Arabian Drilling Company (2381) Earnings Call Transcript & Summary

Good afternoon, everyone. This is at Iyad Ghulam. On behalf of SNB Capital, I would like to welcome you to our conference call with Arabian Drilling management regarding the full year 2023 earnings results of the company. We will first listen to the management feedback. Following this, we will open the floor to questions. With no further ado, I will hand over to Mr. Raed Maharmeh, Investor Relations Manager.

Thank you, Iyad. Good afternoon, everyone, and welcome to Arabian Drilling's Earnings Call for the Fourth Quarter and Full Year of 2023. Our thanks to SNB Capital for hosting this call. We have recently announced our 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. 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 will have our CFO, Mr. Hubert Lafeuille, who will take us through the company's financial performance. The agenda for today's session will cover various topics including a look back at 2023, some key milestones achieved and a review of our operational and financial performance, including forward-looking guidance. We will then open the floor for your questions. I would like now to hand over to our CEO, Mr. Ghassan Mirdad.

Thank you very much for the introduction, Raed. [Foreign Language] and welcome to all participants joining us today. Before we go through the details of the presentation, I want to take this opportunity to express my gratitude to our team, our business partners. 2023 was a year of hard work, unwavering commitment and outstanding achievements at all levels of the company. Let me take you through the major milestones achieved in 2023, starting clockwise. In February, we received various awards for the two capital market transactions we did in 2022. Our SAR 2 billion Sukuk and the IPO. June marked the completion of our shipyard work as we started the mobilization of three -- our three latest jackups within one month, highlighting the excellent efficiency of our team. In July, we were awarded the 10 new unconventional [indiscernible]. In August, we announced multiyear extension with Aramco. 2 of our rigs received a 10-year extensions, resulting in a record high backlog in Q3. In November, we paid our first post-IPO dividends and returned SAR 225 million to our shareholders. We wrapped up the year in December by mobilizing one of our land rigs to drill the first geothermal well with Aramco, representing a new area of growth in line with sustainability agenda of the country. Now let's take a closer look at our performance for Q4 2023 in Slide 8. Overall, we have delivered a strong quarter, both operationally and financially, achieving record high returns. Starting with operations. We have maintained a steady level of rig activity this quarter with 47 active rigs, the same as last quarter. However, due to the recent retirement of our land rig AD28 our total available fleet has decreased by one unit, going from 50 to 49 rigs. This adjustment brings our current utilization rate up to 96% within 47 active rigs out of 49. We are seeing a significant improvement in nonproductive time this quarter, coming in just under 1%. This translates to a strong rig efficiency index score of 93.5%. Our rig move performance have improved to 1.6 days saved per rig, this quarter, boosting our operational efficiency as well. On the safety front, our total recoverable injury frequency rate was in line with the last quarter and still 3x lower than the global industry average. We are also pleased to announce the finalization of our comprehensive corporate sustainability framework. This outlines our commitment to environmental, social responsibility and ethical governance to guide our long-term sustainability efforts. Moving on to the financial highlights, which Hubert will cover later in more details. Our Q4 revenue grew 7% quarter-on-quarter, and we closed just shy of SAR 1 billion, benefiting from the full impact of the jackups that started in the last quarter. We saw a significant double-digit jump in our EBITDA of 11%. This is nearly down the rate of our revenue growth, translating into a profitable margins of 44%. Our Q4 net income has shown tremendous improvement and is up 31%, with an excellent [ profit ]. Our cash flow from operations reached SAR 441 million, a substantial improvement largely driven by a favorable change in [ network counter. ] On the growth front, we made great progress. We recently announced the award of three additional unconventional rig, bringing us to a total of 13 rigs out of the total of 23 awarded. Backlog remains very strong with a book-to-bill ratio of 3.4x and an average contract terms of 2.6 years per rig. Finally, we have now completed a pre-qualification process with Kuwait's oil company, which opens the opportunity to start expanding region. Moving on to the latest contract and market update on Slide 10. We are happy to see that we continue to grow in the unconventional gas space. The three new rigs awarded means that our firm contract backlog will increase by up to SAR 850 million and will be added to the backlog in Q1 2024. The total CapEx program will be shy of SAR 0.5 billion. In Q4 2023, we have added approximately SAR 100 million of backlog with the current Khafji Joint Operation as follows: First, we renewed our MPSV AD20 for another year until November 2024. Second, we won a multi-well contract for a land rig AD29, that was not contracted and which just started this month. As we are about to receive the first of the 10 new unconventional rigs, we will focus on the commissioning and client acceptance in Q2 and we expect the associated revenue to start flowing in Q3 2024. To date, there have been no change on our offshore fleet activity. We currently have 9 rigs contracted with Aramco, and we are working on mitigating plans to address any potential offshore fleet downside, including returning these rigs if necessary. Our growing land footprint provides resilient and stable to our business and stability to our business. As mentioned, we are now qualified by Kuwait Oil Company for the medium and deep drilling segment. As mentioned, in the past, Kuwait is a market that forms part of our regional expansion plans. Looking at the backlog, the position at the end of the year was SAR 11.9 billion. This represents a SAR 800 million reduction compared to last quarter, coming from SAR 900 million of revenue burn rate during the quarter, partially offset by the SAR 100 million of firm contract backlog addition with Khafji Joint Operation as discussed earlier. Aramco remains our main customer and holds 85% of our current backlog with 55% attributed to the growing Land segment. In 2024, we have 7 rigs rolling off contract. Of these, 3 are offshore rigs, 1 with Aramco and 2 with Khafji Joint Operation, which are all under negotiation. For the four remaining on the land side, one rig has been extended this month, two are under negotiation for extension. And the last one saw its contract end January and is being actively marked. Now looking at our operational performance. We have delivering -- we have delivered a strong quarter with most of our operational KPIs up. Aramco, 36 months rig efficiency index average was stable at 93.5%, and we have seen more than 80% of our Aramco rig scoring in the high and superior performance category. Additionally, our nonproductive time has also decreased in Q4 and the 12-month rolling average is showing a trend of excellent progression quarter-over-quarter. Finally, we have also performed very well on the rig moves with an average of 1.6 days saved per rig move during the quarter. For 2023, we have performed 175 rig moves and saved a total of 182 days compared to Aramco KPI. This means one day save per rig move and this equivalent to an additional 6 months in day rate revenue. As mentioned before, our utilization rate has gone up to 96%, but this is only a function of reduction of available fleet size by one unit going from 50 rigs to 49. Overall, we have the same number of operational rigs, 47 with 12 offshore and 35 onshore. This concludes our operational review. And I will now hand it over to Hubert, who will discuss our financial performance. Hubert?

