Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the Odfjell Drilling Q2 2021 Investor call. At this time, I would like to turn the conference over to Eirik Knudsen. Please go ahead, sir.

[Eirik Knudsen, VP of Corporate Finance & Investor Relations]

Thank you, Keith, and welcome to this investor conference call for Odfjell Drilling, we will present the second quarter of 2021. My name is Eirik Knudsen, I'm Head of Investor Relations in Odfjell Drilling. And CEO, Simen Lieungh, is currently on travel would be joining by phone and will participate in the Q&A session following the presentation.In addition, our new CFO from 1st of September, Jone Torstensen; and VP Finance for Frode Syslaks are also present. I will go through the presentation today and then Simen and the rest of us will be available for Q&A thereafter. For the sake of good order, we make reference to our disclaimer on Page 2 of the presentation. Let us move to Page #3. As normal, the agenda for today's call is a short summary of the Q2 2021. Then we go on to the segment reporting and ESG. Then we go to financial information. And finally, we make a short summary and then open for a Q&A session.Let's move over to Page 4 and the key financials for this quarter. We delivered revenue of USD 233 million and an EBITDA of USD 85 million in the second quarter. The company had per end of June 2021, a leverage ratio of 2.7% and an equity ratio of 48%. And the group's total backlog, including price option is at $2.4 billion at the end of the second quarter. Turning to Page 5 and the key summary of this quarter. We had strong operational performance across all MODUs, more info about this later on. Equinor has allocated 6 wells to Deepsea Atlantic so far year-to-date, taking firm operations to end of 2021.Equinor also awarded a 3-well contract to Deepsea Stavanger and included the rig in the Master Frame Agreement, an alliance agreement with BP for platform drilling services were signed. And finally, the refi process for Deepsea Aberdeen and the Odfjell Drilling service facilities were completed early July this year.Moving to Page 6 and some comments on the financial utilization. Deepsea Stavanger commence the Aker BP contract on 10th of April this year, and the remaining units have in the second quarter all been operating on the NCS for Equinor, Wintershall, Aker BP and Neptun. All of our fully owned units have performed with high financial utilization during the last quarter with an average of close to 99%.Yantai had some issues with the BP early in the quarter, affecting the overall financial utilization. If we then move to the contract status for the drilling units on Page 7. As mentioned in the introduction, Deepsea Atlantic is now fully booked throughout this year, and we'll start the Johan Sverdrup Phase II contract back to back early in 2022.Deepsea Stavanger is currently working fully in deal on a 3-well contract, which started early July. The unit will drive to return to Aker BP for 1 more well, which we expect to end in Q4. Commencement of the Equinor 3-well contract is estimated to be early Q1 next year, and we expect any open gaps between these contracts to be filled with work.Aberdeen commenced the contract with Wintershall in February this year, and we expect the rig to be in operation until the start of the Breidablikk campaign for Equinor in Q2 next year. Deepsea Nordkapp with lost option being exercised by Aker BP in March this year, the rig has now firm contractual period to end of June 2023. In addition, Aker BP has a 12-month option, which can take the unit to June 2024. And then finally, Deepsea Yantai for Neptune on the Norwegian continental shelf on a well-based contract.The firm scope is expected to end in Q1 next year, and Neptune has further more 8 optional wells, which can be added to the program. This brings the total backlog for MODU to $1.4 billion, where $0.4 billion is priced options.If we then move to Page 8 and the Energy segment and platform drilling contract status. Platform drilling continues to add backlog, and we now have 16 platforms in our contract portfolio divided over 6 clients on both the Norwegian and U.K. continental shelfs. We are very pleased with the last Alliance agreement, which BP U.K. awarded in the second quarter.This contract secures operations on Clair, Andrew and Clair Ridge to February 2025, plus a 2-plus-2 year options. The total backlog for platform drilling is now USD 1.1 billion, whereof $0.6 billion is priced options.Moving to Page 9 and Well Services. The Well Services business currently serves more than 200 customers across 20 countries, offering diversified service line within well intervention, tubular running, casing drilling and drill tool rental.Well Services, Norway is the largest contributor on the revenue side with close to 60% of the revenue year-to-date, and the remaining part is evenly split between Europe and Middle East and Asia.Well Services has been affected by COVID-19 restrictions in some regions over the last year. We have well observed an increase in operational activity in the Norwegian market and expect in the short to medium term to face an overall increase in activity level for this segment.Moving to Page 10 and the backlog overview. At the end of June this year, the total order backlog was USD 2.4 billion, whereof $1.4 billion is firm contracts. For the sake of good order, revenue from firm agreements and call-off contracts in Well Services and revenue from technology and MODU management is not included in the backlog figure.Turning to Page 11 and ESG. Odfjell Drilling has a strong focus on ESG, and we issued our first sustainability report