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

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to the Arabian Drilling Third Quarter 2025 Results Conference Call. I'll now pass the line to the Investor Relations and Communications Director, Mr. Bassem ElShawy. Please go ahead, sir.

Thank you, Michael. Good afternoon, everyone. This is Bassem ElShawy, Director of Investor Relations. I would like to welcome you all to the Arabian Drilling Q3 2025 earnings call. Please note that this presentation includes forward-looking statements. We encourage you to review the disclaimer provided in this document at your leisure for more details. I'll begin today's session by introducing our presenters. Joining me, Mr. Ghassan Mirdad, our Chief Executive Officer; and Farid Mustafayev, our Chief Financial Officer. Ghassan will -- sorry. Ghassan will start by sharing our strategic and operational highlights and then we will hear from Farid, who will walk us through the financial results in detail. With that, I'll hand over to Ghassan.

Thank you, Bassem. [Foreign Language], and good afternoon, and thank you for attending today's call. Before I start, I would like to take a moment to introduce Farid Mustafayev, who joined Arabian Drilling as the Chief Financial Officer on the 1st of October. This is Farid's first earnings call with us. He brings over 24 years of global corporate finance experience, including significant leadership roles in the energy sector. We are delighted to welcome Farid to the team and look forward to his contribution as we continue to drive the company forward. I will start by giving you high-level views of financials, which Farid will cover in more details in the following slides. Let me begin with a brief overview of our performance for the first 9 months of 2025. Despite headwinds, Arabian Drilling demonstrated resilience in both revenue and EBITDA margins. While our total revenue at SAR 2.6 billion declined by 5.8%, reflecting reduced offshore and land activities, this was largely offset by a robust increase in unconventional operation. This shift in our activity mix affected net income and partially cash flow. But thanks to the proactive steps we have taken, we are steering through these challenges and setting Arabian Drilling up for recovery and long-term growth. Looking at quarterly performance, we are recorded a modest decline in revenue, while our EBITDA margins held steady at 35.1%. Net income decreased by SAR 16 million, resulting in a net loss of SAR 9.4 million. This was primarily driven by continued decline in rig utilization, which I will cover in more details in the coming slide and further impact on a one-off deferred tax provision. Cash flow from operation and net debt levels remained stable and [indiscernible] unchanged during the quarter. Moving to the next slide, I will highlight some of the important metrics. Backlog shy of SAR 11 billion, which represents 6.8% increase compared to the same period last year. Our utilization rate dropped to 73.8% within -- with 45 active rigs down from 48 in the previous quarter, which continued to have an effect on our profitability. However, we see strong recovery of utilization by Q1 2026 and expect Q2 2026 to reach a utilization of 80%. This leads me to the last point of this slide and the highlight of our call today. During the past few days, we have made 2 important announcements. We have received official notice of resumption of 2 offshore rigs and 3 land rigs, all scheduled to resume operation in Q1 2026, along with the commencement of the first international contract in the GCC. Our offshore utilization rate will reach a 100% by Q2 2026. Moving to backlog and utilization. Our backlog remains robust, shy of SAR 11 billion, as I mentioned, as of September 2025, up 6.8% year-on-year, indicating a strong client relation and confirms clear visibility for the coming years with 2.4 years in contract tenor and 3.2x book-to-bill ratio. Utilization rate declined this quarter following the suspension of 3 rigs. We do not see any further suspension in Q4 2025. We expect utilization to recover starting Q1 2026 to reach 80% by Q2 2026, supported by commencement of our first international contract and confirmed rigs reactivation. Now I will go over 2025 contract renewals. In 2025, we renewed 22 out of 24 rig contracts, which demonstrated the continuous demand for our service, thanks to our ability to deliver world-class performance and service quality. Notably, 11 LSTK contracts in the gas rigs were extended for 1 year as announced in August. These rigs are part of the 23 contracts scheduled for renewal and tendering in 2026. We are in the final stage of renewing the 2 outstanding rig contracts to be announced before year-end. I will now hand over to Farid, who will walk us through the financial results in more details. Farid?

