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

Good afternoon, everybody, and welcome to the Odfjell Drilling Q4 2023 and Preliminary Full Year Results Presentation. My name is James Crothers, and I'm Investor Relations Officer of the company. And I'm joined today by our Chief Executive Officer, Kjetil Gjersdal; our Chief Financial Officer, Frode Syslak; and our Chief Technology Officer, Hakon Klepsvik. Before we begin, your attention is brought to the important information slide of our presentation, which we'd invite you to read in full. Note that this presentation is only a summary of the quarter and the more comprehensive quarterly report should be read separately. Our call today will begin with a brief summary of the quarter with Kjetil taking us through some of the key highlights, before we then move on to discuss our operations during the quarter. And Hakon will then give us a brief update on the SPS program, before we move on to the financial review with Frode. We will then summarize the presentation and close the call. [Operator Instructions] With that, I'll pass on to Kjetil, who will take us through the key highlights. Over to you.

Thank you, James, and a very good afternoon, everybody. So Q4 was another busy quarter for our company with many strong achievements. Looking first at our key financial results, you can see that during Q4, we achieved revenue of $192 million, adding up the total revenue for the year of $732 million. The EBITDA for the quarter was $83 million, resulting in an EBITDA for the full year of $329 million, which is a 7% increase compared to 2022. Our own fleet achieved a financial utilization of 94.5% during Q4. This was impacted by an unplanned downtime event on Deepsea Stavanger. This was a technical issue related to the top drive of the rig. It's a onetime occurrence. And all in all, it had negative EBITDA effect of approximately $4 million. This is including both of hire cost and equipment cost related to that incident. All in all, I think it's another good set of numbers for our company, which would have been, of course, even stronger without the downtime that we saw on Deepsea Stavanger. And as you can see, on all metrics, we have improved compared to 2022. Also during the quarter, we were able to secure further contract backlog on 3 of our 4 owned units, resulting in us ending the year with $2 billion of firm backlog and a total order backlog of $2.1 billion. And finally, we would also like to mention that we have carried out what we think is something quite impressive with the Deepsea Nordkapp, where we achieved the SPS certificate renewal while entirely at sea and during full operations of the rig. And our CTO, Hakon will briefly talk about this later on in the presentation. And lastly, we have declared another quarterly dividend of $14.2 million for Q4 '23, which will be paid to shareholders on March 14. Then we move on to our operations. And I think we can start by saying that we remain in a very confident position. All of our owned and managed fleet were on contract during the period. And as you can see from our own fleet backlog charts, this is set to continue for some time. Minus a month worth of priced options for the Deepsea Stavanger, which remains outstanding, I wanted to note that this is something that we expect will be exercised. Our own fleet is now entirely sold out until 2026, with the Deepsea Stavanger and Deepsea Nordkapp having firm backlog until 2027. And the Deepsea Atlantic enjoying firm backlog until first half of '26. In addition to our firm backlog, we have strong unpriced option coverage across our fleet, which could see our units in operation until past 2029. And we have deliberately chosen for these options to be unpriced as we believe the market will continue to improve. This also gives us an option to pursue other opportunities if we feel that we were not able to agree on decent levels with our current customers. So we think that this is a very enviable position to be in, and we believe that it reflects the operators wanting to secure our Tier 1 units and the capabilities that we have in our company. Further, I will skip the details for each rig, but on -- a notable difference this quarter for our owned fleet was that the Deepsea Aberdeen moved from Breidablikk to the Svalin field at an increased day rate where it will continue before returning to complete further wells on the Breidablikk field on the previously agreed contract. And before I move further on, we once again want to highlight the value of the contracts, which we secured during 2023. As we have done in the box, as you can see on the bottom of the page here. We think that this new standard contract reflects the value of the Tier 1 rigs that we have and what we're able to secure. And with the Deepsea Nordkapp contract most recently, which we believe is at a very much a leading edge day rate. And just as a reminder to listeners, all of the contract values detailed here and in our previous press releases, these are clean values. They do not include integrated services, performance and fuel incentives, which all comes on top of that contract value. And finally, I'd like to take a moment to appreciate all the hard work done by our team for securing the backlog coverage that we have. As we discussed on our last quarter results call and in subsequent investor conference that we've attended, this year, our fleet moves on from the legacy contract values that were entered into during COVID years, and we will gradually roll over to market rates and particularly so from 2025. And we believe that this is an extremely exciting proposition for our stakeholders going forward. Then we will look at the market and the market outlook. And as we noted in our results statement this morning, we reiterate the view that the market dynamics will likely persist in the medium-to-long term. The chart that you can see here shows 2 things. Firstly, there clearly remains a preference among operators for Tier 1 harsh environment semis. We have evidence this time and again that the higher performance units give additional flexibility and operability, which deliver lower total well costs for our clients. And as you can see from the chart here, utilization rates for Tier 1 units between 2018 and current have rarely dropped below 80%. And it's also worth recognizing that during the same period, the Odfjell Drilling fleet was fully contracted. The second thing to note is that demand continues to increase as we look ahead to '25 and '26. And this is when our fleet begins to have some availability again. As we know, supply side is highly unlikely to change. However, demand is expected to increase. And what is encouraging to note is that this demand seems to be increasing in the North Sea and is not necessarily driven by or requiring exploration success for more demand. So we continue to watch development also in places such as Namibia, which could further increase. Namibia remains a very interesting region for us, and we're all aware of the recent discovery that has been announced down there. Of note, we've had new inquiries from potential clients and are also in firm discussions with clients who are looking for rigs in that region. So with that, I will now pass over to our CTO, Hakon, to take you through an update on our SPS schedule as well as CapEx for the year ahead.

