Odfjell Drilling Ltd. (ODLO.OL) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the Odfjell Drilling Q2 2025 Results Presentation. My name is James Crothers, and I'm the Investor Relations Officer at the company, and 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. Notes that this presentation is only a summary of the quarter and the more comprehensive quarterly report should be read separately. Both that report and today's presentations are available on our website, www.odfjelldrilling.com. Our call today, we will begin with a brief summary of the quarter with Kjetil taking us through some of the key highlights. We'll then move on to discussing our operations during Q2 before moving onto our financial review with Orjan. We'll then summarize the presentation and close the call. As always, following the presentation, we'll open the Q&A session and invite participants to submit questions either by the telephone line or electronically via the webcast tools which are available. Q2 has been a busy quarter for our business, and I'm delighted to hand you over to our CEO, Kjetil, who can take us through some of the key highlights.

Thank you, James, and a very good afternoon, everybody. Q2 was an extremely busy period for our company. Completing 3 yards stays in short succession in addition to focusing on delivering for our clients. This was an important period for us to get right. And I can happily say today that we are very much achieved our objectives in Q2 and we do enter Q3 with a fully upgraded fleet, no major CapEx builds ahead of us and increasing day rates secured. Despite how busy this quarter was from an operational standpoint, we were able to once again set new quarterly financial records. As can be seen, we achieved a record EBITDA of $109 million from a revenue of $219 million, and we were able to achieve a net profit of $42 million. Financial utilization was 92%. This is somewhat reduced for our normal levels, but it is reflecting the off-hire due to the SPS on the Deepsea Aberdeen. Shareholders will be pleased to see that we once again increased the dividend to $0.18 per share from $0.16 per share, and we remain well placed to continue to increase shareholder distributions from here. As discussed, all of our SPS programs are now completed, all of them on time and on budget. And our next SPS will be for the Deepsea Nordkapp in late 2028. And finally, our financial position goes from strong to stronger with the company reducing its leverage ratio again to 1.3x net debt-to-EBITDA, while our equity ratio remains at 64%. Moving on to our operations. During the quarter, the company's own fleet was active on the Norwegian continental shelves working for Aker BP and Equinor. Three of the company's units had yard stays during the quarter with the Deepsea Aberdeen SPS being the most impactful. However, the company was still able to achieve 92% financial utilization for the entire fleet. And going through our units specifically, we're not in the yard for the SPS, the Aberdeen was working for Equinor on the Breidablikk field. The Atlantic was also working for Equinor throughout the period, that worked on various exploration wells. Q2, so Deepsea Stavanger working for Aker BP on exploration wells as part of its wider campaign on the industrial development. The Nordkapp was also working for Aker BP during the period, having completed a short yard-stay towards the end of Q1 and going into the start of Q2. And when it returned to operations, Nordkapp was still under contract with Aker BP, worked with Harbour Energy on a carbon capture well. In our external fleet, the Yantai and Bollsta were working in Norway for ConocoPhillips and OMV, respectively, throughout the Q2. The Bollsta is now likely to begin the operations with Equinor in September, meaning next month. The Mira was demobilizing follow its contract with TotalEnergies before preparing for a new contract with Rhino Resources in Namibia. And finally, the Hercules was in yard in Norway for the entire quarter. And then moving on to what will be our final SPS update for some time. Thank God for that. As many will be aware, we have now successfully completed all 4 owned rigs SPS, having completed the Aberdeen SPS in Q2. We have been preparing for this critical period since early '22 and to see it now finally completed is fantastic. It's taken a huge amount of careful planning, creativity and execution to ensure that it went smoothly and with all rigs completed on time and on budget, the crew and staff, they both can be extremely proud of how they have performed. Ultimately, with all projects now completed, our rigs are in prime condition and installed with the latest technologies, and this provides a solid foundation to deliver further value and excellent performance. And I think the subtitle on the slides says as well, our fleet is very much ready for what's next. Now turning on to the backlog. And what's next? It was noted earlier, our backlog now sits at $1.7 billion. Our forward schedule is largely unchanged from our previous quarter with all 4 units having firm contract coverage until nearly the end of '26, and with the Stavanger booked until 2030. And as can be seen, our first contract opportunity is with the Aberdeen and the Nordkapp and we are working on opportunities for both these units currently. Regardless, our units are well secured with contract coverage at increasing day rates. And as per previous quarter, we thought it was important to demonstrate what this backlog translates into in terms of revenue generation. And as you see, we maintain year-on-year revenue growth based on firmly secured contracts alone. Our average day rate per rig continues to increase quarter-on-quarter, and our average OpEx per rig is anticipated to only marginally increase. It is also worth reminding stakeholders that on top of these day rates comes an historic average of at least $25,000 to $30,000 per day per rig in bonuses and add-on sales. And going forward, we will not have the CapEx that we have experienced in '24 and '25 associated with the SPS projects. So our net term growth is very well secured and our Q2 record today, we hope won't last very long. And then before I hand over to Orjan, I would like to talk a little bit about how we view the market and the market outlook. And as the title suggests, we see a market that is well balanced. The Norwegian market is positive for work in '27 and beyond. And with several clients expressing direct interest in contracting our units. Speaking with our clients, we expect that in response to the intention to maintain Norwegian production levels, we will see more wells being drilled on smaller infill development and on exploration wells. We expect that these developments will require more wells for less barrels of production, which could be favorable for our business. Former tenders remain outstanding in Norway. And we maintain our view that demand for rigs will increase in the coming years, particularly from 2027. If you look internationally, we see demand as being more mixed. Contracting is largely dominated by short-term exploration work with no -- with longer-term contracts expecting to mature in coming years. And we expect demand to come from places such as Namibia, Canada, South Africa, Australia and the U.K., with projects expecting to be matured from '27 and onwards. On the supply side, our view remains unchanged. We expect the supply to likely reduce with some retirement of vessels in our sector expected and no newbuilds likely to happen. There are a few stranded and/or incomplete vessels in our sector also, but we do not believe it's likely to create any meaningful competition in the near to medium term. Ultimately, we do see good interest from clients seeking to secure Tier 1 assets in this period and are confident of securing additional backlog for our units for work in '27. And with that, I will now pass on to Orjan to go through the financial review.