[Foreign Language] and good afternoon to everyone. Thank you, Ghassan and Bassem. I'm honored to join Arabian Drilling team and to be speaking with you today. I look forward to meeting you in person during upcoming investor events. Starting with our year-on-year financial performance. Revenue for the period was SAR 2.6 billion, down 5.8%, primarily due to rig suspensions and contract terminations in offshore and land. This was partially offset by the deployment of unconventional rigs, which helped mitigate the impact. EBITDA decreased by 15.1%, reflecting the decline in revenue, combined with a shift in our activity mix and the effect of discounted rates across certain contracts. To shed light on the magnitude of this mix change, offshore revenue declined by approximately SAR 400 million and the suspension of land rigs contributed an additional SAR 300 million to the drop. And these reductions were largely offset by unconventional revenue amounting to SAR 600 million. Despite this significant shift in mix, we successfully maintained a strong EBITDA margin in the high 30s with the Q3 year-to-date margin standing at 37.4%. Net income fell by 70.8%, in line with the drop in EBITDA and further impacted by higher depreciation due to year-to-date effect of deploying unconventional rigs and full quarter impact of acquired service vessel. Capital expenditures were down 60.2%, reflecting the absence of significant investment in unconventional rigs done in 2024. Net debt increased by 2.2%, but remains broadly stable and within our comfort range. I'll provide more detail on this later in the presentation. Operating cash flow declined by 17.1%, consistent with the drop in EBITDA. Now let's turn to the quarter-on-quarter performance. Revenue declined by 3.1%, mainly due to reduced rig activity with the number of active rigs in Q3 dropping to 45 from 48 in Q2. This was partially offset by the full quarter contribution from the acquired service vessel, which began operation in late May. It's worth mentioning that 3% drop is notably lower than our 10% guidance on the back of higher-than-expected operating days for the rigs, which were on suspension. EBITDA decreased slightly by 3%, in line with lower activity levels. However, the EBITDA margin remained stable at 35.1%, demonstrating healthy pull-through despite lower revenue. Net income moved to a single-digit loss at SAR 9 million, reflecting the EBITDA decline and one-off impact from deferred tax. This was driven by the capitalization of service vessel and the resulting increase in our deferred tax liability base. CapEx was down 50%, consistent with our guidance and the absence of service vessel-related investment that were present in the prior quarter. And net debt was stable and operating cash flow in line with EBITDA performance. Now let's look at our segment performance across land and offshore operations. Starting with land, year-to-date revenue is up 16.7%, driven by increased unconventional activity and higher rig moves. Gross profit also improved from 9% to 12.2%, supported by stronger rig move margins and the absence of Q2 '24 impairment. While Q3 saw a slight dip compared to Q2, the overall year-to-date trend remains positive. Looking at offshore, offshore revenue declined 36.4% year-on-year, mainly due to lower utilization and partially due to discounted day rates. Gross profit fell from 37.4% to 23.7%, reflecting a significant drop in activity. However, quarter-on-quarter profitability showed modest 2% improvement, which was driven by the addition of a new barge and maintenance activities carried out in Q2 and not repeated in Q3. Combined EBITDA margin declined year-over-year, reflecting the shift in segment activity mix as explained earlier. Let's now bridge the movement in net income from Q2 to Q3. As mentioned earlier, we reported a net loss of SAR 9 million in Q3, down SAR 16 million quarter-on-quarter. The largest driver was the SAR 27 million revenue decline, mainly due to reduced rig activity and continued suspension during the quarter. We also saw a higher deferred tax provision resulting from the increased fixed asset base following service vessel capitalization. Depreciation and finance costs had relatively minor changes and largely offset each other. But on a positive note, we continue to realize benefits from our cost structure optimization program. SG&A and other cost lines trended down. And in Q3, we delivered SAR 19 million in additional cost savings, some of them one-off, some sustainable. With this, we remain on track to achieve SAR 30 million in annualized savings by the end of 2025. Let's now take a closer look at the key movements impacting our cash position this quarter. Cash on hand was relatively low at the quarter end, mainly due to minor collection delays. These were timing-related issues on scheduled payments and I can confirm they were fully recovered in October. Moreover, overall collections in the weeks following quarter end were quite strong, giving us a solid start to Q4 and positioning us well for a strong close to the year. Looking by key components impacted cash position, let's start with CapEx. As we completed our planned investment for the unconventional rigs and service vessel, Q3 saw a significant reduction in CapEx compared to Q2. This is fully in line with our guidance provided in prior quarters. Moving to changes in working capital. Let me provide a bit more color. Accounts receivable, as already mentioned, increased during Q3 due to delayed client collections and have since been resolved. Accounts payable decreased, reflecting major CapEx-related payments made in Q3 for the unconventional rigs and service vessel investments. These were due as of the end of Q2. Finance costs this quarter included the semiannual Sukuk coupon payments, resulting in SAR 81 million paid this quarter. And with regards to debt reimbursement, we made scheduled principal repayments and met our lease obligations, contributing to the overall cash flow. Let me now wrap up the financial section with a look at our debt profile and capital structure. Net debt remained stable at SAR 2.7 billion. The marginal year-on-year increase reflects the SAR 300 million bank loan drawn in Q1. Quarter-on-quarter, we saw a slight increase mainly due to lower cash hand at the end of Q3, as explained earlier. Our net debt and EBITDA ratio is maintained at 2x, well within comfortable levels. While we expect a temporary minor peak above 2x in the coming quarters, it is expected to normalize thereafter. Importantly, we have no plans to assume additional debt beyond current levels. This prudent approach ensures we have the strategic flexibility to undertake growth opportunities, both within and outside the Kingdom. That concludes the financial update. I will now hand over back to Ghassan to present guidance for the next quarter.

