MB Petroleum Services LLC (ADNOCDRILL) Earnings Call Transcript & Summary

Hello, and welcome to today's ADNOC Drilling webcast and conference call about the acquisition of an 80% stake in MB Petroleum Services. My name is Bailey, and I will be the operator for today's call. [Operator Instructions] I'd now like to pass the conference over to Mr. Abdulla Ateya Al Messabi, ADNOC Drilling's CEO. Please go ahead.

Thank you. Thank you very much, and a very warm welcome from my perspective as well, and thanks for joining us today. We have called for this call really to brief you about the very exciting transaction we have done. This is the second transaction in the region, and we are really, really glad we have managed to reach the milestone. And hopefully, we will close it by the first half of 2026. Very much aligned with our growth strategy, sustainable, profitable, smart growth. I think this transaction will really add value at the moment we close. Good long-term contracts, good economics, EBITDA, I think a transaction at 4x, really, really great transaction. So very much aligned with our strategy in terms of profitable growth in the region. And as I said, I think we have a clear focused priorities. One of them is the sustainable smart growth, which is this transaction is part of that pillar. The other 2 strategies that I have shared with you on the last call is about really operational excellence as well as scaling up our technology and AI platform. And hopefully, soon you will hear from us on the other basically strategic pillars, how we are progressing. I will hand over to Youssef to give you a little bit more detail about the scope of the transaction and the financials, and then we will open it for Q&A. Thank you very much.