Thank you, Ghassan. Good afternoon, everyone. Moving on to some highlights on Slide 14. As mentioned earlier, our financial performance in Q4 has been particularly good, and we have seen an acceleration in our ability to build a strong return. To start with the financial review, let's have a snapshot at some of those highlights. Our revenue grew quarter-over-quarter at 7% and was the highest ever. Our EBITDA was strong at SAR 435 million at a 44% margin level. Our CapEx was SAR 535 million, of which approximately 50% related to the 10 new unconventional rigs program. Our free cash flow was negative SAR 93 million due to the high CapEx investment level seen during the quarter. Our return on equity was 10.1% calculated as net income over total equity and our net debt was SAR 1.75 billion, with a net debt over an EBITDA leverage ratio of 1.2x. Moving on to our returns profile. I will first address quarterly numbers before talking about full year's. So for the quarter, our sequential revenue growth was 7% with a quarterly revenue of SAR 907 million (sic) [ SAR 987 million ], our highest ever, as I mentioned. The single-digit growth in our revenue has delivered a double-digit growth in our EBITDA and net income with a plus 11% and plus 31% increase, respectively. This means that more than 60% of the revenue growth has flown through and materialize in EBITDA and net income growth. For Q4 '23, again, the good results are coming from strong revenue with a favorable impact of three main items: first, we have the benefit for the full quarter of the three new jack-ups that started in July. Second, we have improved operational performance and NPT, as Ghassan has mentioned. And third, we also have seen additional rig move activity during the quarter. Overall, our Q4 EBITDA of SAR 435 million came with a strong margin of 44% and our Q4 net income of SAR 183 million was in excess of 18% profitability. Approximately half of our Q4 CapEx of SAR 535 million related to the 10-year rigs unconventional program, as I mentioned. Today, we have spent approximately 1/3 of the total CapEx program, which is estimated to be around SAR 1.7 billion to SAR 1.8 billion. Now I'm going to address the full year 2023 numbers. For the full year, we closed with a revenue short of SAR 3.5 billion, which represent a 29% year-on-year growth, mainly driven by an increased rig activity coming from the offshore. In 2023, we have an average of 44.5 -- sorry, 45.4 active rigs per month. Our full year '23 revenue was on the top of the range of our '23 guidance. Our full year '23 EBITDA was SAR 1,485 million with a 30% year-on-year growth in line with the revenue growth. Our margin level of 42.7% was also in line with our expectations. Our net income for the full year was SAR 605 million, which is a 25% year-on-year growth, equivalent to SAR 6.79 in earnings per share. Overall, our profit level was in excess of 17%, close to that of last year. The net income for full year 2022 of SAR 484 million was adjusted to exclude the impact of a onetime tax effect of SAR 74 million. For the full year '23, the total CapEx was close to SAR 1.9 billion, of which SAR 1.2 billion related to the fleet expansion, about SAR 400 million related to the sustaining CapEx for the existing fleets and another SAR 300 million is related to facilities, spare equipment and our renewed company offsets. The CapEx related to facilities included the acquisition of a building to host our learning academy as well as various head office and facilities upgrades we have completed during the year. Now looking at our segmental reporting. Let us focused on offshore first, which is on the top half of the slide. For the offshore segments, we reported a quarterly revenue of SAR 448 million, with a revenue quarter-on-quarter increase of 7%, again, due to the full quarter impact of the 3 new offshore rigs that started in July. Our full year '23 revenue of SAR 1,467 million has almost doubled compared to that of last year. More than 80% of the incremental revenue year-on-year came from the contribution of the 5 latest jackups. The increase in the gross profit, both quarter-on-quarter and year-on-year was in line with the increase of the revenue with a margin level of 43% to 44%. Compared to 2022, gross profit was impacted by the start-up of 3 jackups as well as additional compensation costs to retain our operational rig crews. This gross profit includes