Arabian Drilling Company (2381) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Iyad Ghulam. On behalf of SNB Capital, I would like to welcome you to our conference call with Arabian Drilling management regarding Q2 '24 earning results of the company. We will first listen to the management feedback. Following this, we will open the floor to questions. Arabian Drilling management, please begin with your feedback.

Thank you, Iyad. [Foreign Language]. Good afternoon everyone, and welcome to Arabian Drilling earnings call for the second quarter of 2024. Our thanks to SNB Capital for hosting this call. We announced our financial results yesterday, and the documents are available in our Investor Relation website. As usual, we must start with the disclaimer. So I invite you to read it at your convenience. Let me now introduce our speaker for today's call. First, you will get a performance overview from our CEO, Mr. Ghassan Mirdad. Then our CFO, 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, Jamal. [Foreign Language], and heartfelt welcome to all participants joining us for the earnings call today. We will begin with a brief overview of this quarter and year-to-date. We delivered strong growth with excellent operational execution, solid financials, and we have many achievement to celebrate, despite the offshore suspension taking effect. On the achievement front, let me start by congratulating and thanking the team that are doing a remarkable job in deploying the unconventional rigs, including the project team, logistics team, operations, safety and HR on the people side. We managed to reduce the deployment of our rigs from the original plan 70 days to 45 days from the arrival time at port to start drilling on site. This would not have been possible without the support of our client and the Dammam Port authorities. Starting with operation, our total available fleet has increased from 49 to 53 due to the start-up of the 4 unconventional rigs. However, our utilization rate decreased to 91% due to the offshore suspension. Our 36-month rig efficiency index stays consistently strong at 94%. Over the quarter, our rig move business continued to bring value with 1.1 days saved day per rig move with a total of 38 rig moves. On the safety and sustainability front, this remains our top priority, and we have a few milestones to celebrate. We are very proud to announce that 7 rigs reached significant milestones with an accumulated 63 years without any lost time injury, which is an average of 9 years with no lost time injury incident per rig. On the sustainability front, we launched 3 projects focused on reducing CO2 emissions, using battery pack, solar panels and LED lights. We also published our 2023 Sustainability Report, which explains in detail all our strategies, achievements and goals. Moving to the financial highlights, which Hubert will cover later in more details. Compared to H1 last year, both our revenue and EBITDA showed strong growth of 21% and 20% respectively. Our EBITDA level was 41% this quarter, which is in line with our expectations. We have also declared a dividend of SAR 1.35 per share. On the growth front we have good news. As mentioned earlier, we see the benefit of our outstanding unconventional rig deployment with 5 out of 10 rigs have started their drilling contract to-date. The remaining 5 rigs are expected to start between now and September, with 2 rigs starting this month in August. The 3 rigs from the second award will come online before year-end instead of Q1 next year 2025. We also plan to diversify our revenue stream by providing training services to other companies. We have excellent facilities and international well-controlled training accreditation that we intended to convert from a cost center to a profit center. We are working with the local authorities to get certified to provide the training locally. Let's now have a look at the last contract and rig activity update. This quarter, 2 offshore rigs have begun their 1-year suspension, and 1 rig ended its contract at the end of June, as previously announced. Part of our technical strategy was to have leased rigs that can be returned at the end of the offshore development project in 2027 and to de-risk our offshore exposure. This enables us to return the rigs quickly, with minimal cost, and the 2 leased rigs will be returned as part of any further rig count reduction. This may include the leased rigs currently under discussion for suspension. On the positive side, a 1-year contract extension was signed with our client, KJO, Al-Khafji Joint Operation, and we are positioning ourselves with multiple opportunities in South and Southeast Asia. On the land rig activity side, we see continuous growth in the gas sector in both conventional and unconventional, and we expect another round of tenders to come. As mentioned, we started drilling operation for 5 unconventional rigs with the 13 rigs expected to be online by year-end. We also see an opportunity to reposition rigs from oil to gas to improve margin over time in the Land sector. Let's now discuss our backlog. The backlog of SAR 11 billion was approximately SAR 800 million lower compared to last quarter, with approximately SAR 900 million of revenue consumed in Q2, partially offset by the additional of SAR 100 million as we secured the 1-year extension for one of the offshore contract with KJO. We have 6 rigs rolling off contract in 2024, of which 2 are offshore and 4 are land. On the 2 offshore rigs, 1 rig is part of the 3 currently suspended rigs and the other is our MPSV, which we expect to renew in Q4. On the 4 land rigs, 2 are under negotiation, 1 is under maintenance, and 1 received a 1-year extension in July. Moving on to the