Noble Corp (Cayman Island)

NYSE:NE

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the Noble Corporation Plc First Quarter 2020 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded.

At this time, I'd like to turn the call over to Craig Muirhead, VP, Investor Relations and Treasurer. Please go ahead.

[Craig Muirhead, Vice President, IR and Treasurer]

Thanks Denise. And welcome, everyone, to Noble Corporation’s first quarter 2020 earnings conference call.

We appreciate your interest in the company. You can find a copy of Noble’s earnings report issued last evening, along with the supporting statements and schedules on our website at www.noblecorp.com.

Before I turn the call over to Julie Robertson, I’d like to remind everyone that we may make statements about our operations, opportunities, plans, operational or financial performance, the drilling business or other matters that are not historical facts in our forward-looking statements that are subject to certain risks and uncertainties.

Our filings with the U.S. Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry, the various factors that could keep outcomes of any forward-looking statements from being realized including the price of oil and gas, customer demand, operational and other risks. Our actual results could differ materially from these forward-looking statements and Noble does not assume any obligation to update these statements.

Also note, we are referencing non-GAAP financial measures in our call today. You will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website.

And with that, I will now turn the call over to Julie Robertson, Chairman, President and Chief Executive of Noble.

[Julie Robertson, Chairman, President and CEO]

Thank you, Craig, and good morning everyone.

Welcome to a review of Noble Corporation’s first quarter 2020 results. I hope you're all healthy and safely managing through this extraordinary time. As always, we appreciate your participation on today's call.

For those of you paying attention, you all heard Craig Muirhead introducing the call today. In addition to Craig's role as Vice President and Treasurer, he has now assumed the responsibility for the IR function. Craig, thank you for stepping up and taking on this additional role and we know you will do as great of a job in this role as you have as Treasurer.

And we're also joined this morning by Richard Barker, who on March 30 began his new role as the company's Senior Vice President, Chief Financial Officer. I've had the privilege of working with Richard at various times while he served in an investment banking capacity, specializing in oilfield services and equipment industry. Besides his in-depth, familiarity with Noble, Richard brings to the CFO role, strong knowledge of our industry and the capital markets. We are delighted to have Richard on our team and I look forward to his valuable contributions.

Our first quarter financial performance when adjusted for special guidance was highlighted by lower than expected contract drilling service cost and higher EBITDA. The favorable results were in spite of the challenges created by the rapid deterioration in the oil and gas market, and the COVID-19 pandemic. And while addressing the first quarter achievements, one we're all proud of is the manner in which our company has responded to the current environment.

I want to recognize our COVID-19 response team, who recognized as early as January 5, the potential gravity of the Coronavirus situation and began working to lead our organization through a most complex landscape characterized by ever-changing risk and uncertainties. Through their leadership, our company has worked together with a common purpose, to maintain the health and safety of our employees and operating partners by mitigating the transmission of this virus in any adverse impact to our organization.

Additionally, I'm particularly proud of our global onshore personnel, many of whom have worked well over their hitches for extended periods of time and to their families for the support they have provided. Although the challenging environment remains, I want to thank all of our employees for their successful efforts to-date.

I'm extremely proud of your commitment and dedication and the manner in which you have maneuvered through this crisis. Your attitude and approach epitomizes the character which resonates throughout the Noble organization.

As you all know at our Annual General Meeting on May 21, Robert Eifler, will be assuming the role of President and Chief Executive Officer of Noble Corporation. Again, I want to extend my congratulations to Robert and in my simultaneous move to the role of Executive Chairman, I will remain his biggest supporter and advocate, as we together with our excellent leadership team continue to lead this 99-year old company through these unprecedented times and into our second century of successful operations.

With that, I will turn the call over to Robert.

[Robert Eifler, Senior Vice President, Commercial]

Thank you, Julie. Good morning, and welcome to everyone.

I want to echo Julie's thoughts and thank each of you for your participation on this morning's call. I'll open with some observations on offshore drilling industry and bring you up to-date on the Noble fleet. Richard will follow with a review of our first quarter financial results after which I'll provide some closing thoughts and address your questions.

