Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Odfjell Drilling Q2 2022 Investor Call. At this time, I would like to turn the conference over to Kjetil Gjersdal, CEO. Please go ahead.

[Kjetil Gjersdal, executive]

Thank you, and welcome all to this investor conference call for Odfjell Drilling, where we will present the second quarter of 2022. And as mentioned, my name is Kjetil Gjersdal, and I am the CFO -- CEO of Odfjell Drilling. And today, I have with me my CFO, Frode Syslak.

So I will start and go through the first part of the presentation, and then Frode will cover the Q2 financials. And at the end, we will conclude the session with Q&A.

And for the sake of good order, we make reference to our disclaimer on Page 2, and we can then actually move directly over to Slide #4, please. And I want to start with a little bit of backdrop. Currently, we have an energy crisis, particularly in Europe with very high energy prices, and we see a greater focus on energy security.

There has been lack of upstream investments for a long period, and the industry needs to increase in advance significantly to compensate for decline of existing fields and to meet the growth in energy demand. And all of this provides a strong backdrop for Odfjell Drilling. And we can clearly see that the activity level in our sector is increasing, both in harsh environment and in deepwater areas.

And now this is the second quarter where we are presenting as a pure play drilling company after we did the spin-off of Odfjell Technology back in March. And both companies are now standing firmly on their own feet, and it is a pleasure to present a strong quarter and a positive outlook for Odfjell Drilling here today.

And for the second quarter of '22, we had a revenue of $163 million, an EBITDA of $79 million, a leverage ratio of 2.5x and equity ratio of 56%. And finally, we continue to build order backlog, and presently, the backlog value is $1.9 billion, including price options but excluding expected bonus and fuel-saving initiatives.

So we can then move over to Slide #5 to our highlights. And we had a strong operational performance in this quarter with our own fleet in full operations in Norway. And for the company, we see continuing deleveraging. We have a robust balance sheet and a very sound cash position.

On the commercial status, Equinor has exercised further options on Deepsea Stavanger, taking the unit into Q3 '23. We added a significant order backlog with the 5-year contract for Deepsea Stavanger with Aker BP, and I will return later in the presentation with more details about that one.

The Deepsea Bollsta was recently awarded a contract by Shell in Namibia. And in general, we see increased commercial and tender activity, both in harsh environment and deepwater market.

And if you look on the right side of this slide, we -- our recipe for this is that we strongly believe that we have the best rigs in this segment. We have a very strong, competent workforce. We seek to have the best people in the industry, and we strive every day to have the best culture to match the two above. That is an important sort of strategy for us that we seek to check in on every day.

Moving on to Slide #6. We continue our strong financial utilization with an average of 99% for our own fleet this quarter. Now these are strong numbers showing that we have a high predictable uptime, and all units have been in operations during the quarter in Norway.

We can then move on to Slide #7. And there is one big news recently that I assure that many of you have already noticed. And we are very, very pleased with the recent contract award by Aker BP and the long-term cooperation that we have under the alliance agreement.

With Aker BP's recent acquisition of Lundin, they have increased their portfolio. And Aker BP is expected to deliver 15 PDOs in Norway this year. And with that, they will have a lot of development work in the coming years. And we very much look forward to continue to develop our close relationship with them.

We believe that the contract is attractive on terms, in particular, given the length of the contract. And we do expect that the day rate will be at the ceiling level and also foresee escalations on the ceiling due to inflation. We also foresee that we will receive performance bonuses and fuel-saving incentives under this contract.

The terms and the length of the contract provides a solid foundation for our company as it gives long visibility, which is a good starting point for us when we are entering into future refinancing for the company.

This brings us over to Slide 8 and the overall contract status. So with the recent [indiscernible], this gives the following overview. I'll start at the top here. Deepsea Atlantic is working on the Johan Sverdrup Phase 2 and has a firm contract until mid-'23 with further options. Under the -- we have this continued optionality frame agreement together with Equinor, which is highlighted in yellow in the graph. And there are exit possibilities if we should not agree on new day rates for both Atlantic and Aberdeen.

