Arabian Drilling Company (2381) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Mazen AlSudairi from Al-Rajhi Capital. Al-Rajhi Capital is pleased to host Arabian Drilling Q1 2024 Earning Call. Welcome, all, to the call, and now I will hand over the microphone to Mr. Ghassan, the CEO of the company. Please.

Good afternoon, everyone, and welcome to Arabian Drilling's Earnings Call for the First Quarter of 2024. Our thanks to Al-Rajhi Capital for hosting this call. We announced our financial results yesterday 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. Let me now introduce our speakers for today's call. First, we will get a performance overview from our CEO, Mr. Ghassan Mirdad; then our CFO, Mr. Hubert Lafeuille, will take us through the financial performance. The agenda for today's session will cover various topics, including key milestones, a review of our operational and financial performance and 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 for the introduction, Raed. [Foreign Language] and heartfelt welcome to all participants joining us for this earnings call. We will begin with a brief overview of this excellent quarter. Q1 2024 was a strong start of the year with an excellent operation, operational execution, solid financials and achievements to celebrate. Starting with operation. We have maintained our utilization rate of 69% with 47 active rigs over a total available fleet of 49, same as last quarter. Our non-productive time of 0.81% was the lowest achieved over the last 4 quarters. Our 36-month rig efficiency index was consistently strong at 94%. Over the quarter, we added 56 additional drilling days through our rig move efficiency, which all added directly to the bottom line. On the health, safety and sustainability front, we improved our total recordable injury frequency rate, and we were very pleased to receive Aramco award for the Best HSE, Health Safety and Environment Offshore Rig of the Year as a testimony to our safety culture. On the sustainability front, we finalized our Scope 1 and 2 baseline emission to progress on our long-term sustainability efforts. This is an important step that will let us measure the effectiveness of our strategy, and we look forward to publishing our sustainability report by the end of this month. Moving to the financials highlights, which Hubert will cover later in more details. Compared to Q1 last year, both our revenue and EBITDA showed strong growth of 24% and 25%, respectively. Our EBITDA level was 42% this quarter, which is in line with our recent expectations and market consensus when normalized. On the growth front, we have great news. On the unconventional rigs, we are very pleased to announce that we started drilling operation last week on the first of our unconventional rigs ahead of schedule. This early start would not have been possible without the support of our partners around the globe, and we look forward to continue working closely with them on this exciting project. For this rig alone, we will account for an additional 6 weeks of drilling revenue ahead of plan. We expect another few rigs to start before the end of H1, which will give us some more revenue upside. Let's now have a look at the latest contract and rig activity updates. On the land rig activity side, as mentioned, we started our first unconventional rig, and the start-up activity for the other 9 rigs are in full swing. I would like to recognize the team who is doing an excellent job in getting those ready to drill quicker than initially planned. Also, this quarter, on the land rig activity, we started an idle land rig with our customer, KJO, Kuwait Joint Operation. This is a new milestone as we never had a land drilling operation with KJO in the past. On the other hand, one land rig finished its lump-sum turnkey contract, and we expect to reassign it to another customer shortly. The previously announced suspension of the 3 offshore rigs will be effective towards the end of Q2. We are having constructive discussions with Aramco to achieve the best possible outcome for all parties. As mentioned in our earnings announcement, we are finalizing the terms of the suspension. From a market outlook standpoint, we see further growth opportunities in the conventional and unconventional gas drilling space in Saudi Arabia. Let's now discuss our backlog. The backlog of SAR 11.8 billion was mostly stable compared to last quarter. Our quarterly backlog naturally consumption rate was mostly affected by the addition of the 3 unconventional rigs contract award. The backlog reduced by SAR 900 million due to revenue recognition during the quarter, offset by the SAR 800 million coming from the 3 new unconventional contracts. We have 7 rigs rolling off contract in 2024, of which 3 are offshore and 4 are land. All 3 offshore rigs are under negotiation and the 4 land rigs are expected to be extended or reassigned to a new project. Moving on to the next slide. We have a strong start of the year operationally. Looking at the top left, we kept the Aramco rig efficiency index at a very high level of 94% in Q1. Then more importantly, as you can see in the green, over 90% of our rigs are scoring in the high and superior performance category, which is the highest score achieved in the last 4 quarters. On the lower left graph, you can see that our quarterly nonproductive time dropped further to 0.84%, which was the lowest achieved over the last 4 quarters. Overall, we see a very good trend over the last 4 quarters with the 12-month rolling average heading in the right direction. On the top right, our rig move performance was also consistently strong with an average of 1.3 days saved per rig move. If you multiply 1.3 days saved per rig move by the number of rig moves completed, we have effectively gained an additional 56 drilling days in Q1. If you recall, in Q1 last year, we did not save any day from the rig move due to bad weather. Even though we experienced worse weather conditions this quarter, the performance of our OFSAT team enabled us to operate as normal. This is another proof of the benefits of continuous enhancement we are implementing. With that, I will now hand over to Hubert to go through the financial performance. Hubert?

