Dolphin Drilling AS (DDRIL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Dolphin Drilling Presentation of the Third Quarter 2024 Financial Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bjornar Iversen, President and CEO. Please go ahead.

Ladies and gentlemen, thank you for joining us for Dolphin Drilling's Third Quarter 2021 (sic) [ 2024 ] Financial Results Presentation. We're excited to share our latest updates of the company and insight with you guys. Today, we will present our financial performance, operational highlights and the key events that has led us to this point. I'm Bjornar Iversen, the CEO of Dolphin Drilling. And with me today, I have CFO, Chief Financing Officer, Stephen Cox; and Ingolf Gillesdal from Investor Relations. Before delivering or diving into the details of our financial performance this quarter, I'd like to highlight some key developments that demonstrate our progress. We recently celebrated a significant milestone with the successful commencement of the Blackford Dolphin's exploration drilling campaign in partnership with our client, Oil India Limited. This marks a very important transition for our company as we move to a period with 2 active operations for the group. Furthermore, I'm pleased to report that the Paul B. Loyd Jr continues to deliver strong results with no recorded incidents for the quarter and maintaining a very high rig uptime. This consistent performance underscores our commitment to operational excellence and safety across our fleet. We kindly ask you to take a moment after this presentation to review the important elements of the disclaimer. In today's session, we will cover our third quarter financials, safety and operational performance and other key developments. We'll also discuss the company's solid revenue backlog position and our ongoing efforts to ensure all of our rigs continue to operate safely and remain under contract. Following our prepared presentation, we open up the floor for questions, and we look forward to a productive discussion. We appreciate your continued support and interest in Dolphin Drilling. Let's start by examining the key financials and material events for the third quarter as well as subsequent developments. I now hand over to our CFO, Stephen Cox, to begin the review.

Thank you, Bjornar. We released our quarterly report for Q3 2024 earlier today, and here is a brief overview of the financial results. In Q3, we recorded revenues of $16.5 million primarily generated from the Paul B. Loyd Jr contract, supplemented by modest income from equipment rentals to third parties. The rig continues to demonstrate exceptional performance, maintaining an operating efficiency rate of 96% for the quarter and robust safety metrics. These financial results are consistent with the previous quarter, during which we also had only 1 rig under contract. Our 2 other rigs had no revenues booked in the quarter. Blackford was in transit to India and Borgland was in Las Palmas undergoing her SBS works. As a result, we reported a negative EBITDA significantly lower than the previous quarter. This decline was primarily due to costs and time spent mobilizing the Blackford to India, following a delayed and disrupted exit from Nigeria. The Paul B. Loyd Jr experienced slightly higher operating costs compared to the previous quarter, mainly attributed to extra expenses associated with end of well work on the unit before relocating to a new drilling site. Our land-based organization costs remained consistent with the previous quarter. We continue to defend our position in the ongoing arbitration case in Nigeria and in the U.K. tax case, incurring legal costs of $1.4 million during the quarter. Despite these challenges, our overall G&A costs were in line with the previous quarter, reflecting our continued focus on cost control. Following the end of the quarter, the Blackford commenced our contract with Oil India on the 11th of November and has performed fantastically well since, recording 100% uptime to date. We are due to collect a mobilization fee during December this year. The Borgland often remained at Las Palmas. As notified last week, EnQuest elected to terminate the contract, and we have now received the approximate $21 million payment. Firm backlog consists of more than 3 years remaining work for the Paul B. Loyd Jr and 3 wells in India for the Blackford, which are planned through early 2026. All backlog related to the Borgland has now been removed. Moving on to key financials. As discussed previously, the extra transit costs and higher operating expenses for Blackford have resulted in an EBITDA loss of $22.1 million, some $16 million lower than quarter 2. The majority of this is driven by the running OpEx and transit costs of the Blackford from Nigeria to India. Following a lengthy delay in departure, various legal process issues, weather issues and longer-than-anticipated port stops, a significant portion of the additional costs were attributed to vessels, not only in towing the unit but also in various support operations, including the start-up in India. Further variations in quarter-over-quarter numbers were driven by adjustments to revenues related to amounts recognized in the previous quarter, an adjustment related to Blackford OpEx in Q2, not repeating in Q3 and additional costs in the Paul B. Loyd Jr in the current quarter. For a more comprehensive review, I refer you to the earnings report released earlier today. The company concluded the quarter with a total cash balance of $37.6 million, down from $54 million as of June 2024. Of this amount, $5.6 million is considered restricted due to its use in supporting various bonds and guarantees or because it was held in bank accounts outside our main banking locations. During September, we recovered a $3 million cash bond related to the temporary import of Blackford to Nigeria, and there are no remaining cash balances in any Nigerian bank accounts. Dolphin's total debt comprises the MAP facility and the shareholder loan. This was from gross of a $6.5 million reserve amount, which is recorded in other current assets. we have no new material update on the ongoing arbitration process in Nigeria. Now some high-level guidance on the forward liquidity situation for the company to the end of the year. Following the Blackford contract start-up in India and the collection of the termination fee related to Borgland as well as the pausing of the SPS, we will stabilize company cash flows and cast many of the large variations we've been dealing with behind us. The graphic to the right shows an approximation of how we see the year-end 2024 shaping up and the large ticket items that have been impacting us. I hasten to add, these are estimates subject to change and obviously, timing. Regarding the Oil India mobilization fee, we do anticipate some deduction by Oil India regarding the late start-up, and we remain in dialogue with the client on that subject. Moving forward, the 2 rigs in operation will produce positive cash flow for the company, with G&A estimated to decline quarter-on-quarter based on returning to a more normal running cost base and a reduction in legal costs. We continue to assess visible opportunities on the Borgland, and we'll assess liquidity requirements in light of developments on that rig. Next up on today's agenda is an update on the rig fleet, current rig tenders, initiatives and our main strategic priorities from Bjornar.

