NorAm Drilling AS (NORAM) Q4 FY2025 Earnings Call Transcript & Summary

Okay. Hello, everyone, and welcome to NorAm Drilling's Fourth Quarter 2025 Results Presentation. My name is Marius Furuly, and I'm the Director of Strategy and Investor Relations here at NorAm Drilling. With me today, I have the company's CEO and CFO, Marty Jimmerson in Houston. We will first go through a presentation of the results and recent market developments before we open up for a question-and-answer session at the end of the presentation. Before we begin, I would like to note that this conference call will contain forward-looking statements. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. Forward-looking statements are not guarantees of future performance, and these statements are based on our current plans and expectations and are inherently subject to risks and uncertainties that could cause future activities and results of operations to be materially different than those set forth in the forward-looking statements. You should, therefore, not place reliance on these forward-looking statements. So with that said, Marty, please begin.

Thank you, Marius, and hello to everyone joining us today. I am pleased to report that NorAm continued to deliver operational excellence despite Permian rig counts declining modestly 2% during the quarter. Permian rig counts finished the quarter at 247 down 6 from the end of the third quarter. WTI began the quarter at approximately $62 and finished the quarter at $58. Revenue was $26.5 million, up $2.6 million from the previous quarter as a result of improved utilization and increased reimbursables. Adjusted EBITDA, defined as earnings before interest, tax, depreciation, amortization plus noncash stock option expense was $3.8 million, down $0.6 million from the previous quarter, primarily attributable to expenses related to the rig that returned to work in December, required certifications of certain equipment and modestly higher R&M. Profit after tax was $2 million in the fourth quarter compared to $4 million in the third quarter. 10 out of our 11 rigs were under contract and working at the end of the fourth quarter. Our backlog is $27.6 million as of yesterday. Turning to Page 4. During the fourth quarter, we paid dividends of $3.9 million or NOK 0.91 per share. Subsequent to year-end, we have announced 2 additional dividends, which constitutes our 39th consecutive monthly dividend payout. As mentioned on the previous slide, our current revenue backlog is $27.6 million. 6 of our rigs are currently operating under contracts of at least 6-month terms. Three of our rigs are operating on pad-to-pad contracts and 2 rigs are contracted to commence operations in March on pad-to-pad arrangements. We started the year with 1 rig stacked and an additional rig was released in January as a result of that E&P cutting its budget due to volatility of WTI. Seven of our rigs are contracted with major E&Ps. One rig is contracted with a top-tier pure-play E&P and 3 rigs are contracted with 2 of the largest and most significant private equity-backed E&Ps. Permian rig counts started to stabilize towards the end of the third quarter and continued into the fourth quarter. As of last Friday, Permian rig counts declined 9 additional rigs during the first quarter of 2026 to 238. As stated earlier, WTI started the fourth quarter at $62 and finished 2025 at $58. This caused some E&Ps to release rigs and evaluate their capital commitments in early 2026, given their focus on maintaining fiscal and operational discipline. Since year-end, WTI prices have increased slightly to $66. We believe the outlook for the first half of 2026 is flat overall and expect to see some E&Ps adding a few rigs that will likely offset any released rigs. We continue to believe U.S. shale production has likely peaked at the current rig count levels and creates longer-term optimism for super-spec rigs. In closing, I would like to thank all of our employees for their hard work and dedication. Our entire team from operations, supervising, support and maintaining our rigs deserve the credit for our operational performance, which has contributed to the improvement in concentration of major and significant E&Ps operating in the Permian Basin. With our announcement earlier this week that we have contracted both of our available rigs, we expect that we will have 100% fleet utilization starting in March for the first time since 2023, which I don't think you can find anyone who would not say, well done, NorAm and very impressive in this current market. And with that, let me turn it back over to Marius for a review of our key operational figures for the quarter. Maybe on mute, Marius.

