Arabian Drilling Company ($2381)

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Arabian Drilling's First Quarter 2026 Results Conference Call on the 11th of May 2026. I will now pass the line to the Investor Relations and Communications Director, Mr. Bassem ElShawy. Please go ahead, sir.

Thank you, Mike. [Foreign Language] Good afternoon, ladies and gentlemen. Thank you very much for joining us today in our first quarter 2026 earnings call. We appreciate your time and continued interest in Arabian Drilling. This presentation contains forward-looking statements. We encourage you to review the accompanying disclaimer in this document for further information. As usual, I'm joined today by the Chief Executive Officer and Chief Financial Officer, Mr. Fahad Al-Bani and Farid Mustafayev. Fahad will walk you through the financial and operations overview, followed by Farid's detailed review of our financial performance. Over to you, Fahad.

Thank you, Bassem. [Foreign Language] and good afternoon and thank you for participation in today's call. Our quarterly performance showed positive improvement across all key financial metrics. Revenue was broadly flat quarter-on-quarter, fully in line with our guidance. EBITDA increased by 9.7%, reaching a margin of 35.2%. This is a direct result of higher utilization and improved operational efficiency. As a result, we returned to positive net income of SAR 7.1 million for the quarter. Operating cash flow remained strong, while leverage steady, stable at 2-fold. Moving to the next slide. Compared to quarter 1 last year, revenue declined by 9.8%, primarily driven by the normalization of rig move activity compared to the same period in the prior year. Additionally, lower utilization, particularly in the land segment, which also contributed to the decline. EBITDA declined in line with revenue, reflecting both the lower activity level and the absence of the exceptionally profitable long rig move activity seen in Quarter 1 2025. Net income decline was mainly driven by lower utilization level, again, particularly in the land segment. Moving to the next slide. Our backlog continues to reach a new high. We closed the quarter at SAR 12.5 billion, representing 31% increase compared to last year. Utilization increased to 81.7% versus the prior quarter, supported by the resumption of operations for 2 lands and 2 offshore rigs. Our nonproductive time and total recordable incident frequency metrics both remained lower below international and industry benchmark, reflecting consistent operational improvement and our continued focus on operational excellence. We also saw high rig move activity and importantly improved rig move efficiency as a result of increased operational focus. We expect these efficiency gains to support better revenue quality going forward. Turning to key developments during the quarter. We successfully spud our first international contract in the GCC, marking a significant milestone for Arabian Drilling. In parallel, some offshore rigs were suspended due to the current regional situation, which we are closely monitoring with our clients and relevant authorities. Finally, we have launched a company-wide cost optimization program with multiple initiatives across the organization. This program is expected to deliver meaningful and sustainable savings over time. We will share further details in due course. We are very pleased to see our backlog reach an all-time record of SAR 12.5 billion, representing 31% year-on-year growth. This reflects consistent demand for our services and the strength of our client relationships. With this backlog, our average contract duration has increased to 3.3 years and our book-to-bill ratio stands at 3.7x. Utilization improved to 81.7% in quarter 1 2026, supported by the reactivation of 2 land and 1 offshore rig in Saudi Arabia, as well as the startup of our first international offshore rig in the GCC. However, due to the regional conditions affecting drilling operations in the Arabian Gulf, we expect lower utilization in the second quarter of 2026, driven by the temporary suspension of some offshore rigs. Moving to contract renewal in 2026. Last year was particularly active in terms of contract expiry and we achieved 100% renewal success rate. Securing all 24 rigs that were up for renewal, this was a key driver behind the sustained growth of our backlog. Similarly, 2026 is expected to be another year for renewal. During quarter 1, we announced several contract extensions, reducing the number of contracts due for renewal this year from 21 to 18. As of today, we expect to renew 18 contracts in 2026, of which 11 relate to the gas LSTK tender with results expected to be announced in the second quarter 2026. In the meantime, our client has exercised a 3-month extension option for these contracts, now extending their expiry to 31st of August 2026. The remaining contracts are progressing as planned, and we will provide further updates in due course. I will now hand it over to Farid, who will walk you through the financial results in more details.

