Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2018-Q3

[Operator]

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

[Atle Saebø, CFO & Executive VP]

Thank you. Together with me today, I have Simen Lieungh, the CEO; and Eirik Knudsen, Investor Relations. We will today take you through the highlights and material events, the segment reporting, financial information before we end this call with a short summary and then open up for Q&A session.We go to Page 3, which is the key summary for third quarter 2018. We have the bank financing of Deepsea Nordkapp secured of USD 325 million. We have a strong operational performance across the fleet. We have a strong performance of Drilling & Technology. Well Services increases turnover, but still pressured on margins. And we have improved market terms.We move on to Page 4, where I'll take you through the highlights and material events. We start with the subsequent equity offering, in conjunction with the USD 175 million private placement in April. Odfjell Drilling on the 11th of July completed a subsequent offering by issuing 46,302 new common shares at NOK 36 per share.Then we go on to the bank financing of Deepsea Nordkapp. We accepted, on the 28th of August, a firm offer for USD 325 million senior secured term loan facility for Deepsea Nordkapp. The facility includes a 10-year tranche of USD 162.5 million guaranteed by K-SURE and a 5-year commercial bank tranche of same amount. The loan facility is available at delivery of Deepsea Nordkapp, expected at year-end. The facility shall be repaid by quarterly installments of USD 8.5 million, with the first installment 9 months after delivery of the unit. The final loan documentation was entered into on end October 2018. Following this, Deepsea Nordkapp is fully funded, including ready-to-drill project costs and working capital requirements, with bank debt, equity and yard seller's credit.Then we continue with the highlights on Page 5, and start with the additional work secured for Deepsea Bergen. We signed, on the 11th of September, a contract with Ithaca for 1 firm well plus optional wells to be mutually agreed on the UK Continental Shelf. Commencement of the firm well is scheduled for February 2019, with an expected duration of 115 days and will be followed by a contract on Norwegian Continental Shelf with OMV for a firm high-pressure, high-temperature well as earlier announced.Furthermore, Odfjell Drilling has, on 16th of November, signed a drilling contract with MOL for 1 exploration well in direct continuation of Deepsea Bergen's contract with OMV, estimated to expire in Q3, Q4 2019. The estimated duration is approximately 50 days plus possible well testing. The addition of the well with MOL, we'll keep Deepsea Bergen employed throughout 2019.Then we go on with the extension of Drilling Services bank facility. We have on November 6 entered into an amendment agreement to extend the facility to November 2019. Additionally, the waiver consent regarding the debt service coverage ratio of the Odfjell Drilling Services group has been extended to the new maturity date of the facility. The amortization profile of the loan will be unchanged with semiannual installments of USD 20 million in November 2018 and May 2019. The balloon will consequently be USD 250 million at the new maturity date.Then we go on to Page 6, and start with the migration to the U.K. The Board of Directors of Odfjell Drilling Ltd. has, on November 19, following a strategic review proposed that the company should be managed and controlled from U.K. rather than Bermuda. Some of the key reasons behind this conclusion are the size of the group's existing operations and presence in the U.K., the location of key personnel in U.K. and the fact that the U.K. is well established as a holding company jurisdiction for international groups because of its globally recognized legal system and tax framework. The company's new head office will be in Aberdeen, which will ultimately result in the company becoming resident in the U.K. for tax purposes. The proposal is subject to approval by the company's shareholders, and a special general meeting is convened for 11th of December 2018.Then we go over to Page 7. Segment reporting for the Mobile Offshore Drilling Units. And as you can see, we continued our strong operations on all units in third quarter, with financial uptime of 98% in average across the fleet. I will take you through the contract status for each of the rigs on the following slide.Let me go to Page 8, which is the contract status for the drilling units, and we start with Deepsea Bergen, which will operate for Equinor until January next year. The unit will thereafter move to the UK Continental Shelf for 1 well drilling contract for Ithaca starting in beginning of February. Thereafter, the unit will return to Norway and commence the work for OMV around mid-second quarter next year. This well has an expected duration of 130 days before we commence drilling for MOL Norge, which will take us through 2019 or into 2020.Deepsea Atlantic will start its