Noble Corp (Cayman Island)

NYSE:NE

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the Noble Corporation plc Second Quarter 2020 Results. At this time all participants are in a listen-only mode. [Operator Instructions]

I will now like to turn the conference over to your speaker for today Mr. Craig Muirhead, Vice President of Investor Relations and Treasurer.

[Craig Muirhead, VP, IR and Treasurer]

Thank you and welcome, everyone, to Noble Corporation's second quarter 2020 earnings conference call. We appreciate your continued interest in the company. You can find a copy of Noble's earnings report issued yesterday evening, along with the supporting statements and schedules on our website at noblecorp.com.

For today's call, we will not have a question-and-answer session at the end of the prepared remarks. Before I turn the call over to Robert Eifler, I'd like to remind everyone that we may make statements about our Chapter 11 filing restructuring, activities or plans, operations, opportunities, plans, operational or financial performance, the drilling business or other matters that are not historical fact and are 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, and the various factors that could keep outcomes of any forward-looking statements from being realized including resolution of our Chapter 11 Cases, our ability to consummate our restructuring as contemplated, the impact of COVID-19 pandemic on Noble’s operations, 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'll now turn the call over to Robert Eifler, President and Chief Executive of Noble.

[Robert Eifler, President and CEO]

Thank you, Craig.

As previously announced on July 31, Noble filed for Chapter 11 protection under the U.S. Bankruptcy Code. This was not a decision we made lightly or without evaluating a number of potential alternatives. We ultimately determined that a comprehensive restructuring path best position at Noble to meet the challenges we face in the current environment and to create a strong and appropriate financial foundation to support our industry leading operations.

We've signed a restructuring support agreement with several of our largest bondholders that plans to convert our bonds into equity in the reorganized company. And those bondholders have committed to invest an additional $200 million in the company. Additionally, a steering committee of our existing bank lenders has agreed in principal to a new $675 million revolving credit facility with our existing Bank Group.

We also have had discussions with the Paragon Litigation Trust, which we think is the right path to get to a resolution of this case, hopefully soon. While there is clearly work that remains to be completed before we emerge, we are very pleased to have obtained this consensual deal and are optimistic we will navigate through the court process in a relatively expeditious manner.

Given the status of our having filed for Chapter 11 and the related activities, we will not be holding a question-and-answer session on today's call. And I hope you understand our position there. It is important to stress that we remain absolutely committed to delivering operational excellence for our customers. It is our balance sheet that needs to be fixed, not the company. We plan to pay all of our employees and vendors in full for our day-to-day operations continue uninterrupted.

Our legacy was built through operational excellence and customer satisfaction. While this is a significant event in our company's history, we will not lose focus on our core competencies or change the way we do business with our customers. Richard will address our restructuring again in just a moment. But first, I would like to give you an update on our operations and the good work the Noble team is doing and will continue to do around the world.

As everyone knows, our industry is dealing with one of the most difficult environments we've endured in decades. I've heard the current market described as a perfect storm or a double Black Swan event. Whatever the label, we have seen a significant disruption in our business.

During the COVID-19 pandemic, our primary focus has been on keeping our workforce safe and maintaining the high operational standards that our customers have come to expect from Noble. Travel restrictions have created a challenge for crew changes, with 14-day quarantine before travel to many regions or outright travel restrictions in some cases. This is difficult on our crews and their families who have had to endure much longer hitches and more time away from home.

We've organized quarantine procedures for the most difficult regions that allow us to crew change regularly but the time away from home is still difficult for our crews. Our COVID-19 response team has done a great job of organizing the very complicated logistics and our offshore crews has stepped up to the challenge and done an incredible job of keeping our rigs running. I could not be prouder of the men and women of Noble and would like to offer my thanks and appreciation for the many individual efforts that have collectively allowed us to continue operating our rigs during this most challenging of time.

Far from the green shoots we were seeing as 2020 began, operator drilling plans have been splashed across the board, and we expect the depressed activity level to persist well into 2021. Tender activity in the second quarter was down 50% from Q1 and offshore rig contractors have lost $1.3 billion of backlog since March, due to contracts being early terminated or cancelled prior to start.

While the trough of the recovery remains unclear, offshore exploration and development remains a key component in the global - in the supply of global oil. With a growing number of rigs coming out of the global rig fleet, we believe the supply demand dynamics will be more favorable coming out of this downturn than the previous downturn. And during the trough, the best properties will still be drilled, such as those in the Guyana, Suriname Basin, where another significant discovery was announced last week.