Thank you, Fahad. [Foreign Language] and good afternoon, everyone. Starting with our quarter-on-quarter performance, revenue was broadly flat, down 0.2%, reflecting a SAR 7 million impact from conflict-related offshore suspension in late March, as well as the absence of a long rig move in Q4. This was largely offset by the resumption of 2 land rigs and 1 offshore rig in Saudi Arabia, together with the start-up of offshore activity in the GCC during the quarter. EBITDA increased by 9.7% quarter-on-quarter to SAR 289 million, with margin at 35.2%. This was primarily driven by higher utilization supported by the restart of 2 land and 2 offshore rigs, as well as continued improvements in operational efficiency, particularly in the rig move execution. Net income returned to positive at SAR 7 million, compared to a net loss of SAR 34 million in Q4 2025, excluding the one-off impairment. This improvement reflects the stronger EBITDA performance, combined with lower G&A and financing costs, supported by both internal cost actions and a more favorable interest rate environment. CapEx increased by 8%, mainly reflecting reactivation activities for rigs returning to operation during the quarter. Net debt decreased slightly, supported by scheduled loan repayments. As a result, net debt to EBITDA remained stable at 2x, while operating cash flow improved in line with EBITDA. Let's now turn to our year-on-year performance. Revenue was SAR 822 million, down 9.8% compared to Q1 last year. This was primarily driven by the non-repeat of the exceptionally long and high-margin rig move activity in Q1 2025 with Q1 2026 reflecting a more normalized level of rig move activity. In addition, lower land rig utilization also contributed to the decline following suspensions that occurred during Q2 and Q3 last year. EBITDA was SAR 289 million, down 24.1% year-on-year. This decrease was mainly driven by the revenue dynamics just described. Importantly, the long rig move activity in Q1 2025 carried significantly higher margins, which explains the more pronounced decline in EBITDA. Net income was SAR 7 million, representing a 90.6% decrease year-on-year. Profitability remains modest at current activity levels. Nonetheless, we had some improvements during the quarter, supported by lower G&A, depreciation and financing costs. Looking at other key metrics, capital expenditures decreased by 39.6%, reflecting the absence of the significant unconventional rig investment made in Q1 2025. Net debt declined by 13.1% to SAR 2.4 billion, supported by a higher cash balance and scheduled bond repayments. Net debt to EBITDA increased slightly to 2x, remaining broadly stable and within our target range. I will provide more detail on this later in the presentation. Operating cash flow declined by 22.3%, consistent with the movement in EBITDA. Let's now turn to our segment performance across land and offshore operations. Left-hand side, comparing Q1 '26 with the prior quarter. Revenue remained broadly flat with a stable mix, while EBITDA margins improved from 32% to 35%, supported by higher utilization and operational efficiencies. On a year-on-year basis, we see a shift in the mix, with land contribution declining from 73% to 67% alongside an overall revenue reduction of around 10%. This, combined with the change in activity mix resulted in lower EBITDA margins. The decline is primarily driven by the absence of the exceptional rig move activity seen in Q1 '25 as well as the impact of land rig suspensions during Q2 and Q3 2025. Just to mention, 5 of 10 currently idle land rigs were active in Q1 2025. These drivers are reflected in the segment level performance on the right-hand side of the slide. Land segment, quarter-on-quarter revenue declined by 4%, mainly due to lower rig move activity, partially offset by the start-up of 2 rigs. Gross margin also softened, reflecting the absence of high-margin rig move activity seen in Q4. Year-on-year, land revenue declined by 17%, driven by 2 key factors: the absence of exceptional rig move activity in Q1 '25 and additional rig suspensions and out of contract rigs during Q2 and Q3. As a result, profitability declined in line with the lower activity levels. Looking at offshore segment, quarter-on-quarter, revenue increased by 8%, supported by start-up of 2 offshore rigs. This also drove a strong improvement in margins from around 20% to above 30%, additionally supported by the absence of the demobilization costs recorded in Q4 '25. Year-on-year, offshore revenue growth reflects higher utilization, including the contribution from the service vessels added in Q2 2025. Margins improved due to stronger activity levels and lower costs associated with idle offshore rigs following the departure of the chartered rig in Q4 2025. Let me bridge the movement in net income from Q4 '25 to Q1 '26. Starting from adjusted net loss of SAR 35 million in Q4, we delivered net income of SAR 7 million in Q1, a SAR 42 million improvement quarter-on-quarter despite the conflict impact. The bridge has 3 key drivers. First, we had a net SAR 13 million benefit from Q4 exceptionals, not repeating, mainly the absence of the offshore demobilization costs, partially offset by nonrepeating the long rig move benefit recorded in Q4. Second, we saw SAR 11 million conflict-related headwinds, reflecting lost revenue from offshore suspension towards the end of March and as well higher war risk insurance costs driven by the regional situation. Finally, we delivered SAR 40 million of operational improvement, driven primarily by rig start-ups and operational efficiencies, plus lower financing and G&A costs, partially offset by higher-than-planned maintenance. Overall, underlying performance improved materially despite the conflict headwinds, returning us to positive net income in Q1. Let's now take a closer look at the key movements impacting our cash position this quarter. Cash on hand remained broadly stable at SAR 566 million, despite several planned outflows during the quarter. Working capital was a source of cash this quarter, primarily driven by an increase in payables, reflecting focus on DPO optimization, while we continued to maintain discipline on receivables. On capital allocation, CapEx was focused on rig reactivations alongside ongoing sustaining investments to support operational readiness. Importantly, operational cash efficiency continues to strengthen with a 1-day reduction in DSO, translating into approximately SAR 10 million of working capital release and a cumulative approximately 20-day improvement year-on-year. Overall, liquidity remains stable and well managed, supported by disciplined working capital execution. Let me now wrap up the financial section with a look at our debt profile. Net debt decreased quarter-on-quarter, primarily supported by scheduled loan amortization. On a year-on-year basis, net debt is down 13%, reflecting a combination of scheduled loan amortization alongside stronger cash levels. Importantly, leverage remains well controlled with net debt to EBITDA broadly stable at around 2x. Overall, the balance sheet remains robust, providing continued financial flexibility to support operations, navigate near-term challenges and fund planned growth. That concludes the financial update. I will now hand over back to Fahad.