next slide, we continue to have strong operational KPIs. Looking at the top left, we kept the Aramco rig efficiency index at a very high level of 94.1% in Q2, with 92% of our rig scoring in high and superior performance category, which is the highest score achieved in the last 4 quarters. Please note that these numbers are company estimates, as we have not yet received Aramco data. On the lower left graph, you can see that our quarterly NPT increased to 1.61%, which was higher than the previous quarter. The unexpected service quality events can have an impact on NPT at any point of time until an investigation is completed to understand the root cause. Following the investigation, the NPT will be allocated to the concerned service provider depending on the outcome. On the top right, our rig move performance was also consistently strong, with an average of 1.1 day saved per rig move. If you multiply the 1.1 days saved by the number of rig moves completed, we have effectively gained an additional 42 drilling days in Q2. This proves again and again that OFSAT is a key enabler for our business. On the bottom right, you can see the 3 offshore rigs are now stacked, 2 of these rigs are currently undergoing mandatory planned recertification activity, and will be warm-stacked until their next assignment. 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 key numbers for the quarters. We stayed consistent in Q2, continuing our strong start to the year. We closed Q2 revenue with SAR 939 million, a slight contraction of 3% compared to Q1. Our Q2 EBITDA was SAR 386 million, slightly below that of Q1 by 5%, with a margin of 41%, in line with our expectation. We saw some record high CapEx this quarter, with more than SAR 600 million spendings. Our free cash flow remains negative at minus SAR 299 million as our growth CapEx cycle is in full swing. However, our cash flow from operation before working capital change remains strong, slightly below SAR 400 million per quarter. We are showing a return on equity of 10.1% based on our last 12 months' net income over an equity position of SAR 5.9 billion. We closed the quarter with a net debt of SAR 2.42 billion and a leverage ratio of 1.5x, which is slightly higher than the 1.2x of the last quarter. Now let's get into a little bit more detail and have a side-by-side comparison, first quarter-on-quarter and then year-on-year. So let's look at the trailing quarter comparison, which is the upper graph. Looking at the revenue first, as mentioned, we see a slight quarter-on-quarter decrease of 3% from SAR 967 million to SAR 939 million, mainly due to the offshore rig suspension of minus SAR 33 million and partially offset by the start-up of 4 unconventional land rigs of SAR 14 million. Following the slight revenue contraction, EBITDA also decreased by 5% quarter-on-quarter from SAR 405 million to SAR 386 million, mainly due to the suspension of the offshore rigs of minus SAR 30 million, which was partially offset by the contribution and the mobilization cost deferral of the unconventional land rigs of about SAR 30 million. For the suspended offshore rigs, we incurred in the quarter a full cost due to some of the planned maintenance activities for equipment recertification that Ghassan has mentioned. Therefore, in the quarter, the revenue loss had almost 100% flow-through impact on the EBITDA in Q2. And we will start seeing the costs going down by the end of Q3 as we are downsizing the rig crew after the completion of the planned maintenance activities. In Q2, we have recognized a one-off noncash asset impairment charge of SAR 105 million to adjust the book carrying value of 1 land and 1 offshore rig. Our net income was therefore adjusted to exclude these impairments for like-for-like comparisons. In Q2, our adjusted net income decreased in comparison to the previous quarter by 14% from SAR 146 million to SAR 125 million, due to additional depreciation cost of SAR 15 million and reduced financial income of SAR 7 million as the excess cash is depleting. On the CapEx side, there is a SAR 307 million or 100% increase in spending quarter-on-quarter, mainly coming from the unconventional land rigs worth SAR 265 million, and it also includes OFSAT rig moving equipment to support fleet expansion as well as 1 land rig upgrades. Moving now to year-on-year, H1 '24 versus H1 '23 comparison, which is shown on the bottom graph. Looking at the revenue first, we see a year-on-year increase of 21% from SAR 1.6 billion to SAR 1.9 billion, mainly driven by the contribution of 3 offshore rigs that were added to the fleets in Q3 of '23. Along with the increase of the revenue, EBITDA also increased 20% year-on-year, going from SAR 658 million to SAR 791 million. This increase, which is driven by the revenue growth, is partially offset by the start-up of the unconventional rigs, which was incurred in H1 '24 for approximately SAR 29 million. Now excluding the start-up costs, the normalized H1 '24 EBITDA margin is approximately 43%. Moving on to the adjusted net income, we see a slight year-on-year decrease of 4% from SAR 282 million to SAR 271 million. The additional net income from the increased rig activity was offset by increase mainly in the net interest expense of SAR 69 million, the unconventional start-up of SAR 29 million, as I just mentioned, as well as increase in staff costs of about SAR 40 million, some of which is expected to ease off in H2. Now to conclude, looking at the CapEx, we've spent SAR 919 million in H1 '24, about SAR 137 million more than H1 '23, and this was mainly driven by the unconventional rig expansion. In H1 '24, we spent approximately SAR 650 million with the unconventional rig that makes up roughly 70% of the total CapEx