Thank you, Ghassan, and good afternoon to everyone on the call. First, let's have a look at some of the key numbers for the quarter. Financially, we also had a strong start of the year with our quarterly numbers. We closed with revenue of SAR 967 million, showing a 24% year-on-year increase. Our EBITDA was SAR 405 million, representing a 42% margin and in line with our expectation. The CapEx spending for the quarter was north of SAR 300 million, of which approximately 2/3 related to the ongoing CapEx program of the unconventional rigs. Our free cash flow remains negative as we're in full swing with our ongoing CapEx growth. We're showing a return on equity of 10% based on our last 12 months net income over an equity position of SAR 6.1 billion. We closed the quarter with a net debt of SAR 1.85 billion and a leverage ratio of 1.2x, which is stable compared to what we had in the last quarter. Now let's go more in detail, and let's have a side-by-side comparison year-on-year and quarter-on-quarter. So first, I'm going to look at the year-on-year Q1 '24 versus Q1 '23, which is on the upper graph, and I'm going to go from the left-hand side to the right-hand side. So we start with the revenue first. So looking at the revenue, we have a strong year-on-year increase of 24% from SAR 779 million to SAR 967 million, mainly coming from the additional 3 jackup that started mid-year '23. Then moving along on the right. Following the revenue upside, EBITDA also increased by 25% year-on-year from SAR 323 million to SAR 405 million, mainly coming from the contribution of the 3 offshore rigs as mentioned. The EBITDA increase of SAR 82 million was partially offset in Q1 '24 by the impact of unconventional start-up costs of SAR 26 million. If you exclude the start-up cost and normalized Q1 '24 EBITDA, we would be approximately at SAR 430 million of EBITDA. Net income shows a much reduced growth of 3% from SAR 141 million to SAR 146 million. Q1 '24 net income was impacted by increased interest expenses as well as additional depreciation costs compared to Q1 of last year. And then again, there is also the impact of the SAR 26 million start-up weighing down. Again, if we were to normalize net income and exclude the start-up cost, net income would be north of SAR 170 million for this quarter. Just a note on the increased interest and depreciation expenses affecting Q1 '24 net income. The increased interest expense year-on-year comes from the combined effect of increasing the debt position, higher market interest rates as well as a portion of the interest expense that were capitalized in '23. For instance, in Q1 '23, we capitalized SAR 18 million of interest expenses related to the offshore fleet expansion program, the one that took place last year. The increased depreciation expense year-on-year is mainly coming from the full impact of the 3 jackup as well as some well-controlled equipment purchase and upgrade, which took place last year. On the CapEx side, on the year-on-year number, the year-on-year number does not really compare since Q1 '23 did not include any of the unconventional CapEx program. However, in Q1 '23, we incurred some CapEx related to the shipyard activities for the 3 jackup contract preparation. Now moving on to the quarter-on-quarter Q1 '24 versus Q4 '23 comparison, which is shown on the bottom graph, and again, going from left to right. The revenue was slightly lower by SAR 20 million with a number of factors offsetting each other, including 1 less operating days in Q1 with the month of February being shorter and also high rig move activity witnessed in Q4. From an EBITDA standpoint, we have a SAR 30 million decrease from SAR 435 million to SAR 405 million. So SAR 20 million of that is coming from the revenue decrease, as I just mentioned, and the remaining SAR 10 million is coming from additional unconventional start-up incurred in Q1 as well as some year-end adjustments [Audio Gap] numbers. Now if you look at the net income, you will see that there is a decrease of SAR 37 million from SAR 183 million to SAR 146 million. So again, SAR 30 million can be explained as coming from the EBITDA, as I have just described. And there is an additional SAR 7 million mainly related to an increase in the Zakat taxable base as well as deferred tax liabilities generated by capitalizing equipment and assets in our books. If you now look at the CapEx, you will see a decrease of 43% between this quarter and the last quarter from SAR 535 million to SAR 306 million. This decrease is coming from 2 things. First, we spent approximately SAR 75 million less in Q1 on the unconventional rig CapEx program. And in Q4, we also had significant CapEx spending coming from the purchase and upgrade of well control equipment. Overall, on the 10 unconventional rig CapEx program, we have spent close to SAR 800 million to date, and we estimate that the total program is around SAR 1.75 billion. If you add the additional 3 rigs that were recently awarded, then the total estimated spend for all 13 rigs award is expected to be in the range of SAR 2.2 billion to SAR 2.3 billion. We expect to see a bit of an acceleration of the CapEx spending in