Arabian Drilling Company (2381) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Mazen Al-Sudairi from Al Rajhi Capital. Al Rajhi Capital is glad to host Arabian Drilling Q2 2023 earnings call. Welcome all to the call. And now I will hand over to the management.

Good afternoon, everyone, and welcome to Arabian Drilling's earnings call for the second quarter 2023. Our thanks to Al Rajhi Capital for hosting this call. We have recently announced our Q2 financial results, and the documents are available on our Investor Relations website. As usual, we must start with a disclaimer, so I invite you to read it at your convenience. Following the presentation, we will be pleased to address your questions. As we kick off this presentation, I would like to take a moment to introduce our speakers for today's call. First, we will hear from our CEO, Mr. Ghassan Mirdad, who will provide an overview of our performance. Then we'll have our CFO, Mr. Hubert Lafeuille, who will take us through the company's financial performance for the second quarter and 6-month period. The agenda for today's session will cover different topics, including our accomplishments and analysis of the competitive landscape, a review of our operational and financial performance as well as forward-looking guidance, before we open the floor to your questions. I would like now to hand over to our CEO, Mr. Ghassan Mirdad.

[Foreign Language] Thank you very much for the introduction. From sunny London, [Foreign Language] A heartfelt welcome to all participants joining us for this earnings call. We will begin with a brief overview of what happened during the quarter. So looking at a glance. We are encouraged by the progress shown in our financial and operational results to close the first half of the financial year. Starting with operation, rig activity this quarter remained identical to last quarter with 44 operating rigs over a total fleet of 47, which resulted in a utilization rate of 93.6%. Our nonproductive time increased slightly. However, our rig maintained a high rig efficiency index of 93.6% with 25 rigs rated as superior performers. Finally, we have seen significant improvement in our rig move efficiency in the Land segment with 1.3 days saved per rig move in quarter 2 versus 0.2 days last quarter. On the safety front, I am pleased to report that we have improved our total recordable injury frequency rate performance, and we continue to record 0 environmental spill this quarter. We also just received 3 ISO certificates, demonstrating our commitment to safety processes and environmental prevention. Moving to the financial highlights, which will be detailed by Hubert later, our Q2 revenue of SAR 791 million was in line with that of Q1 on a similar rig activity. Our EBITDA improved by almost 1%, mainly due to improved rig move performance that represented approximately 40 days of additional revenue compared to last quarter as well as improved cost base, particularly in the Land segment. Our Q2 net income contracted slightly by 1% compared to last quarter as a result of high depreciation costs and financial charges. Net cash from operation was SAR 348 million, showing a 26% decrease, bearing in mind that Q1 included a one-off exceptional item for the collection of the mobilization fee of the 2 offshore rigs, AD110 and AD120, that started in Q4 last year. We closed Q2 with SAR 1.8 billion of available cash, which is slightly lower than Q1, driven by the completion of the shipyard activity for our 3 new Jack-ups that have just started. Shifting our focus to growth, the strategy was -- the strategy we established at the beginning of the year is in now full swing. I would like to recognize our project team that has done an outstanding job to deliver the 3 offshore rigs safely, on time and on budget, AD130, AD140 and AD150. This was a key goal for 2023, and all 3 rigs have started their 5-year contract with Saudi Aramco. As announced this week, we were delighted to have landed a milestone win for Aramco unconventional gas project. We have won 10 out of 13 tendered rigs. All 10 new rigs will be newbuild, and we have already started the procurement activity. The win will significantly increase our backlog as we will see later. This is a major growth area for our Land business as natural gas is an essential part of the successful energy transition globally. We are excited to be playing our part in it. The major investment to develop Saudi Arabia's gas resources through infrastructure will benefit the economy, employment and support the government's carbon emission reduction targets and the production of low-carbon fuels. We remain very positive about the business outlook influenced by the recent market and industry development. Our backlog addition in Q2 includes marginal contract extension and awards. However, in Q3, we expect the backlog will significantly increase as we will include the 10 new rigs contracts for unconventional gas, and we are in a very good position to finalize the extension of the rigs that are rolling off contract in 2023. As mentioned, our 3 Jack-ups started operational in July as planned. This was achieved despite major challenges across supply chain, logistics and human resources. This is testimony of Arabian Drilling team, outstanding performance and strong relationship with our suppliers. On the Land segment, we believe that Saudi Arabia growth will continue to be stimulated by the unconventional projects. Our backlog position decreased from SAR 8.1 billion to SAR 7.6 billion in Q2. We added approximately SAR 150 million to our backlog during Q2, mainly attributed to contract award and extension of 4 land rigs with SLB and with Baker Hughes. Baker Hughes was added as a new client last year, and our performance to date has resulted in a request for more rigs to be added to their fleet, bringing the total from 3 rigs with Baker Hughes to 5. Our backlog as of today is 56% offshore and 44% onshore. The additional 10 rigs for the unconventional contract will add a backlog of approximately SAR 3 billion. As mentioned earlier, our REI remains strong. Our nonproductive time was slightly higher this quarter. However, the overall 12-month rolling average is improving and going in the right direction. On the rig move front, you will recall that we highlighted in the last earnings call a low rig day saved number. This was due to poor weather and higher maintenance during the last quarter. However, we see on the top-right graph, a clear improvement this quarter. And even with a fewer rig moves at 38, we were able to save 1.3 days per rig. Rig activity and utilization remained stable as the 3 Jack-up will only kick in during Q3. With that, I will now hand over to Hubert to cover the financial highlights. Hubert?

