NorAm Drilling AS (TM9.F) Earnings Call Transcript & Summary

All right. Hi, everyone, and welcome to NorAm Drilling's Second Quarter 2025 Results Presentation. My name is Marius Furuly, and I'm the company's Director of Strategy and Investor Relations here at NorAm. And with me today, I have the company's CEO and CFO, Marty Jimmerson, in Houston. We will first go through presentation of the quarterly results and the recent market developments before we open up for 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, 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 from those set forth in the forward-looking statements. You should, therefore, not place undue reliance on these forward-looking statements. So with that said, Marty, please go ahead.

Thank you, Marius, and hello to everyone joining us today. I am pleased to report NorAm continued to deliver operational excellence during the quarter despite Permian rig counts declining 10% during the second quarter. Permian rig counts finished the quarter at 270 rigs, down 30% from the end of the first quarter. WTI began the quarter at approximately $72 and finished the quarter at $67. I believe, today, we're trading around $64. Revenue was $24.9 million, down $900,000 from the previous quarter as a result of slightly lower utilization. NorAm's fleet utilization decreased to 86.0% from 89.7% in the prior quarter, and I'll comment on that shortly. Adjusted EBITDA, defined as earnings before interest, tax, depreciation and amortization plus noncash stock option expense was $5.3 million, down $1.4 million from the previous quarter. Adjusted EBITDA was impacted during the quarter by lower utilization, slightly higher repair expenses and slightly higher insurance cost. Profit after tax was $3.7 million during the second quarter versus $5.2 million during the first quarter. Nine out of our 11 rigs were under contract and working at the end of the second quarter. Our backlog is $12.2 million as of today with 9 of our 11 rigs under contract and working. We expect 3 rigs to be renewed over the next few days and an additional 3 rigs to be renewed before the end of September. If you'll flip to the next page, Marius, and we'll cover recent events. During the second quarter, we paid dividends of $5.3 million or NOK 1.24 per share. Subsequent to the second quarter end, we have announced 2 additional monthly dividends, and our latest distribution represents our 33rd consecutive monthly distribution since our public listing. As mentioned on the previous slide, our current backlog is $12.2 million. 7 of our rigs are currently operating under contracts of at least 6-month contract terms. Two of our rigs are on a pad-to-pad contracts and have continued to work much like term contracts. We did have a second rig stack during the quarter as a result of E&P consolidation, and we have active discussions ongoing for near-term work. As of last Friday, the Permian rig counts have declined an additional 15 units during the third quarter or 6% to 255 rigs as a result of WTI prices, continued economic and geopolitical uncertainties, OPEC's announcement of production increases and EP's consistent operating and fiscal discipline that they continue to demonstrate. While near-term WTI prices suggest a flat to slightly down activity levels in Permian, we do believe U.S. shale production has likely peaked at current rig count levels and creates longer-term optimism for super-spec rigs in our opinion. Flipping to Page 5. Rig counts, as you can see, continued to decline and -- which indicates lower production ahead. Permian rig counts are now down 50 rigs year-to-date and a total of 100 since 2023. Well completions continue to decline, and this started in early 2024. Also, oil production growth has continued to slow and has been flat over the last several weeks. We are firm believers that we need to see increased rig counts to accommodate material production growth in the Permian going forward. E&Ps in the Permian continue to high-grade underperforming rigs and our discussions with customers indicate that 2026 CapEx and drilling plans could result in modest but not significant increases in rig counts at current WTI prices. In closing my opening remarks, I would like to thank all of our employees for their hard work and dedication. We continue to be a top contract driller with our talented employees and ultra super-spec rigs. And now let me turn it back over to you, Marius, for a review of our key operational figures for the quarter.