Thank you, Farid. For the fourth quarter of 2025, we anticipate that revenue will remain largely unchanged from Q3 2025 though there is a risk of a decline of up to 5% as the full impact of Q2 temporary suspension rigs is realized. This potential decrease may be partially offset by expected pickup in rig move activity, which has been lower than average in Q3 2025. For CapEx, our guidance for the year was SAR 1 billion at the beginning of 2025. As we progress through the year, we have trimmed our guidance down to SAR 800 million to SAR 850 million as part of last quarter guidance. Now we project to record an SAR 800 million for the year, including the majority of CapEx for recently announced rig resumption. This is achieved by an excellent effort by the team. Finally, as we conclude today's presentation, I would like to share our key priorities for the months ahead. First, reactivation of recalled rigs. We are focused on accelerating redeployment in a safe and efficient manner. Second, the successful commencement, our first international contract. With decades of experience, we are renowned for our high performance with our clients in Saudi Arabia. We are determined to showcase our performance in our first international contract to set the stage for expanding our international footprint even further. Finally, to continue our efforts in cost structure, CapEx and OpEx optimization in order to deliver a strong fall-through as we recover from an 18 months of challenging market dynamics. With this, we end our presentation and I will now pass it over to Michael to open the floor for questions and answers.

Thank you.

[Operator Instructions] The first question comes from Mr. Giuseppe Villari from Morgan Stanley.

The first one, if I may, is on the rig reactivations. What do you think is the main driver behind the reactivations? And what's the outlook for the rigs that are still suspended for 2026? And maybe if you could shed more color on the daily rates as well, that would be great. And then secondly, a question on dividends. What's your expectation now going forward given that the policy changed a little bit recently?

Giuseppe, we had a hard time to understand your question. Your line was breaking up quite a lot. Would you mind just once again very quickly just repeat your question?

Sure. The first question is on the suspended rigs. What do you think is the main driver for your reactivations? And what's the outlook for the rigs that are still suspended for 2026? And then the second question was on dividends. What do you expect looking forward for dividends?

I think that was much clearer. I'll pass the line back to the team for their answer.

On the...

The reactivation.

You can hear?

Yes. Bassem, please go ahead.

Yes. Sorry, it seems to be muted. So can you repeat the...

So I'll repeat, apologies if I was muted maybe during the answer. So on the reason of why the rigs have been called back, this is, I think, a strategy of our client to call back. We have seen out of the 10 suspended rigs, 5 was called back. Those 5, some of them were suspended this year, some of them were suspended last year. So there is no specific clear reason why there was a short suspension or a long suspension. So it all depends on the client strategy. And it's Arabian Drilling and other companies as well being called back. We still don't know the final number. So we believe there is might be more callbacks and this can get our other 5 rigs as well to come back as well. On the dividends, we will have to see with the new Board whose term started yesterday, but things look positive going forward in 2026.

Next question is from Mr. Faisal Al Azmeh from Goldman Sachs.

Maybe starting off with a question on the number of rigs that we should expect into next year. So you've ended Q3 with 37 onshore rigs and you're redeploying 4. So we should expect around 41 for the full year. Do you envision that you might be able to deploy more than 41 next year in Saudi? And that's my first question. And then my second question relates to the pickup in number of rigs on the onshore side versus the offshore side. How do we think about the Aramco plan to increase production? And where is the highest delta? Should we expect more deployment on the onshore side in your view? Or do you think this is -- these are the number of contracts that they would need for now for 2026 at this stage?

Maybe I'll start just to answer the first half of your question about the number of rigs. We are closing this year with overall with 45 active rigs, 37 land and 8 offshore. And as we announced, we have 5 rigs recalled, so reactivated -- to be reactivated and 3 of them is land and 2 offshore. So next year, we'll see 40 land and 10 offshore rigs. And it's worth mentioning as well that the total available fleet right now is 61. And it is -- 2 of them are leased rigs. So one of the leased rigs will be returned back to the owner by the end of this year. So the start of the year will be 60 rigs -- available will be 60 rigs. So with that and the fact that there is one more offshore rig that will go for operations in -- as per the international contract. So the plan is that all 11 offshore rigs will be utilized by Q2 of next year. And at the moment, there are -- when it comes to land rigs, it will be 40 active land rigs and we don't have any further details if this number will change going forward.