Thank you, Ghassan, and good afternoon, everyone. I would just would like to pause it here to see if the slides are -- we're in sync on the slides. Yes? Okay, very fine. So let us start with the consolidated view. We have closed the quarter with a revenue of SAR 791 million, in line with the previous quarter while reflecting the same level of rig activity. In contrast, the year-on-year comparison is much more striking with a 25% increase year-on-year. And this increase is due to higher rig activity, we have had additional jack-ups as well as additional land rigs in 2023. Our Q2 EBITDA of SAR 335 million represented 42.4% of the revenue with a quarter-on-quarter improvement of 90 basis points. This improvement was mostly due to our Land segment regaining better operational performance and fewer maintenance activities this quarter as opposed to the last quarter. This EBITDA margin remains in the range of the low to the mid-40s, as expected. We have seen a slight contraction on the net income in Q2, mainly due to higher finance -- financial charges as the day rate for the next coupon payment was reset in February. In addition, as mentioned by Ghassan as well, our depreciation cost was also slightly higher this quarter in Q2. On the CapEx side, we have seen an acceleration of the CapEx spending in Q2 versus Q1 due to the completion of the shipyard activities and mobilization of the 3 new Jack-ups that started in July. In addition, we have also completed shipyard activities around the 5-year recertification of our MPSV 8020. Now looking into the segment reporting, let's focus on the Offshore first, which is on the left side of the slides. So for Offshore, we have a flat revenue, reflecting maximum capacity utilization of 9 rigs working, with no significant change in status or day rates quarter-on-quarter. On the cost side, we have seen a slight increase in the cost in Q2 as opposed to Q1, reflecting some start-up costs for the 3 Jack-ups, mostly compensation costs related to getting the required drilling crew onboard ahead of the start of the rigs. On the Land segment, we have a slightly improved revenue, mainly due to less maintenance activities that we have incurred in Q2 compared to last quarters, and this represents approximately 52 days of additional day rates this quarter compared to the last quarter. Now on the cost side, we have seen some solid improvement in the Land cost structure quarter-on-quarter, which again is mostly resulting from a better operational performance on the rig move, as highlighted by Ghassan, as well as fewer maintenance activities that were late this quarter compared to the last quarter. Now if you look at year-on-year, the Land segment include incremental cost due to the high maintenance activity in Q1 that we have seen as well as the cost of the retention plan that was introduced in the second half of 2022, which is coming through this year. Now moving on to cash flow and net working capital. Our net cash flow generated from operating activities was SAR 348 million in Q2 versus SAR 472 million in Q1. However, as Ghassan mentioned earlier, Q1 includes a one-off exceptional item related to collecting the mobilization fees of AD110 and AD120. Now excluding this item, our Q2 normalized cash flow would actually sit higher than that of Q1. From a cash position, we closed Q2 with a balance in excess of SAR 1.8 billion, which is about 7% lower than the last quarter. And we expect this cash to deplete quickly over the next 12 months as we are building the 10 new rigs for the unconventional contract. Our net working capital, which is on the right side of the graph, was unusually low at the end of Q2 by at 5% -- sitting at 5% of the revenue, which is mainly due to an increase in our trade payable. The DSO by itself was stable at 68 days. Finally, looking at our net debt and our leverage ratio, we have increased our net debt position by 23% between the end of Q1 and the end Offshore Q2, which basically represents the change in the cash position quarter-on-quarter. There was no change in our total borrowing position other than the portion of the accrued interest for the period. Alongside the future cash depletion that I just mentioned, we can expect the net debt to significantly increase over the next 12 months to fund our CapEx, and we expect to draw on an additional bank facility that has already been secured at a very competitive price. Our net debt to EBITDA of 0.7 continued to be healthy, but will increase as we enter the execution of our next CapEx growth plan with the 10 new build rigs. Now moving on to the guidance. Our revenue guidance remained unchanged at between SAR 3.3 billion and SAR 3.5 billion for the full year 2023. And let me add here that this guidance does not include any revenue stream for the new 10 rigs that will materialize only next year. The full EBITDA margin is set to remain at the current level. We are updating our CapEx guidance to include the portion of the CapEx that we expect to spend in 2023 related to the 10 new rigs. Therefore, we now believe that our CapEx spending for the full year 2023 will be around SAR 2.2 billion to SAR 2.4 billion. Finally, in terms of dividends, the Board has recommended a dividend of SAR 2.53 per share based on H1 net income, which is consistent with the previous guidance. These dividends will be paid out in Q4, subject to the shareholders' approval. And this concludes my section. I will now hand it over to Mazen from Al Rajhi for the Q&A session.

Thank you for your comprehensive presentation. And now we'll start the Q&A.