spend. And we -- and the total -- bringing the total CapEx spend on this program to approximately SAR 1.2 billion. Overall, if you look at the extensive 13 unconventional rig CapEx program, we estimate that the total program is around SAR 2.1 billion to SAR 2.3 billion. And therefore, we have spent a little bit more than half of the program to date. As most of you know, Arabian Drilling operates on 2 different segments, which is land and offshore. In this slide, we look at each segment, focusing on the quarter-on-quarter and year-on-year revenue and gross profit. As a reminder, gross profit includes the direct operating cost of the rig, which also includes the purchasing expenses, but does not include G&A nor interest or tax. So for the Offshore segment, looking at the first graph in the top left, we noticed a slight decrease in the revenue quarter-on-quarter of about 8% from SAR 453 million to SAR 490 million. And we also see a decrease in the gross profit of about 11%. Now this was due to the suspension of 2 offshore rigs that were effective at the end of May. On the other hand, if we compare on the year-on-year numbers on the right side, we see a strong increase in the revenue of 31% from SAR 601 million to SAR 872 million. And our gross profit has also increased by 32%, in line with the revenue increase and driven again by the contribution of the 3 offshore rigs that were added to the fleet in Q3 of 2023. Now moving on to the Land segment, which is on the bottom, which is the bottom graph, there are a lot of moving parts that make the side-by-side comparison uneasy. And as we move into H2, we expect to see our cost basis and profit normalize and gel into a more steady-state business. So starting off with the quarter-on-quarter revenue, there is a slight increase of about 1% from SAR 514 million to SAR 520 million. And this was due to the start-up of the unconventional land rigs in Q2, which brought an additional SAR 14 million of revenue, partially offset by a mobilization fee and a well site preparation fee that we recognized in Q1 of about SAR 11 million. We also see a decrease in the gross profit of about 18%, with a lot of ups and downs offsetting each other, but overall, most of the Q-on-Q volumes boils down to a one-off credit of SAR 60 million that we recognized in Q1, related to downsizing the payout of a retention plan that was introduced mid-2022. Going to the year-on-year number, we see a revenue increase of about 6%, going from SAR 969 million to just over SAR 1 billion. This increase of SAR 65 million is mainly coming from the additional rig activity of SAR 33 million, including the SAR 14 million from the unconventional, as mentioned several times as well as higher rig move revenue and client chargebacks on reimbursable logistics services. On the other hand, we saw a decrease in gross profit of about 35%. The contribution from the additional revenue was offset by the start-up of the unconventional land rigs of about SAR 29 million as well as an increase in the depreciation base of about SAR 34 million, including SAR 8 million for the 4 unconventional rigs that started in Q2. The next slide is a cash flow bridge that provides a snapshot on the cash movement for the 6-month period. So overall, we started with a cash position of SAR 1.4 billion, to which we added net income before tax of SAR 166 million and noncash item of SAR 630 million. This was offset by CapEx spending of SAR 919 million, of which 70% related to the unconventional rig, which is about SAR 650 million. And then the remaining SAR 269 million of CapEx include mainly offset rig move equipment, 1 land rig upgrade as well as some facility and ERP upgrades. Now we also paid out SAR 225 million of dividends related to H2 '23 period, and we met our financial obligation with a repayment of SAR 83 million on 1 bank loan as well as the lease for the 2 offshore rigs. In addition, we had a SAR 99 million net interest payments, which includes finance income from short-term deposits of approximately SAR 18 million. Finally, the last piece of the bridge includes a net working capital increase of SAR 174 million and other elements, mainly related to Zakat and income tax payments for about SAR 38 million. 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, which is made up of SAR 2 billion in Sukuk as well as 2 bank loans of SAR 500 million each. We started repaying one of the bank loans with a payment schedule of SAR 25 million per quarter, and the repayment schedule for the second bank loan will start in 2025 with an additional SAR 25 million principal repayment per quarter. The company net debt position of SAR 2.42 billion has increased by approximately SAR 665 million or 38%. As mentioned earlier, our net debt-to-EBITDA leverage ratio has increased to 1.5x on the account of cash allocations on the CapEx spending. Going forward, we are likely to draw on additional debt to finance the remaining unconventional program, and we already have a bank facility of SAR 500 million secured at very competitive price. Consequently, our leverage ratio will continue increasing and peaking at around 2 plus times. My last slide relates to 2024 guidance. At this point in time, we reiterate our revenue guidance expected to be in the range of SAR 3.6 billion to SAR 3.9 billion, reflecting a year-on-year growth of 4% to 12%. This guidance factors in the suspension of the offshore rigs. We also reiterate our CapEx guidance with 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. And as mentioned by Ghassan, we also paid out a dividend of SAR 1.35 per share for H1 '24 with a distribution date of 22nd of August. This concludes my section, and I will now hand it over to Ghassan for his closing remarks.