Despite the very challenging backdrop, Noble has continued to outperform the market with respect to marketed utilization. In our floating fleet, the drillship Noble Sam Croft is currently working on a very successful program for Apache in Suriname, and we will complete our contracts there in the fourth quarter.

I'm excited to announce that earlier this week, ExxonMobil awarded the Noble Sam Croft a new six month contract to drill offshore Guyana, with operations commencing in the fourth quarter of 2020 after the rig finishes its current program. This contract was awarded under the previously announced commercial enabling agreement established with ExxonMobil earlier this year.

We did experience a temporary pause on the Noble Tom Madden due to COVID related travel restrictions, but returned to full dayrate in early June. So with this award, all four of Noble five specification HHI drillships will now be contracted to ExxonMobil in Guyana expanding our relationship with a valued client in one of the world's most exciting deepwater basins and deepening our footprint in this emerging region.

Gulf of Mexico drillship utilization has dropped by about 20% its contracts rollover with few new opportunities, but still has a stable base of long-term contracts. Also, while rates are trending downward, early indications reveal they are holding up better than 2016/2017 lows. Our two rigs in the region, the Noble Globetrotter I and Globetrotter II remain on contract with Shell into 2022 and 2023 respectively.

The Noble Clyde Boudreaux has been impacted by the market conditions with the cancellation of its previously announced contract in Vietnam. We are bidding into multiple opportunities now, but the rig will see some downtime and is currently mobilizing to Malaysia for warm stacking. Five of our floaters are currently cold stacked and not marketed. We're evaluating options for these units, including selling or scrapping, and more closely manage any spending related to our cold stacked rigs.

Turning to our jackups. In the North Sea outside of Norway, the spending outlook has dropped 21% this year as operators review, cancel or defer their work scopes. Four of our jacksups rolled off contract between March and April, which was a challenging time to be looking for work. The Noble Hans Deul and Noble Houston Colbert remain warm stacked but the Noble Sam Hartley and the Noble Sam Turner received two of only four contract awards outside of Norway since the conclusion of the first quarter.

These contracts position the rigs very well for follow-on work in the region. The Norwegian market has gotten a boost through a recently passed tax relief package by the government. Project sanctioned before the end of 2022 will benefit from the new tax measures, resulting in meaningful improvement to project economics. And we expect new projects to be fast tracked on the Norwegian Continental Shelf over the next two years.

The Noble Lloyd Noble has performed extremely well on the Mariner platform in the U.K. sector, supporting our discussions for follow-on work. The rig is one of the most technologically advanced in the world and we remain hopeful that we will be able to secure incremental work following its current contract.

In Australia, jackup demand fell to one rig in the quarter. Fortunately for us, it was a Noble Tom Prosser, which did experience a period of COVID related standby time, but went back on full day rate in mid-July.

We're currently chasing several opportunities for follow on work in the country. Our last week, status report disclosed an extension for the Mick O'Brien in Qatar until November. We are hopeful that exceptional operational performance will lead to additional work in the country.

Saudi Aramco has suspended the Noble Scott Marks, which began its one year standby period on May 10. This suspension is not a reflection on the rigs performance, but rather Aramco’s global response to the change in oil prices.

We've also agreed to a day rate reduction on the Noble Roger Lewis, which will put the day rate at $139,000 per day, effective from April 01, 2020 through the end of 2021. The day rates for the Noble Johnny Whitstine and Noble Joe Knight remain unchanged.

Despite the challenges, we continue to perform very well for Aramco. Earlier this year, the Noble Roger Lewis received recognition from Aramco for successfully delivering a well 64 days ahead of schedule, and with the lowest recorded lost time percentage of 2.95%. We are pleased to deliver this type of performance to a valued long standing client in Saudi Aramco.

The Regina Allen is finishing its program in Canada and will move to Trinidad and Tobago to start work there in September. We expect the efficiencies of the JU-3000 in design to compete well in the Trinidadian market, providing an opportunity for follow on work in the region with broader market recovery.

I'll now turn the call over to Richard to give an update on our financial results and more details on our restructuring process.

[Richard Barker, SVP 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. I will start my comments with some highlights of our second quarter results and then give an overview of our restructuring support agreement, and what we are trying to achieve through this process.

As announced yesterday, Noble concluded the second quarter 2020 with a net loss attributable to the company of $42 million, or $0.17 per diluted share on total revenue of $238 million. Our EBITDA in the second quarter was $58 million after adjusting for pre-petition charges for professional fees related to our Chapter 11 filing and an increase in legal contingencies related to ongoing litigation.

