Arabian Drilling Company (2381.SR) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the Arabian Drilling Q2 and H1 earnings call. My name is Elliot, and I will your coordinator for today. [Operator Instructions]. I would now like to hand over to Ricardo Rezende with Morgan Stanley.

Thanks, operator. Welcome, everybody. Good afternoon. Thanks so much for joining the Arabian Drilling Second Quarter and First Half Earnings Call. It's a pleasure of hosting the management to have the discussion. My name is Ricardo Rezende. I lead the oil and gas coverage for the Middle East and Eastern Europe at Morgan Stanley. Just before we start, I got to go with some disclaimers [indiscernible]. This webcast is intended for Morgan Stanley [indiscernible] and corporate clients, as well as for Morgan Stanley employees. It's not for members of the press. If you're a member of the press, please disconnect now and reach out separately. Please also note that this webcast is not for retail and individual wealth management clients. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. And with that, I would like to pass it over to Bassem ElShawy, Head of Investor Relations. Bassem, over to you.

Thank you very much, Ricardo. Thank you, Morgan Stanley for hosting this call. Good afternoon, ladies and gentlemen, thank you for taking the time to join us today for the first half and second quarter 2025 earnings call. I'm joined today by Ghassan Abdulaziz Mirdad, CEO; and Hubert Lafeuille, the CFO. We will begin with an overview by Ghassan followed by an in-depth analysis of our financial and operational performance for the first half and second quarter buyback. After our presentation, we will open the floor for questions. Please note that this presentation includes forward-looking statements. We encourage you to review the disclaimers provided in this document at leisure for more details. Now I'll pass the presentation over to Ghassan.

Thank you, Bassem. [Foreign Language] Good afternoon, and thank you for your participation in today's call. I'll start by giving you a high-level view on the financials, which Hubert will cover in more details in the following slides. H1 2025 compared to H1 in 2024 last year highlights 2 important facts. The impact of the suspension that started kicking in gradually end of H1 2024, offset by the unconventional land revenue contribution. On the EBITDA side, we closed H1 with an EBIT margin of 38.5%, slightly below the 48% mark. As we expected and mentioned during our last earnings call, achieving 40% will remain challenging under the prevailing market conditions. Despite of the current headwind, we are showing resilience with a cash flow generation of circa SAR 650 million and the net debt to EBITDA still below 2 multiples. Moving to the quarter-on-quarter performance. We have a slight revenue decrease of 5% while within the guidance we gave. As you recall, we had a strong rig move performance that pushed our revenue and profits up in Q1 2025. Q2 is showing more normalized numbers. While the decline in revenue, only 5%, we have seen a substantial drop on our net income due to the combined effect of high-margin rig move activity in Q1 that did not repeat as well as some nonrecurring income in Q1. In addition, in Q2, we had planned maintenance signed for one of our offshore rig that spend more time in the shipyard in Q2 versus Q1. This rig is now back into operation. Now looking at the operational indicators. I will focus on key indicators that had an important impact. First, I am happy we announced that the intake of SAR 2.4 billion of backlog in Q2 2025, which is the largest at log impact since the award of the unconventional rigs in Q3 2023. This backlog addition relates to 6 rigs that were extended for a total of 39 rig years. Land segment contributed most of this intake highlighting the continuation of land segment going forward. On the other hand, our utilization rate continued being affected by ongoing suspension and Hubert will cover it in more detail. On the rig move, although we have the same activity quarter-on-quarter, this quarter was affected by longer duration of the move during -- due to an external factor. Finally, and more importantly, I am thrilled for signing our first international contract with a DCC-based oil operator. We signed this contract directly with the client. This is a significant milestone for us as it is the first win in our geographical expansion. After having a 13 unconventional land rigs fully operational, with a sustainable revenue stream of close to $400 million since the beginning of the year, I am proud that we are now delivering on what we have been promising the market since the IPO. It is important to note that the offshore rig committed to this international contract is one of our suspended rigs and is scheduled to start operation in Q1 2026. We have obtained permission from our clients, which allowed us to use this suspended rig and other tenders while keeping its existing contract active. The rest of the suspension rigs are actively participating in more than 8 tenders across different geographies. Now I will pass it to Hubert to walk you over the backlog and financials in more detail. Hubert?