Thank you, Stephen. Dolphin at a glance. Dolphin Drilling is pursuing a strategy focused on securing long-term profitable contracts in some key growth markets. The company has recently commenced a significant long-term exploration drilling contract with Oil India, position ourselves for material improvement in revenue generation. The group now operates 2 semisubmersibles on long-term contracts, demonstrating its capabilities and ability to win and commence work around the world, utilizing our in-house marketing, technical and operational teams. We have extensive worldwide experience working with exploration and production companies across most offshore basins for decades. And we have the in-house know-how that enable the efficient integration of people and equipment into our well-established systems. This is evidenced by the recent smooth start-up for Paul B. Loyd Jr into the Dolphin organization and also the late start-up of Blackford Dolphin with Oil India, following a long transit and integration of new crews and services. Borgland is currently marketed into multiple offshore basins, and we expect a decision on these contract opportunities in the coming months. Paul B. Loyd Jr excellent operational performance. We are again pleased to see the continued strong operational performance achieved from our crews and teams operating the Paul B. Loyd Jr. A strong safety record continues, same with the rig operational uptime. We are proud of the good safety record with no lost time incident recorded since the rig entered into the Dolphin Drilling fleet. Paul B. Loyd is well underway in its long-term contract with Harbour Energy, potentially extending its operation into the next decade. This rig is part over only a small selected group of semisubmersible rigs still active in the U.K., which are capable of drilling wealth and supporting the massive number of required decommissioning projects in the U.K. This underpins the likelihood for Paul B. Loyd to continue the work in the U.K. for many years to come. Blackford Dolphin commenced contract in India. Our second rig, now generating revenues for the company, is Blackford Dolphin. The journey of the Blackford Dolphin has been eventful during the last years. The rig's voyage began after concluding its operation in Nigerian Waters. The rig then embarked to the long journey covering approximately 8,636 nautical miles to reach its new destination in India. During its transit, the Blackford Dolphin made 3 scheduled stops with the final one in Port Louis, Mauritius. It departed from Mauritius on September 13, 2024, en route to its final destination offshore Port Blair in the Andaman Sea. The rig arrived in Indian Waters in October 2024 where it underwent custom clearance and client acceptance procedures. Upon arrival, the Blackford Dolphin began the preparations for its new contract with Oil India Limited. And on November 11, 2024, the Blackford Dolphin had officially commenced its long-term exploration drilling contract with Oil India Limited. This marked the beginning of a new chapter for the rig, now returning to drilling wells in India and contributing to India's ambitious energy goals. Let's then move to the Borgland Dolphin marketed for work. Moving on to Borgland. The unit was moved to Las Palmas from Norway in May 2024 where the special periodic survey began, also called SPS. Our rig crew has kept Borgland in great condition in the period leading up to the class renewal. Equipment and services has been tested and periodically run, and the hull and structure has proven to be in excellent condition. Following the recent contract termination, we have paused the class renewal, be immediately start to preserve the rig and the key equipment. And post this exercise, we will reduce layup costs estimated to be below the $30,000 mark per day. For today, we have completed approximately 2/3 of the class renewal with spending in line with previous estimates. This means we will defer the remaining cost until we know the next contract for the Borgland. Then moving over to the fleet status, now showing 2 contracted rigs in the U.K. and India. This drilling campaigns should provide a steady revenue stream for the company and both have the potential to extend contract lengths. In the U.K., the Paul B. Loyd Jr is contracted until early 2028. Harbour is the U.K.'s independent oil and gas producing company and only paused by a short class renewal in the second half of 2025, which is expected to take around 30 days. In India then, we have the Blackford Dolphin, commenced a few weeks back on its drilling contract, and we see attractive follow-on work opportunities for the rig in India, a country with high production targets for oil and gas in the years to come. As we mentioned earlier, Borgland Dolphin is marketed into multiple offshore