Thank you management of Al Rajhi Capital for hosting the call. This is [indiscernible] from GIB Capital. I have only one question regarding the onshore revenue. So as you mentioned that onshore revenue increased Q-over-Q by 2%. This is mainly due to the less maintenance days. However, we [indiscernible] the number still below Q4 revenue by around 12%. And I think this is mainly linked to the days savings, which was 2 days savings in Q4 compared to 1.3 days in Q2. So you -- can you [indiscernible just shed some light on the normal levels in terms of day savings given we have been seeing a quite a fluctuation in the past quarters and this ratio?

I'll take that. There is one change in the rig activity, if you look at Q4 compared to Q2, which is AD29. AD29 was a land rig that was working during the fall of Q4. And if you remember the call that we had last quarter, we said that AD29, the contract was terminated, and we deployed AD29 to first drill a couple of rigs for SADA, for the Saudi Arabian Drilling Academy, and then we'll use AD29 as a training facility. So the difference will also come mostly from the -- from taking -- having taken one land rig of in Q2 compared to Q4.

And you're right, we had a lot more rig moves. There was a lot more days saved during the Q4. And as well, February is 2 days less of revenue as well.

Thank you Saleh. Now we'll start with Akash. You can start your...

Congratulations on the results, and congratulations on winning the new Jafura tender. So I have 3 quick questions. First one is if you can share what is the CapEx requirement that you will have for the 10 new rigs since these will be newly built? The second question is if you can share the EBITDA margin for the leased rigs, the AD110 and AD120. And third question is, I'm new to the sector, so a general question I wanted to ask then that what happens when, let's say, Aramco or, let's say, Saudi Arabia announces that there will be a production cut that we'll be doing for oil. So in that case, what happens to the drilling? Do you keep drilling and keep getting revenues? Or is there -- will there be a decline that can happen? So these 3 questions.

Okay. So let's start one by one. So the acquisition cost?

Yes. So you want me to...

Yes, go ahead.

No, look, so in terms of -- so there are different rigs in the 10 -- I mean there's 10 rigs package. It's different types of rigs. You have rigs that are skidding. You have rigs that comes with higher spec in terms of well-controlled equipment. But to be in the ballpark, I would say that the acquisition cost -- sorry, the building cost of those rigs is about from $40 million to $50 million each. So this is the kind of CapEx that we'll be looking to deploy over the next 12 months. You had a question on the EBITDA related to the Offshore? Yes, AD110, AD120...

Because they are...

Yes. So those are the 2 rigs that are very more charter. They start the contract in Q4. We don't particularly disclose EBITDA at rig level for confidentiality purposes. But what I can tell you is that, I mean, I don't know how much you know about the drilling sector, but offshore, the offshore EBITDA is basically accretive to the overall EBITDA of the company.

Yes. So I just wanted to have an idea that whether these rigs are like getting more margins than your mid-60s for offshore? Or are they like lower than that? Just to have an idea.

So those rigs were contracted at day rate, which were north of 100,000. So they are getting the EBITDA that you would expect one rig in the market would get in those days.

I mean just to add to what Hubert said, the reason why is we managed to secure it during -- as charter during COVID, so it was a good, good pricing as well. So on the last question, in terms of -- you need to understand the way our clients, Saudi Aramco, which is the biggest client producer in the world, they don't react to these small changes that happens every now and then. They set a plan, which is the Saudi Aramco wants to go to 13 million barrels per day, sustainable. So they don't get affected. So this is a goal that needs a lot of drilling, so they don't get affected with cuts. So we don't see, when you have these small cuts that happen during the, plus affects the day-to-day business because these are long-term plans that Aramco decides, and they march straight.

Now we'll go to Ricardo. Ricardo, you are unmuted, you can start. I can't hear you Ricardo. We'll come back to you. Now we can go to Abdul [indiscernible]

[Foreign Language] First of all, congratulations on the strong set of results. I just have a couple of questions. The first one is more of a high-level question. Given where the tight market on offshore and the increasing demand on onshore rigs, I just wanted to ask from the management view, what would be the scenario that would take day rates lower over the midterm? So that's my first question. The second question, if you could...

Can you just -- can you repeat the first question, please? Just to make sure I understand you.

So we continue to see a hike on the day rates across offshore and onshore. I just want to get the management view, if we were to reverse the direction and we start to see declining in day rates, what would take or that traverse to take place? So that's the first question. The second question, are you anticipating that the cost -- the operational cost per rig for the unconventional rigs to be any different than the onshore rigs?

Very, very good question. So let me take the first one. So if we split the segments, so Offshore and Land to discuss on the rates for the first question. So for the Offshore, if you look at Saudi today, Saudi Aramco have secured the rigs that they want for offshore. There is not much available rigs in the market at a global level. So Saudi Aramco managed to cure the rigs that they want for offshore. So the only reason that the price will go -- continue going up in Saudi is if Saudi Aramco requests more rigs. And because there is not enough rigs in the market globally, then that will push the price up. But we don't see, I think Saudi Aramco have secured the rigs that they want. So I don't see this going forward in Saudi. However, if any client at a global level is requesting for a rig, the rigs are -- I mean, it went up also to the 180 or 190 outside of Saudi. And the reason why, one is not -- there is no availability of rigs. And number two, the usual contracts at international level, they're not on an annual like 3 years, 4 years, 5 years. The contracts are 4 wells. So there's a huge investment from the contractor -- drilling contractor to provide the rig only for 4 wells or 2 wells. And that's why the price is a lot higher than here in Saudi. On the Land, it's very competitive. And it's -- I don't see going to be a spike up or down on the rigs for the land. They only see -- I mean we see a single-digit increase, and I think that's mainly of support of inflation more than -- not more than that, to be honest.

