quarters. The assumption from my end would be it would be quite a steep increase given the $1.7 billion is being accelerated. That's the first question. And the second question is related to Page 18 of the presentation, where you've shown an illustration of how the mechanism of Turnwell JV works. And it seems like Turnwell is -- basically, it's a contract that you have given Turnwell from ADNOC Drilling perspective. So can we assume that in Phase 2, probably there would be a situation where there's no Turnwell involved and you get the whole contract and work accordingly instead of giving it to Turnwell? Just trying to understand the mechanism here.

Thank you, Sashank. And thank you for being here also. And definitely, I mean, 2 important questions on the unconventional. There is the plan to accelerate the unconventional since we had a good start. I mean one of the key success for that is having this Turnwell establishment and really putting all those experiences together to deliver a world-class kind of service to our clients. Now definitely Youssef will pick up on the financial side, but as the company has started working and delivering this objective and -- definitely we'll have more probably discussion here. Okay. Youssef, if you can...

Absolutely. Maybe starting with the second point. So yes, it is a fair assumption that 100% of the economics for Phase 2 as a starting point will be for ADNOC Drilling. Now whether that takes the form of, at that point in time, Turnwell or any other vehicle executing on this contract is owned 100% by ADNOC Drilling or that there is a partner being brought on board, but then there's an upfront consideration being paid by these partners for the share of the economics. And hence, either way, ADNOC Drilling would ultimately get 100% of the economics either over time or partially over time, and partially in the form of an upfront consideration. In terms of Phase 1, so the $1.7 billion revenue was originally anticipated to be gradually over kind of 2.5 years until the end of 2026, with the potential acceleration depending on the continued kind of upward performance, as [ Mohammed ] indicated, which has been substantiated so far in the first few wells in terms of delivery on well time, that can potentially be brought forward. In all cases, we have our medium-term guidance which runs until end of 2026. And hence, the balance of the unconventional will be during this overall period in line with the CAGR that we've outlined, which incorporate the $1.7 billion.

Okay, Youssef. If I can just follow up. In terms of winning the Phase 2 contract, are there any KPIs that we should be looking at or you will be as a company focused on to win the contract from ADNOC for Phase 2?

No, definitely Turnwell Phase 2 is something we need to deliver certain targets. And hopefully, that will be during Phase 1 to work it out. And that's the whole intention, I mean, of establishment of this entity, to be able to take the project to the next level. So, so far, things are going positive. And we are expecting we will be able to continue with that output and move to the Phase 2. Definitely we'll be updating over the time, I mean, as we go forward. We have 144 wells in hand that we are working with. So hopefully, further updates will be coming in different venues or calls that we have as we just started. As you are aware, I mean, it's only 1 quarter now since we started, so there is more to update, will be happening as we go forward.

Our next question comes from Guillaume Delaby of Bernstein Societe Generale Group.

Two questions, if I may. Maybe I'm going to repeat, to a certain extent, the question which has just been asked just to be fully sure to understand. So basically, you will update in due course for Phase 2. What should we expect in terms -- and I'm really repeating the question just to be sure to get the answer, in terms of the speed at which unconventional is going to develop? And also, I would like also to conclude with maybe, what I would call, the near-housekeeping question. The $33 million unconventional revenues, they're split $27 million and $6 million, or 75%-25%. Should we assume that it is going to be a recurrent split going forward?

Sure. Thank you very much. I think Turnwell or unconventionals will be -- a lot of questions coming from that. I mean as I mentioned earlier, we just started and things are progressing very well, which leading to clients asking for expedited deliveries, I mean, to accelerate the program. Now today, at least from the work that we have been doing, we've seen already as good as 30% and 40% improvement in deliveries. Now definitely, that will expedite the program. Now the whole intention for us and to meet certain delivery time to make it more economical for us and for the client to continue with the Phase 2. So I would say at least we will be in a better position probably towards mid next year to really see how effective will be the learnings and everything moving forward. So from there, we will be able to probably put more solid expectations. Now we know in unconventionals, there are wells being turned over in less than 2 weeks in certain areas. Now we achieved already like 20 days a year, 22 days now in one of the wells. Whether that continues to be with us, we are expecting yes, because we are mixing all those expertise together to deliver. So I would say, yes, it will be expedited. And as I mentioned earlier also, we'll be more updating as we go forward. And probably mid-'25, we'll be in a better position to see very solid information that we can plan based on that also.

And yes, the 80-20 split between services and onshore drilling and unconventional, we expect that to be recurring as that's reflective of the division in the well plan by the client between these 2 areas. And that's great for us because that basically puts the vast majority of the spend in the more asset-light oilfield services category, which allows us to overall achieve higher returns on the unconventional and become kind of return accretive for the overall business. And continue to drive rapid growth on the OFS side, which is already now at 98 rigs, 50 integrated and 48 discrete. And now in the unconventional, we have 100% market share on the OFS. So that will continue to drive rapid growth on the OFS. And all of that is why we're kind of updating that in the medium-term guidance, we'll be trending towards the kind of the upper end as all of these growth levers come together.