basins, and we expect decisions on several of these contract opportunities in the months to come. Let's then look at agenda and go over to look at the market for the semisubmersible drilling rigs, moored semisubmersible drilling rigs - Tight Supply Balance is as in the heading. Dolphin Drilling has centered its focus on the moored semisubmersible rig segment. You see that in the middle of the foil there, and we are specialists operating these rigs and currently operate and own 3 of them. Our rigs are capable of drilling in both harsh environment offshore basins as well as in benign waters. And our rigs can drill shallow water down to around 65 meters and as deep as approximately 1,800 meters. This is truly a versatile rig fleet, which can drill wells cost efficiently and at a much lower fuel usage versus larger dynamically positioned drilling rigs. Next year, Dolphin Drilling will celebrate its 60 years anniversary as a drilling contractor. In our opinion, the medium-term outlook for the offshore floater rig segment is largely driven by rig supply characteristics and the actual available rig supply. We are showing the fleet of the competitive moored semisubmersible drilling rigs. The rig supply is small and has continued to reduce in the recent years due to the low day rate level, which has prohibited the reinvestment in this rig class. More than 75% of the worldwide moored rig fleet has been scrapped during the last decade, and the total rig count now is around 10 active rigs. And interest in these rigs cover offshore basins from Asia, India, West Africa, South America, Central America, the Gulf of Mexico, the North Sea and parts of the Mediterranean. We claim based on counting the ongoing rig tenders and early discussions on future drilling campaigns, all of these active rigs still in class should have a very good prospect for work ahead. Okay. Let's then move over to the demand side. Diving into the demand side for these rigs, external research indicate a good number of prospects requiring moored semisubmersible rigs. As we mentioned on the previous page, the small number of rigs remaining will need to service the total global requirements, meaning rigs may have to be sourced and mobilized between regions, has happened to us when we took the opportunity to relocate the Blackford from Africa to India. We have seen several rigs now being moved between regions, from Asia to the Gulf of Mexico, from Asia to South America. And based on the recent reduced activity in the U.K., we will not be surprised to see more rigs leaving the U.K. for other destination, which will -- from a rig demand perspective to fulfill planned rig tenders. The market will likely remain supply-driven and programs may need to include longer drilling work programs in order to justify costly mobilizations. The international outlook remains very attractive from an overall rig supply point of view. The timing of actual commitments to move forward with drilling plans indicate some drilling project delays. Let's then have a quick look at the rate development and [ heading ] there, it says positive rate development. Moving on to the review of day rates for the moored rig segment. Here, we see historical fixtures and day rate levels. And historically, the day rate path for these segments has followed the deepwater segment, with a discount of approximately plus/minus $100,000 a day. As you can see from the graph, and we have seen rates fixing at higher levels, average moving up to around $250,000 and increasing as we see to the right in that figure. We are actively involved in several rig tenders today, and we expect fixtures to be awarded at this level and above in the coming months. We are then at the summary section of this quarterly presentation. Dolphin Drilling has come through a year with many uncertainties, having a strong impact on the company. A lot of uncertainty is taken out, and the company can now move forward with strength. The company has 2 rigs on contract, providing for predictable cash flow for the next 1.5 to 2 years and beyond. Returning Borgland to work is clearly a catalyst for growing the group's revenues. However, we will only take on projects that makes economic sense and provide the company with attractive returns. Through the company's close to 60 years legacy, we are 60 next year since 2025, brand and operating platform, we are positioned to find work in most offshore basins, and we have the in-house systems required to participate in most rig tenders for our rigs as well as marketing and operating other's rigs. The firm backlog account USD 371 million as of date of reporting, which should result in a strong cash flow generation for the company in the years ahead, in a strong market for the last available rig, Borgland Dolphin. With this, we open up for questions.