Yesterday, we announced in our press release that we retained Evercore for financial advice and are evaluating various options to address our balance sheet and liquidity. We will address these subjects during our prepared comments today, but ask that you please refrain from questions related to these topics during the Q&A portion of the call. We look forward to receiving questions on other matters of interest to you.

We continue to assess the potential near and intermediate term impacts to our industry as a result of the global pandemic and concurrent collapse in oil prices. The simultaneous emergence of declining global oil demand and rising oil supplies is unparalleled for our industry, and establishes a highly uncertain future. It remains difficult to forecast the duration of time for which these unfavorable industry developments will impact our business.

So I want to explain some immediate steps we have taken to adapt to this current state of circumstances. Julie has already mentioned the formation of our COVID-19 response team. This team recognized the threat very early and has displayed impressive focus and care to protect the wellbeing of our employees, while ensuring business continuity and customer responsiveness.

The challenges have been numerous and include understanding and monitoring the public health threat, coordinating and implementing a program to allow quarantine personnel, and adapting to numerous global travel restrictions and border closures. Their work has paid off, and I can't express enough how proud I am of our team.

Likewise, the men and women working offshore for Noble, as well as their families have demonstrated their commitment and professionalism by adapting to the difficult circumstances. Their dedication has been the driving force enabling Noble to continue to operate and serve our customers during the COVID crisis.

In spite of the constant distraction and stress caused by this virus, and the many work assignments that ran significantly over their scheduled duration, the team offshore completed the month of April without a recordable incident. My thanks to each of you.

In parallel with our COVID response, we've continued our focus on operational efficiency, and have implemented a number of cost cutting measures in order to streamline our business to the reality of the new industry outlook. The measures address reductions in headcount, corporate discretionary expenditures, and capital expenditures, while continuing to identify ways to drive greater operational efficiencies. Richard will have more to say on that in a moment.

In addition, we remain committed to a thoughtful approach to the evaluation of all opportunities for deleveraging the balance sheet, managing debt maturities and enhancing liquidity. As mentioned, we've retained advisors to assist us on these topics and in determining the best solution for Noble. Deleveraging the balance sheet has been and will continue to be a priority for the company.

Now, let me offer some insight into our business outlook. Offshore drilling business fundamentals are slowing as our customers react to the dramatic disruption to oil and gas markets. Almost universally customer spending plans for 2020 have been adjusted dramatically lower. As everyone on this call knows, a great deal of exploration and appraisal drilling, as well as multi-year field development opportunities have been postponed or cancelled.

On a brighter note, a number of customers have shown an interest in continuing discussions regarding future rig needs for both floating in jackup units. Although the number of discussions are down and many of the drilling programs are pushed into 2021, the evaluation of rig needs continues, and we hope to have some news on new contracts for you in the coming weeks and months.

Also, many of our customers are highly motivated to ensure program continuity, while mitigating the risk of disruption due in part to creating challenges following the implementation of protocols intended to mitigate the spread of COVID-19. These important and necessary steps are adding to the cost of operations. However, our customers have agreed to absorb a portion of these costs, demonstrating the importance of mitigating factors that could negatively influence safe and efficient program execution.

Finally, our industry has been engaged in a five year effort to rationalize fleet supply, and has made meaningful progress over this period. The impact of recent events on our industry is likely to lead to the stacking of additional rig capacity and an acceleration in rig attrition.

At the close of 2019, a total of 136 floating rigs and 98 jackups had been retired from service since late 2014. And we've already seen 12 floater retirements so far this year, seven since late March.

Entering 2020, 77 floating rigs and 96 jackups were stacked in various yards around the world with many of the rigs idled for more than four years. The weakening industry dynamics are likely to keep the total supply of both floating and jackup rigs in steady state of decline.

I now want to review the current status of our fleet and identify some early impacts resulting from the oil and gas market dislocation. I'll begin with our U.K. North Sea base jackups. Of the five jackups located in the U.K. North Sea for completed contracts during March and April of 2020 and remobilize to a yard in the region.

The four weeks include the Noble Hans Deul, Noble Sam Turner, Noble Sam Hartley and Noble Houston Colbert. I noted on our February 2020 call, the risk for idle periods was elevated for some or all of our jackups with availability during the first half of 2020 due in part to a reduction in customer commitments over the fourth quarter of 2019.