new drilling contract for 18 months under the Master Frame Agreement with Equinor early next year, following the completion of the current Johan Sverdrup contract and the 5-year special survey to be carried out in December.Deepsea Stavanger concluded its contract with Aker BP on 11th of October this year and is currently mobilizing to South Africa for the 1 well contract with Total. It is expected that operations phase will start in December this year. The unit will thereafter return to Norway and continue on a 12-months contract under the alliance agreement with Aker BP. We estimate commencement of this contract to be in May 2019.Deepsea Aberdeen is contracted until April 2022 for BP for work West of Shetland.Finally, the newbuild Deepsea Nordkapp is scheduled for delivery around end of this year and will thereafter mobilize operations with Aker BP on the Norwegian Continental Shelf. The commencement of operation is expected in May or June next year. We have a firm MODU contract backlog of approximately USD 1.2 billion at end of the third quarter with additional priced option for another USD 0.2 billion.Let me go on to Page 9, which is the Platform Drilling & Technology segment. The Platform Drilling is secured by medium- to long-term operations on the UK and Norwegian Continental Shelf for BP, TAQA, EnQuest, Equinor and Wintershall. On December 1, 2018, Serica Energy will take over operations on Bruce platform from BP. Odfjell Drilling will continue to deliver Platform Drilling Services on Bruce to Serica Energy. Johan Sverdrup operations started in Q3 2018 after a successful pre-operation phase. In addition, Mariner is expected to start operations in 2019. Platform Drilling continues to provide safe and efficient drilling services to our clients combined with improved financial performance. Platform Drilling operations are secured by medium- to long-term contracts with a contract backlog of $1.1 billion, whereof $0.8 billion is priced options.Then we go over to the Well Services segment on Page 10. Well Services is now operating in around 20 countries worldwide, including 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 line is still representing a relative small share of Well Services revenue. However, the market outlook is promising for this service area.Then we go on to Page 11, the contracts backlogs. At end of September this year, the order backlog was USD 2.5 billion, whereof USD 1.5 billion is firm contracts. Revenue from frame agreements and call-off contracts in Well Services and revenue from Technology is not included in the backlog.Then we move on to Page 12, 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 resulted in major impairment across the sector and oil companies have been forced to reduce costs and establish more efficient operations. The efficiency programs carried out by the oil companies have led to a substantial cost reduction in field development and production.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 market. This has led to an increased utilization of the harsh environment fleet. The ultradeep water market still remains challenging 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 lower activity level for development and upgrade projects over the last few years. Drilling & Technology has experienced an increased demand for its services and is well positioned to take part in the coming market recovery.Then we move over to the financial section and start with the group summary financials on Page 14. The group operating revenue was $181 million compared to $178 million in same quarter last year. Operating revenue increased due to higher activity in Drilling & Technology as well as Well Services segment, offset by decreased revenue in the mobile drilling units segment from third quarter 2017 to third quarter 2018.The group EBITDA was $69 million in third quarter compared to USD 81 million in third quarter 2017. The EBITDA was, however, in third quarter 2017, including a gain from sale of our investment in Robotic Drilling Systems of approximately $10 million. And the EBITDA margin in third quarter this year was 38%, same level as in second quarter this year. The depreciation was $40 million, same as in third quarter '17.Net financial expenses was also at the same level as the same period last year. The income tax this quarter was $1 million compared to $2 million in third quarter 2017. And at the end, the profit for the period was $8 million, same as in second quarter 2018.If we then move over to the segment reporting for the -- start with the mobile drilling units. The operating revenue for the MODU segment was $119 million compared to $128 million in third quarter 2017. The change is mainly explained by lower revenue for Deepsea Stavanger compared to the third quarter 2017. EBITDA was $59 million compared to $65 million in third quarter '17.The EBITDA margin was 49% at same level as third quarter 2017. Depreciation was also at the same level as it was in third quarter '17. It was $33 million. The EBIT ended then up at $26 million compared to $31 