Thank you, Farid. Let me now turn to our outlook for the second quarter of 2026. Due to the ongoing regional uncertainties, we currently expect revenue to be lower by up to 12%. This impact is driven by the temporary suspension of certain offshore rigs, as well as the delayed start of 1 offshore rig that had been planned for early April. As mentioned earlier, we view this as a temporary disruption and remain in close coordination with our clients. In the meantime, crews remain on standby and rigs are positioned to allow for timely resumption of operation once activity restarts. At the same time, we are actively working to mitigate the impact of this disruption. As outlined earlier, we have launched a company-wide cost optimization program with initiatives spanning both structural cost measures and operational efficiencies, including rig move and maintenance activity as well as the restructuring of selected internal services. This program is expected to support a more efficient cost base over time. On capital allocation, we have adjusted our CapEx guidance from SAR 750 million to SAR 700 million, ensuring alignment with the current activity outlook. Now let me conclude with a few key points. We continue to see 2026 as a recovery year. Although the timing of a full offshore utilization is now expected to shift into the second half, we are confident in our ability to renew all contracts due to expire in 2026. Securing this renewal will be also an additional driver for improving utilization. The cost optimization program is an important lever to enhance efficiency and strengthen our cost base over the long term. Operational excellence and safety remain at the core of everything we do and we remain focused on delivering consistent performance for our clients. With that, we conclude today's presentation and I will now hand it over to Michael to open the floor for questions. Thanks.