As customers in the region reassess their spending plans for the balance of 2020, idle periods are likely to be extended, although we remain in discussion with some operators regarding rig requirements for the second half of this year. While the outlook is somewhat weaker in the near-term, we do have several ongoing conversations and hope to have some contract news for you soon.

Our fifth rig in the U.K. North Sea, the Noble Lloyd Noble remains under contract until at least September 2020. In March, compliance with new policies aimed at limiting the transmission of COVID-19 resulted in the rig being placed on standby for 30 days, after which the rig returned to full operations on April 15. We continue a discussion with our client regarding prospects for the rig beyond its primary term.

Our experience in the Middle East has been more mixed. For example, the Noble Mick O'Brien is now employed into August 2020 offshore Qatar following a recent six month extension. In contrast, one of our four rigs operating offshore Saudi Arabia the Noble stock marks will be placed on standby for up to 365 days with no rate paid during the idle period.

The standby period is expected to commence during the first half of this month. Also, operations continue on our three remaining rigs in the kingdom. However, due in part to the rapid decline in the price of oil, our client has requested a reduction in the operating day rate on each rig. The Noble Roger Lewis, Noble Johnny Whitstine and Noble Joe Knight. We have submitted a proposal and await feedback from our client.

In Australia, the Noble Tom Prosser was recently placed on standby for up to 365 days at a reduced day rate following new regulations intended to mitigate the transmission of COVID-19. The standby period commencing April, however, we are hopeful that the period is significantly shorter than a full-year.

Finally, the Noble Regina Allen continues to execute a P&A program offshore Noble Scotia and remains on schedule to commence an estimated 190-day contract offshore Trinidad and Tobago in October 2020.

Turning to our floating fleet. Six ultra deepwater drill ships and one semi-submersible rig remain contracted, while five other floating rigs are cold stacked, which now includes the drill ship Noble Bully II and semi-submersible Noble Paul Romano.

Four of our contracted drill ships are assigned to the Guyana Suriname Basin for successful exploration programs have revealed multi-billion barrels of recoverable oil. Offshore Guyana, the Noble Bob Douglas continues its assignment on the lives of Phase 1 development with a rig committed into September 2021.

Also, the Noble Don Taylor remains engaged in exploration activities, and was recently awarded a one year contract term that extends the rigs primary term into November 2021. The additional year of term was transferred from the Noble Sam Croft, which is continuing operations for a separate client offshore Suriname.

Recent exploration success in Suriname could lead to additional opportunities over the near to intermediate term. Finally, the Noble Tom Madden remains under contract, but in April was placed on standby for up to 90 days. The rigs primary term extends into December 2023, and the time spent on standby will be added to the primary term.

To close out my floater discussion, operations on the drill shifts Noble Globetrotter I and II continue in the U.S. Gulf of Mexico with contract terms extending into July of 22 and September of 23 respectively, while the semi-submersible Noble Clyde Boudreaux is expected to commence its next contract in early June offshore Vietnam.

A review of regional offshore opportunities quickly reveals a trend toward program cancellations and deferments. Some regions such as West Africa have experienced a greater impact due to challenges related to supply chain and crewing. Other regions such as the U.K. North Sea may come into acceleration in P&A work, while the region's extensive focus on natural gas could offer some opportunities as the year progresses.

Also, given Noble fleet concentration in the Guyana Suriname Basin we remain encouraged by the continued customer focus in the region and believe a number of opportunities and near term customer needs remain under review, which could lead to expanding fleet utilization.

I'll now turn the call over to Richard for review of first quarter financial results.

[Richard Barker, Senior Vice President and CFO]

Thank you, Robert. Good morning, everyone.

I would also like to welcome each of you on today's call and thank you for joining us. As the newest member of the Noble management team, I am honored and excited at the opportunity to serve as the company's Chief Financial Officer and help identify and execute the best path forward for Noble.

My discussion this morning will include some observations on our first quarter financial performance and our current financial position. However, given the uncertainty that currently exists in our industry, we will not be providing any updated guidance for full year 2020 or for the second quarter of 2020 with the exception of updating our expected capital expenditures range for the year.