Thank you so much, Mohamed, again, reiterating Mohamed. Welcome to everyone. Thank you so much for taking the time, especially on a short notice. We were keen to speak to you at the earliest opportunity to walk you through this transaction, which we're extremely excited about. So thank you again for taking the time. I think starting with, as Mohamed said, this has to be set within the overall strategic context, and that context is really the accelerating growth that we're embarking on. So on top of the domestic accelerated growth initiatives, which we have went through during the Majlis recently in terms of the unconventional ramp-up to 300-plus wells a year, the integrated drilling services ramp up to 70-plus rigs and the additional island offshore drilling activity in 2029 and 2030. On top of all of that accelerated domestic growth, we're now also embarking on accelerated kind of inorganic growth, both through kind of Enersol, where we continue to see very strong synergies and deployment on the ground by the Enersol company as well as now through our regional growth, which started with the partnership with SLB earlier this year, starting with 8 rigs. And then now through this additional partnership with MBPS, we're adding on another 21 rigs, both doubling down on our footprint in Oman and Kuwait, where now we effectively with 19 rigs, we become the third largest drilling company in Oman. And with 6 rigs, we become one of the top 7 drilling companies in Kuwait as well as the 4 rigs in Bahrain as well as the Oilfield Services in Saudi as well as additional prequalification and additional countries of operation, which open up for us additional opportunities to expand even further in the region on both drilling and Oilfield Services. I think with the second acquisition now, we're really transforming this into a consistent blueprint and with the amount of similarities between the first and the second deal, which we'll walk you through, this now really is a full rollout strategy that we're able to execute on consistently in a very disciplined way to continue to accelerate growth further. So if we go into the details of this transaction, we're taking an 80% stake and hence keeping with us the partners, which is a long-standing blue-chip, well-reputed family in Oman with a 20% stake. Also in the other countries of operations, like Kuwait, they have established JVs with 4 different local partners. So effectively, we have the relationships now both in Oman and in Kuwait with local family groups that really allow us to continue to have that local relationships on the ground, which continue to future-proof the business. From a perimeter perspective, that includes 21 rigs, all of them are working, all are contracted. Out of these, you have 13 in Oman, 4 in Kuwait and 4 in Bahrain. These rigs also vary from a horsepower perspective between these rigs and the SLB was done earlier this year. We now have everything from 550 horsepower all the way to 3,000 horsepower across these countries and hence, being able to span all the type of kind of horsepower that the clients want as well as the compatibility with our operations in Abu Dhabi across these different horsepower, providing us additional regional mobility and flexibility for our regional footprint. From a financing perspective, we already have in place undrawn facilities that allow us to fully fund this transaction with debt. And hence, it has no impact at all on our continued dividend policy, both the guaranteed minimum dividend as well as the additional potential discretionary dividend on top. This effectively goes as part of our strategy to add additional leverage on the balance sheet to optimize the capital structure and continue to grow both the business and the dividend. With that, it is immediately accretive on all fronts. So on earnings, it's immediately accretive. On free cash flow yield, it's double digit compared to our high single digit. On IRRs, it is mid- to high teens compared to our low teens. So effectively it's accretive on all levels for us, similarly for return on equity, et cetera. It will be fully consolidated in our financial results, and hence, it would translate into immediate revenue, EBITDA and net income growth for us from as soon as the second half of next year and then the full financial impact will be in 2027. That's why when we come to talk about the guidance, the impact of this will really appear once we release the full 2027 guidance. That's where you would have the step change from this. We also have an agreed mechanism in place in terms of call and put options to be able to buy the remaining 20% stake after 3 years, which means that we have a clear sight down the line to be able to extract even more synergies between [ SLBC ] and MBPS and any other additional opportunities we pursue. For now, there are synergies between them, while our biggest focus is on maintaining these local relationships on the ground. And with time, we'll have even more avenues to consolidate and drive even more stellar [indiscernible]. From a size perspective, as we -- effectively we are focusing on specific markets in order to be able to really achieve synergies and size in these markets. So by being the third largest player in on that and within touching distance of players #1 and #2 in terms of size, we're really able to build a sizable position in Kuwait, that is effectively ultimately what we're also continuing to push forward. In terms of the margins of this business, so on an overall blended margin, we're around 30%. The drilling margins are higher, are closer to the high 30s to 40%, but we have also the Oilfield Services from our business [indiscernible], but higher return business due to the asset-light nature. So overall, we have a 30% EBITDA margin, which overall is effectively continues to be accretive from a returns perspective to our business. From a top line, that's around $190 million top line with growth effectively that will add a couple of hundred million dollars at least by 2027 to our top line and hence, effectively will be a boost. And on EBITDA, that's currently around $56 million. So again, by 2027, that will be an incremental $60 million to our current EBITDA coming from this. In terms of the rigs, if you look at the core drilling rigs, for example, the 6 rigs in Oman, 5 of which are built in the last 5 years and 4 out of the 5 are built in the last 3 years. So this is a new fleet effectively that we're able to kind of carry value on for a very long time. In terms of contract, this is a $100 million backlog. These are some of the longest contracts to be able to find in the region outside Abu Dhabi, where some of these contracts are fixed lease term, plus 2-year extension option, plus another 2 years [indiscernible] 10 years. Some of these expiries go all the way until 2033 and hence, they really give us long-term visibility on the business. With $900 million backlog at a 30% EBITDA margin, that's close to $270 million of implied EBITDA backlog. That's more than the entire valuation of the business. And hence, we're able to recover the principal plus a base level of return just from the contracted cash flows of the business over the next few years. We're operating in resilient geographies, Kuwait ramping up to 4 million barrels per day by 2035. Oman as well ramping up its capacity to above 1 million barrels a day, derisked by operating with world-class operators like KOC in Kuwait, [indiscernible] in Oman as well as some of the independent operators in Oman like Oxy, long-standing relationships with these clients. From a valuation perspective, we continue to come in at lower than 4x, closer to 3.5x and hence, completely derisking this from a valuation perspective as well and basically kind of recovering and having a payback within a very short period of time. Further upside potentially to come from having more Oilfield Services into these countries as well as now we have a significant pipeline of tenders in these countries for both rigs and services, which now with the operation and track record on the ground, we will be very well positioned in these tenders. So maybe to recap quickly, strategically, very much doubling down our strategy, core geographies, expanding capacity, high-quality clients, young rigs that are able to serve them, full suite of capabilities from a horsepower perspective. Financially, it's accretive on every front, earnings per share, free cash flow yield, IRR. From a capital structure perspective, [indiscernible] deploy a little bit more leverage, effectively extract more cash flows and improve the capital structure and the returns and then really a room to deploy additional rigs, additional services and go further. So we see it on one side, very much a core validation and testament to the strategy we've all aligned on. And second, really demonstrating that this was not just one deal in SLBC, that's a clear blueprint that we're now able to continue to take further. Thank you again for taking the time. We're very much looking forward to closing this within the first half of next year after all the approvals are completed. And would love for Mohamed and myself to take any questions you have.

[Operator Instructions] Our first question today comes from the line of Anna Kishmariya from UBS.

Thank you very much for doing this call to present the deal. It's always very helpful. I have several questions, please. First, maybe you can comment around the day rates in the countries and how it differs from maybe the previous deal. The second question would be around the timing for the contract. So in the presentation, you mentioned that 4 rigs contracted for 6 years. Could you provide some color around the other remaining contracts? And my third question will be around -- after this 2 deals, can we expect any further? Because I remember that you were mentioning that possibly near-term target is to increase the rig fleet internationally to around 30 rigs. So you're already there. Should we expect a pause now? And -- or do you see some further upside?