I think there was a question on the OpEx. You want to...

On the OpEx for -- do you want to start, then I'll add.

So look, I mean, at this point in time, we have modeled the OpEx for the unconventional to be the same as a conventional. Saying so, we believe that there is potential upside in terms of economy of scale, synergies, et cetera. It's just that those upside at this point in time are not known because we haven't really tested it. So do you want to add?

So -- yes. So this win is our first penetration to the unconventional. So it's very, very key for us, specifically that we're going to see growth on the land will be more work to be added, more rigs to be added on land. So what you can -- if you look at factory in the unconventional, it's factory drilling. So when you have this kind of factory process, you can eliminate a lot of cost or fat in the organization. And this is what we didn't model yet. Once we have the rigs and we start operating and having a factory drilling, then we can see how much we can save some of the costs that we usually use in a conventional rig. As mentioned by Hubert, today, we just modeled the cost as per a conventional rig.

Now we're back to you, Ricardo. You are unmuted.

Unfortunately, we can't hear you, Ricardo.

Yes, unfortunately.

Sorry, I had some issues with my connection. First question is on the new contract. I just wanted to get some color on how was the competition for those rigs? You did a phenomenal job on getting the 10 rigs out of 13. It's a lot higher than your standard share on the land rigs in Saudi. So how do you see the competition? And then 2 follow-up questions is the first, on the press release, you mentioned that those rigs should start generating revenues in the second quarter of next year. So we think about the time line for the general revelation or the most in the second, third quarter, where is more spread out? And then the final question on my side is how to think about execution from Arabian Drilling as now you have quite a significant backlog in a lot of new rigs to enter operations. What would be your appetite incremental contracts in the short to medium term?

Okay, that was a lot of questions. So the first was about the competition. I think -- I mean being in this unconventional is, I think, it's key for any drilling contractor. So a lot of the contractors will exist in Saudi who have participated in this. And I think it was key for everyone. And I think the team have -- the strategy team, we've done a good job in terms of putting ourselves in the right spot to win 10 out of 13. Now this 10 out of 13, just to understand, half of it is skidding, which is the unconventional factory drilling, and the other half is conventional -- is in the unconventional group, but to explore for unconventional fields. What was the other question?

There was a question on the revenue flow. So I guess the revenue flow is -- yes, so the first ring -- so it's a phase delivery, right? So not all the rigs are going to come into the into the first. We expect the first rig to start coming in Q2, and then it's going to be a phased delivery of the rigs. Each of them has a different delivery date. And what we meant is the full -- I mean, the fund of the revenue will really hit H2, right? So it's going to be -- there's not going to be any substantial increase related to those rigs in Q2. It's just we'll start -- we'll see the start of those first 3 in Q2.

The arrival will be in Q2, but the revenue stream will start in H2. Yes. And there was a third.

There was a question on the execution with all this backlog, how we're going to execute [indiscernible]

Yes. So I mean this is a very good question. I mean if you look at the supply chain, the suppliers, managing the inventory, human capital, making sure you have the right crews, this is -- it's a constraint on the whole sector, not only on drilling contractors, drilling contractors, service providers and as well our clients. So the good thing, as mentioned in my presentation, our strong relationship with our suppliers played a key role in the offshore to deliver offshore on time and on budget. And I think this will come again with the 10 rigs. The other part is human resources. So if you look at our head count on the rigs without the Ofsat, which is the transportation, we're shy of 5,000. And if you want to add the 10 rigs, each rig, let's say, take or give 75 employees, so 75 multiplied by 10, that's 750 crews, I mean, the team that needs to be added for the 10 rigs. So you're talking almost 16% of my population is going to be increased. So -- and I just added as well the 3 rigs. So you can imagine the amount of people that are recruited and trained. So today, we're focusing a huge focus on training. So AD29 is purely now focused on new crews coming in, getting the right exposure before they get deployed to the field. And as well, we have just acquired, I mean this was last week, we just acquired a new facility to cater for our training. We acquired it as drilling, it will be announced on social media. But this is one bottleneck that we think we can debottle because of we control the training ourselves.

Thank you, Ricardo. Now we'll go to Ibrahim. Ibrahim, you are unmuted.

Congratulation, management, on securing the SAR 3 billion contract. My 2 questions is regarding the -- if I want to see the growth and the revenue from onshore side, since last year, you renewed almost 21 rigs. But if we can see the like the growth year-over-year, it's almost 5%, like as mentioned by my colleague before. And also, like I want to see -- if I'm not mistaken, you renewed at like double-digit growth from the last contact. I want to see what -- is there effect from that side? Because I don't see the margin of responding, especially operating gross margin is increasing by almost 40 basis points. I want to see -- I want to hear from you like had a light on that side. Also...