direct fuel costs as well as depreciation. It does not include G&A, interest tax and other income. For this reason, gross profit, as shown on the slide does not compare with EBITDA. For the Land segment, the revenue increase of SAR 38 million quarter-on-quarter is mainly due to an increase in rig move. For the full year '23, we closed with a revenue of SAR 2 billion, which is a 6% sequential increase. The increase is mainly due to higher rig activity with a net increase of plus 2 active rigs in 2023 compared to 2022. Full year '23 gross profit is showing a 23% decrease, mainly due to the combined effect of the start-up cost of the 10 unconventional rigs as well as higher compensation and employee-related costs incurred during the year. Moving on to this slide. We introduced a cash flow bridge to provide a comprehensive overview of the moving part. So this bridge shows a cash progression between year end 2022 and year end 2023. So overall, the cash position has progressed by SAR 0.6 billion. We have SAR 1.5 billion of EBITDA, offset by a CapEx of SAR 1.9 billion, again, of which SAR 1.2 billion relates to fleet expansion. On the financing front, we have a SAR 1 billion of short-term deposits with the maturity in excess of three months that was not classified as cash as of 31st of December 2022. This deposit matured in 2023 and where we invested with maturity in less than three months and are therefore not showing as cash in 2023. During the quarter, we drew another SAR 500 million in bank loans to complete the ongoing CapEx projects. And then we have all the disbursements such as dividend interest these obligations, et cetera. Overall, we close 2023 with a cash position in excess of SAR 1.4 billion, of which -- SAR 1 billion is invested in short-term deposits as an offset to the cost of servicing the debts. Moving on to the detail of the debt profile. As we mentioned in the past, our net debt is increasing given that we are in full steam ahead in our CapEx growth cycle. In 2023, again, we spent roughly SAR 1.2 billion on fleet expansion, and we expect to spend another SAR 1.5 billion to SAR 1.7 billion in 2024, only for the fleet expansion. Overall, since we began our fleet expansion program back in 2022, we are talking about the total CapEx plan in excess of SAR 4 billion. So we closed 2022 with a net debt of SAR 1.8 billion, which is double what it was a year ago. However, please keep in mind that we remain very moderately leverage with a net debt-to-EBITDA ratio of 1.2x. To put into perspective, again, we have communicated that we wanted to maintain our long-term leverage ratio below 1.75, which means that we have room for further growth. Overall debt as of 31st of December '23 was SAR 3 billion and has increased by SAR 500 million in the quarter as we drew another bank loan to complete the 10 new build rig program. Our gross debt is made over Sukuk with a principal of SAR 2 billion and two bank loans of SAR 500 million each. In 2024, we have a loan repayment obligation of SAR 100 million related to one of the two bank loans. The other bank loan comes with a grace period of one year, and therefore, there are no repayment obligation in 2024. Moving on to the forward-looking guidance. Full year '24 revenue is expected to be in the range of SAR 3.6 billion to SAR 3.9 billion. This guidance corresponds to an average of 46 to 51 active rig per month, taking into account the start-up of the 10 new rigs in Q3 '24. Our full year '24 guidance for CapEx is expected to be in the range of SAR 2.2 -- sorry, SAR 2.1 billion to SAR 2.4 billion, fueled by the continuation of the 13 rigs unconventional CapEx program estimated to be between SAR 1.5 billion to SAR 1.7 billion, as mentioned earlier. Finally, on the dividend, the Board has approved a dividend of SAR 2.53 per share, totaling SAR 225 million. The dividend -- this dividend payout does not require the approval of the shareholder general assembly and will be paid early April '24. Overall, the dividend for period 2023 is SAR 5.06 per share, corresponding to SAR 450 million returned to our shareholders. As we go through the current investment cycle, the Board will continue to assess future dividends based on the company ongoing CapEx program and cash financial requirements to support the long-term sustainable growth. This concludes my section, and I will now hand back it over to Ghassan for his closing remarks.