Thank you. Thank you, Hubert. In closing today's presentation, our key metrics and KPIs are in the green in H1, financially and operationally. Losing offshore contract is the nature of the beast in our sector across cycles. We had planned for this with the 2 leased rigs that can be returned quickly with minimal financial impact. We continue to monitor operational adjustment by Aramco, impacting our sector, both offshore and land, and as mentioned in Q1, we always expected a softening of the offshore market in 2027 upon completion of Aramco's development project. The decision from our client accelerated the time line and our segmental mix is evolving as a result with a greater land contribution and gas in particular. This will bring long-term sustainable in a sector that is crucial for Saudi's energy transition. We believe that gas will continue to grow, both on the conventional and unconventional front. And we are well positioned to capture it. Now is also a good time to shift our focus on consolidation opportunities and new revenue streams as our investment cycle is peaking with all 13 unconventional rigs coming online by year-end. As promised, we are set to deliver continuous top-line growth for the full year. I will now hand over this to SNB Capital for the Q&A session. Thank you.

[Operator Instructions] Our first question comes from the line of Ricardo Rezende from Morgan Stanley.

I guess just following up on something that Ghassan said about Southeast Asia. In the past, you have mentioned Kuwait and Oman as well. So if you could just give us a little bit more color on the regional expansion. If there's any updates on the other GCC countries as well? And my second question is on the margin recovery. We know that margins have been pressured by the free start-up costs on all the gas rigs that you got. And now with this phenomenal job you've been doing on the start-up ahead of the schedule, should we think about margins being back to normalized levels by the second half of next year?

Okay. So on the expansion on Southeast Asia, it was mainly on the offshore. And what happened is we had several meetings, we met clients, and we've seen good opportunities. The challenges what we have now is, you have a lot of rigs in the market, when the suspension of 20 rigs. So there is a lot of available fleet at the moment to take. The challenge as well is when we try to look into going with the alliance with the company, most of the companies actually operate in Saudi and as well, they have suspended rigs as well. So they would more lean to put the rigs first. Having said that, we think we still have opportunities, but it's not as easy as it was at the beginning of the suspension. On the Kuwait, I think there will be tenders coming by year-end, and I think we're set up to -- that we can participate in these tenders. The only for the tender that was there before, we were certified just after -- we were qualified just after the tender was almost at the end of it, so we could not participate. That is on the expansion front. The other question is on the margins. I think you have a very valid point. So at the beginning, H1, we were covering most of the cost of the start-up. And now starting the 5 rigs will ease up. I mean even the 5 rigs that started, 4 rigs started in H1 and 1 just after H1. I mean they just started at the end, and so it's only SAR 14 million. So -- but we'll see in H2 better coverage with the 5 rigs and the remaining other rigs as well, and hopefully bringing the rigs that were supposed to start in Q1 next year to come this year as well by year-end. So we'll see an improvement over there. And as well, in addition to the rigs, we have several cost initiatives that we're working on to improve as well and kind of compensate for the drop of the offshore.

If I may just add, I think that in terms of margin, what we're thinking is that, obviously, the offshore will impact in the short term of margin, but it will be offset by the unconventional that are going to come online. I mean, we expect that the unconventional will bring about SAR 250 million to SAR 300 million in H2 in additional revenue. And with margins that are accretive to the Land segment, the margins are going to be in the mid-30s percentage points around. And then there are a number of cost initiatives as well that we're doing to reduce our cost base. So all in all, we think that the margin overall, we should see a contraction from low to mid-40s to low 40s. This is where we see where we're going to end the year.

And then this includes the 3 rigs suspended, -- and we're expecting 1 as well that is pending right now. So the 4. So still, we are within what we expect low 40s.

Yes. So based on what we know today, based on the information that we have, I mean this is where we see the margin target by the end of the year.

The next question is from the line of Oliver Connor.

This question was just on the unconventional piece. You mentioned around possibly a new tender coming through. I've seen that Aramco being quite busy with a few packages and you mentioned 23 unconventional rigs coming. I'm just trying to get a sense of the order of magnitude that you see in terms of unconventional rigs to tender later this year. And then the second point is probably just more of a broader point on the sort of Saudi rig market. There's been a lot of chatter around more suspensions on jack-ups and also potentially some suspensions on onshore rigs. Just trying to get a sense if you have a view on either of those in terms of direction of travel for the second half of this year.

Okay. Okay. You're right. So we will see coming tenders for the unconventional. We don't know the size yet, but there will be like 1 or 2 coming in, maybe something in this year and early next year. In terms of suspension, we see that Aramco is going for a second round of suspension. We're expecting 5 rigs. One is coming towards our way. And on the land, there will be suspension on the land. However, it's all focused in the oil. The gas is continued to be strong, and we expect even in the conventional gas that will be more rigs coming. So in the oil front for Arabian Drilling, I think we have a good number of rigs that we can convert as well to gas conventional. So if that's the case, it's going to be more accretive. So it's good for us in that aspect.