Deepsea Stavanger commenced its well program with Equinor in January and has now firm options into Q3 '23 with Equinor having options until the end of '24. After that, Stavanger has the 5-year contract that I just mentioned on the previous slide.

Deepsea Aberdeen concluded its contract with Wintershall at the beginning of May and commenced the Breidablikk drilling program for Equinor on 8th of May. Breidablikk is a long-term program expected to take the firm operations into Q4 '24. In addition, there are also options tied to the contract potentially taking the operations into '26.

Deepsea Nordkapp has been operating for BP -- Aker BP on the Norwegian continental shelf in the quarter and is occupied with Aker BP into Q1 '24. There's also further options for Aker BP for use of the rig after that.

And the Deepsea Yantai, that just started -- just finished the well with Neptune. And this has, I think, study yesterday for PGNiG to do well for them. Then back to Neptune for another well. There might be some shorter stops 1 or 2 in '22 for the rig. However, we do see that there is work for Wellesley in '23, and we expect that we're going to fill up most of '23. And we are also positive that we can get backlog for the rig well into '24.

Deepsea Bollsta was recently awarded a contract by Shell in Namibia. The expected commencement for this work is middle of Q4 '22. It has a 12-month firm period and a 6-month option thereafter.

And then it's Deepsea Mira that is currently located at [indiscernible] south of Bergen. We are marketing the rig, and I can say that there are interesting leads also for this rig.

And then finally, we have the Deepsea Hercules, which is currently working for Equinor in Canada. It has firm operations until Q4 '22. And when that is completed, Odfjell will take over as a manager of Hercules when the rig returns from Canada. In order to secure work for the Hercules once the upcoming SPS is completed, we have already started operation preparations and are well into marketing of the rig.

So then we can move over to Slide #9 and sort of an overview of our backlog. So all in all, this provides us with a very solid order backlog. We now have an order backlog of USD 1.9 billion. And out of this, $1.4 billion are tied up to firm contracts. And the backlog value does not include any expected bonuses or incentive pays, but it does not include any revenue from the managed fleet.

Moving over to Slide 10 and the outlook. And as mentioned, globally, we see high energy prices, energy supply challenges and unprecedented cash flow generations from E&P companies. And to meet the oil and gas demand growth, the forecasted substantial new investments are required to compensate for the production decline of existing fields.

Also, there has to be done more exploration drilling. Deepwater market has been leading the way up until now with both utilizations and day rates improving while harsh environment has been more muted. And I have to say it is expected to be so, also until the, I would say, half -- first half of '23. But after that, we see a clear increase in the activity level also for harsh environment.

And we can then move on to the next slide, Slide 11. And in Norway, we do see a significant increase in the submissions of PDOs this year as the operators look to meet the '22 submission deadline with regards to the tax regime. This is expected to increase demand for drilling units for development work for the period beyond '23.

And we see, in particular, for production development work, there is a clear preference by our clients for Tier 1 high-spec harsh environment units with low carbon footprint, which fits very well with the ODL fleet and the experience that we have in our company. We see increased demand in Norway, and at the same time, we see supply reduction continue in the harsh semi market. This has been driven and is driven by recycling of harsh environment units and also units relocating to the international deepwater market, as we saw with the case with Deepsea Bollsta and its recent contract award in Namibia.

And further, due to regulating barriers to enter Norway and the lack of new build activity, the mobilization of incremental supply to Norway is inherently limited. This may result in demand outpacing available supply in the years to come, particularly related to the Tier 1 rigs. And we believe that this might lead to longer-term contracts for our industry and an upward pressure on day rates in Norway.

So with that, I would give my word to my CFO, Frode, who will take you the financials.

[Frode Syslak, executive]

Thank you for that, Kjetil. We are starting with the income statement on Page 12. The revenue for the own fleet in the quarter was $145 million, while the revenue related to the external fleet was $17 million. EBITDA was $79 million in Q2, which is equal to 48% EBITDA margin for our 2 reporting segments combined.