Thank you, Kjetil. I'm pleased to say that we are reporting strong financial results for second quarter, and I will begin with a summary of the income statement. Operating revenue in Q2 was $219 million compared to $190 million in Q2 last year. Operating revenue from our own fleet was $171 million, while the external fleet generated revenue of $47 million. As reported earlier, the positive impact of higher day rates is continuing also in Q2 with an EBITDA for the own fleet segments of $101 million which is a margin of 59%. The EBITDA for the external fleet segment was $9 million, which is a margin of 19%. Less corporate overhead and other adjustments, the group EBITDA was $108 million. The company delivered a net profit of $42 million in Q2, which is a significant improvement compared to previous quarters. The total net profit for the first half is $73 million. Let's move on to the balance sheet page, Page 14. Our net debt is decreasing. During the quarter, we have reduced it by another $17 million down to $458 million. which corresponds to a leverage ratio of 1.3x. I refer you to the last page of the report for details regarding the leverage ratio calculation. Equity ratio was 64% out of total assets of approximately $2.2 billion. The available liquidity is $217 million, including undrawn RCF of $113 million. As anticipated, the available liquidity is down from last quarter, mainly due to CapEx payments related to SPS and half yearly amortization on the bond. In addition to increased dividends and upgrade projects. Further details of the cash flow for Q2 follows on the next slide. In Q2, we generated $127 million in cash from operations. Net interest paid was $21 million, including half yearly interest payments on the bond. Tax paid was $4 million. CapEx for the quarter was $52 million, of which $25 million were client induced upgrades, that are covered by lump sum payments from customers in this or adjacent quarters. Net cash flow from financing activity was minus $11 million, of which $28 million in scheduled amortization on loans and $3.5 million in repayment of lease liabilities, offset by drawing on $20 million on the RCF during the period. Dividends paid in Q2 were $38.4 million and related to Q1 results. We are continuing our upward dividend trajectory by declaring a dividend for Q2 of $0.18 per share, which will be a total dividend payment of $43.2 million. This corresponds to an annualized yield of approximately 10% based on yesterday's close. The shares will trade ex-dividend from 3rd of September and payments will be made around 17th of September. We see a strong potential for continuing the increase in quarterly shareholder distributions going forward. Given our solid financial position and our increasing free cash flow generation as a result of higher locked in day rates reduced CapEx payments and reduced debt payments. With that, I will pass back to Kjetil, who will summarize our presentation.