Also, yes, just to be clear, I think the land rig and the oil, some of them are the least accretive rigs that we have because they are at very low day rates. So if any of those rig gets suspended, I mean, to be honest, it's not going to move the needle at all. I mean, if anything, it will give us the opportunity to reposition some of the rigs for the gas that we still -- or which we still see the growth coming.

With minimal CapEx.

Yes, minimal CapEx.

I hope I answered your question.

The next question is from the line of Jarryd.

Two oil land rigs were released. I just want to get clarity on what that means. So does that mean they were working last quarter and they're not going to work this quarter? So that's the first question. The second question is, you mentioned that, obviously, there's a lot of jack-ups now in the market looking for a new home. Is selling your jack-ups to another player an option? Or is that not an option?

So on the land rig, I think 1 will come back to operation end of the year. And I think if there is any suspension on the land rigs, I think it's just temporary, not like the offshore. I think the offshore is, once the suspension is there, it's there. But in the land, I think it will rebound next year. In terms of the sale, yes, we're open if there is an opportunity that -- to sell, yes. I mean, we're looking at one of the rigs that was actually came to an end of a contract and we did not renew it. It's a rig that is more than 40 years old, and we were thinking of selling it, because if we upgraded it, it's going to cost us more than SAR 25 million. And then we're -- if we keep it and then we get it suspended, then you wasted your money. So we are open for selling the other rig as well. And actually, there is a couple of, I mean, contractors asking for it as well.

[Operator Instructions] We have a follow-up question from Ricardo.

Just to follow up, and apologies if I understand it correctly. On one rig that you said that it might be suspended as well, have you already been officially communicated or just by this stage of negotiations, you believe that the chances of having an additional suspension, it's high likely?

No, they just recently communicated to us, and we're just seeing the opportunity that we can keep it or not. So we're assuming that it's going to be gone, will be suspended. The good thing is it's going to go, one of these leased rigs. So it's going to be a minimal impact on the cost.

And I mean we're just going to execute the strategy that we put in place back at the beginning when we started leasing the rig, which was to have a bit of a buffer in case of softening in the market. So now we're going to play this card. I mean if this rig comes up, then it'll go back to the owner and with minimum impact.

Just a follow-up question on this. What would be the cost of early returning this leased rigs?

So there is -- so contractually, there is early cost, which is going to be in the range of SAR 10 million to -- I mean it's going to be in the range of SAR 10 million to SAR 30 million roughly.

And this is...

I mean, it depends when you exactly -- I mean you can't give a number until you know exactly when the rig is going to be returned, right? Because I mean, the more you use the rig and the less the early termination fees because the closer you are to the contract there, right?

So the cost that Hubert is alluding to is, when we received the rig, we did some upgrades. So these upgrades usually get the cost of that CapEx depreciated by the contract duration. So the more the rig stays, that means less. So...

Just for the assets, yes.

Just for the assets, yes.

Not for the origination.

From the 3 rigs that ended their contracts, 2 of them are leased, right? So, 2 of them will be returned now? Sorry?

No, no, no. So for the 3 rigs that are end of contract, none of them are leased.

Actually 2 suspension and 1 ended.

Yes, 2 suspended and 1 whose contract was not renewed. So these are assets that we fully own. Now we're talking about a fourth suspension. And this fourth suspension relates to a leased rig. So this one, we're saying this one, this one is the buffer, and we're just going to return it to the owner. I mean the 2 lease rigs that we took, again, they were never part -- I mean, they were a buffer, and it was a bit of a tactical move from our side just to make sure that we have some excess capacity that we can easily get rid of because we thought that at the end of the completion of the development program, there will be a bit of a softening in the market. So all we do is we're just returning them to the owners a bit earlier than planned. That's all. But it was part of the strategy. And this -- I mean, the decision that we took at the time is something that now we can see serving us so as well.

Now I want to highlight one thing that is very, very important that might come to your mind. Why we did not release -- and the 3 rigs that were suspended before, why didn't we release the leased rigs initially? And the reason for that, we did the full cost-benefit analysis. And what we saw is, if -- imagine I released those 2 leased rigs. I have 2 rigs that are right now doing major certification, which takes a month to 2 months. That was planned part of this year. So if I spend these 2 and as well release 2, that means I have 4 rigs of an average of 4 months that's going to go from my revenue bottom line, plus of the mobilization of these. So it was a decision looking at cost. So this, I think, now is paying off very well for us. We're upgrading -- we are recertifying the rig and it's in the final stages to be ready to be deployed anywhere. And now we're going with the leased rigs going -- if -- so if one comes, it's going to be one of the leased rigs right now.