This compares to EBITDA of $91 million in the first quarter. Our contract drilling services revenues were down $47 million from the first quarter to $220 million in the second quarter. This is due to a number of rigs rolling off contract in late first quarter and early second quarter.

However, we have focused hard on managing costs closely with contract drilling costs being reduced $17 million quarter-over-quarter to total of $144 million in the second quarter, which includes approximately $3 million of costs in the quarter related to our COVID-19 response efforts.

On our last earnings call, we discussed our move to improve efficiency and reduce our shore base and G&A spending by $25 million on an annualized basis, excluding restructuring related costs. We're continuing to work diligently to find additional areas of efficiency without sacrificing our operational excellence.

Our capital expenditure estimate for the full-year 2020 is in line with that estimate at the end of the first quarter, and is expected to range between $165 million and $175 million, of which we anticipate reimbursement for our customers of between $50 and 60 million.

Additionally, we previously referenced the anticipated cash tax refund of approximately $152 million as a result of the CARES Act provisions. During July, we received roughly $134 million of this refund and anticipate to receive the remaining [$18] million before the end of the year.

In addition, in July, we also received roughly $19 million in refunds related to closures of certain prior year tax audits. These tax refunds received in July bolstered our cash position at the start of the third quarter.

Last week we signed a consensual restructuring support agreement with a number of our largest bondholders that calls for the full equitation of all of our outstanding bonds, which total over $3.4 billion today.

As of July 31, approximately 70% of the aggregate principal of the 2026 guaranteed notes, and approximately 45% of the aggregate principle of all our other notes, or the RSA described as our legacy notes have signed up to support the agreement.

We are very encouraged by the support we've been shown by our bondholders and our banking partners in coming to this consensual agreement to recapitalize that balance sheet, which will be implemented through a voluntary Chapter 11 process.

This same group of bondholders has committed to provide $200 million of new investment into the company in the form of second lien notes with a seven year maturity. The company will have the option to pay cash interest on the new notes, pay interest in kind, or pay some combination of cash interest and pick. This will further allow us to manage our liquidity and cash outflows providing incremental flexibility to the company.

We have also agreed to a term sheet in principle with a steering committee to our existing revolving credit facility lenders to provide a new five year $675 million secured first lien revolving credit facility, which will provide meaningful liquidity and a multi-year extension of our banking credit commitments.

As a result of our current cash balance, we expect to have sufficient liquidity to manage through the duration of our bankruptcy proceedings without the need for additional financing. We currently have $545 million of borrowings on our credit facility that we anticipate will be paid in full either through refinancing with borrowings under the new revolving credit facility or through cash pay down.

At emergence, we expect to use the proceeds from the second lien bond and any remaining excess cash to pay down borrowings under our credit facility. This will free up borrowing capacity on the new revolving credit facility and bolster our liquidity at emergence.

These agreements are not final as they still require additional support from bondholders and banks, compliance with certain conditions and then approval by the court. There is more information in our 8K filed on July 31, and additional details are being developed. Both in new first lien credit facility and the second lien notes are scheduled to become effective upon emergence.

We currently anticipate that we will complete the Chapter 11 process and emerge as a restructured company before the end of the year. In connection with our restructuring announcement, shares of our common stock have been delisted from the New York Stock Exchange, and as of Tuesday, have been listed for trading on the over the counter pink Exchange under the ticker and NEBLQ, as shares will continue to trade here until the final conclusion of our Chapter 11 Cases.

Upon emergence, we intend to regain listing status for the restructured company. As Robert mentioned, we spent considerable time evaluating numerous alternatives to address our balance sheet issues. The comprehensive restructuring, which we now have engaged in will provide significantly reduced leverage and corresponding interest expense and enhanced liquidity position and improved cash flow after financing costs, which will create a much more sustainable capital structure for us as we navigate the current market conditions.

I will now turn it back to Robert.

[Robert Eifler, President and CEO]

Thanks Richard.

We're facing many challenges as an industry, and have had to make a lot of hard choices. Restructuring is clearly a major event for our company but it does not deter our focus to maintain our reputation and our brand. We will continue to deliver operational excellence for our customers, we will work safely and we will be good stewards of the environment. These are things that we do well and that people have come to expect from Noble, which is why we are fortunate enough to have many great relationships with discerning customers.

We are pleased to have received this support of our lenders and noteholders in a consensual deal. I am especially proud of the men and women at Noble who continue to deliver operational excellence for our customers every day. And I'm confident that on emergence from Chapter 11, the strength of our operations combined with a solid financial platform will position Noble to lead the industry.

That concludes our prepared remarks. Thank you for your participation in our call today. And I'll now turn it back to the operator to close the call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.