Thank you, Kjetil. We are now in the middle of conducting our fleet SPS program, both for the owned and managed fleet. And as Kjetil mentioned, we were pleased to receive the renewed class and statutory certificate for Deepsea Aberdeen and Deepsea Nordkapp at the end of last year. This was done without the rig going off location and in close cooperation with our Aker BP's drilling alliance where we managed to secure a high financial utilization through the whole SPS period. To our knowledge, this is the first North Sea rig ever to conduct the main SPS offshore. We do not see that we will be able to complete all future certificate renewals offshore, but the offshore SPS scheme and dedicated SPS organization that we presented on this call last year, has enabled all inspections and testing to be done offshore. Hence, we significantly reduce the project risk with this model. So the Deepsea Nordkapp offshore certificate renewal is mainly a result of no major or unexpected findings during the inspection and also demonstrating the high quality of the rig and the crew together with a robust maintenance system. So Deepsea Nordkapp was conducted in line with the estimated CapEx spending and about 50% for the total CapEx was paid out for year-end 2023. The next Odfjell owned unit due for certificate renewal is Deepsea Atlantic. The majority of the SPS inspections and tasks have been conducted offshore as for Nordkapp and without any unexpected findings, but the rig will require a yard stay planned for early summer this year. The yard stay will partly be to conduct the remaining SPS scope and also installation of the new BOP and control system, combined with other deepwater upgrade requirements for the upcoming West of Shetland work next year. So this combined project has eliminated the need for a separate deepwater upgrade project prior to mobilization next year. The Deepsea Aberdeen is the next rig in line after Atlantic with certificates due later this year. Deepsea Stavanger is due next summer. So both -- also Aberdeen is currently performing offshore inspections as per plan, and Stavanger is due to start quite soon. So related to the CapEx allocation for the remaining fleet, we have seen some effects of inflation and we've also seen some effects of rig wear and tear and opportunities to invest proactively to avoid any future downtime or issues. But we don't see any material deviations from earlier estimates on the SPS. So all in all, we remain on track for our SPS plans going forward. So with that, I think Frode will continue with the financials.