So just to answer the second part. So the -- can you hear me? Are you -- am I back?

Please go ahead. We can hear you.

Yes. On the second part of the question, we have 5 land rigs that are still pending and some doesn't have contracts. And all of them are in different tenders in Saudi or out of Saudi and tenders and opportunities that might be direct award as well in different countries. So as of now, they don't have a confirmed work, but we are actively making sure that they try to go back to operation. Am I still online?

Yes, we can hear you. Our next question comes from Ms. Anna Kishmariya from UBS.

I have several. First, around the rigs re-contracting for next year, you currently have 23 in the pipeline. Can you please comment on whether you expect re-contracting on which term? Any color would be very helpful here. And the second, it will be like a follow-up to the first question we had. Can you comment on the day rates for the rigs renewal in offshore? And on the land side, do you need to provide any discounts? Or is it the similar levels as some other fleet operating?

So just to answer, if you look at historically, we've been seeing renewal year-on-year, the contracts are renewed. So we are in a good position to see renewals when they come to the end of the contract. Having said that, we are in different tendering. While the rigs were suspended, our clients accepted that we can use them for other contracts within Saudi. So to give you an example, for the offshore contract that we won outside of Saudi, it's still contracted with Aramco, but Aramco gave us the privilege that we can use the rig internationally and then we can come back and we can use the contract that was suspended on. So all I'm saying is the 23 rigs, some of it are suspended, some of them are coming for end of contract and going for different tenders.

Maybe just to add generally, as communicated, this year, we had in the beginning year 24 contracts to be renewed and the 22 is already renewed and 2, you will hear from us by the end of the year, so which shows that we are quite consistent in the execution of this renewal. So for the next year, yes, we have 23 and 11 of them, they relate just to one contract is LSTK gas for which we received extension this year. So next year, it will be -- the tender has started. It is happening. And this makes the biggest part of the next renewals.

Yes. And if I would like to add the 11 is in the LSTK gas and we don't need the gas. So -- and we're trying to see how -- we're making sure that we have the whole experience in the gas and most of the service providers who are trying to penetrate this market being that we are the only rig contractor, so we have most of the knowledge in the gas that we can help them to drill faster. On the day rate, the question on the day rate, if we look at the offshore, the offshore, we've seen a discount in the offshore, mainly going to equilibrium. When we had -- when we started the offshore rigs, there was a peak of demand and low supply. So the prices were very high. Now we're going to equilibrium for the offshore. For the land, they are going back. However, different companies have given slight discount because they're very, very -- I mean, our prices and it's very -- the window of discount is very small. So you see a small discount just to start, just we did with COVID. We started the first 6 months with a minor discount. And then after 6 months, prices goes back to normal. Hope I answered your question, Anna.

Our next question comes from Mr. Oliver Connor from Citi.

Another one just on the contracting point. I think you mentioned in the past that you thought there was a risk that Aramco would let some contracts expire more broadly so that even if suspended rigs come back, the rig fleet doesn't really grow from here. Can you provide some color maybe on where you think the offshore market goes from here vis-a-vis sort of contract renewals more broadly for the market, suspension returns?

Okay. So my view stays the same as been saying before in the previous calls. We've seen a huge drop on the offshore rigs in Saudi. We don't believe that this -- all the rigs will come back on offshore. We will see a slight pickup. And we're around 4 to 5, maybe 6 rigs. So we're not going to see a huge pickup on the offshore. And out of this level of increase, if we say 5, we picked up 2, which was very good in our side. On the land, however, we will see a big pickup. We're seeing a huge pickup on the land side from Arabian Drilling and from other contractors as well.

Our next question comes from Ildar Khaziev from HSBC.

I think one of my questions has already been answered, but just to make sure I understand. A couple of rigs this year, I think generating revenue with discount. Do you expect that revenue to remain in place going into 2026 or not really? And lastly, one of your rigs secured an extension while being suspended. Can you tell us how long is that extension?

Yes. So actually, one of the rigs took actually a 10-year contract that was suspended, took a 10-year contract, actually 2 rigs. 2 rigs actually took a 10-year contract while they were suspended. This tells you that it's just a matter of time when we go back. On the discount, we've seen some discounts this year, yes, but as well, these are discounts are temporary discounts that we gave for this year and then prices will go back next year.

Oh, so basically that contract rate is going to resume to the contractual level in [ 2026 ]?

It wasn't very clear. Could you...