So let's answer this question, so just to make sure. So you're right, the double-digit was in the offshore market. On the onshore market, it was a single digit, it barely covers inflation. So mid- to high-single digit, the landing. So the double digit was on the offshore that we had, just to clarify.

So it should make margin better, right, since your cost is the same?

Well, the cost is not exactly the same. What we've said is we've said we've seen -- on the land side, we've seen high -- mid- to high-single-digits increase on the day rates. But then we also have seen a similar increase on the cost side as well. So there is not substantial difference. I mean year-on-year, there is no substantial difference on the land margin. Now the offshore is a completely different story. But on the land, it's -- there is not any substantial difference.

I think most of the single-digit increase was wiped out with the inflation that we've seen.

Okay. So my second question is regarding, when we had the first quarter call, you mentioned that the new renewals you will talk about in August, if I'm not mistaken, is there any update from that side?

Yes. So we have 6, 7?

So far, we have -- so we -- yes, we have a total of 6 drilling of contracts.

Yes, out of which -- we have total 6, out of which 5 were in the final closure to be renewed. And I think this will be -- I mean, once it's renewed, we'll announce. But it's there in the final signature state. And one will be still is going to be kind of afterwards, right, the last 1 because the 5 is with Saudi Aramco and the sixth one is in Khafji. So it's as well it's in the 5s. It's in the negotiation phase to renew.

But I mean, overall, we're very -- I mean, we're very confident those rigs will be extended.

So it would be the same thing, like there is no margin from that side because I guess it will barely...

Yes. So out of the 5, 4 are land, so you're right, you're correct, and 1 is offshore. So the offshore will have a better increase than the land.

if I'm not mistaken, Mr. Ghassan, in the report, it mentioned that 2023, 6 lands and 2 offshores, right?

6 land?

Yes, 6 land contract ending date by year. 6 in [ 2023 ]...

We go back to the slide. Just. We are going back to the slides.

Yes, so 6 land and 2 offshore. Yes. So yes, you're correct. So out of the 8, 7, so the land and one offshore is with Saudi Aramco, that's going to be is in the final stage; and 1 offshore with KGO, which is Khafji joint operation that is taking -- it will be a longer time to sign, but it will be signed this year as well.

Now we'll go with Jonathan.

Congratulations on the new contract.

It's unclear, Jonathan. It's unclear.

Can you hear me better now?

Yes, Yes, much better, yes.

Okay. The new...

We lost you.

He's not here with us. Now we will go with Ibrahim.

[Foreign Language] I do have a few questions. The first one, just a follow-up on my colleague Ibrahim's question, the margin profile. So just for the fact that we have 2 segments, each has different margin profile. The onshore versus the offshore, one is the third 1 in the 60s. Just for the fact that offshore contribution increased from 28 to 38. I would expect higher margins and what you reported during the first half or higher margin expansion than what you reported. So am I missing something? Is there certain one-offs -- you mentioned the pre-operating cost as well. And you mentioned also that the land rig margin is flattish year-on-year because the inflation in cost is compensated by higher day rate, et cetera. So what's the story in the offshore, if the pressure is coming from the offshore, other than the pre-operating expenses? That's the first question.

So no, you're absolutely right, I mean, we have seen some pre-operating -- I mean to start of the an offshore rig is not a walk in the park. I mean you have to have the crew ready, so you have to get unique. So there is a lot of pre-operating costs that are hitting the P&L months before the revenue stream starts flowing. So you will -- so you have seen that in H1 as we started 130, 140, 150, that just started in July. So we have a couple of months where the costs are hitting you, but you're not getting the benefit of the revenue. So that's one thing. The other thing as well is I think that we have seen some cost escalation as well, particularly in the onshore offshore -- I mean, the manpower of the offshore. I mean, I think Ghassan alluded to that, but it has become a very, very scarce resources. And one of the things that we did in particular, we have introduced a retention plan, just to make sure that we keep the key people -- that we keep our key people offshore. So it's a combination of those 2 elements. Now saying so, the pre-operating costs are kind of a one-off. I mean, once you have your crew and everybody is working on the rig and you get your revenue, then it's business as usual, I would say. Do you want to add?

No, if I would add, I mean we had to put a very strong retention plan because we've seen our competition was growing very fast in Saudi, they're finding it difficult to find good candidates and the best place to come to have been drilling. So they are trying their best, and we're trying to put a good sound retention plan that is phased on, I think, 2 years to retain them. And this is that kind of affected our cost as well.

Just a follow-up question before moving to the second question. So I know it's too early to think about next year, but what sort of margin profile we should expect next year, assuming everything is normal? I mean...

I think you answered to the question.

Yes. I just want to look at the normalized stuff. I don't want to miss the performance, the great potential that the company has.

I think -- I mean, really, we are in a very intense growth phase, right? So I mean, this year is not business as usual. Next year will not be business as usual either because we're going to start up those 10 rigs. So it's very -- honestly, it's very difficult to answer to your question, what is business as usual because it's not -- I don't think that next year is going to be business as usual either, right?