Okay. May I ask a quick follow-up? You mentioned that you are more or less targeting the high end of the medium-term guidance in terms of revenue growth. And you mentioned CapEx. In your medium-term CapEx guidance, you only include -- at least maybe I'm wrong, but I think you only include maintenance CapEx of $200 million to $250 million. What kind of reasonable CapEx should we, I would say, forecast in the coming 2 or 3 years? And this additional CapEx, is it going to be only for unconventional and -- or what should we basically assume? Can you give us a little bit of a steer?

Of course. So I think starting with 2025, if you start with the top end of the maintenance guidance of $250 million given the kind of increased fleet on both the rig side, where we're ending this year with $142 million and the next year up to $145 million; or on the services side, where now we have 98 rigs kind of service equipment and that, again, will be increasing significantly over both Q4 and next year. So starting with the $250 million. Then on top of that, adding the bulk of the 3 island rigs which will arrive in 2026, but the majority of the CapEx will be during the course of kind of next year. So if you kind of round that up to kind of $450 million so far. Then if you also include the kind of potentially land rigs expansion as we potentially look at additional land rigs to service the kind of unconventional Phase 1 exploration as potentially up to 3 kind of land rigs, which we include there. Alongside, there are also associated services and fracking equipment, that kind of rounds you up to around $550 million. And then if on top of that you add the oilfield services expansion CapEx, which, as part of the Q4 results and the full year guidance, will be including a significant expansion. You see this quarter was static at 50 IDS rigs because we're very focused on the expansion in the discrete side and building some of the service one by one. But a lot of these will now become integrated by the end of this quarter and next quarter. So a significant expansion on the OFS space there. So again, rounding that up, that will take you to around $650 million, including another $100 million of OFS CapEx. If you look at today with kind of where this year is 2024, it's $800 million to $900 million. And hence, we see that kind of, let's say, gradual decline next year. So I think the identified CapEx currently is around $650 million. Obviously, there's potential for additional growth and acceleration opportunities on top as well. So we expect to kind of end up somewhere between that $650 million buildup we mentioned and the $800 million, which is the bottom end of this year, because definitely next year is expected to be lower than this year. This is purely on the organic expansion side. On top of that as well, you would have the deployment of the remaining Enersol piece. So Enersol in total, our share of Enersol is $765 million. Around 1/3 of that has already been deployed so far this year, so the remaining 2/3 will be deployed between the end of this year and beginning of next year.

Our next question comes from Ruben Dewa of Jefferies.

I just had an additional follow-up on the Phase 2, and hopefully, it's kind of a bit more broad brush. But I just wanted to see, should we assume that the economics in terms of revenue per well and the CapEx per well are very similar to Phase 1? That's my first question. And just on the second one, on your rig expansion, so I think you mentioned that you're looking to get to 145 rigs by the end of 2025, and I think it was 148 by the end of 2026. Are all of these -- or are all the increases in the rigs, are they all IDS rigs as well? So would it be safe to assume that your IDS -- the number of rigs increases from 50 to, say, 55 IDS rigs, then 58 IDS rigs by the end of 2026?

Thank you, Ruben. Let me just understand the first part of the question. You mentioned the...

For the first phase, it's $12 million per well. What would the second phase look like?

Yes. The whole intention for us, I mean, is the drive to bring the project into economical phase. We are targeting to achieve the oil was below 8 and the gas was below 12. Definitely, I mean, the expectation is to go even lower than that. Is that possible? Yes, it's possible. It requires effort. It requires change of practices, change of mindsets, which is the whole intention of this joint venture, which we have today with Turnwell. And with that kind of setup that we have, we are more confident that we will be able to deliver those kind of numbers and even better than those. So that's the part I hope that answers your question. On the IDS, I think if you can take that.

Definitely, definitely. And Ruben, really great to start having you on these calls and part of the ADNOC Drilling ecosystem. So on the integrated drilling services side, yes, we definitely expect to even cross these numbers that you mentioned. So in addition to kind of looking to have the new rigs come in at IDS, whether upfront or after joining, we also have a lot of the existing rigs in the fleet being able to kind of also get moved into IDS. I should add, the 58 number you mentioned, we expect to hopefully between -- to be between there maximum by Q1 of next year. So hopefully much, much faster as well. And then after that, we kind of continue to trend gradually towards 50% of the overall fleet being in IDS. So by kind of 2026, 2027, we hopefully will be at 70-plus rigs at that point in time.