Thank you, Hakon. I'll begin with the income statement on Page 10. As can be seen, operating revenue in Q4 '23 was $192 million compared to $167 million for the same quarter last year. Operating revenue for the Own Fleet in the quarter was $147 million, while the External Fleet was $44 million. EBITDA for the Own Fleet segment was $79 million, a margin of 54%. While the EBITDA for the External Fleet was $7 million with a margin of 17%. Less corporate overhead and other adjustments, the group EBITDA was $83 million. As Kjetil said, the impact from the downtime on Deepsea Stavanger was approximately $4 million including the increased equipment and personnel costs incurred to rectify the equipment failure. The company delivered a net profit of $24 million in Q4. For the year, the net result was $222 million, including the reversal of the impairment losses of $163 million from Q3. Moving to Page 11 and the balance sheet. We see continuing deleveraging of the balance with net interest-bearing debt of $582 million, excluding leasing liabilities as of the end of the quarter, and we had a leverage ratio of 2.0. The company has a robust balance sheet with an equity ratio of 60% based on total assets of approx $2.3 billion. The available liquidity is strong at $294 million, including the fully undrawn RCF of $165 million. After the balance date, the company has in January '24, repaid the 5-year seller's credit of $54 million to Samsung related to Deepsea Nordkapp. Q4 produced strong cash flow from operations of $90 million. Net interest paid was $23 million, mainly related to payment of half yearly interest on the bond loan. As comparison, net interest paid for the full year was $56 million. CapEx for the quarter was $14 million and financial investments, $2 million. Net cash flow from financing activities was minus $44 million, including the dividend payment of $14 million made in Q4. Full year CapEx was $54 million, net of grants of $13 million from the NOx fund. Of the CapEx paid in 2023, $31 million is related to SPSs and $18 million is related to the new BOP on Deepsea Atlantic. Moving to Page 13 and the dividend. Clearly in accordance with our dividend policy, we maintain a dividend payment of $0.06 per share for the quarter. Dividends are declared in U.S. dollars, whereas actual NOK payments per share will be determined based on the Norges Bank exchange rate at the last day, including rights, being 29th of February. Payment date is set to 14th of March. Combined with our Q2 and Q3 dividend, Odfjell Drilling returned $43 million to shareholders for 2023. The company's ambition is to grow the cash distributions in the medium term, in line with increasing underlying earnings and reduced CapEx commitments. And with that, I'll pass you back to Kjetil to summarize the presentation.

Thank you, Frode. So as we said before, this has been another busy quarter for the company and our business. Our fleet has been fully active and has performed well, minus the Stavanger incident. And this has resulted in a strong financial results. We achieved the first-ever SPS performed entirely at sea and during operation and also achieved full utilization from the unit while we did it. And we recovered record revenue generation as we have higher-value contracts ahead of us with over $2 billion of firm backlog. So with our market outlook for -- being -- remaining positive particularly in the medium and long term for our business, we have elected to announce a further quarterly dividend of $14.2 million. And with that, I think I'll pass it back to you, James, and open up for the Q&A.

Thank you very much. Thank you, Kjetil, and the rest of the team. Operator, you can open the -- to Q&A.

[Operator Instructions] Our first question today is coming from Fredrik Stene of Clarksons Securities.

I'll start with my regular question. You guys have now booked up most of the fleet in '24 and '25 and some rigs even beyond that, good cash flows, et cetera. And with your managed fleet, there will always be this question whether or not you're looking to consolidate more to potentially be able to recontract something that you own before 2026. And I think last week, there was also an Upstream article suggesting that you were hunting for more capacity. So I just wanted to revisit this theme, as I always do, to see if there's any new thinking on your part and how you would go about an acquisition, if you were to do something like that.