Thank you for the questions. I think on the first one, if you look at the day rate, the first transaction was done, it was around $125 million on around 8 rigs. So we were looking at around $15 million to $16 million per rig per year in terms of revenue, which was implying a blended day rate of around $40,000 per day and that is because the majority of the rigs were towards the higher horsepower that we effectively have. If you look at the second transaction we've done, if you look at the revenues of the drilling part of the business, it's around $140 million on closer to 20 rigs. You can see that the revenue per rig is closer to around $7 million, which is closer to around $20,000 daily, and that is because the majority of the rigs are towards the lower horsepower. From a kind of a returns and a margin perspective, you will see that they are relatively similar. So on the drilling side, if you exclude OFS, both of them trend between the high 30s to the 40% EBITDA margin. However, the difference in the implied day rate is a function of the kind of the portfolio of the rigs. So that's why for us, the real focus is on being able to deliver the highest right returns and the right margins with them, and the day rates will vary depending on that horsepower. In terms of your second question, in terms of the backlog, so the average kind of remaining contract period that we have in this business is around 5 years. So some of them go all the way until 2033, which effectively gives us from now up to 7 additional years. Some of them are shorter to 3 to 4 years. The blended average remaining life in the contracts we have is around 5 years remaining. Then on your third question, obviously, yes, because we wanted to always guide very conservatively. We will always use kind of around 30 rigs number because obviously, that deal is very advanced in the works and hence had a very high visibility over. We have additional opportunities to deploy additional rigs, whether organic or inorganic. But at this point, they're still at an earlier stage compared to where this deal was when we are more comfortable guiding forward. And hence, at that point, we are definitely confident to be able to scale above the 29 and hopefully add a meaningful number of additional rigs in the medium term. In terms of providing more specificity on that guidance, we'll do that immediately once we're more advanced in some of the tenders or the deals to the level that allows us to give that level of specificity again, that this is the number of rigs we're expecting. But we'll definitely see it as a growth driver that will continue to deliver in the medium term.

Our next question today comes from the line of Ildar Khaziev from HSBC.

Youssef, you talked about the further upside. You mentioned new tenders in these countries. What sort of tenders are these? I think there is a lot of -- there is a pipeline of tenders for jack-up rigs in Kuwait, for instance. Is this something you will be off chasing or the focus is rather on the onshore services given the nature of your acquisitions so far?

So on the offshore side, we are currently undergoing the prequalification process. We have very good engagement, the highest level. We obviously have a very strong track record in offshore in Abu Dhabi, where we have been operating for the last 50 years. We've done some of the most complex wells, high temperature, high-pressure wells. We hold -- on the offshore side, we hold the record for some of the longest factors that have been done globally in offshore. So we are very capable in that space. And we are going through the prequalification process and having very strong dialogue. And once that is administrative process is completed, then we'll be able to tender for these jack-ups. In the meantime, the tenders that we'll be pursuing in the immediate short term are the ones on the land drilling and the oilfield services.

[Operator Instructions] Next question today comes from the line of Giuseppe Villari from Morgan Stanley.

We have 2, if we may. First one is about the services in Saudi. Does this acquisition offer you services that you don't currently have in your portfolio? Or is there stuff that you can already offer your client? And then secondly, for the prequalifications, for instance, in Qatar, is it for both drilling and services?

So I think on the first part of your question, yes, on both. So effectively, one is MBPS offers us prequalifications in areas where we do not have currently prequalifications in terms of service, in terms of certain geographies. And hence, it's the ability to deploy services we already have, but into additional geographies that we now have access to. And second is the other thing is it also offers some of our additional services. We were effectively gradually expanding into, for example, something like well testing, which was always part of where we're evolving. As you take a step back, we started with drilling, then effectively drilling oil field services, then completion and then production services. So effectively, with MBPS having some of these production services in place, like well testing and others, it's basically allowing us both a geographic synergy as well as the product synergy in terms of further expansion into that area. I think when it comes to Qatar, so from an MBPS perspective, the focus is on the onshore opportunity in terms of being able to bring some of the services, like the fluids, et cetera, which they are doing in Oman in terms of being able to do that supply chain, which can kind of be done onshore and ultimately to serve offshore, but some of this effectively kind of logistics around the provision and the servicing around the provision of the chemicals. So that's the immediate opportunity that we see through MBPS. Separately through ADNOC Drilling longer term, there can be an opportunity around the potential jack-ups in Qatar. That is for further more of an ADNOC drilling opportunity for the medium to long term. But the immediate opportunity through MBPS will be more of the complementarity in Qatar to some of the services that they offer like [indiscernible] in the chemicals, which are already established in Oman and can be extended to Qatar.

[Operator Instructions] We have a followup question coming from the line of Anna Kishmariya from UBS.

Just a quick question. Do you plan to -- do you need to invest any additional CapEx for the rigs to maybe do some upgrades? Do you plan any investments further than the [indiscernible] amount?

So currently, the business operates at around kind of just under $60 million EBITDA. Around half of that at the current level is being reinvested predominantly into CapEx, in terms of maintenance and upgrades and then the remaining in terms of working capital, et cetera. So the kind of net income free cash flow level is around half of that at just around $30 million. In the medium term, there will be an opportunity for that to expand closer to $40 million of free cash flow as effectively this kind of upgrade CapEx comes down and we move into a more regular maintenance CapEx, which will be on average closer to kind of just under $1 million per rig per year.

Thank you. There are no additional questions waiting at this time. That will close today's call. Thank you all for your participation. You may now disconnect your lines.