Thank you, Ghassan. Very good afternoon to everyone, and thank you for joining our earnings call. Let's start with the backlog. So on the backlog, we closed the quarter with a backlog in excess of SAR 11 billion. As mentioned by Ghassan, we have added SAR 2.4 billion in our backlog this quarter, which was the largest intake since 2023. These backlog additions have improved our top line visibility with the remaining contract tenor of 2.4 years per rig on average, up from 2.0 in Q1 and the book-to-bill ratio on trailing 12-month revenue of 3.2 multiple, up from 2.7 in Q1. The day rates associated with this extension are solid compared to the market. On the rig activity front, as mentioned by Ghassan, our utilization rate keeps being affected by the ongoing suspension. We have 3 more rigs suspended in Q2, 2 lands and 1 offshore. We now stand at 13 in active rigs out of a total fleet of 61 units, which means that our utilization rates at the end of Q2 was 79%. You can refer to the appendix of this presentation that gives a more detailed view on the breakdown of these 13 inactive rigs between what is suspended, what is uncontracted and what is land, what is offshore. In terms of contract renewal, if you recall, we had 24 rigs to be reviewed in 2025 as we started the year. We have achieved good progress as we have successfully renewed 10 weeks as of 30th of June, plus 1 more offshore rig that we announced on 14 July. This means that out of the original 24 weeks, we have secured renewal for almost half of them. So as of 30th of June, we still have 14 rigs to be renewed, which is broken down between 12 land and 2 offshore. So if we look at the 12 land, on the 12 land rigs, we have 11 land rigs that relates to the gas LSTK with SLB. So we have a 1-year option that we expect to finalize in Q3. And then we have 1 more land rig, which ends contract in Q4. On the offshore, 2 more offshore rigs to be renewed, of which 1 was renewed in Q4. This is the market announcement that we did on 14th of July that I just mentioned. And the other one is the second of the 2 leased offshore rigs that just got suspended [indiscernible] got suspended in Q2. So the contract for these leased rigs end in Q4, and it has a 1-year auction. So the rigs will be returned to its owner if the option is not exercised. Now let's have an overview on the financial performance, and let's start looking at the year-to-date figures for H1 '25 versus H1 '24. On the revenue side, the drop that we see between '25 and '24 was limited because the impact of the suspension and the contract termination, which amounted to roughly SAR 460 million was partially offset by the revenue contribution from the unconventional land rigs of about SAR 330 million. We dropped -- our EBITDA dropped by 14%, which is in line with the revenue shortfall. The net income dropped by roughly SAR 100 million, which is made of SAR 100 million of EBITDA shortfall, plus another SAR 100 million of costs in 2025, mainly due to the additional depreciation of the unconventional rigs. And this was partially offset by an asset impairment of SAR 100 million that we recognized in 2024. On the CapEx side, you can see there is a significant reduction as the unconventional rig CapEx cycle was in full swing in 2024. Our net debt increased by roughly SAR 240 million, which is mainly due to lower cash on hand position of circa SAR 200 million, while the gross debt only increased by SAR 40 million as the new debt facility that we took in 2025 was offset by ongoing loan repayments. Now looking at the quarterly figures. The revenue dropped by 5%, mainly due to the high renew performance in the last quarter that did not repeat in Q2. Then in Q2, as mentioned by Ghassan, we also had more maintenance time for a planned shipyard for one of our offshore rigs. And both impacts were partially offset by the revenue contribution of the new service vessel that was acquired in Q1 and has started its 2-year contract in June. Our EBITDA is down by 20%, 21% Q-on-Q due to the revenue loss just explained as well as some nonrecurring income that were recognized in Q1. In addition, we have incurred higher rig move expenses due to longer rig move duration due to some external factors such as waiting on weather and restriction to conduct certain key rig move activities during night time. On the net income, the Q-on-Q net income was mainly affected by the EBITDA shortfall just as discussed, as well as additional financial interest expenses due to a slightly higher gross debt partially offset by a few other items. Now let's move on to our segment analysis. So our segment analysis land versus offshore, you can clearly see the shift in the revenue mix between 2024 and 2025. While the revenue split was roughly 50-50 in 2024, we can see now the land revenue now makes up for almost 3/4 of our top line in 2025. Now looking at the EBITDA progression, as Ghassan mentioned, our EBITDA is slightly below the 40% mark as we expected. However, we're still showing some good resilience during these challenging market conditions. Now looking specifically at the segment, let's talk about the land on the upper graph -- upper side of the slide. The land revenue, we have a progression year-on-year of almost 24%, which is mainly due to the unconventional and the performance of the rig moves that we had in 2025. That was, of course, partially offset by the suspension and the uncontracted rig. The gross profit increased from 5% to 15% is due to the impairment that was recognized in 2024. And then in 2025, we had the high rig move performance that pushed up the gross profit as a percentage point. Now if you look at the offshore segments, on the bottom, so the revenue dropped by 43%, and this is the combined effect of the suspension, the contract terminated, the discounted rates. We had some shipyard activity as well in 2025. So all of this contributed to the drop. And it was partially offset by the new barge that started contract in June. And again, if you look at the gross profit, the decrease from 40% to 22% is due to the overall lower rig activity and discounted day rates. The next slide is about the net income bridging. So as you can see, the main components of the decrease relates to the impact of the rig move performance Q-on-Q, which accounts for SAR 54 million, as well as some nonrecurring income that were recognized in Q1, which accounts for SAR 30 million. So collectively, these 2 items represent unfavorable volumes Q-on-Q of SAR 67 million, which is roughly 90% of the net income that we recognized in Q1. And then in Q2, as mentioned, we have also incurred more planned maintenance time for one of our offshore rig that was in shipyards that accounted for a SAR 16 million negative buoyance. Our finance expense was slightly up by SAR 4 million due to drawing a SAR 300 million bank facility at the end of Q1. And now to add on positive note, we start seeing some good payoff on the cost reduction initiatives with a significant SAR 40 million cost decrease quarter-on-quarter on our SG&A expenses. Now if you look at the cash-on-hand bridging, our cash-on-hand position remained solid with shy of SAR 400 million balance. If you look at the CapEx, you can start saying, so we have a CapEx spending of SAR 196 million, we can start seeing a more normalized spending as we have now completed our CapEx growth cycle. Another noteworthy event is the improvement on the net working capital quarter-on-quarter. Our DSO and client collections have improved compared to Q1 '25. We have debt reimbursement of SAR 72 million. So during the quarter, we paid back roughly SAR 55 million of debt and the rest in lease obligation, and there was no new debt during the quarter. Finally, we paid in Q2 SAR 120 million of dividends that related to the period of H2 2024. My last slide relates to the debt profile. As you can see, our balance sheet remains robust, reflecting a strong solvency position with our net debt to trailing 12 months EBITDA at 1.9% multiple and net debt remaining below 0.5 multiple of equity in spite of the current headwinds we are facing. This metric demonstrates our financial health, which supports our capability to fund future growth opportunity efficiently. And I will now hand it over back to Ghassan, who will walk you through the guidance for the next quarter and some closing remarks.