Yes. Thank you, Fredrik. And yes, just to be clear, I'm going to again be sort of repetitive, boring here, Fredrik. But we still think there is definitely room for more consolidation in the industry. There's a lot of deals that makes industrial sense out there. And we do want to be an active participant in this discussion. So we're exploring what's out there. But again, I have to repeat for Odfjell Drilling, any consolidation would need to be -- to make strategic sense and it needs to be accretive -- be viewed as accretive for our shareholders. And it is worth remembering, however, that our forward revenue production from our booked day rates will lead to increased revenue regardless. But we follow everything closely, Fredrik, and we'll update everybody if we have any news on the subject.

Not that I expected too much news, but it would be -- if you suddenly announce something, I would hate myself for not having asked. Then just 3 quick ones after. Dividends, you say your ambition is to grow that with time. Is it fair to assume that, that might be a 2025 second half event then, when all the SPSs are done? Or do you think it can happen sooner?

I think that could easily happen sooner. But we do want to derisk the CapEx commitments and the SPSs a little bit further, but I don't think we need to see all 4 SPSs complete prior to a dividend increase.

Also, can I add that it's important that we are consistent -- that we are consistent on dividends going forward. That's also important to us.

Yes. You would steadily increase it rather than having it be volatile, as I understand.

Correct. Yes.

Yes. Perfect. And final one. On the managed fleet, you had higher margins now than before, around 17%. Is that something you think you will be able to keep at that level? Or it's kind of a reversion to around 15% sensible and this was more of a one-off thing?

No, I think Q4 for External Fleet is a good sort of quarter to annualize all units in operation. We have earlier estimated a full year EBITDA contribution of around $30 million from the External Fleet segment And I think the $7 million in Q4, that equates to $28 million on an annual basis. So it's -- I think it's more or less in line with what we expect. Of course [indiscernible] that all 4 units are in operation. Yes.

[Operator Instructions] We do not appear to have any further audio questions coming at this time. So I'll turn the call back over to James to take any questions submitted via web.

Thank you. Thank you, George. So we've had a few questions on here, which is great. One of the first question here, I suppose, speaks to capital allocation. So will all excess cash be distributed to shareholders? Or are you open for M&A? And from the same shareholder, are you planning to pay down debt further? Or will you sustain the leverage you have now?

Yes. We can start with the second question. Of course, we did the full refinancing of the company last year. We have a scheduled installment profile now for the current debt, our leverage is declining quarter-by-quarter, not only because we are doing installments, but also due to the fact that our rolling 12 months EBITDA is continually increasing. I think we're very comfortable with the debt level we have now at 2x net debt-to-EBITDA. In a couple of years' time, you could probably argue that the debt level is too low. So there is, for sure, re-leveraging capacity then. I think medium-to-long term it's probably right to be between 1 and 2 in terms of leverage ratio. And it all is a function of also the market outlook and the contract backlog we have entered into at any given time. Yes. Second question was related to, yes, basically the capital allocation policy. As we have said, we definitely have an ambition to increase the dividends going forward. We have increase in free cash flow from the contracts we have already entered into. CapEx commitments are reducing going forward and the SPSs are derisked one by one. So there is an ambition to increase dividends. And on the M&A question, I think we just need to repeat the answer we have given before. It needs to make strategic sense and it needs to be accretive for shareholders.

Thank you very much. I believe we've got another question on the phone line. George, do you want to open that line?

We have a question now coming from Truls Olsen, calling from Fearnley Securities.

Just a quick question from me and this relates down to -- going down to West Africa and Namibia. Can you talk a bit about what kind of demand you guys are seeing there in terms -- I mean, it seems to be a sort of a typical short-term market exploration-driven. Is there any color on how that looks and looking into '25, '26 as well? And yes, feel free to elaborate.