Thank you, Hubert. In closing today's presentation, we are confident that our business model and footprint will see us deliver continuous top line growth in the year ahead. 2024 will mark the peak of our current investment cycle. This all upfront OpEx and CapEx costs coming through before we can start to enjoy the benefit of our expanding fleet and incremental revenue. Our terms -- our team are lately focused on deploying the 10 unconventional rigs to maintain our reputation with our clients. Of course, we are also being proactively to mitigate any impact from the change in the Offshore segment and remain engaged with our clients. We have delivered on the offshore expansion and are now delivering on our Land segment. As a result, our segmental mix is evolving and the growing land contribution, although at a lower margin, will bring longer-term stability. This is something that we are maintaining -- mentioned at the time of the IPO as well. I will now hand over to Iyad from SNB Capital for the Q&A session.

Thank you, Ghassan. Ladies and gentlemen, now we'll start the Q&A session. [Operator Instructions] The first question is from the line of Zohaib Pervez.

This is Zohaib Pervez from Al Rayan Investment. I've got two questions. I'll start with two questions. Firstly, your rig moves were similar from third quarter to fourth quarter. However, your revenue was quite higher for the rig moves. Could you give us the rationale why that was the case? And my second question is regarding -- you mentioned that the costs were higher because of employees being compensated more. If I remember, last quarter, you had mentioned there is a lot of demand for the employees. But now with the change in Aramco's strategy, do you think this cost structure will continue or you will see some rationalization of cost for employees?

So for the first question on the rig moves. The way we get compensated in the rig moves, it's on distance. So if your rig move has a longer distance, then the cost of the rig move is more and you get compensated for it. So it was just the distance changes from quarter to quarter, you might have the same rig moves, but the distances are different. So this is for the first one. On the second one. So what we did is we -- when we -- in 2022, when we realized that our rig crew are being kind of approached because you've seen a huge increase on the offshore fleet, and that was the easiest talented pool to get, if you have any problem getting people from outside. So we build a retention plan. It was a very good retention plan because we've seen people not leaving us and this retention plan has a window and then it stops. So it's just a matter -- it's not going to continue, of course. So we'll see the stopping with the time.

Thank you. The next question is from the line of Ricardo Rezende.

If I may, following up on something that Ghassan mentioned during his remarks on the outlook for the jackups, Aramco was quite vocal about the potential for gas. And they mentioned that we should see the number of rigs stable in Saudi. So, when you look at your jackups, if you would be willing to bid for some gas contracts, how much do you think you have to spend on the jackups to make them ready to drill for gas? And then the second question is on the regional expansion. You now got the prequalification in Kuwait and also with all of the potential for unconventional gas in Saudi. Does it still make sense to look for inorganic opportunities in the region?

Okay. So the first question on the moving from oil to gas. Aramco has very high standards on the requirements on the offshore or in the land rigs. So most of the rigs, not all but most of the rigs, especially the offshore, you can actually move them with very little CapEx cost because it's actually part of the requirement. So the rigs will drill for oil or for gas. So when the client says, "Okay, Ghassan, please shift to a gas well in offshore," most probably, there's no change in CapEx or equipment upgrades because they're already within that standard. So hopefully, that will cover the first question. The second question, so on the expansion. I think they're all both good, to be honest, if you have an expansion on the unconventional, an expansion to Kuwait. They're both kind of give good returns, and it's just which one comes first. So today, we are approved by KOC. We just have to wait for the cycle of the tendering. And as well, we're looking -- after we deploy the 10 rigs for the unconventional, we start going back and being active in seeing if there's any M&A within the region as well. So -- I mean, I think both are lucrative and both are good for [ offshore debt. ]

Thank you. The next question is from the line of [ Abdullah Hakami. ]

[Foreign Language] I just have a couple of questions. If you could just give us a color on the offshore day rigs of the last contracted rigs in the market just to get a sense where the last bit landed debt. And if you expect this [ day rig ] to kind of be stable going forward, especially following the Aramco announcement. So that's the first question. The second question is on the onshore. I think you mentioned that there is one rig that has been expired in January and currently being marketed. Who was the customer of that rig?

