Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Odfjell Drilling Q2 2018 Investor Call. At this time, I would like to turn the conference over to Atle Saebø. Please go ahead.

[Atle Saebø, CFO & Executive VP]

Thank you. Welcome all to this investor conference call for Odfjell Drilling, where we will present the 2018 second quarter results. Together with me, I have the CEO Simen Lieungh; and Investor Relation Officer, Eirik Knudsen.We will take you through the highlights and material events, the segment reporting, the financial information before we end this call with a short summary and then open for a Q&A session.On Page 3, we have the Q2 2018 key summary. In the quarter, we are successful in the private placement and purchase of Deepsea Nordkapp. The Deepsea Nordkapp is fully funded. Strong operational performance across the fleet. Drilling & Technology continues its positive trend. Well Services increases turnover, but still pressured on margins. And there is clear signs of market improvements. Then we go to Page 4, the highlights and material events. On 19th of April, Odfjell Drilling successfully completed a private placement of USD 175 million through a share issue of 38 million new common shares. This was carried out at a subscription price of NOK 36 per share. On April 27, Odfjell Drilling signed a preference share agreement and warrant agreement with Akastor to carry out a $75 million preference share issue and an issue of warrants for 5,925,000 common shares. The proceeds were used to partly finance Deepsea Nordkapp.In conjunction with the USD 175 million private placement in April, Odfjell Drilling, on 11th of July, completed a subsequent offering for shareholders not invited to participate with the private placement. This was carried out at the same price.On 27th of April 2018, the company announced the purchase of Deepsea Nordkapp, an enhanced Moss Maritime CS-60 unit winterized and a harsh environment unit. The company further entered into a 2-year drilling contract, plus 2x 1-year options, with Aker BP. Odfjell Drilling estimates delivery of Deepsea Nordkapp to be in Q1 2019 and commencement of operations in summer 2019. The progress at the yard is at schedule as per today.We continue with highlights on Page 5. On 3rd April, Equinor awarded Odfjell Drilling a Fixed Platform Drilling Services contract for Heidrun, located on the Norwegian Continental Shelf. The firm contract is for 4 years, with 3x 2 years optional periods. Further on, on May 25, Odfjell Drilling signed a drilling contract for Deepsea Atlantic for 6 firm wells, with an estimated total duration of 18 months, scheduled to commence in early first quarter 2019. The contract contains the option to continue operations for Equinor after the firm period, and such options shall be based on market pricing. The contract value is estimated to $160 million, plus potential income from the contract incentive model.In addition, and as part of our long-term cooperation with Equinor, we also signed a Master Frame Agreement for the drilling units, which will be the foundation for any future rig requirements with Equinor. And then we continue on Page 6. On 29th of June, OMV exercised the second optional well in the contract entered into in April of 2017. The well is an appraisal well, with high pressure, high temperature on the Norwegian Continental Shelf. The parties have also agreed to add an additional option for a well to the program. The contract commencement for the fixed well is scheduled for second quarter 2019 and has an expected duration of approximately 140 days. The contract value is estimated to be $28 million, giving a day rate of approximately $200,000 a day.On 28th August, Odfjell Drilling received a firm offer for $325 million secured -- senior secured term loan facility for Deepsea Nordkapp. The facility includes a tranche of $162.5 million guaranteed by K-SURE and a 5-year commercial bank tranche of $162.5 million.The loan facility is available at delivery of Deepsea Nordkapp, expected in first quarter 2019.The facility shall be repaid by quarterly installments of USD 8.5 million, first time in fourth quarter of 2019. At the current swap rate, the average interest cost is approximately 5.4%.Signing of the facility agreement is expected by end of September of this year.Segment reporting, mobile offshore drilling units. As you can see on Page 7, we continued our very strong operations from all units in the second quarter, with financial uptime of 99% in average on all units. Let me take you through the contract stages for each rig on the next slide on Page 8.Deepsea Stavanger commenced operations with Aker BP on the 22nd of February 2018 and will be in operation on -- until the mobilization to South Africa for a drilling contract with Total, expected to start in the beginning of fourth quarter this year. As earlier announced, Odfjell Drilling has entered into a 5+5 year alliance with Aker BP, and the first call-off under the alliance agreement was received in December 