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

[Audio Gap] My name is James Crothers, and I'm Investor Relations Officer at the company. I'm joined today by our Chief Executive Officer, Kjetil Gjersdal; and our Chief Financial Officer, Orjan Lunde. Before we begin, your attention is brought to the important information slide of our presentation, which we would encourage participants to read in full. Note that this presentation is only a summary of the quarter and a more comprehensive quarterly report should be read separately. Both that report and today's presentations are available on our website, www.odfjelldrilling.com. Today's call will follow the traditional structure, with Kjetil taking us through the key highlights before moving on to our operational review. Kjetil will then continue with an overview of the market as we see it today, before handing over to Orjan, who will go through our financial review. Kjetil will then summarize the presentation before we open up our Q&A session for analysts and investors. As always, the Q&A session will be conducted over both telephone lines and the webcast tools, and we will try to get through as many of the questions put to us as possible. However, if we don't get a chance to get through your question, I will endeavor to follow up with you directly after the call. We make an effort to answer all of the questions asked, so we do encourage you to use this feature. With that, I'll pass over to our CEO, Kjetil Gjersdal. Kjetil?

Thanks, James, and a very good afternoon, everybody. As was quoted in our report, which was published earlier today, results emphasize the resilience and capability of our organization. Even though we've had 1 rig off-hire for much of the quarter, we still have been able to return solid financial results, deleverage our balance sheet, and we are continuing to return cash to our shareholders. From revenue of $251 million, we have recorded EBITDA of $162 million and achieved a net profit of $57 million. These numbers are positively impacted by the insurance proceeds from the Atlantic incidents. After write-off of lost equipment and expenses incurred related to the insurance claim, there is a positive EBITDA effect of $32 million. Meanwhile, we have continued to deleverage, reducing our leverage ratio now to 1.5x net debt to EBITDA and our net debt to $863 million. At the same time, we have announced a dividend for the quarter of $0.25 per share. And while we are still seeking to increase our dividend to a long-term sustainable level, we believe that, given the incident, for this quarter, it was prudent to maintain our distribution level at $0.25 per share, and we'll touch more upon this later in the presentation. In addition, we have also added more backlog, resulting in our own fleet now having firm contract backlog of $2.1 billion. And of course, as many of you know, we have successfully brought Deepsea Atlantic back on hire following the incident after total off-hire of 106 days, within the 3 to 4 months guidance, which we gave during our Q1 results presentation. And while the incident was a tough hit, I would say that the response of our organizations, our vendors, insurers, our clients, peers and the wider industry has just been exceptional. We did this the Odfjell way, and it speaks volumes to all involved that we were able to bring the unit back into operations within 106 days. And I would like to sincerely thank everybody who has been involved in making this happen. And on that topic, as we move on to the operational review, we wanted to make sure we provided an update on what's been going on with the Deepsea Atlantic. Since the incident, the company has been working hard to bring the rig back on hire. This started by locating, cleaning out and recovering the BOP, which had been dropped to 1,100 meters of water depth. This was not easy, but working with various suppliers, we were able to recover the BOP by using specialist equipment and by using the Deepsea Atlantic itself. Inspections of this dropped BOP suggests that it will be likely repaired and refurbished. Following this, the rig sailed to yard for repairs and to install a now upgraded BOP, which the company had in stock. The rig subsequently returned to site for testing and final acceptance in mid-July before going back on rate on August 2. The company has so far recognized $82 million worth of insurance proceeds related to recovery and repair following the incidents. As mentioned, the company has had a positive EBITDA effect of $32 million in Q2 related to the insurance proceeds and has had a positive EBIT effect of $4 million, following an impairment loss of $28 million relating to the damaged equipment. As regards to cash, the estimated net impact from the incident, all effects taken into account, is negative approximately $35 million compared to what it would be if the incident had not happened. And I would like to add that, over the past couple of months, we've naturally had a lot of people asking what the cause of the incident was. And while there's still a formal investigation ongoing, I think we can, with confidence, say that the cause of the incident was equipment errors and not operating error. And then moving on to our backlog and general operations performance. And despite the incident on the Atlantic, our units performed extremely well during the quarter. Notably, both the Deepsea Nordkapp and Deepsea Stavanger averaged a financial utilization of 99% during the period, above our 10-year average of 97%. Meanwhile, we also added another year of backlog to the Deepsea Nordkapp after Aker BP elected to exercise options to extend backlog for the unit for another year ahead of schedule. The day rates for this contract will be defined by 2 independent rig brokers before the end of this year. And with this extension, Deepsea Nordkapp's firm contract backlog is now secured until at least 2028, and all of our units are now secured until at least late '27. The Deepsea Atlantic is the first unit with availability. However, Equinor still has priced options for the unit, which extends into early '28. Our focus over the next couple of months will be on securing more backlog in a market that we believe will continue to strengthen going forward. And on that point, I think we can have a look at our view on the market. Starting with the supply side, the story really hasn't changed that much. The average age of harsh environment units continues to increase while limited new supply is being added or is likely to materialize in the near future. Newbuilds remain unlikely, and the high-spec unit market is increasingly tight. And when you look at the availability of Tier 1 rigs in '27 and '28, it is notably low. We consider the utilization in our sector to currently be at around 90%. And if you consider historic trends, as utilization goes above 90%, day rates tend to often follow. We believe that this tightening of the supply market is largely due to the strength of the Norwegian market, which we have been vocal about for some time now. Operators continue to reaffirm their strategy of drilling to arrest production decline, and they are looking to secure rig availability into the future. I think this is emphasized by recent contract awards in our sector, such as for Transocean's Cat Ds as well as the Deepsea Nordkapp. In addition to this, we continue to see good interest from overseas, notably in Namibia, Suriname, Canada and the U.K. In addition to exploration work, many of these areas are looking at development opportunities, which could mean further increased utilization of rigs in our sector. And ultimately, with these conditions, we believe that the market is likely to facilitate more strong day rates for future contracts. And I think we do certainly echo comments made by our peers of a strengthening overall drilling market and particularly for the harsh environment sector. And with that, that concludes my section, and I will pass it on to my CFO, Orjan, to go through our financial review.