Our first question comes from Ms. Julia Forde from Morgan Stanley.

I have 2, if I may. The first one, on the recently suspended rigs, do you have any updates on when contracts could be resumed? And secondly, given the revenue guidance for the second quarter, how do you expect margins to behave?

I think for the suspension, we don't have really clarity now in the event. But once we know really exactly when the rigs will be back to normal, we will announce this immediately. You have the second.

Yes. On the second question on the impact on margins from this offshore suspension, we typically don't provide specific guidance on EBITDA or margin levels. What we can say is that margins in the near term will continue to be influenced by activity levels, particularly due to this offshore utilization as well as we are taking actions now on cost optimization and operational efficiency. So as activity normalizes, we would expect this to support the gradual recovery of our margins.

Our next question comes from Mr. [ Harishankar ] from J.P. Morgan.

So I have 2 and they're based around the land segment. So the first one is why did the land segment gross margin decline quarter-on-quarter? And then the second is on land utilization. Do you think you can get back to 100% sometime in the near future?

Yes. Actually, land margin pressured by lower rig move activity and 10 inactive rigs. Actually, this is one of the reasons why you can see it's dropped. And actually, our current focus as we speak on improving rig move efficiency, this will improve at optimizing the land rigs. So we are expecting improvement in the margin because we can see improvement in the rig move as we speak and this will come, but mainly really because of the 10 inactive rigs.

On the second question, it was when we expect land utilization or offshore utilization to get to 100% -- what was the question?

It is land.

Land utilization to get to 100%. Land. So as mentioned, we have right now 10 idle rigs, 5 suspended and 5 out of contract. So obviously, we are working hard on increasing the utilization. And we expect some changes with the contract renewals during the year. But we are not seeing a target of 100% achievable for this year. Historically, land, if you look for the last several years, the high utilization rate for land rigs was in the range of 90%, 95%. So that's what we are targeting.

However, just to add to what Farid said, there is an ongoing tender and we are waiting for this, but nothing is confirmed yet.

Our next question comes from Ildar Khaziev from HSBC.

Can't hear.

We have a text question regarding debt. The Sukuk worth SAR 2 billion due in February 2027. What is your plan for repayment?

Yes. Indeed, we have 5 years Sukuk, which is reaching maturity in February 2027. So obviously, our plan is to refinance it on a timely basis. We already have started working on this exercise for the last several months. So we are in close engagement with multiple banks in Saudi Arabia. So we expect to refinance it on time. Our objective is maintain our flexibility with reaching -- keeping a permanent debt. So that will add flexibility for our working capital. And obviously, we'll use this opportunity to further reduce and optimize our interest costs.

Once again, opening the line for Mr. Ildar Khaziev from HSBC.

Can you hear me?

Yes, we can hear you now.

Yes.

Sorry for the issue previously. So I have a very simple question about the interest income. So you have about SAR 0.5 billion on the balance sheet. Why the interest income has been so small, like between SAR 2 million to SAR 3 million a quarter? I would expect that you would actually earn a bit more interest. What explains this? Am I missing something?

So first of all, yes, we are using short-term investments, obviously, to make this interest income. But obviously, the priority is not that. Priority for us is to ensure operational flexibility. So there is certain amount out of that number you just mentioned SAR 500-plus million. At least we need to maintain always flexibility for SAR 300 million, right? So that is something that is used on a monthly basis, on a quarterly basis for payment of our salaries, our vendors, principal for the loans. So that is always we need to take into consideration. Excess over that amount we invest, but obviously, we invest in free-risk products and we invest for short time. It can be 2 weeks, 1 month, maximum 2 months. So as a result of that, the interest income represent that number, what you just mentioned. But at the same time, I can mention that year-to-date, April, interest income increased significantly if you compare to last year. So we are obviously focusing on that as well, maximizing our advantage on liquidity position.