As we announced yesterday, Noble Corporation reported a net loss attributable to the company for the first quarter of 2020 of $1.1 billion or $4.25 per diluted share on total revenues of $281 million. The first quarter results were impacted by two items. The first item was an after-tax non-cash charge of $1.1 billion, primarily related to the impairment of the semi submersible rigs, Noble Jim Day and Noble Danny Adkins, and the drillship Noble Bully I and Noble Bully II.

These impairments were driven by the impact of recent market events on our outlook for the demand for these rigs. The second item related to tax benefits totaling $47 million of this amount $43 million related to the application of the CARES Act provisions passed by the U.S. Congress. The CARES Act provisions are expected to result in a meaningful tax refund of approximately $150 million, with the majority related to the NOL carry-back provision. We expect to receive this tax refund by the end of the year.

When excluding the effect of these items from reported results, a net loss attributable to the company for the first quarter of 2020 was $86 million or $0.34 per diluted share. Contract drilling services revenues in the first quarter were $267 million compared to $441 million in the fourth quarter of 2019 or an adjusted $274 million after the exclusion of $167 million relating to the Noble Bully II contract buyout by Shell.

When compared to the adjusted fourth quarter results, contract drilling services revenues in the first quarter declined a modest 3% due primarily to a slight decrease in total fleet operating days.

Our fleet uptime was the essentially flat, finishing the first quarter in 96% compared to 97% in the fourth quarter.

The company's jackup fleet had first quarter utilization of 94% compared to 93% in the fourth quarter. Across the floating fleet first quarter utilization was 58% compared to 60% in the fourth quarter. However, when three cold-stacked rigs are excluded, adjusted utilization was 78% compared to 80% over the same period.

Contract drilling service costs in the first quarter totaled $161 million, compared to $182 million in the fourth quarter, which had been adjusted to $175 million for the $7 million of costs related to the Noble Bully II contract buyout. When compared to the adjusted fourth quarter results, first quarter costs declined 8% with the favorable result, due primarily to lower repair and maintenance expenses, and reduced expenditures relating to operation support.

Due largely to the lower than expected contract drilling service costs, first quarter EBITDA totaled $91 million compared to $83 million in the fourth quarter, adjusted for the impact of the contract buyout with Shell.

Capital expenditures for the first quarter were $25 million, compared to $48 million in the fourth quarter. When compared to Q1 guidance the favorable outcome was primarily driven by the timing of client requested modifications on the drillship Noble Tom Madden, including the installation of managed pressure drilling capability. All expenditures associated with the modifications for the Noble Tom Madden will be reimbursed to Noble.

The company concluded the first quarter with cash and equivalents of $176 million compared to $105 million at the close of 2019. Borrowings outstanding on the company's 2017 credit facility totaled $445 million. In April 2020, the company reached an agreement with the lender under the seller finance secured loans associated with the February 2019 and September 2018 purchases of the jackups Noble Joe Knight and Noble Johnny Whitstine respectively.

The seller loans were terminated in exchange for final payment consisting of 85% of the outstanding principal amount, and all outstanding interest payable or approximately $102 million. The company borrowed $100 million on its 2017 credit facility to fund this payment, increasing pro forma borings outstanding to $545 million. We currently have the ability to borrow up to an additional $297 million.

Our revolver availability is currently restrained by a $300 million minimum liquidity covenant and buy the Indenture Secured Debt Basket, which was negatively impacted by the $1.1 billion impairment that we realized in the first quarter. While we currently remain in compliance with our debt covenants under our revolving credit facility. These recent double Black Swan events impacting oil demand and supply will likely put us in violation of the covenants by the end of 2020.

Despite recent market events, we remain committed to running a highly efficient business. To that end, we have recently reduced our G&A and shore-based support burden by approximately $25 million on an annualized basis, and are evaluating further ways to streamline our business processes going forward. These efficiency measures will in no way compromise our commitment to operational excellence.

Additionally, we have revised our total capital expenditures estimate for 2020, which is now expected to range between $165 million and $175 million of which we anticipate between $50 million and $60 million will be reimbursed by our customers. As Robert mentioned earlier, we are actively evaluating various alternatives to address our current capital structure and liquidity needs.