Thank you, Kjetil. I'll start with a summary of the income statement. Our operating revenue continues to benefit from higher day rates, while it was negatively impacted by the off-hire time on Deepsea Atlantic in Q2. Operating revenue in Q2 2026 was $251 million compared to $219 million in Q2 2025. Operating revenue from our owned fleet was $221 million, while the external fleet generated a revenue of $29 million. The reduction in revenue from the owned fleet compared to Q1 is explained mainly by off-hire time related to the incident on Deepsea Atlantic. Q2 EBITDA for the owned fleet segment was $160 million, representing a margin of 72%. The EBITDA and margin has been impacted by recognition of insurance proceeds, write-off of lost equipment and expenses incurred related to the insurance claim, resulting in a positive EBITDA effect of $32 million. Following an impairment loss of $28 million relating to damaged equipment, the EBIT was positively impacted by recognition of an insurance proceeds by $4 million. The EBITDA for the external fleet segment was $5 million, which is a margin of 16%. Less corporate overhead and other adjustments, the group EBITDA was $162 million. And as was stated in the highlights section of our report, excluding insurance proceeds and other accounting impacts related to the insurance claim, the EBITDA for the quarter would have been $129 million. The company delivered a net profit of $57 million in Q2. On to our balance sheet development and status, which remains solid. Our net debt is decreasing. Following the increase in debt level in Q4 2025 related to the acquisition of Deepsea Bergen, we have, during the first half of '26, reduced our net debt to $863 million, which corresponds to a leverage ratio of 1.5x. The equity ratio is largely flat at 55% out of total assets of approximately $2.6 billion. The available liquidity is $308 million, including undrawn RCF of $248 million. Details of the cash flow for Q2 follows on the next slide. In Q2 2026, we generated $128 million in cash from operations. The impact from insurance proceeds, as discussed in our P&L, is the main explanation of the negative change in working capital of $35 million for the quarter, as insurance proceeds remained fully unpaid to the company per quarter date. The interest paid was $6 million on facilities and leases, while tax paid was also $6 million. Cash flow from investing activities was minus $20 million, whereof $3 million was related to the Deepsea Atlantic incident and $9 million was related to periodic maintenance. The remaining $8 million was client-specific upgrades that has or will be fully covered by our customers. Net cash outflow from financing activities was $44 million, including minor FX adjustments. We paid $14 million in scheduled installments on our bank facilities and leases. In addition, we made net repayments of $30 million on the revolving credit facilities during the quarter, increasing the available amount under the RCFs to $248 million. Dividends paid in Q2 were $60 million and was related to Q1 results. And then finally, despite a strong operational performance from the rest of the fleet, we are conscious that off-hire time related Deepsea Atlantic has impacted our business. While we maintain our view that we want to continue to increase our dividend to a point that we believe is sustainable in the long term, we believe that it would be financially prudent to maintain our quarterly dividend at $0.25 per share for Q2. Today's dividend translates to a total dividend payment of $60 million for the quarter and corresponds to an annualized yield of 10% based on yesterday's close. The shares will trade ex dividend on the 3rd of September and payment will be made on or around the 17th of September 2026. I'll pass back to you, Kjetil, who will summarize our presentation.