Yes. No, I can elaborate a little bit. I mean, I think we can firmly [ establish ] there's been some fantastic discoveries being made in that region. And there are operators continue to join that region, and we are in middle of operations that will sort of paint that picture clearer going forward. When it comes to the longer-term that need -- rig need in that region that will -- and potentially when it comes to setting into production, that is a timing question, which is, of course, up to the operators. But we do see more clients join in that region. There's more new clients that's going to start the operation down there. And I think it's very much a region that is sort of in continuous development. Yet to see sort of longer-term commitments being made. But we like it and we like what we see there and we see clients that are very interesting in -- continue operating down there.

We now have a follow-up question from Fredrik Stene of Clarksons Securities.

Again, just super quick. Did you use the RCF or cash on hand to pay the seller's credit?

Sorry. Yes, the January seller's credit. We made a small drawing on the RCF in January to repay the $54 million to Samsung.

We don't have any further audio questions at this time. I'll turn the call back over to James with web questions.

So this is probably one for Hakon. So just to clarify on the SPS program, the Nordkapp did not require a yard stay, but the next 3 semisubmersibles do require yard stay. What are the costs and duration savings of the SPS done entirely offshore? Or I suppose in a different way, what's the benefit of doing it offshore?

Yes, there is no absolute on yards stay or not. But the philosophy we have implemented is that we would like to do all the inspection and get the status of the rig offshore. And then on a case-to-case basis, we are seeing if the yard stay is required or not. And the benefit of that is, of course, to be predictable such that if a yard stay is required, we could plan it in much detail -- much more detail than previously with a much clearer scope and a predictable execution. And we are also -- as we are developing now, we are developing a more and more advanced toolbox such that we can do more and more activities actually offshore. So this is a philosophy in the making, in the development. But I think we have got the full effect of Nordkapp and I think we will see full effects also on future yard stays. But typically, Atlantic now, where we will go to a yard stay is partly because the project is not only an SPS, it's also an upgrade project for the future clients and mobilization. And of course, then we have a benefit of combining these 2. And for the last 2 rigs, we are evaluating based on the findings and the progress, how a yard stay typically would look like and how and when it will be done. But it's all based on the same philosophy that we do a thorough inspection offshore. For the cost, we, of course, see that cost is also linked to the scope, and we see no major findings on the rigs we are in progress. It is somewhat more costly to send individual persons offshore, but you see we benefit a lot by not having a large yard stay, and of course, that we can keep the rig on rate. So there are mainly on predictability and also, of course, time [ off-hire ] is more important than the actual cost of conducting the SPS. There are some effects, but there are some plus and minuses there.

Thank you. Thank you, Hakon. We have a number of questions on the same topic, and I think one here summarizes it quite well is, what are the key metrics which determine whether a potential deal is accretive or not for the company?

Now as said, it needs to make strategic sense. I think in determining whether the deal is accretive, the enterprise value over EBITDA multiples of interest. And of course, dividend potential per share over time is also a key determinant in evaluating whether a deal is accretive.

Thank you. I think we'll probably take maybe 1 or maybe 2 more questions, but we'll take 1 here. Regarding your comments on Namibia, a drillship has operated there as well as other harsh environment semi-submersibles that you manage. Could you elaborate on what type of rig is best suited for this market in your opinion?

Yes, I can comment on that. I was also -- I just visited Namibia recently and got to look a bit deeper into this. What is clear to us is that the bigger high-spec semi subs have definitely proven their worth for full year operations down there. We saw this during winter season where we were able to work through harsh weather conditions, while drillship had to halt operations. So we think big semis like we have is very well suited down there. And it's also interesting when you see -- given the proximity to South Africa and the need for semi subs in that area, it sort of gives the operators a good tool to have units like this, which they can -- can have a flexible operation philosophy around. So we're very confident in the semi subs in Namibia and the future for them there.

Great. I think that summarizes it. I think we've had a number of calls and I think we've answered most of the questions that have come in. So I think we can wrap up the call. Our next quarterly report will be on the 19th of -- sorry, on the 15th of May, and we look forward to hearing and speaking to many of you then. I think for now, we can close the call.