Thank you, Hubert. We are bracing for a few tough quarters ahead by recalibrating our cost base line to the new level of utilization. We estimate next quarter revenue to reflect a potential decline of up to 10%, compared to Q2 levels. This is due to realizing the impact of sustainability. The Board of Directors recommendation announced this week to pause dividend payments in 2025 comes as a direct result of the notable decline in utilization rate, which cascades to profitability and cash flow. While maintaining dividend payment to shareholders remain a core interest, our immediate priority is to reinvest available resources into the business as we pursue expansion beyond Saudi Arabia borders. Growing our international presence has long been -- has long been a strategic focus, and we are proud to have already begun delivering on that ambition. We are pushing ahead with our cost realization efforts. This does not apply only to CapEx, but also to OpEx. When it comes to CapEx, we have trimmed our additional SAR 50 million from our plan this year. Our CapEx plan now becomes SAR 800 million to SAR 500 million for the year, compared to SAR 800 million to SAR 900 million level communicated in our previous earnings call. This CapEx level enables us to improve our free cash flow by SAR 50 million. Despite foreseeing the remaining of 2025 being challenging, we see potential signs of pickup in 2026. We will be strategically managing the next 2 to 3 quarters to rightsize the company in order to position ourselves as a vantage point to benefit from this potential pickup early next year. With this, we end the presentation and we will open it now -- I'll pass it now to the operator to open it for questions.

[Operator Instructions] First question comes from Jarryd Thomas with JPMorgan.

So two questions for now. The first question is, it seems like the suspensions in Saudi are an ongoing issue. At what point do you think it stops and we can sort of have a baseline in terms of how many rigs are suspended and how many are not. Do you think it's going to continue in the second half? Or are we done now? And then the second question is on the [indiscernible]. So what will trigger the dividend to be reinstated at some point next year or the year after? Those are my 2 questions for now.

So on the suspension, to honestly, it's not clear, and that's why we are forecasting quarter-by-quarter. It's unclear for this year. I see that what we see the -- in the market that 2026, it will pick up. Now we just signed the SAR 2.4 billion. It just tells you that there is the need for the continuation of the land rigs. It's just when do they start? But we can tell at the moment, it's not very clear on the suspension, and how much it will go.

Second question on dividends. When we doing -- when do we expect to resume the dividend payments.