Thank you, Orjan. So in summary, second quarter showed, for sure, the capability of our organization. I believe that our company had a solid response and recovery from the Deepsea Atlantic incident, while the rest of the fleet continued to perform very well. Putting this incident behind us, we are very excited about what's ahead of us. We continue to deleverage while strengthening our balance sheet with increased liquidity. Our market is strong now, and I think it's likely to become even stronger in the months ahead. And finally, putting the Atlantic incident behind us, we are excited about our strong backlog and the cash generation that we have ahead of us. So thank you very much for listening. And James, please take over.

Yes. Thank you very much, Kjetil, Orjan. [Operator Instructions] So Serge, if you could open the telephone lines, we'd be very thankfull.

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

Congratulations on handling the Atlantic incident faster than what I had in my model. So I had to revise that. So that's good. But that's not my question. I wanted to talk a bit about the market first. You're clearly painting a picture here about the stronger harsh environment market going forward. And I would also argue that one can read into the Nordkapp extension, for example. I think the last one before this extension was agreed in November last year, and now they're adding that in July, even before they know what the rate will be, even though that is the same for you. It clearly shows to me at least that operators are also willing to contract new capacity further out in time than before. So with that backdrop, how should we think about potential new contract announcements on the Atlantic? And even on the Bergen, we still have 1 year plus left on their current contracts. But if the market is tight and E&Ps want high-spec rigs, can we see contract announcements already this year, you think? Or do we have to wait until 2027?

No. I think -- Fredrik, I think we can definitely see something happening this year. We do have good dialogues. We do have very exciting conversations and talks. So as you pointed out, the Atlantic still has priced options in there, which are valid, probably see something happening around that. And also on the Deepsea Bergen, yes, it's a great opportunity. The rig is free of options now, and we have good interest in that rig. And I think the likelihood of us being able to do something around that rig beyond the year of option that Equinor chose not to exercise, I think that's a fairly good chance for that.

Great. And next one, maybe for Orjan. There's a cash impact of $35 million from the incident, and apologies if I didn't catch it, but can you confirm if that includes loss of hire during the downtime? Or is that an additional cash impact? Just for clarity.

Yes. Thank you, Fredrik. Obviously, not surprised by that question on this webcast. But I can confirm that, that's also taken into account loss of hire. That's really the main effect is the loss of hire during the period. But in addition to that, insurance also covers costs incurred during recovery period and incremental rig and equipment repair costs in addition to lost and damaged equipment. So that's how we calculated the net effect is really to compare what could have been if the incident hadn't happened. And that leads us to an estimate of $35 million and the distribution, then $7 million to Q2 and the remainder in the following quarters.

All right. No, that's very helpful. And then just a final one, if I may. You kept your dividends flat this quarter to be prudent about your balance sheet. But clearly, you see potential for that to grow further in the future. Now that these 5 rigs are on contract again, is it fair to assume that you'll kind of resume the growth pace already from the next quarter? Or should we expect this being steady a bit before you potentially add to the payments?

Well, eventually, it's up to the Board to decide the level of dividend going forward. But I think we were vocal about it in both our presentation and the report that we have a long-term vision of continuing to increase dividends to find that right long-term sustainable level, and we certainly see that there's capacity in the company to do that. So -- but you won't get any promises from me here and now, Fredrik.

[Operator Instructions] There are currently no further questions over the phone. With this, I'd like to hand the call back over to James for any webcast questions. Over to you, James. James?

Sure. Thank you very much. Thank you so much for the questions submitted so far. Again, we'll try to get through as many of these as we can. We may run out of time before we can answer them all, however. So one question, can you talk about the dynamics around newbuilds? Given the global supply and demand situation and the aging global fleet, when does the time come for the industry to make a newbuild order?