the second quarter as we now take physical delivery of some of the unconventional rigs, which is going to trigger further milestone payments. On the next slide, which is a segmental reporting, we are breaking down into the 2 different segments. So you have the Offshore segment and the Land segment. And then within the segment, we are looking at 2 things: the revenue; and the gross profits. As a reminder, the gross profit includes direct operating cost of the rig as well as the depreciation expense, but does not include G&A, nor interest, nor tax. For the Offshore segment, as mentioned by Ghassan, let's reiterate the fact that the full offshore fleet was 100% operational during the quarter. So if you look at the top left graph, offshore year-on-year Q1 '24 versus Q1 '23 does not really compare. In Q1, '24, we have the benefit of the full impact of the 3 jackups that were added in Q3 of last year. Also, in Q1 '23, the offshore utilization was slightly lower due to one of our offshore rigs being in shipyards for most of the quarter for a planned mandatory recertification. Compared to the prior quarter, which is the upper right graph, on the same rig activity level, the revenue was flat, and the upside on the gross profit was mainly due to lower staff compensation costs. Now let's have a look at the Land segment, which is the bottom graph. And first, at the year-on-year comparison, Q1 '24 versus Q1 '23, on the lower left side. So for the Land segment, the revenue increased by 7% from SAR 480 million to SAR 514 million with the same level of rig activity. The increase that we see in Q1 '24 is due to the fact that we experienced last quarter a high activity of planned maintenance with a few rigs being on 0 rate. And also, we had a better rig move performance this quarter compared to last quarter, as Ghassan just mentioned. Still comparing year-on-year, we can see that the gross profit in Q1 '24 is slightly below that of Q1 '23, in spite of the increase of the revenue. And again, this is mainly due to the unconventional rig start-up costs that impacted Q1 '24 profitability with an additional SAR 26 million of expenses. Now looking at the quarter-on-quarter comparison, which is the bottom right graph. On the revenue for the Land segment, we are losing SAR 25 million from SAR 539 million to SAR 514 million, which is a 5% decrease. As you may recall, Q4 '23 land revenue was the best quarter on record due to a very high rig move activity. On the gross profit, we lose SAR 20 million from SAR 79 million to SAR 59 million, which is a result of the SAR 25 million revenue difference, as just mentioned. The next slide is a cash flow bridge that provides a snapshot of the cash movement for the quarter. Overall, we started the quarter with a cash position of SAR 1.4 billion, to which we added SAR 405 million of EBITDA contribution, offset by SAR 306 million of CapEx, again, 2/3 relating to the unconventional. We also had some financial obligation of SAR 41 million, which includes a loan repayment of SAR 25 million with the rest being lease obligations. In the quarter, we repaid interest expense of SAR 86 million net, which includes the semi-annual Sukuk coupon payment of SAR 78 million that took place in February. We did not withdraw any further financing line during the quarter. Finally, we had a swing on the net working capital, mainly due to the increase of inventory as we are starting off the unconventional rig as well as significant trade payable settlements made during the quarter. Overall, we closed the cash position of almost -- we closed with a cash position of almost SAR 1.26 billion, of which we invested on average SAR 800 million in short-term deposit as a natural offset to the cost of servicing the debt. Moving on to the detail of our debt profile. Our gross debt position remained roughly the same during the quarter. We have a total borrowing of SAR 3 billion made up of SAR 2 billion Sukuk and 2 bank loan of SAR 500 million each. We started repaying one of the bank loan with a payment schedule of SAR 25 million per quarter. The repayment schedule of the second bank loan will start in 2025 with an additional SAR 25 million principal repayment per quarter. Quarter-on-quarter, the company net debt position of SAR 1.85 billion has increased by approximately SAR 100 million or 5%. However, our net debt-to-EBITDA leverage ratio has remained stable as 1.2x on the account of a growing EBITDA number. Going forward, we may decide to draw on additional debt to finance the remaining 3 unconventional rigs, and we already have a bank facility secured at a very competitive price. My last slide relates to the '24 guidance. At this point in time, we reiterate our revenue guidance for full year '24 with the revenue expected to be in the range of SAR 3.6 billion to SAR 3.9 billion. The guidance factors the upcoming suspension of the 3 offshore rigs. We also reiterate our CapEx guidance with the expected spending to be in the range of SAR 2.1 billion to SAR 2.4 billion as we continue to invest in the unconventional CapEx program. This concludes my section, and I will now hand it back over to Ghassan for his closing remarks.

