Odfjell Drilling Ltd. (ODL) Earnings Call Transcript & Summary

Good afternoon all, and welcome to the Odfjell Drilling Q2 2023 Results Call. My name is James Crothers, Investor Relations Officer, and I'm joined today by our Chief Executive Officer, Kjetil Gjersdal; and Chief Financial Officer, Frode Syslak. It has been a busy quarter for our company, and we're delighted that you've chosen to join us today. So before we begin, your attention is brought to the important information slide of our presentation, which would invite participants to read in full today's presentation and all of our quarterly results are available on our website and on Euronext as well. Our call today will begin with Kjetil going through our key highlights from the quarter before going through our operational performance and forward backlog. Frode will then take you through our financial results and our updated dividend policy before Kjetil concludes. With that, I'll pass it over to Kjetil who will summarize the quarter.

Thank you, James, and good afternoon, everybody. So Q2 has been another busy quarter for our business with many key workflows successfully completed. One such activity, which we successfully completed during Q2, this refinancing has diversified our capital structure sources and removed any significant maturities until 2028. It has also supported the company's future growth strategy and has given us additional flexibility going forward. And this completion of the refinancing actually gives the company the longest runway that we've seen in at least a decade. Importantly, and as I will come on to later, the refinancing has facilitated our new shareholder distribution program, which we are very pleased to announce today. Our backlog remains strong at $2.2 billion with new contracts agreed across our fleet with the company securing additional firm backlog on the Deepsea Aberdeen and Deepsea Stavanger. In addition, we also secured new contracts for our managed fleet, specifically for the Deepsea Yantai and Hercules units. And finally, our financial utilization was for the eighth quarter in a row above 97%, this quarter at 98.2%. All right. We then move on to our financial results and as you can see, we are really beginning to see the value of the work we have been putting in for the past few months and years. Our second quarter revenue was at $184 million, contributing to first half 2022 revenue of $355 million and this is a 12% increase compared to first quarter in '22. Similarly, our EBITDA was $85 million during the quarter, resulting in a first half EBITDA of $158 million. And this is a 7% increase compared to the first half of '22. Following securing of the revolving credit facility on the Deepsea Stavanger as part of our refinancing, our available liquidity has now increased to $249 million out of $117 million of which is cash. Our net debt has been reduced to $645 million and our equity and leverage ratio are 57% and 2.2x respectively. Taken all together, our financial results point to a healthy and growing business. And it's also worth bearing in mind that these results come from strong operations and contract values that were agreed during extremely tough times for our industry. As we progress to newer contracts [ workout ] way through these legacy contracts, we look forward to seeing our average day rates increasingly. And turning to our operations. As many of you will be aware, we had 6 of our units on contract throughout the quarter. In addition, the Deepsea Mira began operations offshore Namibia towards the end of the period. As of right now, however, this has increased with all of our fleet now on contract across the world, and they're all working for Tier 1 customers and so they are, I would say, most exciting projects globally. And this is, in fact, the first time Odfjell Drilling has had 8 rigs active at once. This is, of course, a great accomplishment for us. So moving on to our backlog. As mentioned before, we have a total revenue backlog of $2.2 billion, this is firm and $500 million is in options. As per previous quarters, all of our own fleet was on contract throughout the period as were 2 of our managed units, the Deepsea Yantai and Deepsea Bollsta. The Deepsea Mira began operation in the final weeks of June. And I'm going to go through each specific rig starting with the Deepsea Atlantic that remained on contract with Equinor during the period, working on Johan Sverdrup Phase II. It will continue to do so until early first quarter of '24 where it will begin a new contract with Equinor for various works on the Norwegian Continental Shelf. The rig will also go through its SPS around this time. And as previously announced, we will install a new BOP on the Atlantic at the same time as we do the SPS. The Deepsea Atlantic has firm contract backlog secured until mid-'26 where it has priced options for 3 wells before going on to unpriced options, which extend into '29. The price of these unpriced options will be mutually agreed with Equinor prior to being exercised. Moving on to the Aberdeen. That was working on the Breidablikk field for Equinor during the second quarter, and it will continue to do so until third quarter in '23 where it will briefly go on to drill several wells on the Svalin field at an increased day rate as it was announced during the quarter. Further, the Deepsea Aberdeen will drill the Svalin wells before returning back to the original Breidablikk wells and then going on to price options around mid-'25. While these options are priced, there is a market linked to the final value and given current market price, we expect this to be in excess of $400,000 a day before any bonuses and fuel incentives on top. And these options extend until the end of '26. The Deepsea Stavanger was working on various exploration projects with Equinor during the second quarter, and it will continue to do that until at least the end of '24, whereafter it will start its SPS and thereafter begin its contract with Aker BP. This contract with Aker BP is firm, and the price is operated within the range where there is a floor and a ceiling pricing model. Again, given prevailing market rates, we expect to see final day rate towards the ceiling of this contract. And I'd also like to mention that we have yearly escalations on that ceiling starting from when we signed the contract. The Deepsea Nordkapp was operating with Aker BP during the second quarter in the Alvheim area. Nordkapp will continue to work with Aker BP until the third quarter in '24. We will then go into a brief price auction period before moving on to priced options with a sort of similar floor ceiling model that we have on the Stavanger. We look at the managed fleet, the Deepsea Yantai was working throughout the second quarter on various projects in Norway and has a firm backlog until the end of '24. The Deepsea Bollsta was drilling in Namibia with Shell, who also exercised several options for continuous use of the unit during the second quarter. The Bollsta has a firm backlog until mid '24 and options which cover the unit into early '25. The Deepsea Mira completed its stay at the [ yard ] before moving into a location in Namibia with Total towards the end of the second quarter. The Deepsea Mira has a firm backlog now into early '24 with options, which extend until mid-24. Finally, the Hercules completed its SPS program here in Norway and moved offshore Canada towards the end of the quarter. And as you many of you know in Canada, that rig also goes to Namibia. And I'm sure also many of you noted that recently we secured another contract with the Hercules and we will then go back to operations in Canada and as announced, this contract has implied day rate of around $500,000 to $520,000 per day. So that was the backlog and we then move into the market outlook and we continue to see the existing supply and demand dynamics persisting, which continues to result in increasing day rates. We saw this recently with the award of several contracts at around $500,000 a day, and we also saw more units leaving Norway. In addition, commodity prices have been strong during the second quarter, and macroeconomic indicators continue to support the demand for our services. The supply of units remains tight, and we still struggle to see any new capacity meeting demand. Currently, there are 12 floaters active here in Norway. And at the moment, we see requirements for the further 4 to 6 units from 2025 and onwards on the Norwegian continental shelf. Overseas demand in places like [ East ] Africa, Canada, Australia and Brazil continues to draw units away from places like Norway and we see no reason in the short to medium term for this to change. And also in the U.K., we are encouraged by recent governmental support of the oil and gas industry, which we expect to continue under the current and opposition governments. So with that, I will now pass the word over to my CFO, Frode, who will take you through our financial results of the quarter.