One thing that I would like to clarify as well on the leased rig. So the early termination fee that we just mentioned is also going to be offset by the fact that we will have to an accelerated recognition of the deferred mobilization revenue, because as the rig where we see -- there was -- the rigs were coming with the mobilization fee and the revenue was recognized over the 3 years of the contract. So if the rig is returned earlier, you will have an early termination fee, but that early termination fee will be more than offset by the accelerated recognition of the deferred mobilization revenue. I hope I'm making myself here.

Yes, that's clear.

[Operator Instructions] We have a question from [indiscernible].

One question or actually a follow-up question on why you suspended the own rigs rather than the leased one. So the question, can you going forward replace the owned by the leased one instead of marketing the owned one?

It is a possibility, yes. It is a possibility.

Is it into consideration to save on the cost?

I mean it is one of the outcome that we might...

It's part of the discussion that we're having.

Yes.

Sorry, can I get, please?

It is part of the -- one of the scenarios that we might execute and do. The thing is we just have to wait because now Aramco is going for the second wave of offshore suspension. So we just want to make sure to engage what's happening. You don't want to change and then stop again. So this is the only thing. But we're looking -- it is -- you're very right, it's one of the options that we have.

Excellent. One question on the onshore market. So -- and this is related to the suspension or possible suspension of onshore rigs. How is to convert from conventional to unconventional from oil to unconventional gas, et cetera? Because it's my understanding that -- I don't know much of a difference between them.

You're very right. Very, very true. The only thing is the -- how much horsepower is the rig? So if it was 1,500 horsepower, mainly it's an oil rig. The gas is 2,000 and more than 2,000 horsepower. The -- and if you have a 2,000 horsepower like today, we have like, I think, 3 or 4 rigs that are in the oil that are actually can be going to gas. And all you have to do is update some of the equipment like BOPs, choke manifold, some of the -- I mean, it's $5 million to $10 million of an upgrade if you need to, if we don't have the equipment. And it's very easy, and it's fast. This is going to conventional. Now unconventional, I mean there is -- it's more CapEx and you need to add the skidding package. Doable, but it's more cost, and it takes a bit more time.

Sorry, can you repeat the last point in specific? I couldn't understand it.

Okay. So moving from oil conventional to gas is very easy. It's just you buy some more equipment to upgrade as long as the rig is a 2,000 horsepower or more. Now to go to unconventional, it will be -- it will need more CapEx. You need to do the skidding and it takes a longer time.

Okay. But the high spec in the oil shouldn't be margin accretive and profitability accretive because you mentioned the one that will be suspended as a lower return profile rigs, right?

Yes. So if you move to gas, which is the fastest and easiest to go to gas conventional, it's more accretive.

It will be accretive.

Accretive, yes.

And even the upgrade is well justified by a good return profile, the upgrades in terms of...

Yes. So the upgrade -- yes, you're right. So the upgrade is $5 million to $10 million, but some of the equipment we might have already actually. So we don't have -- not all the rigs that you need to acquire these equipment. Some of them we have already. I mean just to add to your question is, I mean, the focus on gas, we've seen what the minister has said on the gas. We've seen what the CEO of Saudi Aramco talked about the gas, the exploration that happened in the Empty Quarter, the unconventional is growing. So there is a lot of focus on gas and this is good news for us. And I think Arabian Drilling is set, we have a very good base that we can grow there, be it from our fleet, if there is expansion in the oil, it will be very good for us.

Excellent. And probably, I have one more question on the conventional gas. So we were in the wait-and-see mode to see the actual profitability and the actual OpEx of these plans. And probably, we are 2 months into this. So can you give us some indication of, was it higher than you expected, lower than what you expected, et cetera?

Yes. I think if you look -- I mean the 4 rigs came literally in the -- the tail end of H1, right? So it was supposed to come in H2, we managed to push it…

Yes, I think it's a bit too early to say because, honestly, if you look at this quarter, so the rig came towards the tail end of the quarter. And then within the quarter, you have start-up costs, you have deferred mobilization costs, you have operating costs. So it's really a mixed bag. So it's not…

Too early to say.

It's a bit too early to say. For sure, by Q3, we'll have a much clear picture. But again, we're quite confident that those unconventional rig will be accretive to the overall land reliance.

Is there any information about the second wave of the suspension? So how large is it?

I mean, as a contractor, we don't know. But I mean, we know one is coming our way. And I think what I know is like 5 offshore. And the land, to be honest, we're not sure to be honest. Yes.

I mean ARO is 2 because this is publicly they have disclosed…

Yes. ARO disclosed 2. So if you see out of the 5, ARO took 2, which is Valaris and us 1, so that's 3, there is 2 more.

So there is 2 more for 2 other contractors.

And is it typical to have suspension in the onshore?