2017, covering 12 months for Deepsea Stavanger after its return to South Africa, estimated to be in second quarter 2019.As mentioned, Deepsea Atlantic has received a new drilling contract with Equinor, estimated to last for 18 months, which is the first drilling contract under the Master Frame Agreement between Equinor and Odfjell Drilling. The contract will commence in early Q1 2019 after completion of the 5-year special survey scheduled for December 2018. Until then, Deepsea Atlantic will continue working for Equinor on the Johan Sverdrup contract.Deepsea Aberdeen is working on its fixed contract with BP West of Shetland until March 2022 with additional optional periods. Deepsea Bergen finished its 1-well contract with OMV on the 17th of April and immediately started operations for Equinor on the well-based contract. The unit has firm work for Equinor until late 2018 and has, as mentioned, secured a new high-pressure, high-temperature well for OMV starting in second quarter 2019, expected to last for approximately 140 days.Finally, the newbuild, Deepsea Nordkapp, is scheduled for delivery in first quarter 2019 and will thereafter mobilize for operations with Aker BP on the Norwegian Continental Shelf. Commencement of operation is expected around mid-2019.On Page 9, we present the Drilling & Technology segment contract coverage. As you can see, the platform drilling is secured by medium- to long-term operations on the U.K. and Norwegian Continental Shelf for BP, TAQA, EnQuest, Equinor and Wintershall. We will shortly start operations on the Johan Sverdrup field after a successful pre-operation phase. In addition, Mariner on the U.K. Continental Shelf is expected to start operations early next year. Platform drilling continues to provide safe and efficient drilling services to all clients, combined with healthy financial performance.The platform drilling operation is secured by medium- to long-term contracts, with a contract backlog of USD 1.2 billion, where $0.8 billion is priced options.Then we go to Page 10, the Well Services segment. Well Services is operating in around 20 countries around the worldwide, including the North Sea market, mainland Europe, Middle East and Southeast Asia. The product portfolio includes tubular running services, rental services and well intervention services. The rental service is -- service line is still representing a relative small share of the Well Services revenue. However, the market outlook is very promising for this service area.If you move on to Page 11, we can see the earnings visibility through $2.7 billion in order backlog as per end of June this year, whereof USD 1.6 billion is firm contracts. Revenue from frame agreements and call-off contracts in Well Services and revenue from technology and mobile drilling unit management is not included in this backlog. On Page 12, we will move to the market outlook.Following the drop in oil prices in 2014, the drilling and oil service market has suffered a severe decrease in the total activity level. The downturn has returned -- resulted in major impairments across the sector and oil companies have been forced to reduce costs and establish more efficient operations. Efficiency programs carried out by the oil companies have led to a substantial cost reduction in field development and production.We are currently observing a recovery in the oil price, with levels more sound for the drilling and oil service market. This, in combination with a more favorable cost structure, has resulted in a further increased appetite for exploration and production activities by the oil companies. The global drilling and oil service market is growing at a steady pace, however, with some regional differences. In harsh environments, we have observed a higher demand combined with a substantial number of mature units permanently withdrawn from the market. This has led to an increased utilization of the harsh environment fleet. The ultradeep water market remains very challenging still due to an oversupply of newbuild rigs in recent years.Based on the preference of new and more efficient units, combined with a high reactivation cost, we believe that scrapping of older midwater and harsh environment drilling units will continue over the next few years. In combination with a more healthy market environment, we believe this will bring the harsh environment market back into balance with subsequently improved day rates.Well Services is still facing fierce competition for its services globally. We currently observe an increased tender activity in the European and Middle East markets. However, the oversupply of equipment will, in the short to medium term, continue to keep pressure on prices.The slowdown in the North Sea market has led to a low activity level for development and upgrade projects over the last few years. However, the Drilling & Technology has experienced an increased demand for its services lately and is well positioned to take part in the forthcoming market recovery.Let's move on to the financial section