NorAm Drilling AS (NORAM) Earnings Call Transcript & Summary

All right. I think we can start. Hi, everyone, and welcome to NorAm Drilling's Second Quarter 2026 Results Presentation. My name is Sander Borgli. I am the Director of Strategy and Investor Relations here at NorAm Drilling. Also with me today, I have the company's CEO and CFO, Marty Jimmerson in Houston. We will first go through a presentation of the quarter results and recent market development before we open up for a questions-and-answer session at the end of the presentation. Before we begin the presentation, 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. 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 our operation to be materially different from those set forth in the forward-looking statements. You should therefore not place reliance on these forward-looking statements. So with that, Marty, please begin.

Thank you, Sander, and hello to everyone joining us today. Starting on Page 3, going over our highlights for the second quarter. I am pleased to report that our financial results improved with revenue increasing 12.3% quarter-over-quarter as all of our rigs remain contracted and operational throughout the second quarter. We continue to have 7 of our 11 rigs contracted with super major E&Ps with contracts on all of our rigs ranging from pad-to-pad intervals up to 12-month contract terms. Permian rig counts increased 17 during the second quarter to 258, driven primarily by private E&Ps, and we'll talk about that a little bit more shortly. WTI began the quarter at approximately $111 a barrel and finished the quarter at $68. Since the Iran war started, WTI has been extremely volatile, trading as high as $113 and as low as the upper 60s. WTI is currently trading at $80. Adjusted EBITDA, defined as earnings before interest, tax, depreciation and amortization plus noncash stock option expense improved 40% quarter-over-quarter to $6.3 million. Our backlog as of yesterday was $30.3 million. Turning to the next page, we'll cover recent events and outlook. During the second quarter, we increased our dividend payout by 26% quarter-over-quarter. Our current backlog of $30.3 million is supported by the majority of our fleet being currently working for super majors and major E&Ps and over half of our rigs working on contract terms of 6 to 12 months. As stated earlier, Permian rig counts increased 17 during the second quarter and have already increased another 9 rigs up to 267 as of last Friday. WTI has continued to increase and is currently $80. Based upon the current commodity prices and ongoing uncertainty surrounding the Iran war, our discussions with operators, we continue to believe that major E&Ps are maintaining their original 2026 capital expenditure plans, while some private operators are increasing theirs. As a result of the increase in WTI subsequent to the second quarter, we have witnessed an increase in inquiries for available rigs, primarily from E&Ps or private E&Ps. Turning to the next page. Let's talk about kind of the forward-looking curve of WTI given the volatility and what we think that means for rig counts. So turning to the macro backdrop. The Middle East conflict has lifted the WTI forward curve since the start of the year. And you can see that on the graph on the left. The curve now sits above the breakeven levels of U.S. E&Ps needed to drill profitably a new well based upon the Dallas Fed's energy survey. The Permian Midland breakeven sits right in the range at $69 a barrel. So we are now in the zone where new drilling makes economic sense near term. That is supporting higher rig counts and further drawdown of the DUC backlog. However, Permian DUC inventory has halved over the last 2 years, and we are seeing increasing questions around the economic viability of much of what remains. Bottom line, DUCs are becoming a less reliable short-term way to offset production declines. So we do expect any rig demand to benefit from this. Near term, we believe private E&Ps are likely to be the marginal driver of that demand as majors continue to hold to their original 2026 CapEx plans. In closing, I would like to thank all of our employees for their hard work and dedication. Our entire team deserves the credit for our continued exceptional operational performance. And now let me turn it back to Sander for key operational figures for the quarter.

Thank you, Marty. In the second quarter, we achieved a rig utilization of 98.6%, up from 90.3% in the first quarter. Revenues came in at $29.4 million, up from $26.2 million in Q1. Our adjusted EBITDA was $6.3 million, up from $4.5 million in Q1 as a result of all of our rigs being contracted and working during the Q2. Our all-in fully burdened breakeven, including direct costs, overhead and maintenance CapEx was around $18,700 per day. This is an increase of $800 per day compared to Q1, primarily due to higher maintenance CapEx related to spares and customer requirements. In the income statement for the second quarter, we had an operating profit of about $4.8 million compared to $3 million in Q1. In Q2, we had a net financial expense of $24,000 as a result of interest expense associated with financing insurance premiums. Second quarter net profit after tax was $4.2 million versus $2.6 million in Q1 2026. 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 $8.1 million. We also have available an RCF of up to NOK $4.5 million, where we had no amounts drawn during the quarter. The company paid out $4.9 million or NOK 1.08 per share in monthly dividends in the second quarter and have declared 2 quarterly dividends so far in the third quarter of 2026. We will continue to pay dividends subject to continued positive net cash flow from operations. I will now hand it back to Marty for closing comments.

Thank you, Sander. In concluding our prepared comments in this presentation, 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. We maintain a top-quality customer portfolio of 5 E&Ps ranging from super majors to small private companies in the Permian. The company has an industry low cash breakeven and minimum investment requirements in the rigs to keep them 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 now returned over $100 million to our shareholders equal to about NOK 24 per share and our latest monthly cash distribution implies an annual yield of approximately 11% as of the closing price yesterday. Thank you for listening to -- go ahead, Sander, sorry.

No worries. Thank you for listening to the presentation. And we would now like to open for questions from the audience.

[Operator Instructions] We have our first question from Marcus Monsen.

Congrats on the good results. I was just thinking, as you highlighted, private E&Ps appear to be driving incremental rig additions right now. What kind of oil prices do you see these guys need to continue drilling? Would you expect them to pull back if oil falls below $70 to $80? Or is this a sustainable increase? How do you see it?

Marcus, thank you for the question, and great to catch up. We look forward to seeing you here in a couple of weeks. Very similar to what we saw kind of early in the second quarter when WTI declined is I think most private E&Ps probably don't -- their blood pressure doesn't go up as long as WTI is above $70 I think as it gets between $65 and $70, they're probably less likely to be looking at contract terms beyond pad to pad or 3 months, probably start feeling a little bit of pressure on pricing. As it gets below $65, I think you will start to see some privates either cut their budgets or slow down their drilling plans. So in essence, we're still well above, but I do think it's in that low to mid-$60 WTI that we start to see some impact on private E&Ps decision-making regarding their plans.