So the customer is Baker. So Baker reduced one of their rig fleet. Actually, they took another rig and renew the reduce as well. This is swap. It was kind of a swap. So now we're marketing this rig with other service providers. So on the offshore rig, I mean, I think we're in the north of $100,000, right? So we cannot give you the exact number, but I think it's in the north of $100,000 per day. And it's too early to see what's going on and how Aramco would come out across. I mean, all what we know is there will be some shift from oil to gas. There might be some reduction, but still nothing communicated to us.

I mean, we have a mix. We have a mix data of legacy rates. I mean, rigs were contracted in the past time where the market was a completely different cycle, and then we have the latest fixtures of 10. So it's a mix bag. So overall, on average, it's about $100,000. But the latest pictures, where all north of $100,000.

Thank you, [ Abdullah. ] We will take a question from the Q&A box. It's coming from [ shahrukh Salim. ] He's asking, you have a high number of rigs coming off contract or due renewal in 2026. Do you plan to renegotiate them earlier or all of them in 2026?

So you're very right. What happened is a lot of -- some of our customers try to close some contracts during the pandemic. And we did not -- what we ask is instead of closing a long-term contract, during the pandemic, of low rates. We asked to delay. So all of them came just after the pandemic, and we renewed a lot of contracts. And that's why you see you see 2025 is the year that we're going to see a lot of renewals that's going to come. And I think this -- I mean, the renewal will start maybe starting into the year started looking at it and seeing what we needs to renew and start the negotiation. We do have some, I think, one or two rigs that ends next year, I'm negotiating [indiscernible] a longer extension.

I mean, yes, we have a big portion of the fleet coming off contract in 2025. But remember, I mean, those rigs have been working for a long time, right? So these are the rigs that we keep rolling -- running over, right? So we've been here for more than -- for quite a long time. So we expect them to be renewed and it has always been the case.

But it's just the timing of the extension usually is closer to the time of the contract, like 3 to 5 months before the contract expires.

Okay. Thank you. The next question is from the line of [ Aarsh Suman. ]

I have a question and a follow-up on your previous answer. So the first question is, can you remind us what is your maintenance CapEx is currently on an annual basis? And a follow-up on the previous one, you said that the rig that got expired was from Baker and it was a swap. So when you say it was a swap, they took the rig from someone else or one of your rigs was change to that, like how did that go about?

So I mean -- so I called musical chairs. So what happened is 1 rig from Schlumberger was asked to release because we're doing very well. And then Baker said they want to take that rig, they took the rig, but then they had some challenges to keep all of the rigs, so they reduced one rig. So it's just a musical chairs now. Another -- now we're having 1 or 2 actually service providers asking us [ if we can ] take the rig. So this is kind of what happens between the service providers.

So on the CapEx side, so as we mentioned, so in 2023, we have roughly SAR 400 million of CapEx for the existing fleets and we have a leverage of about 45 active rigs throughout the year. So you can do the math. But the one thing is that out of the SAR 400 million, there is also a lot of things that are sometimes refurbishments. So this one needs to be -- so you really need to take up from the SAR 400 million things that are specific refurbishment and some specific life enhancements. So to be fair, you can say that from a sustaining CapEx, purely sustaining CapEx, excluding life enhancements, et cetera, it's about SAR 7 million to SAR 8 million per rig per year on average. Did that answer the question?

Yes, I think, he unraised his hand. So I think -- okay, so the next question is from the Q&A box. A question from Jerry. He is asking, can you provide more color on the offshore rig mitigation plans? And can you remind us of how many offshore rigs are leased?

Okay. So this question [indiscernible]. If the way what we see maybe the offshore market is the one that's going to be kind of having an impact. And we don't know what's the impact. But if you look at my fleet is 49. I have 13 offshore out of the 13, I have 9 with Aramco. And out of the 9, I have 2 under network charter or leased. So I mean, this is what we see. I mean, if there is any rig that's going to be changed from oil to gas, that's a continuation of operations. We don't see any problem there. If there is any need to lease, we have 2 rigs on [indiscernible] charter. So -- and as well, we can see if we can divert it to another client because we have as well another client who wants to offshore, then we can try to utilize this investment.

[Operator Instructions] We have a question from [ Hassain Yousaf. ]

First, there is some talk about the use of new energy or using of thermal energy?

Yes, geothermal.

Okay. What is -- are there any more details about this from the...