Thank you, Kjetil. Let us start with the P&L statement on Page 11. We have a record strong quarter with good cost control, high utilization and high performance incentives. 2 out of 4 managed units were fully operational through Q2, resulting in EBITDA of $5 million from the external fleet. The owned fleet segment delivered an EBITDA of $83 million. After corporate overhead, the group EBITDA was $85 million, taking our last 12 months EBITDA to $319 million. Remember, we are still operating on low legacy day rates. The net result of $11 million in the quarter is impacted by currency loss of $7 million and nonrecurring expenses of $5 million related to the refinancing. The net interest costs for the quarter was $14 million. Moving to Page 12 and the balance sheet. Following the refinancing, we have a solid available cash of $249 million. The last tranche of the refinancing will be available shortly, and this will release another $30 million of liquidity taking the available liquidity to $280 million proforma for June. We see continued deleveraging of the balance sheet with limited utilization of our newly established revolving credit, reducing the net interest-bearing debt to $645 million as of the end of the quarter. The leverage ratio is at a very comfortable level, given our strong backlog with a leverage ratio of [ 2.2x ] versus [ 2.4x ] per first quarter. Turning to Page 13. We saw a strong cash flow in Q2 with net cash flow from operations of $66 million after interest and tax. Net CapEx for the quarter was limited to $8 million following grants from the NOX fund of $13 million related to emissions reducing investments that has been made in previous quarters. Moving to Page 14 and a few additional words on our security financing. Given our solid contract backlog and predictability of cash flows, we saw strong support from existing and new banks in the refinancing. Refinancing included close to $500 million of bank debt, [ where ] $175 million of RCF. In addition, we raised $390 million through a rated bond, which attracted strong, strong interest from investors. The diversified customer structure we now have [ finishes ] all significant maturities to 2028. The refi has also significantly reduced the annual amortization schedule going forward, which, together with rising day rates, increases to free cash flow generation especially so when we complete our forthcoming SPS program. One key objective for our refinancing was to increase the capacity and flexibility for shareholder distributions. We have done that, and we have removed any restrictions that previously linked dividends to net results. The refi enables dividends subject to an incurrence test to 3x leverage, which reduces to 2x leverage of November '25 and a minimum available liquidity of $150 million, reducing to $100 million after all four SPSs have been completed. This leads us to Slide 16 and our updated dividend policy. As you know, we have been working very hard through the worst downturn ever to keep our rigs contracted, reduce our debt and position the company for the future and we have done that without wiping out shareholders or creditors. Therefore, we are extremely pleased to now being able to announce our updated dividend policy and institute a quarterly dividend program. Now we're at Slide 17. The dividend for Q2 will be $0.06 per share with an ex dividend date set to 1st of September with payment being made around 2 weeks thereafter. Dividend is declared in U.S. dollars with payment being made in NOK based on the exchange rate at ]. Kjetil [indiscernible] yours to wrap up.