On the onshore, I mean, usually, this is not something that Aramco does very often. I mean the only time we found suspension was during COVID time. And the land is a swing. If you want to reduce OpEx very fast, you just start this, but usually, they won't stack it, and they will tell you, look, be ready to move fast. I mean the unconventional, as soon as the -- sorry, not unconventional, during COVID, I mean it was very fast saying get back now. It was -- so I think the suspension might come. It's not like the offshore. Offshore suspension, you can -- kisses, goodbyes. It's not going to come back. But the land, I think it will come back later on next year.

I mean we had -- during the COVID time, we had up to 9 land rigs being suspended from a few months to up to a year and a half. And all of the land rigs were called back at a point in time. Now, this was COVID, right? So it was a different environment. So how this is going to play out, we don't know.

But historically, other than COVID, it never happened before?

To the best of my knowledge, it never happened before. Prior to COVID, it never happened before.

The next question is coming from Madhu Appissa.

[Audio Gap] to suspension. So you mentioned that you have already received notice for 1 rig suspension. So that makes in total 4 rigs. And then you are expecting another wave of suspension from Aramco where…

No. This is the second wave. This is the second wave. The 5 is the second wave.

Okay. So in total, 4 rigs are suspended as of now?

Yes.

Okay. And of this 4 rigs, how many do you think you'll be able to redeploy in the overseas market by the end of this year?

It's -- I'll be very honest, it's going to be a bit difficult. We are trying our best. We might sell. So out of the 4, 3 were suspended and 1 that came to the end of the contract. So we have 4. The 1 that came to end of contract, there is a chance maybe we can sell. We're doing our best. But as I said, there is so much rigs in the market. So we're doing our best, but I think it's going to be challenging to have this year. It will be a plus for this year.

All right. And will there be any compensation by Aramco, given that the suspension has been a bit unexpected and now you're expecting in onshore also? So will there be any compensation?

So if you look at the way they ask for the suspension, you have -- let's say, you have a new rig that came in. Usually, in the new rig, you have a clause of early termination. What Aramco does, they release the old rigs that doesn't have a termination clause. And then you can negotiate that you want to shift to another rig, if there is an ET -- if there is an early termination, they'll tell you have to waive it. Otherwise, they will release your other rigs. So it's very well managed by them actually. Very flexible for them, yes.

Very flexible for them. I mean the suspension, I mean, the way it works, I mean the only historical that we have on the suspension was during the COVID. And the way it works in the suspension and the way it's drafted in the current suspension that in theory, the backlog is preserved, right, because the duration of the suspension is added back at the tail end of the contract. So in theory, your backlog is preserved, and it's just a timing. It's just a difference in the timing of when you recognize your revenue. Now practically, at any point in time, the suspension, they can still terminate the contract. So the back -- at this point in time, the backlog doesn't mean anything. But it's just that based on historical, what we've seen in the past is that the backlog was preserved. The rigs were called back from suspension and then they continued the contract, adding the suspension period in the contract done.

But keeping in mind for offshore, I don't think they will come back.

Okay. And in case they come back, would they be paying you for the charges that you'll have to incur for redeploying those rigs?

Yes. I mean, yes, if they call -- so if the rig goes out, you will -- Aramco is -- I mean, we were -- they were very supportive. They say, look, if you have another contract somewhere else, we will just terminate the contract, we'll just -- everything will be okay. So if they terminated the contract and they want the rig back, there is there is mobilization. There is -- and usually, it's a new contract, so you will be more…

Start from scratch.

You got to start from scratch, yes.

Okay. And Aramco recently decided to award for Jafurah Phase 2, 23 rigs are expected. And you mentioned that you're expecting only 1 to 2. I'm wondering why such a low number given that you…

Could you repeat it? Sorry -- may be you misunderstood me.

Yes, Jafurah Phase 2 plan has been initiated and 23 rigs are expected to be awarded. And you mentioned earlier in the call that you're expecting 1 to 2 coming your way. I'm wondering why only 1 to 2.

Okay. So the 23 rigs was the previous tender, which we won 13 rigs. Now we expect 1 or 2 rounds of tenders coming our way. It's not 1 or 2 rigs.

Okay. So how many rigs in total can we assume for Jafurah Phase 1 and Jafurah Phase 2.

So the Phase 1 that was went out that we won 13 out of 23. So that was Phase 1. Phase 2, we'll see more tenders. And I think maybe it will be 2 batches, but we're not sure. It can be 5 to 10 rigs every tender.

Okay. Clear. One last question on the 13 rigs. You mentioned that you're expecting it to be deployed by the end of this year, but earlier in your press release, 3 of them were supposed to start in quarter 1, 2025. So if they're going to be deployed this year, will it be Q4? And is that the reason that you're keeping your revenue guidance intact despite 1 rig suspension?