and start with Page 14, the group summary financials. The group operating revenue was $175 million compared to $165 million in the same period last year. The operating revenue increased due to higher activity within Drilling & Technology as well as the Well Services segment, offset by decreased revenue on -- in the mobile segment from second quarter '17 to second quarter '18.The group EBITDA was USD 66 million compared to USD 72 million in the same quarter last year. The decrease in EBITDA is explained by Deepsea Bergen entering into new contracts on a lower day rate as from mid-2017. The EBITDA margin was 38% compared to 44% in the second quarter 2017. The depreciation was $40 million, the same level as in 2017.The net financial expenses were $18 million compared to $19 million in the second quarter '17. The decrease of $1 million was mainly related to the change in net currency gains and losses. These were the blended figures for the capital-intensive mobile drilling units and the labor-intensive platform drilling market. We will now take a look at each of the segments and start with the mobile drilling units on Page 15. The operating revenue for the mobile drilling units segment was $119 million compared to $124 million in the second quarter 2017. The change is mainly explained by lower revenue for Deepsea Bergen and Deepsea Stavanger due to lower day rates compared to second quarter '17. The decrease is partly offset by higher utilization and an increase in revenue for Deepsea Aberdeen.The EBITDA was $55 million compared to $67 million in second quarter 2017.The decrease in EBITDA is due to the same reason as just mentioned for the revenue element. And as such, the EBITDA margin was 46% compared to 54% in second quarter '17.We then move to the Drilling & Technology segment on Page 16. Operating revenue was $34 million compared to $23 million in second quarter 2017. The increase in revenue was primarily due to the commencement of new platform drilling contracts and increased number of strings in operation and increased activity in Technology segment compared to the same period last year. EBITDA was $1 million, same as in second quarter '17.We then go to Page 17 to Well Services segment.Operating revenue was USD 27 million compared USD 23 million in second quarter 2017. The increase in revenue for the well segment in second quarter 2018 is explained by somewhat higher activity levels in the Norwegian and the Continental Europe markets.EBITDA was $7 million compared to $8 million in second quarter 2017. The EBITDA margin was 26% compared to 34% in the same period last year. The decrease in the EBITDA margin is mainly due to higher costs related to the mobilization of new contracts and increased third-party equipment rentals due to the increased activity.We then move over to Page 18. The group eliminations and reconciliations have been included for your information. So we won't go into detail on this page here. If we then move on to Page 19, the summary statement of financial position. You can see that the group's interest-bearing debt now is at the level of $1,167,000,000, net of capitalized financing fees at the end of June 2018.We have $181 million in cash and cash equivalents at the end of June and an equity ratio of 44% at the same time. On Page 20, we have the summary statement of cash flow. Net cash from operations in the second quarter of '18 was $49 million. Net cash from investing activities was negative, with USD 235 million, mainly due to payment of first installment on Deepsea Nordkapp to the shipyard. Net cash from financing activities was USD 178 million, whereof USD 58 million was used for installments on existing credit facilities and USD 236 million as net proceeds from the capital increase.Cash and cash equivalents is USD 181 million at the end of June 2018 compared to $194 million at the end of first quarter '18.Then we move over to Page 21, which is the summary for the second quarter of 2018. And if we start with the mobile drilling unit, the fleet is secured by medium- to long-term contracts, purchase of Deepsea Nordkapp backed by a 2-year fixed and a 2x 1-year options contract with Aker BP. And the market is improving, and we observe an increasing demand for harsh environment units.Then moving to Drilling & Technology. We have continued the positive financial performance. The platform portfolio is secured with medium- to long-term contracts, mobilization of Johan Sverdrup in Q3 this year and Mariner in the first quarter next year.Well Services. We can see increased tender activity in the European and Middle East markets, but there's still an oversupply of equipment, keeping prices at low levels, however, turning point has passed. If you look at the key financials, we have an earnings visibility through USD 2.7 billion order backlog and we have a book equity ratio of 44%, cash position of $181 million at the end of June 2018. And this concludes our presentation. We will now open for a Q&A session. And please, everybody, please ask.