So [Foreign Language] I think we were one of the companies that were selected to drill for the geothermal. Just to give the audience a bit on the geothermal, you drilled to get heat from the ground and you can pump water, it comes back as steam and you can generate energy. So it become steam energy that you get. The challenge here is you drill it deep, you drill through tough rocks. So we were chosen, and we -- now we start drilling the first geothermal well in [ Saudi Arabia. ] And this is -- and there is more wells to be drilled, knowing the division of the country, and Aramco looking at sustainability and addressing geothermal that was actually addressed more than once by Aramco. And I think we are in the forefront of this area that we will start right now. And hopefully, future ones to come, we'll be as well a trying our best to make sure that we are addressing that in [indiscernible]. So we are the first and the experience will be the first to be learning on this experience, which is good for us. So whenever we want to put more rigs into this, hopefully, will be the first to gain that market.

Okay. And when is that expected to happen? How many years?

We started it. We started already. We started the first geothermal. So yes. So what happens geothermally, first, you assess, you drill in one well in a certain area and you assess if this is the right place we want to drill and see if that provides the right heat that you want. And if it's that area, then you drill more wells in the same area. If not, then you move around and assess another area. So there is I think what I know there is more than one area was addressed, we were the first to be selected and as well another competitor was selected as well. From the total competitor, there's only 2 companies were selected and we start with this.

Okay. How we can see the -- how it will affect our revenue in the future?

So it's -- when I drill a geothermal well is the normal -- normally is just like drilling a normal well. But all what we're doing is there is more demand. So in the past, the demand only was to drill oil or gas. Now there's oil, gas and geothermal as well. But the rigs are the same, everything is the same. It's still the same as drilling an oil well. There's just more demand. That's what we highlighted.

That's very good. One more question, if you will allow me. Do we have any offshore rigs that will expire the contract within '24? And is that with Aramco, so this will be affecting the new or the coming contracts?

So I think -- so if you look at the slide...

There are 3 rigs...

Offshore, there is 3. Out of the 3, there is 2 of them with Khafji Joint Operation and 1 with Aramco. And actually, we are in the middle of negotiating this rig with Aramco for an extension.

Is it positive negotiation? Is it going to be a positive, productive negotiation?

So I mean, if you ask me, I think it's positive. This rig has a special feature, that is -- we call it low draft, shallow draft. That means the rig can go to a very shallow occasions where not all of the rigs can go to. So that's why I think it's more on the positive side.

The next question from the Q&A box is from [ Nafees Abbas. ] He is asking, any planned maintenance days for the fleet?

In 2024?

Yes.

I mean, we'll always go through a cycle where there is always plan, there is always maintenance, which is planned because if you recall, what we're saying is that some of the components of the rigs, which is, for instance, weather control equipment, that needs to be recertified every 5 years. So at any point in time, we always have a rig or more than one rig in our fleet that has to go through a maintenance in during the year, but it's a roll of effect. So it's not like there's one particular [indiscernible] particular year, saying so it's sure that we have a cycle coming up -- we added 16 rigs in 2028 -- 2018 yes, which are coming up for the cycle. So -- but all of this is planned and all of this is already planned in the budget and in numbers.

There's another question in the Q&A box from [indiscernible] He is asking about the negative free cash flow in the second half. And this dividend distribution, which I think relates to how you're going to see the dividends going forward with your major CapEx plans increasing?

So on the negative free cash flow, it's very simple. I mean, we generate cash flow from operation of SAR 400-plus million, and we spent CapEx of SAR 500-plus million. So the difference between the two, so we spent SAR 100 million more in CapEx than we generate cash from operations. So this is why we have a negative free cash flow, and it's something which is completely expected considering where we are in the cycle and in the CapEx growth. As far as the dividend, so we declared a dividend of SAR 2.53, which will be paid on the 2nd of April. So this is for the period H2 '23. For future dividends, again, the one as always, they will actively review and assess the situation, taking into consideration the need for returning value to the shareholders with the need of reinvesting for growth initiatives. So it's just an assessment that takes place every time, no balancing out where we are on the -- where we are in the cycle or what's on the cash management requirement, the cash -- free cash requirement, et cetera, et cetera. So the Board will do its work when it comes -- when the moment is due to assess the H1 '24 dividend.

Thank you. We have a follow-up question from the line of [ Akash Thomas. ]

Thank you for giving the opportunity to ask the question. I just want to know how much of the rigs are there in the Kingdom apart from Aramco in offshore. So based on my understanding, Aramco has 90 offshore rigs currently, somewhere in that range. How many are the other players -- rigs with other players?

So Aramco is at 90 plus. And then we have KJO who has 3, 3 rigs, all with us.

And that's it or like Schlumberger?

The whole fleet of Saudi, in the Kingdom.

So 90 -- roughly 93 offshore rigs.

Plus or minus, yes.

And the ones that you mentioned with Baker Hughes and Schlumberger?