I think having the rig -- the 5 rigs starting ahead of time was 1. These rigs will come end of -- I don't think they will have much impact. The 1 that is coming, what's supposed to come next year will come this year will be very, very minimal impact. It will come in Q4, maybe the last month -- last month or last November, December.

I mean the reason why we kept the guidance, the revenue guidance, the same is because when this revenue guidance was published the first time around, it already included that there will be some rig suspensions. So we had assumed already some rig suspension. And now -- so now there is the rig #4, which is coming to us. And that rig #4, as I said, I mean, from a revenue standpoint, it's not -- I mean, there's going to be an accelerated revenue because of the deferred mobilization. So it's -- so we're still within the guidance. We're still very comfortable with the guidance.

But rig 4 was not expected. It was not -- we were not expecting that rig.

So, again, this is based on what we know today, right? I mean tomorrow, something else comes and then -- but based on what we know today, I mean, we're comfortable reiterating the guidance because we already had cooked in the guidance that there might be some rig suspension, and this was done since the guidance was first published.

We're still trying. We're still trying with Aramco to revert the decision, but let's assume the worst is better.

I have two questions. One about the cost of the suspended offshore rigs. So the revenue will be stopped, of course, but the operating cost will continue for how long?

So as I said, the operating costs will continue until we finalize the completion of the planned maintenance activities. So this relates to certification on well-controlled equipment and other equipment, which is a mandatory requirement. I mean it's -- recertification of a cyclical nature. Every 5 years, you need to recertify your equipment. So as long as those activities are going on, basically, we'll keep most of the crew. And then when we finish, then basically, we will start significantly downsizing the crew. And what we'll do is, at the end of the day, we'll keep a skeleton crew looking after the 3 rigs because the 3 rigs are physically in the same location, right? So we'll keep 1 crew on 1 rig looking after the 3 rigs. So -- and we'll see this downsizing towards the end of Q3 as we complete the ongoing maintenance activities.

And just to add as well, some of these rigs that are being suspended, we're just shifting the crew to the unconventional. So it's -- so the cost of recruiting can reduce from that aspect as well. Now of course, the offshore rig needs more people because you have the marine part, which we don't need in the land.

Okay. Another question is about -- we heard that the competition in the onshore market is quite intense, especially from Chinese drillers. So is it the case? Or how is it going?

No, I mean I think it's not just the Chinese. I mean, you're right, by the way, Chinese is there, but it's -- there's a lot of players. It's not like a few. I mean there's a lot of players in the land, and it's very -- it's not like the offshore where it goes up or it goes down very high cyclical. But you have to understand the requirements of Aramco standards is very high. So the Chinese, they might be cheap, but they still have to obey with the standards of Saudi Aramco. So it makes them go up in cost.

Are they competing in the unconventional as well?

So I think this is a plus that I actually give credit to the team. I mean the Chinese dominate unconventional. They've been there for some time. They are the only players in the unconventional. Yet we managed to penetrate with 13 rigs. So I think with having the Chinese and yet we penetrate, I think it was a good thing. And we'll try to see how we can accelerate our learning curve to show Saudi Aramco, how can we do better?

We have one more question in the Q&A box from Abdul Aziz [indiscernible]. He's asking, do you have a plan on how many rigs you are trying to bid for on the upcoming Jafurah tenders?

I mean, to be honest...

I mean I think it's all about -- I mean, would be -- I mean, if we can maintain the market share that we have, no, it's something that...

But it's just -- I mean this is, I would say -- I mean, I know how much numbers we want to bid for, but it's just strategically, I don't want my competition to know. So we plan to participate. But I -- excuse me, to refrain from answering this question because it's -- if the competition knows how much I'm tackling, they can plan their -- how they want to bid for it as well.

Clear. I think that was the last question. Do you have any final remarks, Ghassan, Hubert?

No, I would say thank you very much for the time. Thank you very much for your trust in Arabian Drilling. We all know that our stock got a strong hit than others. It's -- with this offshore suspension is an event that happened a bump on the road and we just have to manage it. This is our job. It's the nature of the beast that we work with. And I think it's the trust that you guys given on our shoulders, we just have to manage how we can maintain the profitability of the company and as well grow. I mean there is good news, hopefully. We're looking at -- this is the best time for doing a transactional event, right? I mean with all of what's happening right now is the best time to look at, and we're evaluating different opportunities. And hopefully, we -- you see how we come strong out of this.

And this offshore bump on the road is not something that's going to derail our growth trajectory. I mean we've been saying for quite some time now that the next area of growth in Saudi is the gas and we still see potential and we still see opportunities. So -- and we'll be there.

Not to mention the expansion out of Saudi also. Thank you very much.

But SNB Capital would like to thank Arabian Drilling management for taking the time to conduct this call. We would like to also thank all participants for attending. Wish you a pleasant day. Thank you.

[Foreign Language] Thank you.

Thank you, Iyad.

You may now disconnect.