Thank you, Marty. In the fourth quarter, we achieved a rig utilization of 82.6%, up from 80.2% in the third quarter. We reactivated 1 rig late in the quarter. Revenues came in at $26.5 million, up from $23.9 million in Q3. Our adjusted EBITDA was $3.8 million, down from $4.3 million in Q3 due to higher costs in the quarter. On the cost side, our direct operating expenses increased from the third quarter with higher payroll expenses related to the rig that returned to work in December, required recertifications of certain equipment and slightly higher R&M expenses across our fleet. Consequently, our all-in breakeven was around $19,100 per day for the working rigs. On the income statement for the fourth...

Sorry, everyone. I think Marius maybe have had a connection issue. He may be logging back in. Let's pause one moment. And if not, I'll take over. Okay. Well, Marius is trying to log back in. Let me go ahead and take over. So I apologize for the technical difficulties. So let me start over at the beginning. So for Marius, in the fourth quarter, we achieved a rig utilization of 82.6%, up from 80.2% in the third quarter. We reactivated 1 rig late in the quarter. Revenues came in at $26.5 million, up from $23.9 million in the third quarter. Our adjusted EBITDA was $3.8 million, down from $4.3 million in the third quarter due to higher cost in the quarter. On the cost side, our direct operating expenses increased from Q3 with higher payroll and R&M expenses related to the rig that returned to work in December, required certifications of certain equipment and higher R&M across our fleet. As Marius stated, our all-in breakeven after overhead and after CapEx was around $19,100 per day. On the income statement for the fourth quarter, we had an operating profit of $2 million compared to $2.8 million in the third quarter. In the fourth quarter, we had financial income of $99,000 and as a result of interest income and a debt-free balance sheet. Fourth quarter net profit tax was $2 million versus net profit of $4 million in the third quarter. Turning to our balance sheet and cash flow statement. NorAm has a debt-free balance sheet and minimal investment requirements. We ended the quarter with a cash balance of $10.4 million as a result of working capital reductions during the fourth quarter. We also have available an RCF of up to $4.5 million, where we have no amounts drawn on the line during the quarter or subsequent to quarter end. The company has paid out $3.9 million or NOK $0.91 per share in monthly dividends in the fourth quarter and have declared 2 additional dividends so far in 2026. We will continue to pay dividends subject to continued positive net cash flow from operations. So in conclusion or in concluding this presentation, as a reminder, NorAm has a fleet of 11 super spec rigs fully upgraded with a track record of drilling the longest wells in the Permian and are among the very top performers in terms of drilling efficiency measured by feet per rig per day. I think it's important to note as we -- that we have one of our rigs received the rig of the year for this super major in terms of fleet and feet drilled in 2025, which is just incredible and speaks volumes to NorAm and our team. We retain top quality customer portfolio of 5 E&Ps ranging from super majors to smaller private companies in the Permian. The company has an industry low cash breakeven and minimal investment requirements in rigs to keep us at the top of the market. We have a clear dividend policy of returning all excess cash to our shareholders. Since our listing, we have returned $90 million to our shareholders, equal to about NOK 22 per share, and our last monthly cash dividend distribution implies an annual yield of approximately 9% as of the closing price yesterday. So with that, we thank you for listening to our presentation. We now like to open up for questions from the audience. [Operator Instructions]

Thank you for concluding Marty. I had some issues with the Internet -- sudden Internet outage here. I'm sorry for the inconvenience that caused during the call. I think there's -- yes, Marcus Monsen, are their analyst from Pareto.

In terms of your newly announced contracts, what should we expect in terms of cost, CapEx for those 2 rigs being reactivated? Any color on that?