Thank you, Hubert. In closing today's presentation, we have had a strong start to the year operationally and financially, building on the excellent progress we are making across the organization. We always expected that the offshore market might soften by 2027. Accordingly, our growth strategy included some buffer that materialized with the leasing of 2 rigs that we believe would have been released at the end of their contract. Our client discussion accelerated the process of adjusting our fleet deployment, and we have taken the time to evaluate our options. These include keeping our rigs and releasing the leased ones or keeping the leased rigs and deploying our own rigs in a new market or a combination of both. We are in a -- we are nearing finalization of the suspension, which at the point will not impact our guidance, as mentioned by Hubert. Our segment mix will evolve as a result and the growing land contribution will bring long-term stability in the sector that is crucial for Saudi energy transition. We believe that gas will continue to grow, both on the unconventional and conventional front. 2024 will mark the peak of our current investment cycle, and we are delighted with the early start of our first unconventional rig. Our teams are focused on delivering all 10 rigs ahead of our internal timetable to see the benefit of the new revenue stream flowing through. As mentioned, at year-end, we are set to deliver continuous top line growth for the full year. I will now hand it over back to Raed and Al-Rajhi Capital for the question-and-answer session.

Thank you, Ghassan. Thank you, Hubert. Now we'll start the Q&A, and we'll start with Ricardo. Ricardo, please, can you mention your company before your question?

[indiscernible] with Morgan Stanley. I guess first question just following up with something that Ghassan mentioned about the suspension on the rigs and some of the choices that what you might do with your own lease -- your owned and the lease rigs. Ghassan, you mentioned potentially deploying your own rigs in other markets. Could you please just remind us what's the latest status on having all the approvals and qualifications to bid in other markets? So I'm just trying to get a sense on the timeline on how long could it take to deploy the rigs eventually in another market. And then the second question, it's on the unconventional gas in Saudi. You've been very successful on deploying your first rig ahead of the schedule and being able to book extra revenues because of that. And how sustainable was this deployment ahead of schedule? Meaning, could we expect the same to happen in other rigs as well? Was that more of a one-off?

Okay. So a very good question on the qualification. We are in the final stages of qualifying for Kuwait KOC for offshore. However, with the offshore rigs, there is different means of penetrating the market. You can work -- you can lease the rig, you can work with a local supplier and another environment, another geography. So there is different ways other than being going direct straight. And this is what's going to make it easier for us if you want to deploy into different markets in terms of the offshore. In terms of the unconventional, I mean I think the investment that we put in place in order, recruiting that we hired ahead of time is paying off, and we've seen the first rig. And I believe we'll see -- we are seeing more rigs coming ahead of time. So in our initial, we expected H1 -- sorry, H2 to see -- to start flowing off revenue. And now we'll see more than one rig that will start flowing revenue before the end of H1.

Ricardo, any further question? Okay. I'll move now to Ebrahim. Ebrahim, now you are unmuted, and please mention your company.

[indiscernible] Investment. Congrats on your earnings in Q1 2024. Just have a couple of questions from my side. One is on the guidance. Can you elaborate more on what's the reason behind keeping the revenue guidance at the same level? So just a quick calculation, if we analyze Q1 revenue, it will come up around SAR 3.9 billion. So were you conservative from the beginning in your guidance for 2024? And what are the other basis?

I mean I think we just factored -- we factored the mere drop on the offshore rigs because the announcement of Aramco. And I think our factors were good. So that's why we're not impacting our guidance right now. Anything you want to add?

No, no, that's it. I mean I think the guidance that we gave, I mean, we already cooked into the guidance the fact that we'll see a suspension. And then the guidance was based on what rigs and what timing, et cetera. But at this point in time, we're not moving the guidance. So it's already taking into account that 3 offshore rigs will be suspended.