These are all land rigs. So all of the lump sum turnkey are land rigs. So you have -- we have our client is Baker and Schlumberger. Schlumberger has been with us for quite some time. We have a lot to bring to them. Baker started with us with two rigs in 2022, starting with 2 rigs. And today, we have around 6, so this tells you, even though we're not the cheapest, but they see because we can deliver faster than other contractors, we went from 2 to 6. And the third player who is in the market that we don't have a contract with is Halliburton, and we're trying to see how we can have them then, if we have Halliburton and [indiscernible]. These are the four players in the market, they have lump sum turnkey. Halliburton, Baker, Schlumberger and [indiscernible]. And we have contract with 2 of them.

Thank you, all the best for the future, and we are waiting for your invitation to the rig that you said you'll be inviting us.

You are more than welcome, more than welcome. [indiscernible].

Thank you. We have two more questions in the Q&A box. The first one is -- I will read them together. The first one from Shahrukh Salim. He's asking how many of the 22 land rigs going off contract in 2025 are with Aramco? And the second question is from Amer Farooq. He is asking about what is the payback period/IRR for the 13 unconventional rigs.

So okay, let's go one by one. So the first one is how many out of the land rigs in 2025 are with Aramco, right?

Yes.

I mean, there's a big chunk.

No, no, you have 10 with Schlumberger.

Yes, yes. So we have a big chunk with Schlumberger and some with Aramco. And these LSTKs usually -- they just -- again, it's the same thing they extend, and then they serve Aramco. So Aramco just puts a tender. And today, Schlumberger and Arabian Drilling, kind of they have the full market share in the gas in the LSTKs. So the only player in the gas today is Schlumberger, and the rig contractor is Arabian Drilling. And this is being there for quite some time now. So I think 11 with Schlumberger and the rest with Aramco, if I am not mistaken. [indiscernible]. So that's the first part of the question. And the second one was what...

Yes.

So the payback is, as we like to say, now, we'd like to have a simple payback, which is basically very close to 100% simple payback by the time we reach the end of the contract, which is primary time plus the auction. So for the unconventional the contract is a 5 plus 1 year contract. And the thing we have 100% of the payback slightly after that period, but most of the payback is there by the end of the contract. So I think I recall it's about 7 or -- between 7 or 8 years, out of a 6-year contract. So we know so we find them when we find that -- and the RR really, one of the things that we look at is, IRR that's obviously would be higher than the weighted average cost of capital, [indiscernible] value. So we're talking about the IRR in the low teens, low teens to mid-teens.

Okay. Thank you. The next question is from [ Saleha Rekaf. ] He is asking gross profit margin for the offshore declined from 44.4% in Q3 to 43.3% in Q4 despite the full impact of the three offshore rigs. What was the reason? He's talking about quarter-on-quarter, not full year.

Yes, I think it has to do -- I believe that it has to do with the retention bonus. So we have a retention plan, that will keep -- that is a 3-year program that has been accrued and I think it has to do with the timing of the accrual of the retention program has affected the -- it actually has affected both the land, the offshore and the land segment. That's the only thing I can think of. Yes, nothing really all that has changed other than the timing of the accrual of that particular retention plan.

And just to -- I mean, just to clarify on the retention plan. If a crane operator, if we lose a crane operator on a rig the whole rig stops. If you lose the Chief Electrician, Chief Mechanics on the rig, the rig stops. So we built a very strong retention plan to assure that. And our crew have been literally headhunted they've been target because we have the most experienced Saudis in the market and the crew well. So we spend a lot on training and a lot of development. So we needed to make sure a very strong retention plan. And this applies across the Board. So all of the crane operators in the whole 50 or 49 rigs, the whole chief mechanics, chief electricians, so all of the key positions had a very good 3-year retention plan, which worked very, very, very well. But it's a hefty big one, but it's needed to assure that we don't lose our crew.

Thank you. There's another question from Zohaib Pervez. He is asking, was there a one-off resulting in the professional expense to increase in 2023?

So in 2023, was a bit of -- I'll start maybe [indiscernible]. So 2023 was a bit of a year of reengineering, and we were -- I mean, we've been looking at revamping our business operating model and we have engaged a number of consultants to help us do so. So yes, it was -- 2023 was particularly high year in terms of professional consulting just because of all the work that has been going on, whether HSE on the HR side, on the strategy side...

Just to give you an example, actually, this is something that I'm very proud of. I was invited by our clients [indiscernible] to present. I mean, one professional fees on the AI, artificial intelligence and how we can improve. And this is something new to do the business that can we bought when you [indiscernible] material. So I presented our ideas with the behavior center and how we can improve safety. This idea took -- I mean, I tell you, it took very, very fast interest by Aramco. We had Aramco R&D working with us to partner with us, how we can go to the next level of safety with AI. I was invited in Riyadh the week -- last week before on LEAP to present the same thing. It just tells you we put some investments that how we can transform the company, and this was one of them that really is showing a big difference. Now even our competitors [indiscernible] go and see what Arabian Drilling is doing. So there is some unique stuff that we're doing that kind of we have -- we did some spend last year on different fronts. And this is kind of -- I just want to share this because this is really taking a lot of traction by our clients, by our competition by the AI community we've been asked to go and present.