So it's just -- so you see, I mean, -- we have H2 -- I mean, H2 is not going to be, I mean, better. I mean we're going to have some level the same level because you have the start of the 3 rigs that will take a bit of cost, and the rigs will be a bit -- they will not be 100% efficiency because it's a new crew together. And then you have to recruit and train. There's a lot of cost that's going to impact you next half of the year because of getting ready for the unconventional. And then starting those in Q2, there's going to be a lot of costs that's going to impact. So I think it's too early to say. I mean we have to model this, I mean, Q4 to see how is the next year. But we don't -- I mean, I don't think -- I mean the growth on revenue is in the high teens, I think, from a revenue perspective.

Yes. I mean, yes, we can -- I mean, yes, from a revenue perspective, we see a growth year-on-year in the high teens. We won't be -- we won't reach a business as usual until we are into the second half of next year. So we have some -- we're going to have some extra pre-operating costs, and we're going to have to model them. And where we're going to land, I mean whether it's going to be -- we're going to land is a bit early. But what we can say is that, I mean, for -- as Ghassan mentioned, for this year, we see the EBITDA level that we have reported at H1, we see the same EBITDA level for the rest Offshore 2023.

Clear. Second question is related to the unconventional probably quite a long question. And it was partially answered by the OpEx side. First, we see the CapEx side. It's quite higher for SAR 5 million compared to the average conventional land. So the CapEx side is higher. OpEx probably might be the same, but what about the day rate just for you to end up with the same IRR or the same ROIC? What would be the day rate compared to the conventional land rig? And based on the quick calculation of the SAR 3 billion, the daily revenue rate of the day rate, the daily revenue rate would be around SAR 42,000, SAR 43,000 based on my calculation. So if you can elaborate, please?

So the SAR 3 billion is the total revenue that you can get out of the contract. So it is the rig rate, you have the mobilization, the rig moves, plus extra charges that we have to the client. So it does not -- if you take all of this and divide it by -- it does not give you the day rates. What we see that -- what we see in the backlog, we look at only day rates, only the rates, and we see that around...

Shy of SAR 3 billion.

Shy of SAR 3 billion. So you're not off, but I think it's in the 40s plus. So you're not very off.

Day rate components?

Yes. So the day rate component is in the 40 plus, low 40s, on average, right, because there's different type of rigs with different features, et cetera. So I'm just talking about an average, right?

Average of the 10 rigs.

Average of the 10 rigs, right? And it's still higher than the average of the Land segment, right? I think we have already disclosed on the number of calls that we have an average of the Land segment in the mid-30s. So we're still higher than the average of the Land segments. And the expected EBITDA coming from that particular 10-rig package is accretive to the overall EBITDA of the Land segment.

Great. So this is 20% roughly premium over the conventional land and it's accretive from EBITDA perspective?

From a day rate, yes?

Yes.

May I ask a third question?

Yes, yes, please go ahead.

Perfect. I believe that last quarter, you mentioned that the first phase of Java was around 13 land rigs, unconventional land rigs. Yet, you have been awarded 10. Is this 10 out of the 13?

Yes.

How many phases -- how many 13 you would expect on Japura?

I mean -- so what we know, so there is around just shy of, I mean, 20 rigs, plus us is -- plus the 13, so you have 30 plus. I mean what we -- I mean, our knowledge is we might go up to 40 or 80 rigs for the unconventional. Now -- and this is going to be staggered. So it's not going to come all time. So now we had the 13 tender. We don't know -- we know that there will be more tenders, but we don't know when and how big is each tender. It doesn't have to be every time it's 13. It can be 5, it can be 10, depending on the request of our clients at the end of the day.

Sorry, the 40 to 50 is your share of it or the total, right?

No, this is the total, yes. Yes, total.

Total. So your share of it should be higher than the normal land rig, 17%, or it should be higher?

No. So I don't know if you refer us in the pre-IPO, the plan is to see what is right for our shareholders and the business growth. So we're not fixed to the market share. So I'm not like because I need to keep this market share. What we need to do is we need to make sure that what is the best to have the best return to our shareholders that we look at. Now today, we got 10 of a market of 31. But I mean we know it's going to grow the pie or the number of rigs that are going to be on the unconventional can be 70 to 80, maybe more. It all depends on our clients.

We'll go back to Jonathan.

The chat was off, basically, asked the main question I was going to ask. Another question. You announced the dividend for the first -- the interim dividend for the first half.

Yes.

Assuming you make higher earnings in the second half, which I think would be a reasonable assumption to make. Would that mean that the likely dividend for the second half of the year would be higher?

So in terms of dividend, I mean, the Board will proactively review the dividends and make the recommendation to the shareholders in a way that makes sense and kind of balance the sustainable growth with the returns with the shareholders. So at this point in time, we cannot -- we don't speak on behalf of the Board.

I'll get back to you, Mahar, because I have a question on the chat box. It is from [indiscernible] saying Aramco, Aramco said to cancel bid for month offshore contract for Zolat expansion. Is Arabian Drilling open to bid for the contract and acquire the asset?

No, not really. We didn't have any plan to do that.

Thank you. Okay. Go back to you, Mahar. You're unmuted. You can start.