So, I mean, as of now, we're just pausing for 2025. We don't -- I mean, we don't see any challenges with our cash flow. We're just preserving cash, and we're using it for the expansion that we have outside of the Kingdom and we evaluate it starting early next year [indiscernible].

Yes. And I think if I can add, Ghassan, I think -- I mean the 2 questions complements, right? Because, of course, because of the market uncertainty and because we don't know what's going to happen with the suspension, I think the cost of the dividend was just seen as a prudent and precocious approach due to the uncertainties that we are facing. But I'd like to stress out, as we have said, I mean, we don't have a liquidity problem. We have enough liquidity to meet our future obligation to finance our working capital. It's just that we want to be a little bit prudent and cautious and have a strong financial discipline as we navigate through the uncertainties.

Just [indiscernible] approach.

We now turn to Ricardo Rezende with Morgan Stanley.

If I may, a couple of questions. First one is on this offshore contract that you announced on today as well. If you -- to the extent that you may comment on that, is that contract part of the agreement with shelf training? Or is that something that they be drilling on its own? And second, is there any CapEx related to that new contract that you're going to have to do on this rig? And then my second question is on your cost cutting initiatives, especially in SG&A, how long should it take? Or should we still see some normalization through third quarter, fourth quarter? Or is that a one-off in the second quarter?

Okay. So very good question on the contract. So when we try to go international, there was different ways to international. One is we get direct contracts or we go on the alliance to sell. And the reason why is -- if we go alone, we only cover a small geography, whereas if we go with shelf, we have a bigger geography. So this contract is a direct contract, so it's not going through the alliance. So we went -- we managed -- the team managed to secure this contract. So this secures one of the suspended rigs. So it's still contracted. The clients accepted to keep the suspension. There is one -- the second rig is being tendered on almost more than 8 tenders, and we're kind of a bit optimistic to see some good results hopefully in H2, but that will be with the alliance. So that's on the contract with the Alliance. And the second question was on the -- first was on the CapEx [indiscernible] -- it's not -- we will see some spend on the -- to get to reactivate the rig to go. But I mean, it's not major CapEx that we're going to see. And the last one was the...

It was on the SG&A. So if I may jump in. So on the SG&A. So out of the 14 , so some are one-off items. Some of them are basically structural -- structural savings that we're going to have. We have embarked in downsizing the workforce at the SG&A level. This has started. So you have some effect that will -- that has happened in Q2, and it will continue in Q3 and Q4. So there is an ongoing plan. And we believe that the savings from the SG&A on an annualized basis will be in the range of SAR 35 million to SAR 40 million.

Just to highlight on the cost savings. We're looking at the cost savings, not only in the SG&A. We're looking at all cost lines, looking at the structure of the company and downsizing to make sure that we are good with this such level of activity. And once the activity picks up, hopefully, the pickup will come with a lot better go through.

We now turn to [indiscernible].

This is Nabi from [indiscernible]. So I have a question about your user suspended rigs. Are we expecting any further impairment because we witnessed there was impairment in 2024? Are we expecting any impairment during second half of the year? For the system rigs?

We don't see any plans -- any impairment for any standard rigs.

We now turn to Ildar Khaziev with HSBC.

I have a few questions. First of all, apologies. I wasn't able to join immediately because of poor audio connection. And I've missed what you said about the extensions of the contracts with advance. Can you tell us what offshore rigs have received the extensions exactly. So that's my first question. And then secondly, on CapEx. What is the scale of the potential savings on CapEx on? Because I think previously, you said that the CapEx will probably be 50% of the budget of the last year, which implies SAR 0.9 billion. And I think your guidance is slightly lower at the moment. So that's my second question. And lastly, as I've seen some new sub line saying that you are opening up a [indiscernible]. Could you tell us the cost of setting up the office there and [indiscernible]?

Okay. So on the expansion, so it's SAR 2.4 billion, 6 land and 1 offshore, all with Saudi Aramco at the moment. This constitutes to -- part of the remaining contract that is still ongoing that we're going to see. So we expect another wave of backlog addition in Q3 because we are in the final negotiation of 11 rigs as we speak right now. And then the second question was on the CapEx, I believe. So if I -- yes, so we -- in the plan -- original plan, we had CapEx of SAR 1 billion, and now we trimmed it down to between SAR 800 million to SAR 850 million. I hope I covered the second question as well, no.

You had the third question? [indiscernible].

So we announced -- we open a branch in [indiscernible] this branch will help us and this expansion [indiscernible]. So it's -- I mean, just we looked at then the cost was very, very, very meaningful.