I see. And if I may, my second question is about land rig segment. As far as I understand, Aramco is currently trying to minimize production from offshore fields and maximize production from onshore fields given the, I think, quality issues in the pipeline. Are you seeing -- are you observing any pickup in the land rig activity in general in Saudi Arabia? Is it happening? Like is the demand getting stronger there overall, if you look at the market?

Well, actually, we cannot know all Aramco plans as we speak. But we know now they are in the tender for LSTK rigs. This is -- it will be a big tender for gas LSTK. This is what is in the picture right now, but I'm sure in Aramco they have plans.

And how big is that tender? You said it's a gas tender, right?

Yes, it's gas LSTK tender.

And how many rigs are they tendering?

We don't have exactly the number really, but I think it's a big tender as we did not receive anything until now.

And may I also ask -- I mean, I think there have not been gas tenders for quite a while, I think, after -- since 2024, I believe. Is that correct? They have been...

Yes. This is renewal actually of gas LSTK. This is renewal, not a new tender. It's a renewal of the tender of gas LSTK rigs.

Our next question comes from Leo Currie from UBS.

Can you hear me?

Yes.

Please go ahead.

Just maybe a broader question, but do you expect in the region a more active drilling program following the conflict resolution?

Until now, we did not have clear yet picture because we did not receive anything from the operating company as we speak. But if there is anything in the future, we will announce it.

Our next question comes from Abdessamad Raghibi from Bernstein.

Can you hear me?

Yes, Abdessamad.

All right. Okay. So aside from the short-term noise, I have a question on the impact, the medium-term impact of unconventional on your land margin. So we are hearing a lot about acceleration. So I was just wondering what would be the incremental, either positive or negative, on your land margin going forward as more unconventional flows into your numbers.

Sorry, just a clarification. You are talking about the unconventional in particular?

Yes, just on unconventional. As more unconventional is flowing into your operation, how should we think about the margin accretion on your land segment?

I think, as what we mentioned before there is a new improvement actually to -- and there is a lot of new initiatives to optimize the cost and improve the efficiency in the same time. This definitely will improve our margin actually from unconventional and conventional in both sides. But I think in unconventional because we have a huge number of rigs in the unconventional, it will improve, but we cannot specify the number exactly. But I think in the future, we will see some improvement from improvement in rig move in particular because we can see the trend of rig move now is improving by almost 20% to 30% compared to last year. This will help us to create and improve the margin of...

We have a follow-up question from Ildar from HSBC.

I think I've seen in the financials a comment about canceled sale of one of the rigs, I think. Can you -- could you please sort of comment on what happened and whether you are engaged in any other conversations and what's the pipeline like for the disposals?

Ildar, sorry, we couldn't hear exactly. What did you see in the financials?

Yes. I'm sorry. So I've seen a comment in the financials stating that I think a sale of one of the older rigs was canceled. And, yes, could you please comment on what happened and whether you are engaged in any of the other conversations, what the pipeline looks like for the disposals?

So no, we have not changed our plans on selling offshore rig -- that offshore rig. It's okay. I understand what you mean. So basically, with the first buyer, the deal didn't go ahead due to the regional situation because it was difficult in current situation to move rigs outside of the Gulf, right? So that's why the first buyer, they basically -- we canceled the agreement with them, but there was some nonrefundable deposit that was -- that stayed and we reported that in Q1 results. So that was the comment. But we have not changed our plans on selling that offshore rig. At the moment, we're still looking at that. We're looking at other options and other buyers. We have a second buyer, so we're working on that.

We have a follow-up question from Mr. [ Mossen Alsakir ]. Do you expect the cost of borrowing in the Sukuk to be higher or lower compared to the first issuance?

Okay. We are planning for having that lower, yes, and it looks like this is quite doable. So we expect to reduce the cost going forward for Sukuk.

[Operator Instructions] It looks like there are no additional questions at this point. I'll be passing the line back to the management team for the concluding remarks.

No, just I want to thank everybody for the questions and [Foreign Language] things will improve in the future and we will have more discussions. Thank you.

Thank you very much.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.