So I'm just trying to understand the -- if there are any risks for the unconventional rigs coming in, in the second quarter. Basically, my understanding of natural gas is like gas comes with oil. You have to do something with it, either burn it or transport, store it. So if you're saying that it might begin at the second quarter of next year, is there any risk of delay maybe or something like that because there has to be like infrastructure, right, either you store it, transport it or something like that?

Okay. So in the drilling, we drill the well regardless if there is a facility or no. So we drill the wells and the client will have another team, which I think PMT Project Management, who will connect these wells to a production facility. So regardless if you have the facility or not, you drill the well and the well will be ready for production whenever you want. And what we're saying, H2, we will start seeing revenue. I mean the rigs, as you said, will start arriving in Q2, getting them ready, getting them inspected, approved by the client and move to the well site. This will take time. And that's why you see the revenue in H2. So drilling the wells has no connection with the facility.

Very clear. So you don't have any risk from that point of view?

Yes.

Ricardo, I'm seeing you raised your hand. You are unmuted, if you want to ask. Can you -- Pritish, you are unmuted.

On the SAR 3 billion contract win.

Sorry, your voice came a bit late, so we didn't hear the whole question. Can you start from the beginning, please?

Okay, sure. So I wanted to understand what would be the mobilization costs for the rigs on a per rig basis? And is pre-operating cost a part of this mobilization costs? Or that's completely different? That's on the first question. On the second question, would SAR 25 million per rig would be a good estimation of the mobilization revenues, which you said is already a part the SAR 3 billion, right? So generally, what we have seen is mobilization revenues -- I mean, mobilization revenues are high margin, right? So won't they completely offset any other costs that usually incur in the pre-operating stage? So basically, what I'm trying to say is won't -- would the margins really be quite low when you start off? So these 2 are the main questions. I'll come back with another question.

So I'm going to answer that, Pritish. So basically, there are 3 types of costs and there are 3 types of different accounting treatment. I mean you have the project cost, which is the people that are actually the project team building those rigs. So this is all capitalized together with the -- it's all capitalized with the rig and it's capitalized over the life of the asset, which is 20 years. You have the cost that are attributable to the mobilization of the rig, which is basically bringing the rig from wherever it is, whether assembled, manufactured and assembled on the first well location. And this cost is being amortized and deferred over the life -- sorry, over the primary term of the contract, which is, in this case, in 5 years. And then you have some pre-operating costs which are -- cannot be either deferred or capitalized and this is, for instance, when we hire the crew. So we hire the crew for all the rigs, and then we deploy those crews on all the rigs that we have to make sure that they train and they know the shadowed by the shadow, the mentor, et cetera. And that cost is not capitalized. It's not deferred. It's just part of the regular OpEx of -- it's is just part of the regular OpEx. So these are the 3 sets of costs. So from a contractual standpoint, I mean, we believe that the cost of the mobilization will be fully covered by the mobilization fee.

Okay. Could you put us -- give us an estimate of what would be the mobilization revenue per rig that you would receive when these rigs are deployed? I think we can back calculate in the past, maybe it's like SAR 25 million. Would you say that's the same for a nonconventional gas base rate?

I mean -- this is not a -- we cannot disclose it. Unfortunately, we cannot rely discloses, it's a bit confidential. But let's say that it's -- as I said before, it's enough to cover the cost, yes.

One last question on the total number of rigs. So as you mentioned, there have been like tenders put out for 20 plus 13, around 33, 35 rigs. And so half of this is done. So do you think we could see another tender as soon as, say, 2024? Or do you think no, it's like a 2026, '27 story? Just trying to see -- you also mentioned that you win in -- I mean the tenders would be a staggard basis. But any indication of when probably the next 2 one will come?

Are you referring to unconventional again? You're still in the unconventional, yes?

Actually, you could help us with unconventional and conventional.

I mean, it's the unconventional -- sorry, the conventional, there is not a clear sight if how many yet that the client wants to add rigs for that, to be honest. There might be a tender here or there, but they're not the real growth that you want to look at. What you need to look at that really, I mean, like the unconventional that's going to go from 30 to 70 rigs. So there is a big jump. It's not like 2 rigs here or 3 rigs here there. So the unconventional, you're right, there will be tenders. We're -- I mean, we're not sure -- I mean just to give you an example, I mean, when we forecasted for the IPO, we had the plan of a certain number of rigs, but the unconventional was not part of the plan because we did not know when it's going to come. However, it came sooner than we expected, the tender. So it all depends on the plans of our clients and how fast. Now we know they want to develop this field very, very fast. But so it can be early next Q1 or it can be midyear next year. So it's up in the air, to be honest. But all what we know, it's high on the agenda of our clients.

Now we'll go to Saleh. You are unmuted.

This is Saleh [indiscernible]. So I have a follow-up on one of your answers. So you mentioned that H2 EBITDA should be similar to H1. I just want to know how is that since you are adding 3 new Jack-ups?