Yes. So the branches to facilitate our geographical expansion and the opening of the branch was done in-house, entirely in-house. So we had very, very minimum costs coming from legal tax or external legal or tax advisers.

And just coming back to the first question, you said 1 offshore rig has received the extension of Aramco. Is that rig current operational or it's generating revenue?

No, not at the moment. [indiscernible] it tells you this is -- it gives you a bit of hope that this thing will come back. Having said that, it is being tended outside [indiscernible].

We now turn to Abhishek Kumar with Bank of America.

I have a question on the onshore margins. Previous quarter was obviously benefited from the rig movements. And looking forward, is it going to be like this with quarterly variations or we are looking at some sort of stabilization in margins. And in that case, what is the margins that we should model going forward for the onshore business?

Right. So thank you, Abhishek, for your question. So as we have seen on the slide, so there is a huge increase in the margin between H1 '24 and H1 '25. But again, in H1 '25, you had the effect on the impairment. In H1 -- sorry, in H1 '24, you have the effect of impairment. In H1 '25, you have some very strong rig move performance in Q1. So I would say that in terms of gross profit, I'm not talking about EBITDA, I'm just talking about -- I'm just talking about gross profit. In terms of gross profit, I think it's comfortable to say from low to mid-teens percentage points.

Okay. I was all talking about gross profit margins only. So okay. All right.

[Operator Instructions] We have a text question. When will the impairment loss get reversed? And why was it not done in Q1?

Why? Yes. So we typically don't -- we typically don't reverse impairment. I mean, impairment -- just on the impairment, the process works is every quarter, we look at rigs that meet certain conditions for impairments. One of the conditions would be that the rig is either suspended or doesn't have a contract, then we do an assessment of whether the impairment is -- there is a constitution for an impairment. There is a case for an impairment. We submit -- we submit this work to the -- to our external auditors that validates the logic and the reasoning behind the work that we've done. But we typically do not reverse impairments that we made. The reason we do that, just to expand a little bit more. The reason we do that, the rigs -- it's very common that go on and off contract, right? So then the rig goes on and off a contract. If you said that you have an impairment that it [indiscernible] it goes back of contract again and you have to impair, it's just us and it's not something that we see either practical or something that will -- is not something that will ease on the financial reporting. So we typically make the impairments when the impairment has been -- is proven, and we don't reverse it.

There is a follow-up from Ildar Khaziev with HSBC.

So there is a follow-up, a quick one on the rig, which you plan to return. I think it's Capital Offshore, right? Is there any penalty associated with the early returns on the rig to the owner?

So there's 2 that we're trying to return as we speak. And I think it's ending its contract. So I don't think there is any impairment.

I mean, the contract is such that whether we keep the rig or return the rig, it constitute the same financial. It doesn't make any difference for us.

And so basically, you're trying to return 2 of which 1 was suspended a lot earlier, right? So it hasn't been done for the corresponding?

Yes. So Yes. once -- I mean, if we're going to send it, we'll have to cancel the contract and then we send it. But this is the plan. If it presented it now or at year-end with the same change [indiscernible].

We have another follow-up from Jarryd Thomas with JPMorgan.

Just 2 more questions. You previously earmarked one of the suspended rigs for sale. Can you just give us an update on that, the sale of that rig? And then secondly, the unconventionals in Saudi, any news on tenders coming? Or is it fairly quiet at the moment?

Okay. So on the sale of the rig AD17, it just there's a bit of delays from the buyer. They have to do the -- make sure that they have all the papers ready. So we will try to close it hopefully in Q3. It inverts Q3, Q4, hopefully, will close. Whereas the second one was the unconventional. So we think unconventional will be strong, but we don't know when it's going to stop tendering. We -- in the beginning of the year, we've seen requests to move rigs from the suspended rigs from the gas conventional to unconventional. That was the kind of initial requirement, but it kind of cooled down at the moment. So I think next year, we'll start seeing an increase in activity. Nothing complete, but this is what I feel next year will see that.

We have another text question. Is the company going to perform impartment tests every quarter. Do management feel this will still have negative impact. Also, what are the expected savings until at year-end on the SG&A cost?

So the impairment is something that we do on a quarterly basis, and we've been doing that for the last many, many years, at least as long as I've been here. And this impairment review is being reviewed by the auditors. And on the SG&A. So yes, we expect to see -- so as I said, we had some savings Q-on-Q. Some of them were one-off, but some of them are structural, will repeat in the next quarters. And we expect to see a little bit more of acceleration on those savings, simply because we are executing on the workforce downsizing plan. And this is something which is going as we speak.