Yes Marcus, thanks for the question. So obviously, 1 rig had been stacked for 3 years. We had been very well maintained and prepared. The specific customer we're going to work for, which is a super major. It is a large private. That rig is in good shape. What I would call is there's some nominal cost that we'll spend to assist that customer's needs. We have 2 sister rigs to that rig that the existing super majors don't have the same requirement. But other than that, it's just getting the labor or the crew and the rig shook out. So I wouldn't expect too much, although there'll be some cost on that rig. The second rig, which is a rig that was released by a private customer in January, that's a super major. Working for super majors comes with a much more request, let's just say that. So we're going to spend a little more money on that rig. Some will be CapEx, some will be OpEx. It will be a number, but it's not going to be so large that it's unreasonable. What I would like to comment on is despite the fact that we're messaging that we kind of see a flattish first half of '26, we think there are some rig additions that will probably offset some rig attrition. But in these 2 specific cases, other than kind of being in the right place at the right time and having the customer relationships with the customers that picked up the rig, it was the capabilities of the rigs that specifically led to us getting these jobs. And so again, I think it echoes kind of what we speak to, the quality of our rigs, the high end of our rigs, that we've already invested a substantial amount of money in our rigs that it affords us the right opportunity when customers have those specific needs. So Marcus, sorry, for the long ended response, but hopefully, that helps.

Yes. Thanks, helps a lot. Very impressive to get contracts in that market for 2 rigs. So in terms of CapEx, I think you had $1.5 million for 2025, something like that. How should we think about that for '26? I mean it's a fairly low figure for 10, 11 high-spec rigs.

Yes. And so I think in '26 -- and again, we're new into the year, but kind of based upon what we're doing to reactivate these 2 rigs. I think that even though we said last year, we expect $3 million could go higher if we need drill pipe. I think we're still on track for $3 million to $4 million in 2026, all subject to if we buy additional pipe. Obviously, with all of our rigs back out, you can assume that we're using the full complement of our pipe. Not all of our customers use our pipe. Sometimes they rent high-torque pipe or they rent the high-torque pipe from us. So ballpark, to answer your question, it's going to be $3 million to $4 million. It would be my best guess as of today, subject to whether we buy additional drill pipe or not.

Thank you. I can just go ahead and have one -- at least one more. I mean we have seen the rig count sliding down for the last 2, 3 years. Do you think we just need to see a higher oil price for that to come up? Do you see any other catalysts? And what kind of oil price do we need to see before you think you can see increases in the rig count in Permian?

Yes, it's a great question. I don't have the exact answer. But what I can tell you is -- is that we had 1 rig released in January, and we've been working for that customer for several years. And I think that, that was a specific private E&P that kind of got a little nervous about WTI being below $60. And that doesn't mean that they've changed. But the minute you kind of saw WTI get back towards the mid-60s here in the early part of January, you started seeing other customers kind of respond. Now that doesn't mean that they were ready to pick up 10 rigs, but it was 1 rig here, 1 rig there, and we benefited. So I think kind of in the low to mid-60s, you're probably going to see a net flat rig count from here. Should we get to $70 in WTI, I think you could see some modest additional rig increases before the second half of '26, which I think could bode well.

Just one last. We have seen a lot of M&A within the E&P companies, very limited within the drilling space. Do you expect some more M&A consolidation over the next 12, 24 months? What's your thought on that?

Yes. I mean we've seen the recent announcement of Devon acquiring Coterra and that's really a Delaware play, but a significant transaction. I do think there's probably going to be some smaller consolidation. And I think kind of -- I couldn't be more proud of the company and our team with the -- what I'm going to call diversification. 3 years ago, 2/3 of the rigs were being contracted by private E&Ps. Today, 2/3 of the rigs, ballpark, are contracted by the majors and super majors. And so if you're not working for the majors and the super majors, I think you're kind of already behind the 8-ball as they say. And if you're not, you're going to be subject to -- it's what I believe will be some inevitable consolidation of smaller privates as we move forward. Is it going to be a significant amount of consolidation? I don't know. But it wouldn't surprise me if we have 1 or 2 deals announced here in 2026.

Thank you. All right. It seems like there are no more questions in the audience. So we can conclude here. Thank you all for listening into our fourth quarter results, and thank you to the NorAm family of workers and suppliers. And we hope to see you next quarter and sorry for the bad Internet in the middle of the presentation. Thank you.