Thank you, Frode. So to summarize this presentation, second quarter has been a very important quarter for the future of our company. As a result of strong operations, a strong market, strong revenue generation and the successful completion of our refinancing, we are able today to implement our quarterly dividend. This is a brilliant moment for us, and it is something we have the ambition to continue to grow in the medium term. Now looking ahead, we expect higher day rates to persist for a long term and the continued interest from operators to use high-spec sixth-generation rigs. Looking specifically at the results, our forward backlog remains strong, and we had solid contracts booked for the years ahead. Our average day rate in the coming quarters will continue to increase as we move on to higher-value contracts. And with that, I will pass the phone call back to the operator and James to begin the Q&A session.

[Operator Instructions] We'll take the first question from Fredrik Stene from Clarksons Securities.

Kjetil and team, I hope you are well and congratulation on getting the dividend policy in place here. That's good to see. So I have a few questions that I want to touch on, if that's okay. And the first relates to this dividend. And by the way, like my line was muted at least when you went through Slide 16. I'm not sure if that's only me or the rest of the world. But for the policy here, the $0.06 you've announced now for this quarter, is it fair to assume that, that's a level that you will be given out at a minimum for the foreseeable future. You're talking about your ambition to grow that as well. So any color that you can give in terms of how safe that how much do you think it will be plausible to grow this as we go into '24, until '25 onwards.

As you know, we are still operating on legacy day rates for some time. We have our CapEx program that we are going through , '24 and '25. What we have done now is to institute a quarterly dividend at a level that we expect can be sustained quarter-by-quarter in this first phase. And as revenue increases and CapEx commitments are reduced or derisked, we clearly have an aim to increase that quarterly distribution in the medium term. So yes...

Also I wanted to touch a bit on consolidation, which is a theme that's been recurring for quite a few years. But when you work through your fleet status there, you have good coverage on your own fleet with options and price ranges that at least initially, I think will end up being quite favorable even though there are good rates of [ collection ] would be favorable for the operator. So in my view, sensible that they will end up taking those options. So to kind of play the market, I think you're talking about in incremental demand in Norway, for example, from '25 onwards. I'm looking at your managed fleet here and many people have speculated in, maybe there is something to be done here at some point in time. And I think your previous answers have been around that M&A would only make sense if possible to do something bankable here. And with your refi, you've obviously shown that you can bank these type of assets and the only thing that really remains now is long-term contracts. I guess this is the question here. It was quite [ long ], but what I'm wondering about color on this, one, what's the type of opportunities that you see for this managed fleet in terms of long-term contracts? And two, do you think the time to potentially act on consolidation is getting closer based on the recent developments in credit markets and market prices in general.

Yes, Fredrik, I can answer that. So yes, we think the units that you mentioned, including some of our own, are well positioned to enter into new favorable contracts at levels that goes up from today's level. And we continue to explore what's out there. This is an extremely flexible fleet. It can go -- it can work in Norway. It is built according to Norwegian regulations. It can work in deepwater and it gives us a broad spectrum of opportunities to explore, and we're very positive about the opportunities that are out there for these units. When it comes to, I guess your question is around growth M&A. We still think there's room for consolidation in the industry. And we are aiming to be an active participant in these discussions. However, I would like to emphasize that for oilfield drilling, any consolidation would need to be meaningful on relative valuation and from a dividend per share perspective. And it is worth remembering, however, that the forward revenue projection from our booked dairies will, of course, also lead to future growth in revenue. So yes, maybe not too much news there, Fredrik, but we are still sort of very much on the ball here.

[Operator Instructions] There are no further questions on the phone. I'll hand over to James for any webcast questions.

Thank you. I assume we've had a question from Mr. Sanchez. You said congratulations on the refinancing. My question is about the growth strategy that [indiscernible] to follow. I guess, can be a focus on Tier 1 assets and seeing the increase in day rates and the lack of availability in the future, these rigs, how do you see attractive to buy these assets now? Any comments would be really helpful. We've covered that already. But if you have any further comments on that, we can take that now.

Yes, it's pretty much what Fredrik asked about. But yes, I would say that this is, of course, very interesting times, and we continue to explore what possibilities are out there. I think we positioned our company well. We now have the flexibility to look into these opportunities thereafter, and we will do so.

Thank you. We also had a question from an investor in regards to share buybacks and our position on that and how we might sort of fit that into our distribution policy going forward.

Yes. So we definitely see the merit in doing share buybacks from a general perspective, and we have that in our toolbox for the Board to consider going forward. However, there is a slight concern that a share buyback will reduce the free liquidity in the stock, which again could be negative. So as of now, we see cash dividends as the preferred shareholder distribution mechanism. And we also expect the cash dividends to broaden the investor base in the company going forward. And by that, also will be helpful for the equity valuation.

I think that covers all the questions we've had submitted. I suppose we can start to wrap up the coal. So yes, thank you all for joining and for your continued interest in the company. If you have any further questions or would like to get in touch, please do get in touch with myself directly, which using my e-mail address, which is on the website and on the final slide of our presentation. And as a reminder, our next financial calendar item is our Q3 quarterly results on the 2nd of November, which is not far away. And we look forward to speaking to you all again at that point. Thank you, operator, so I think we can close the call now.