Thank you, Marty. So in the second quarter, we achieved a rig utilization of 86%, which was down from 89.7% in the first quarter. We had 1 rig stacked at the beginning of the quarter, and another 1 ending its contract during the quarter. Both rigs are stacked now in their yard, and we are actively marketing them for new opportunities, including outside of our core market in Permian. The revenues came in at $24.9 million, which was slightly down from $25.8 million in the first quarter. Our adjusted EBITDA was accordingly down approximately $1.4 million from Q1 due to lower revenue. On the cost side, our repair and maintenance expenses increased from Q1 due to some 10-year recertification costs and -- which resulted in our overall cost base coming in a little bit higher during the quarter. Our all-in breakeven cost per rig per day was $18,600 per day for the working rigs and the idle rigs are stacked at approximately 30% lower cost than those that are working. On the income statement for the quarter, we had an operating profit of about $3.8 million compared to an operating profit of about $5.2 million in Q1. We had financial income of $51,000 as a result of interest income and as we keep a debt-free balance sheet. And the second quarter net profit after tax was $3.7 million versus a net profit of $5.2 million in the first quarter. Turning to our balance sheet and cash flow statement. NorAm continues a debt-free balance sheet and minimal investment requirements. We ended the quarter with a cash balance of $7.5 million as a result of working capital reductions and Norwegian tax payments during the second quarter. We also have available an RCF of up to $4.5 million, where we had no amounts drawn during the second quarter. On the distribution side, the company paid out $5.3 million or NOK 1.24 per share in monthly dividends in the second quarter, and we've declared 2 monthly dividends so far in the third quarter. We will continue to pay dividends, subject to continued positive net cash flow from operations. So to conclude this presentation before we start the Q&A session. NorAm has a fleet of 11 super-spec rigs fully upgraded with a track record of drilling the longest wells in Permian and are among the very top performers in terms of drilling efficiency measured by feet drilled per rig per day. We retain a top-quality customer portfolio of 5 E&Ps ranging from super majors to smaller private companies. The company has an industry low cash breakeven and minimal investment requirements in the rigs to keep them at the very top of the market. We have a clear distribution policy of returning all excess cash to our shareholders. And since our listing, we have returned $82.2 million to our shareholders, equal to more than SEK 20 per share. And our last monthly cash distribution implies an annual yield of approximately 13.5% as of the closing price yesterday. So thank you for listening to the presentation. And we would now like to open up for questions from the audience. Please use the Q&A or, if available, to raise hand function to ask a question and your speaker will be unmuted. I'm sorry, but we have a little bit of issues with Microsoft Teams. If it's possible, could you please use the Q&A or the chat function to ask question. Thank you.

All right. The first question we have is from Truls Olsen of Fearnley Securities. How is day rates looking right now, and how do you feel they will develop going forward?

Truls, look forward to seeing you in a couple of weeks. So I think overall, we've been somewhat pleased that day rates continue to be flat to maybe only slightly down upon renewals. It does feel like there's kind of a floor setting in now that we're seeing fewer rigs being released. I think for day rates increase, we'll need to see a pickup in rig counts. But by everything we're hearing and talking to our customers, we feel like we're going to be very stable with our current day rate environment.

All right. We had other one [indiscernible] Claire, who asks, can you say anything about the current backlog. And I guess, the question relates to the figure of $12.2 million.

Yes. So our backlog, even though it's at $12 million, which is low compared to what we've been reflecting over the last several months and quarters, is more of just a timing issue. We do have 3 rigs that we expect to renew this week. They're all working for Oxy, and they've been caught up in the Crown Quest integration into Oxy. We have tentatively agreed on day rate and terms, and I'm very pleased that the terms are of 6 months, maybe even longer, more to come on that. So we're expecting a significant increase in our backlog before the end of week. We also have 3 rigs that are scheduled for renewal. We've commenced initial discussions, and we're encouraged that those rigs will be renewed. So I think stay tuned over the next 30 days, we'd expect our backlog to increase before the next dividend call in early September and then furthermore before the end of September.

Thank you, thank you, Marty. We also have a question from [ Marcus Monson ] of [ Private ] Securities, and he asks, as you commented on costs were slightly higher this quarter than the previous one, should we assume this level going forward, or can we expect it somewhat lower again going forward?

Yes. Great question. And so if you take a look back at our run rate of operating costs. We did benefit a little bit in the first quarter with slightly lower R&M. Our second quarter R&M was more consistent with the last 3 quarters of 2024. We did incur some costs associated with 10-year recertifications of our NOV rigs. We only have 1 more NOV rig to complete as well as we did have some slight increases in insurance. And while I'm optimistic that our cost will be flat to maybe slightly down, it may take us a little bit of time. But I would expect our R&M to also decline somewhat as a result of having the 2 rigs stacked, although we're actively keeping those rigs ready to go. R&M will be slightly down while they are in the yard.