EBITDA for our own fleet was $79 million. And all 4 units had more or less full financial utilization operating in Norway. The EBITDA for the external fleet was $2 million, while corporate and other adjustments were minus $2 million in Q2.

The COVID testing regime was discontinued from 1st of April. And as such, we didn't have the same COVID costs in the second quarter as was the case in the previous quarter. Another improvement this quarter compared to Q1 was higher bonus and incentive pay and higher financial utilization.

For Q2 EBITDA, there was also a positive reclassification effect of $2 million due to long-term lease agreements being entered into for wired drill pipe and continuous circulation system. Note as for Q1 that following the spin-off of Odfjell Technology, the income statement of Odfjell Drilling shows the discontinued operations separately from the continued operations. The net profit of the continuing operations was $22 million for Q2 and $42 million year-to-date.

Moving to Page 13 on the balance sheet. We see continued deleveraging of the balance sheet with net interest-bearing debt of $677 million as of June '22 and a leverage ratio of 2.5. The company has a robust balance sheet with an equity ratio of 56% based on total assets of approx $2.3 billion, and the cash position is sound at $144 million as of June '22.

Before we open for the Q&A session, let us briefly summarize the quarter on Page 14. Generally, it has been a positive quarter for Odfjell Drilling with strong operating performance.

We have recently added significant amount of work and backlog in Norway with a 5-year contract with Aker BP. We were also awarded a contract for Bollsta in Namibia, resulting in reduced available supply in harsh environment markets.

We see increasing tender and contracting activity, both in harsh and deepwater markets, which provides a strong backdrop for the Odfjell Drilling fleet. We currently have long visibility but at the same time, see further upside potential beyond 2024.

And with this, we conclude the presentation and open for Q&A.

[Operator]

[Operator Instructions] We'll take our first question from Fredrik Stene with Clarksons Securities.

[Fredrik Stene, analyst]

Congratulations on strong operational quarter, I must say. My question relates to your managed business since you've covered mostly 2022 or you have covered your own fleet for 2022 and actually most of 2023 as well Yantai seemed for '23 work. And obviously, the Bollsta is going to Namibia and will work there for a year.

So I was wondering 2 things. For the Mira, are you looking at opportunities outside the North Sea also for that one? Or do you expect that rig to be in Norway?

And second part, if we assume that you have contracted all your 4 managed rigs, let's just say for simplicity's sake, current market day rate, what would you expect the quarterly EBITDA contribution to be from that management -- sorry, those management deals?

[Kjetil Gjersdal, executive]

Yes. Okay. I'll start with the first one. Yes, we are also looking for opportunities in international deepwater markets for the Mira but also in harsher environment areas. I think the most important thing with both the Bollsta and the Mira is get them as quickly as possible back to work.

I mean, this is high-spec, high-capacity units that should not be key side at this time. So yes, Fredrik, we are looking both internationally and in harsh areas. When it comes to expected EBITDA, I don't know, Frode, you want to comment on that?

[Frode Syslak, executive]

I think the general comment is that the management contracts are -- have terms that are quite customary for these type of contracts. Typically, we see a low management fee when we're not in operation and a higher management fee in addition to possibly some incentive payments when we are in operation.

Nothing we can give guidance or comment specifically on EBIT -- expected EBITDA level from the contracts. But I think using the 2021 segment figure, which also only includes Deepsea Yantai, that probably gives you a fair benchmark.

[Operator]

[Operator Instructions] And we do have an additional follow-up from Fredrik Stene.

[Fredrik Stene, analyst]

I will use the opportunity to ask about follow-up on the Bollsta contract. With the 6-month option that you have there, are you able to give any comments or color on that option? Was it priced? And if so, directionally and potentially, do you have any kind of day rate figure or estimate that you can give on that one? Or will it be up to market dynamics at that time?

[Kjetil Gjersdal, executive]

That Fredrik, I have to pass on, on the option side.

[Frode Syslak, executive]

We have to leave it with the [indiscernible] to comment on specifics on the contract. Sorry for that.

[Operator]

[Operator Instructions] And it appears there are no additional questions at this time. So that does conclude today's call. Thank you for your participation, and you may now disconnect.