Yes. So I'll explain and then. So we see that there will be some -- a couple of one-off costs that's going to happen in H2. One is some of the costs you have -- when you start a new rig, there is a bit of extra cost of, call it, start-up costs for the rig to start until the crew is aligned because you don't have a full crew on the rig that needs to kind of gel together. So it takes a bit of time. So this is for the 3 offshore rigs. But the real major cost that I was trying to explain, there is a huge headcount that I need to add. 16% of my headcount needs to be added just to be ready for the 10 unconventional rigs. So this head count that's going to be added, there is no revenue against it. And not only the headcount, the headcount is going to be added, and then you're going to really expedite the spend on training and development to make sure they're up to speed and ready for the operation when it starts. And for the rigs, it's -- you cannot train someone over a week or 2. You really need to put him for a couple of months to get acquainted, experienced and knows has good knowledge to be part of the crew on the rig that's going to start the tendering. So we see this cost that's going to happen in H2.

[indiscernible] you will be the last as will take live, then Dan, and will be the last participant. [indiscernible], you're unmuted, you can start.

I have a question more on the business side. And please clarify if I -- if I'm mistaken on this. But Aramco's policy, your key client is, basically, they try to maintain their reservoir, right? So if they're going to produce 1 barrel, they're going to drill for 1 more barrel. So my question becomes, in Q3, for example, we're going to have oil production of roughly 9 million barrels a day. So if we exclude basically their plans on the -- increasing the maximum sustainable capacity, when logically speaking, shouldn't the utilization of rigs fall?

So theoretically, you're right. But you have to understand is when you explore -- let's say, for example, you produce 1 barrel and you want to explore for that barrel that you produced, not every well that you drill, you have a success. So you really need to continue drilling. That's one element. The other element, the decision to drop production, this is minor in the whole scheme of things when you manage the reservoir and try to find more reserves. It's a small changes that Aramco is very, very long-term planning. They don't look at the small ups and downs that affects the day-to-day operation. I hope I did answer your question. I mean just to be clear, it's not a straight calculation. You draw production then drop the drilling. It's not corrected straight to it.

Okay. No, no, that's clear. So you're saying in the grand scheme of things, it's not major, but there is a minor impact or there could be a minor impact.

I mean this would be with the client other than Saudi Aramco, yes. Yes.

The last question is from Dana. Please, Dana, you are unmuted.

Capital. So 2 questions on the unconventional, starting in next year. So what does the ramp-up look like, especially that you've just highlighted the overruns? And it's a big contract, amazing job in winning. But what should we expect on the margins going next year? So that's the first part. And secondly, so the last one I'm going to ask all at once. On the international front, I'm not sure if you have already talked about it, but the IPO guidance of the Tembec internationally, what is the update? And if there is any change in the strategy?

Let me cover -- so let me take that second question first, and then I'll pass it to Hubert for the margins. So if you -- you're right, if you go back to the pre-IPO guidance, what we said is we will have 4 rigs Offshore. we would have 10 rigs expansion out of the Kingdom, and we might have a plan of growth on Land from 5 to 10 rigs. So what did we achieve today? Today, we achieved a 10 rigs, which is instead of the expansion out is in Saudi. So during the IPO, we said they will be unconventional, but we didn't forecast because we didn't know when it's going to come. So the unconventional came faster. And when we look at the expansion out of the Kingdom and the unconventional, we can realize that the unconventional was more accretive. So we decided to win the unconventional for 2 things. One, it's a better deal. Number two, it's very strategic. It's good for the Kingdom and it's sustainable. It's not going to -- it's hit too low for a long time. If you look at any contract out of Saudi, might not have the same length of operational time like the one on unconventional. The unconventional is going to go for years and years and years. So it's better to be -- so we had to -- we decided that we will take this. So what we did is we exchanged the 10 rigs going out of Saudi with the unconventional, which is a better deal that we see. And what additional to, we won an extra offshore rig. So instead of 4, we won 5. So there is 1 additional offshore rig. These additional offshore rigs is almost 4 land rigs. So in all scheme of things, we almost delivered the 5-year plan in 1 year.

So I guess there was a question on the margin. I think we have already answered that in the sense that we have indicated that from a cost standpoint, we have modeled the operating cost to be the same as the land rig simply because we don't know -- we cannot, at this point in time, we cannot quantify the upside, the potential upside that we're going to get from energy -- from synergies, it's a bit too early. That's one thing. And I think on the day rate, we have already answered. I mean, we have said that the day rate will be in the low 40s, and it's -- and we have confirmed that it's slightly accretive compared to the average of the Land segment. So I think you have all the elements.

Did we cover your questions? Or do you want us to repeat?

Yes, on the ramp-up, so all of the 10 rigs were staffed all at once? Or is it going to be a gradual?

I mean arrival gradual, but I think , we are seeing that the revenue will start in H2.

Yes. Okay.

Arriving with the rig doesn't mean that you generate revenue.

You're not going to get all of the 10 at once?

Yes.

Yes, there's going to be -- yes, they're going to arrive at once, but there's going to be a phase, you have to go through in the client's acceptance process. I mean there is there is a process that needs to kick in. And what we say, we're saying we see the revenue flowing into H2.

Thanks a lot, Dana. Thank you all. Thanks a lot, Arabian Drilling management for participating and clarifying and addressing the inquiries. Thank you all for participating, and have a nice day.

Thank you.

Thank you.