for 2020 earlier this year. In short, we have an overall ambition to be a net 0 emission company by 2050, with a milestone of 40% emission reduction in 2026, there are multiple ongoing zero emission drilling projects on all rigs. For example, a battery hybrid solution has been installed on Deepsea Atlantic and a similar system will be rolled out on all of our units.For a full presentation of the strategy, references made to the 2020 sustainability report published on our website. With regards to the market outlook on Page 12, we continue to see COVID-19 related uncertainty in some market segments despite the oil price recovery. The significant oversupply in the global rig market is currently being addressed through all the recent and ongoing chapter 11 processes, and we expect further scrapping and market consolidation as a consequence.The harsh environment segment, however, continues to be in balance with a preference by the E&P companies for high-spec drilling units, sustainable drilling solutions and efficiency.Furthermore, the tax incentive scheme has increased activity on the Norwegian continental shelf and will be important for the activity in the next few years to come. This will have a positive impact for all of our business segments.Let's move over to the financial section, and we start with the group summary financials on Page 14. The group operating revenue was USD 233 million compared to USD 167 million in Q2 last year. The group EBITDA was USD 85 million compared to USD 81 million in Q2 last year. The increase in EBITDA is mainly due to increased EBITDA in the MODU segment, partly offset by decreased EBITDA in the energy segment.More comments to this will follow on the next slides. Moving to the MODU segment on Page 15. The operating revenue for the MODU segment was USD 160 million compared to use of the $180 million in Q2 last year. The EBITDA was USD 77 million compared to USD 68 million in Q2 last year.The change is mainly explained by Deepsea Stavanger as the rig was in operation most of this quarter while carrying out SPS and preparing for the Total South Africa contract during Q2 last year.Furthermore, we have had satisfactory bonus achievements in this quarter. For the energy segment on Page 16, the operating revenue was USD 51 million compared to USD 32 million. The EBITDA was USD 2 million compared to USD 5 million in Q2 last year. The decrease is mainly explained by lower financial performance in the platform drilling due to reduced incentive payments and also reduced engineering profitability compared to the same quarter last year.Moving on to the Well Services segment on Page 17. The operating revenue was USD 30 million compared to USD 24 million in Q2 last year. EBITDA was USD 7 million, same as last quarter -- last year. The EBITDA margin was 23% this quarter compared to 29% in Q2 last year.Norway and Middle East and Asian markets have maintained a consistent level of profitability. However, the results for the European countries were impacted by the COVID-19 pandemic. On Page 18, we have shown the bridge from some EBIT of the segment to the group constant consolidated profit, therefore, tax by adjusting for eliminations and corporate overhead and net financial items.I will not go further into the details on this slide. And then we go to Page 19 and the balance sheet for the group. The group's gross interest-bearing debt was USD 1.1 billion end of June 2021, and we have no debt maturities before mid-2023. We had USD 137 million in cash and cash equivalents end of June 2021 and an equity ratio of 48%. If we then turn to Page 20 and the summary of the group's cash flow and some highlights in this quarter. The net cash from operation was USD 44 million compared to USD 89 million in Q2 last year. There was a negative change in working capital of USD 27 million, and this was mainly explained by the changes in operational activity for Deepsea Stavanger at this quarter compared to last quarter last year.Investing activities of USD 29 million in Q2 '21 were mainly related to CapEx in the MODU business area. And we furthermore repaid $67 million in bank debt during the quarter.The cash position at the end of June 2021 was USD 137 million compared to USD 154 million in last quarter -- in second quarter last year. If we summarize the Q2 quarter on Page 21, we see for the MODU. We continue to build backlog and be the preferred partner within harsh environments. We have an attractive harsh environment assets and healthy outlook. On the energy side, we signed a strategic Alliance agreement with BP in the U.K. for platform drilling activities. And we Further -- we'll focus to develop the service portfolio into new areas.Well Services, continued high activity, although the market has been affected by less demand due to COVID-19. And on the financial side, we have earnings visibility through the $2.4 billion in order backlog. We completed the refinancing before the Summer, and now we have no debt maturities before mid-2023. We continue to repay debt, and we have a sound cash position at the end of the second quarter. This concludes the presentation, and we will now open for a Q&A session.

[Operator]

[Operator Instructions] It appears we have no questions at this time. I'd like to turn the call over to Mr. Knudsen for any additional comments or closing remarks.

[Eirik Knudsen, VP of Corporate Finance & Investor Relations]

Okay. Thank you so much for listening in. And if you have any questions, please don't hesitate to contact us. Have a nice afternoon. Thank you.

[Operator]

This concludes today's conference. Thank you for your participation. You may now disconnect.