We are focused on enhancing our liquidity position and reducing the total amount of debt and corresponding interest costs in what is an increasingly challenging environment. These alternatives include potential capital exchange transactions, as well as a more comprehensive debt restructuring.

I will close by saying that while it clearly has been a difficult time to start a new job, it is a real honor to be part of a team that has demonstrated every day through these challenging times such unwavering commitment to our customers and the pursuit of operational excellence.

I'll now turn the call back to Robert.

[Robert Eifler, Senior Vice President, Commercial]

In closing, I would like to leave you with the following thoughts on our company. Despite the challenges faced by our industry, we remain laser focused on operational excellence in serving our customers. From 2016 through 2019, we were able to maintain an average utilization of over 91% across our jackup fleet all the worldwide Jackup utilization averaged only 65% over the same period.

And on the floating side, our customer in regional alignment positions us very well to continue working our rigs despite the relative dearth of opportunities elsewhere. Although the recent double Black Swan events have worsened the outlook for our industry, we believe that our fleet, people and brand will enable us to continue to outperform the market on utilization.

While we continue to evaluate our options to address balance sheet concerns, we maintain a strong focus on operational efficiency and customer service, which have been hallmarks of Noble for the 15 years of my association with the company and many decades prior. Lastly, I'd like to say thanks once more to the entire Noble team for your extraordinary efforts as we address the COVID crisis.

With that, I'll turn it back over to Craig to open the line for questions.

[Craig Muirhead, Vice President, IR and Treasurer]

Thanks Robert.

And we're ready to begin the question and answer segment of the call. I'll remind callers we're not able to give details about our capital structuring activities, other than what we said in our prepared remarks, but we are able to answer other questions.

So Denise, please go ahead and open the line for question.

[Operator]

[Operator Instructions] Your first question comes from Sean Meakim with JPMorgan. Your line is open.

[Sean Meakim, JPMorgan]

So Robert, maybe to start off just given the priority of the Croft as their rolls off contract later this year, can you maybe just talk about your confidence level with respect to follow-on work in Suriname versus other opportunities, which will be great to get some more detail on that specific rig?

[Robert Eifler, Senior Vice President, Commercial]

Sure, so obviously, we're disappointed at the rate exchange there. Although I'm also - I think we've worked really well with our client there to make it happen in extraordinary circumstances lead to this. I would just note some of the drivers there were beyond oil price drivers in related to some political issues in Guyana. So our hope is that those political issues eventually get resolved. And that work continues and expands in Guyana.

I also noted in the prepared remarks that in Suriname, there is a big follow-on to the recent oil discoveries there, that we're tracking. And we think that there's going to be some work in perhaps the first half of 2021. We know we're very confident in our presence in that basin and so we’ll of course be watching the opportunities for Suriname and Guyana very closely.

Outside there, we're bidding the rig elsewhere. There is some work in the U.S. and elsewhere. So we'll bid the rig outside the region. But our hope is that we can continue our presence there in the region a little too early to tell unfortunately.

[Sean Meakim, JPMorgan]

Got it. That's definitely fair. And Richard, recognizing the limitations around what you can discuss with respect to capital structure, I still think it'd be interesting to hear your thoughts as a longtime follower of the company, someone that's obviously been engaged the management team over the years in advising capacity. Can you maybe just give us some idea into the types of insights maybe that you're bringing with you with respect to the balance of yours from the CFO position?

[Robert Eifler, Senior Vice President, Commercial]

Sure, and it's a good question and obviously my history is different. But I think candidly, it's very synergistic if you will with the team. I would just go back to what our priorities are. Obviously we are laser-focused on enhancing and protecting our liquidity position, reducing our total quantum of debt, and corresponding interest costs. And that's really our priorities. And obviously, my hope is that my history can be very helpful to that course.

[Operator]

And there are no further questions queued up at this time. I turn the call back over to the presenters.

[Robert Eifler, Senior Vice President, Commercial]

Thank you, Denise, and thanks everyone for your participation in our call today and your interest in Noble. Good day, everyone. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.