[Operator]

[Operator Instructions] We will now take the first question from Saleur Renaud from Anaconda.

[Saleur Renaud]

There have been some rumors lately that the harsh environment drilling wouldn't be a strategic business for you?

[Simen Lieungh, CEO & President]

If I understand the question is, if the harsh environment is a strategic area for us?

[Saleur Renaud]

Yes.

[Simen Lieungh, CEO & President]

Yes. That's -- I can confirm that. It's a core area for us going forward.

[Saleur Renaud]

Okay. So they are the core and the Norwegian press was basically rubbish?

[Simen Lieungh, CEO & President]

What did they say?

[Saleur Renaud]

That you would sell your offshore drilling units.

[Simen Lieungh, CEO & President]

Yes, that's rumors. And we don't comment on these -- those details. But that's -- put it in the bucket of rumors.

[Operator]

[Operator Instructions] We'll now take our next question from Lukas Daul from ABG.

[Lukas Daul, Analyst]

I would like to ask about the Deepsea Nordkapp. You paid down an amount in Q2. How much of a remaining CapEx is due on that rig to get it, a, delivered, and b, ready to drill in Norway?

[Atle Saebø, CFO & Executive VP]

Maybe I could give an answer to that. We have paid now approximately $225 million to the Aker. The total cost price, including mobilization, including the project management team, spare parts, everything to get it ready to drill is approximately $600 million for the unit. So based on the bank financing, which we announced yesterday, and based on the equity raising we had earlier in the second quarter, the rig is fully financed, including working capital for the unit.

[Lukas Daul, Analyst]

Okay. Good. And then sticking to refinance -- or financing. You have 2 facilities due in 2019. On the rig side, the $325 million that you have achieved on the Nordkapp, is that a benchmark of what you sort of will be looking for when refinancing Stavanger and Atlantic? Or how are you thinking about that?

[Atle Saebø, CFO & Executive VP]

Well, first of all, it's depending on the backlog for the units. And as you know, both Stavanger and Atlantic is a very good contract position. So debt is -- what the process will be and what the amount will be is too early to state yet.

[Lukas Daul, Analyst]

Okay. But I guess, it's fair to assume that you at least want to roll over the bullet?

[Atle Saebø, CFO & Executive VP]

Yes. That's the plan. But again, we'll come back when we have hard facts to bring to the table.

[Lukas Daul, Analyst]

Okay. And then refinancing of the Well Services facility. How are you thinking about that because, obviously, the EBITDA from that division has declined since you sort of raised the financing a few years back? So what should we be thinking there?

[Atle Saebø, CFO & Executive VP]

We have, during these very demanding years that we have behind us, been able to repay that debt by $40 million a year. And we are at a level which is acceptable for refinancing. We are now still not being able to increase our EBITDA substantially from the low market. But as we informed, we can see a market improvement, we can see an activity improvement. So we will, also here, come back and inform when the refinancing is in place.

[Lukas Daul, Analyst]

Okay. But did you say that the current outstanding is sort of a good proxy in terms of what you are generating in EBITDA in that division? Is that a fair way to...

[Atle Saebø, CFO & Executive VP]

It's -- if you're looking at multiples at the bottom of the market development, it's always a bit difficult. But based on our long-term relationships with the banks and based on the development in this market and that the balance of the loan had been substantially paid down during the recent years, we will find this suitable.

[Lukas Daul, Analyst]

Okay. And just finally on the SPS for Atlantic, which, I believe, is in Q4. Any news there in terms of how long it's going to take, and have you landed on a budget?

[Simen Lieungh, CEO & President]

No. We -- the SPS will be done in either late Q4 or Q1, depending on the start-up on the new drilling programs and the completion of existing ones. We have a budget, so it's the same that we have indicated before. We have done the SPS on several rigs before, so we have a good control about SPS.

[Lukas Daul, Analyst]

And do you have to take the rig inshore, so it's -- is it going to be idle for a while or...

[Simen Lieungh, CEO & President]

It will be idle for, I would guess, some 10, 12 days because we have to take the marine systems a quay farther, which is underwater today, and the rest of it, that is on the rig, in general, has already been taken and will be taken during operation. So it's just the marine stuff that we'd take at the quay side, 10, 12, 13 days, in that range.

[Operator]

[Operator Instructions] There are no further questions in the queue at this time.

[Atle Saebø, CFO & Executive VP]

Okay. If there is no further questions, then we will thank you all for participating in this call. Again, thank you.

[Operator]

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.