And when you provided the guidance revenue of SAR 3.6 billion to SAR 3.9 billion, do you believe that earnings or EBITDA will be lower than initially anticipated when you built the guidance at the beginning?

So we don't -- we haven't given any particular guidance on the EBITDA. We've communicated a number of times that the EBITDA would be in the range of the low to mid-40s percentage points. We're not -- we believe that there will be a slight erosion because, obviously, the suspension will be effective. It's going to happen within the next 45 days, and 3 rigs is going to be suspended. So there will be a slight erosion of the EBITDA, and we're probably going to move from low to mid-40s to low 40s.

Second question from my side is, I would really love to hear your view on the market right now post the suspension of 20 or 22 rigs of the offshore market [indiscernible]. What would be the impact, how fast will it be redeployed? Any medium-term impact on day rate, et cetera?

No. So I think it's -- if you want to penetrate a new geography that you want to be, I would say, qualified, this will take time. So you need to work with what you have and see how you can deploy faster, and that is either by bareboat charter or working with a local contractor who's actually approved in that geography. And this is what we cannot be, a bit creative and think out of the box and how you can deploy it. But that is one option, right? You have 3 options. One option is we just release the leased rigs or we keep the leased rigs and try to deploy our rigs or it can be a combination.

And if I may, one last question from my side. So during the last 2 years we've been seeing cost push in the offshore market specifically because of how tight the market is, and this led to retention program for your employees, higher costs, et cetera. Post the release of these rigs right now by Aramco, do you expect some relief on the cost structure?

Yes. You are spot on.

Can you quantify the numbers?

I don't have it top of my head.

So look, I mean we're doing some -- we're assessing the numbers, but there is definitely an expectation that the cost of the return [Audio Gap] is going to go down. We're still discussing -- finalizing the terms of how we will effectively implement that. At this point in time, it will be a couple of -- it will be -- I mean it will be -- I'm not saying -- I'm not going to say it's going to be material, but there's going to be some -- this is something that we're factoring into our numbers as we go through 2024.

Now we're going to go to Akash. Akash, please mention your company.

Congratulations on the results, I have 2 questions. First one, is you mentioned you have 4 offshore rigs...

Akash, please mention your company.

Yes, it's SICO Bahrain. Securities and Investment Company, Bahrain. So I have 2 questions. First is, you mentioned that 4 offshore rigs will be rolling off next year. So what is the plan there? Like how do you see that going? And just one clarification. You said 3 rigs are -- 3 offshore rigs are rolling off this year. So these are different from the suspended one, or are these the same as the suspended ones? This is the first question. And second is, what is the planned turnaround for this year, or any that you have like built-in?

So the 3 that's going to offshore -- that's going to go this year or are under renewal this year, all are under negotiation. We have to understand not all of them are Aramco. So 2 of them were with KJO. So we are in the finalization of the negotiation, 2 of them, and we are [Audio Gap] of the 3 rigs that is going to be suspended. So it's a combination. Is that the question about, right? The first 2 rigs?

Yes, correct.

What was the second question? What's the second question?

Turnaround -- do you have any maintenance turnaround expected this year?

Maintenance turnaround. Sorry, what do you mean exactly?

So your planned turnaround for rigs, any shutdowns that you might have on rigs, any maintenance activity that is required?

I think what we've been doing -- and correct me if I'm wrong, Hubert, we're being very efficient to do -- instead of having a full shutdown, if you need to do a major recertification, you have to kind of stop the rig, which I think most of the rigs that we're going to have now is mainly doing the maintenance. As you know, we move from one site to the other site, you do the maintenance and try to complete it without having a big impact on stopping the rig.

We also wait for the outcome of the suspension to see, because this has an impact as well on the timing of the maintenance.

Oliver, you are unmuted, and please mention your company.

[Audio Gap] First one, just, I guess, following up on Akash's question around the contracts rolling off next year, you have full expiring. Any thoughts on sort of Aramco's appetite for renewing those? And then secondly, on new markets, whether it's suspended ones or if you have any other contracts rolling off in the medium-term? If you enter with another company, another contractor, a local supplier, is there any sort of changes to realized margins by doing that instead of being able to go in directly under pre-qualification?

So if I understand -- [indiscernible] I couldn't hear the question very well.

On the new markets, can you repeat the questions?