Thank you. So then a summary of the Q2, it has been a record-breaking quarter for Odfjell Drilling delivered by strong operational performance of the Odfjell Drilling team. We have achieved record financial results. Our SPS performance has been exceptional, and all of our 4 units are now upgraded and ready for what's next. We have increased our dividend once again and have strong potential for further increases. And finally, our financial position is further strengthened. To summarize, Q2 was another great quarter for our company, and we are very excited about what comes next. Thank you very much for listening in.

Thank you, Gjersdal. [Operator Instructions] We'll try and get through as many questions as we possibly can, but we may be limited on time. So, our Operator, Sergey, would you be able to please open the Q&A session on the telephone line?

Absolutely. This is Sam. We have a first question from Fredrik Stene from Clarksons Securities.

I want to talk a bit about dividends today. So you have increased your dividend to $0.18 per share for the quarter. And as you said now in your prepared remarks, in the back end here, that you feel very comfortable that you can continue to increase that going forward. And while I'm sure you cannot say exactly how much you're going to increase them, too. I wanted to touch upon a couple of elements that gives you that confidence. First, if you look at your fleet, you have the Aberdeen and Nordkapp going off contract late next year, which is 1 year and something until that happens. But to continue to increase your dividends, I guess the underlying thoughts from your end at least would have to be that you're very confident in securing more work and continuous work on those units. So while you said that you were in discussions, if I understood correctly, I was hoping to get some more color about contract length, day rate levels, if you can share or maybe more so when should we expect any update on more work firming up for these 2 particular units?

Yes. Maybe I can say a little bit about that, Fredrik, and thanks for the questions. So I want to start with the Nordkapp because that's sort of the easiest one. That is, as you know, in the semi alliance with Aker BP. And we have a model there that we add 1 year to the backlog, approximately 15 months ahead of the firm period being completed. So that being completed in the end of '26, early '27. So that should mean roughly around November or something like that. So we've already started those discussions. And those -- the day rates for that contract is to be set by 2 independent brokers. It's a model that we used for some time now, and we use the average of those 2 brokers, and it's a model that has worked fine for both of us and the client. I do not know what that number will be now. But if I were to guess, I would believe it is somewhere between $450,000 and $500,000. And then for the Aberdeen, we have various outcomes. As you can see in our contract backlog, the Equinor has options for use of the rig, which is to be declared, I would say, roughly around 15, 16 months ahead. That is an unpriced options. So that could be an opportunity. But there are also other -- they are in the market with some other tenders. So which, of course, is something that we look at as well. So there are several opportunities there. It could be shorter time or it could be a longer time if we are succeeding in agreeing with Equinor. So does that answer, Fredrik?

Yes. No, that's very good color. Just one follow-up. Revenues that's one thing. But now that you've complete your SPS, and you're also talking about a material lower CapEx numbers going forward. Are you able to give some color on what the run rate CapEx number would be for a year without any SPS work?

Well, firstly, I would say that we have some remaining CapEx from the SPSs and we're looking at a range of $35 million to $40 million still remaining unpaid, which will influence our Q3 cash flow. And in addition to that, there's always, as you can believe, there's always influence on CapEx levels. But we usually say that per rig, approximately $5 million of CapEx run rates year-by-year for periods outside the SPSs.

All right. That's super helpful. Congratulations on a very strong operational performance this quarter.

It appears there are currently no further questions in the phone queue. So I'd like to hand the call back over to James for any webcast questions.

Thank you. I can see that we've had quite a number of questions specifically on that point, namely how much CapEx is remaining? And what sort of we can advise on that? And as said, Orjan, given his view on that already. Perhaps we can sort of answer this question, which has come through a few times to management comment on the contract length in discussions for 2027 contracts. Do customers want to continue short-term length contract or medium length contracts with further options? Is there an appetite for longer-term contracts?

Yes. I would say that remains to be seen. I think all sort of outcomes are being discussed. So it could be shorter, it could be longer. So I won't be sort of conclusive on that one, but I think I can say that all aspects are being discussed, both shorter-term contracts and with shorter, I mean, typically a year, but also longer programs are on the table.

Great. Thank you very much. We've also had a question about our financial utilization this quarter, why it was slightly down from our typical, which is about 97% over 9-year period. A quick answer on why your financial utilization...