[Operator Instructions] There are currently no phone questions. So I will hand over to Stephen for webcast questions.

Yes. So we have some questions come in on the webcast here. We'll try and work through these in an order, but bear with me while we navigate. So a couple of things here, I think, probably covered by the presentation, a question around stacking cost of Borgland. Bjornar mentioned that we expect that to be sub USD 30,000 per day. It's obviously relatively new news for us and to take that rig back to a stacking status but somewhere below $30,000 a day is what people should think about. Equally, there's another question around Blackford rate. That's undisclosed right now. We haven't put that into the market, but I'm sure people can work through that one. And I have another question about G&A expenses. The question is, "Will G&A expenses in '25 be significantly less than G&A expenses in '24?" The answer to that is fundamentally is driven by the legal expenses. We did incur a significant amount of legal expenses this year. We would anticipate, of course, that is going to come down to $1 million to $2 million of the models, at least, on that one. Bjornar, I'm going to push one your way, if that's okay. "Of the 11 active rigs on Slide 14, how many are you competing against in current tenders? And how many active tenders are you currently participating in?" And that's a Borgland question.

Thank you, Stephen. Let me try. Yes. As we said there, 11 rigs in the market, and we -- what should I say? If we look at the last Oil India tender that we had, we -- it turned out that we were the only bidder in the end there. So that's a signal that the market is tight. In the other tenders that we see, we normally see 1 or maximum 2 other competitors in the tenders we are currently, what should I say, working on and in the negotiations on. I think that sums it up. 1 to 2 competitors per bid.

Yes. Perfect. And this is a slightly related question about active tenders for moored semis. The answer to that is yes, as Bjornar mentioned, particular active area. We won't disclose where they are, but let's say they're everywhere right now, I would say, international, U.K. and Norway, everywhere is out there. Any risk of DP floaters crowding into our market?

No, the answer is -- based on the one that we're currently working on, the answer is no. We don't see that as a risk on the current one we are currently working on. No.

And then sorry to continue. "Anything to stop us from competing for shallow water work that might usually be done by a jackup?" I guess, that's a depth question.

I think we will see -- I would see -- we probably will look at some opportunities, particularly around, I would say, the Blackford could do in that area. Work, of course, down to around 60-meter, and we probably could look at some -- to pick up some of the more shallow work in that area, if that makes sense since this relatively high cost of mobilizing jackup into there, if it's shorter campaigns. So the answer is yes. We probably could hit a little bit of the more deeper part of the jack-up market. We could potentially do that with the Blackford. I think that's the answer to that.

Yes. So another question here, a question about the claim we have in Nigeria and the quantum of that claimant. Again, this is not a piece of information that's out there, but what I can say about that claim is that there's over $70 million worth of unpaid invoices that is attached to that. So -- and our quantum is obviously higher than that in terms of our claim. That is what is out there for us to chase in Nigeria. And then there's a question on the Q4 cash guidance, "Do we assume the full moored fee from Oil India?" And again, I think the way we have done the modeling on this one as we assume we will get almost all of that moored fee, but not the entire amount. And as was mentioned during the presentation, we are discussing with the client the liquidated damages in terms of the late delivery of the rig and some of the issues that we experienced there, which were driven by factors well outside our control. So that's how that one will go. We look forward to discussing that in the Q4 presentation early next year. That's all the questions. So we'll maybe leave it a little bit for anything else coming in or can revert to phone questions. But otherwise, I think operator, we are potentially at close here.

There are no further phone questions. Would you like any closing remarks?

Yes, please. To sum it up, I think we -- thank you all for calling in. For us, it's been -- the last quarter has been an eventful quarter where we were able to take out, what should I say, a lot of variables around the company. the company is stabilizing as you see from the presentation now with 2 rigs in operation with solid customers. And we are currently focusing on getting a contract on the Borgland. And I think as a closing remark, we would like to thank you all for showing interest in the company and backing us, and for all of you to call in. So on that remark, I thank you all.

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.