And the peak really in Q2 and Q3 of last year. I mean Q4, I mean it has significantly reduced. And now as we speak, all the people that used to work with us on different fronts. I mean, they are [indiscernible].

And the next question is from the line of Hussain Yousaf I think it's a follow-up question.

I have actually two questions. First, will the effect of the increase in diesel prices will affect our gross profit in the first quarter of 2024 and so on? This is the first one. Second question, how much we are expecting from the unconventional gas views in the second half increase in the growth of profit will have in the margin of profit.

Okay. So in the diesel front, there is 2 -- there's the direct and indirect. If on the direct side, we don't get impacted because usually the diesel is provided by our clients. So to run the rig operation, we don't -- we use a lot of diesel, but it's all provided by our clients. So in that aspect, it's very minimal impact. However, where the indirect effect is from our supplier. So for example, [indiscernible] who provides food to the rigs, they get an impact on their diesel transportation, and they're going to increase their prices to get that effect. So it's not as big as most people would think, but there will be a very, very small impact from our contractors, but not -- I don't think it's material lot, right. Yes. So that's the reason on the profitability on the unconventional.

So what we've been saying on the unconventional is that in terms of margin, it's slightly accretive to the average of the segments. But of course, we're only going to see that once the revenue starts flowing in, which is going to be in H2. So yes, we expect that we'll see some improvement on the margin. And also, I'd say that there is also a couple of -- there could be a couple of onetime cost. I mean, we've been talking about the start-up costs. The land segment, as you look at the numbers today, the land segments are burdened by the start-up cost of the unconventional. It started in H2 '23. It's going to continue in H1 '24. So we're not going to get into -- I am not going to get until we really fully start all unconventional to kind of mobilize normalized position. So we should see some improvement on the land segment profitability by the time we reach our H2.

So when do you expect this -- this time will be -- to see the full effect?

So no, I think by end of the year, I think. By end of the year. So what will happen is -- what you can assume is a normal of a profitability of a normal landing, with a bit of -- because it's higher rates is accretive. The only thing is the rigs, they're coming through an assembly line. So you manufacture one by one. So one rig is arriving as we speak in the next week or 10 days, and then we import, we commission and get the Aramco acceptance. So that's going to be in this Q2, and then it starts and the second rig is already on the boat coming. And so they become one after the other, right? They're just being shipped as we speak. So every rig that comes, you see the effect, but still not the whole effect until all the rigs have come.

I mean, yes, it will be by the end of the year. By when we close H2 that we'll be able, I think, to make a meaningful comparison in H1 versus H2, to see the improvements. H1, we still -- I mean, H1 is still going to be burdened with the start-up cost of the unconventional.

Okay. One more question. We are expecting not to have any distribution of profit in the coming -- this year 2024, I think.

Why not?

The first half, at least, I think, according to last statement.

No, what we're seeing is, we do have a peak of CapEx and OpEx spend this year. And what we'll do is we'll assess with the Board. And then if it's approved then it's approved by the Board. We're not saying it's no, but just...

Yes. 2024 is going to be the peak of the current CapEx cycle. So we just need to balance out our financial cash management with returning shareholders' value. So we're not saying we're not going to do it. We're not saying we're going to do it, [indiscernible] assessing and deciding what is the best both for shareholders and [indiscernible].

That was the last question. Any final remarks, Arabian Drilling management?

No, I would say, look, I think the team, our clients, our business partners, the local contractors business partners did an outstanding effort last year. We came very, very strong. We came on the top of the range actually of our guidance, which shows a bit of strong management. And there is a lot going -- as you said, the question came, I didn't expect that. Some of the spend that we use and how we transform the company, and this will come -- it will pay a long way with Arabian Drilling. Now we're all focused on the unconventional. So at least a focus on the unconventional starting up and Saudi Aramco is very supportive to this trying to accelerate the startup as well. So focusing on the 10 and as we're looking to start the manufacturing and the other rigs that for the other 3 and hopefully, it will be another strong year of growth as well.

[Foreign Language] Thank you, Ghassan. SNB Capital would like to thank Arabian Drilling management for taking your time to conduct this call. We would also like to thank all participants for attending. Wish you a pleasant day. Thank you.

Thank you.

Thank you.