million in third quarter '17, for the same reasons as already explained.If we then move over to Page 16, which is the segment reporting for the Drilling & Technology, and start looking at the operating revenue, which was $40 million in the quarter compared to $29 million in the same quarter last year. The increase in revenue was primarily due to an increased number of Platform Drilling contracts in operation and increased activity in the Technology segment compared to same period last year. EBITDA was USD 7 million compared to USD 11 million in third quarter '17. But again then we have to adjust for the sale of the company shares in Robotic Drilling Systems, which were included in the third quarter '17. The Q3 2018 EBITDA is mainly affected by higher volume and higher margins in both Drilling & Technology in addition to some reversal of accruals in relation to change of contracts. The EBITDA margin in the period was 17%, and this is giving an EBITDA margin year-to-date '18 of approximately 8% in this segment.If we then move over to Page 17, which is the segment reporting for Well Services. We can see that operating revenue was $27 million compared to $26 million in third quarter '17. The increase in revenue for the overall segment in third quarter '18 is explained by higher activity levels in the Norwegian and Continental Europe markets, partially offset by lower activity in the Middle East, Africa and Asian markets in the same period.The EBITDA was $7 million, same as in second quarter this year. EBITDA margin was 27%, also at same level as in the second quarter this year. The decrease in EBITDA compared to last year is mainly due to lower margin on the contract portfolio and cost related to the mobilization of new contracts and increased third-party equipment rentals. EBIT was $1 million, same as in the second quarter of this year.If you then move over to Page 18, it's a listing of the eliminations and reconciliations, which have been included for your information, and I will not go into the details here for this eliminations.Then we move over to Page 19, which is a summary statement of the financial position. And if we start looking at the group's interest-bearing debt, that's now been reduced at USD 1,155,000,000 at end of third quarter 2018. At the same time, we have $184 million in cash and cash equivalents at the end of the period, and an equity ratio of 44% at the end of third quarter.Then we go over to the summary statement of cash flow on Page 20. And here we can see that we had a net cash from operations of $32 million in the third quarter. Net cash from investing activities was negative with USD 15 million, mainly relating to newbuild in progress. Net cash from financing activities was negative with $15 million related to installments on existing credit facilities and end up with a cash of $184 million at the end of September 2018 compared to $178 million at the end of third quarter 2017.If we then go over to Page 21 where we try to give a summary by end of third quarter. If we start with the mobile drilling units, we have a fleet secured by medium- to long-term contracts, and the market is improving and we observe an increasing demand for the Odfjell Drilling fleet.Let me go over to the Drilling & Technology. We have continued a positive financial performance in the period. Platform portfolio is secured with medium- to long-term contracts. We have a mobilization of Johan Sverdrup in third quarter, and we have the Mariner mobilization early next year.Well Services. The recent increased tender activity in the European and Middle East markets. However, due to some oversupply of equipment, keeping prices at low levels, but the turning point has passed.Key financials. Earnings visibility improved $2.5 billion order backlog, and together with a book equity ratio of 44% and a cash position of $184 million at end of the third quarter.This includes (sic) [ concludes ] our presentation. And we will now open for question sessions. So please open for questions.

[Operator]

[Operator Instructions] We will take our first question from Lukas Daul from ABG.

[Lukas Daul, Analyst]

Atle, you mentioned that Atlantic will undergo SPS in December. Was it this year? And can you sort of give us a little bit more flavor on the duration and how do you intend to do it?

[Atle Saebø, CFO & Executive VP]

Yes. Deepsea...

[Simen Lieungh, CEO & President]

It's -- we plan for -- we are completing the work with Equinor in the first phase. So we are starting the SPS in early December, which is scheduled a little earlier than we planned for this year. And then we will do the SPS hopefully until just before Christmas and be back on track late this month.

[Lukas Daul, Analyst]

Okay. So it's less than a month out of day rate then?

[Simen Lieungh, CEO & President]

Yes.

[Lukas Daul, Analyst]

Okay. And you previously talked about sort of streamlining the process of the SPS and using sort of the experience that you have had from the past. So do you now sort of want to throw out a number, where you think you're going to land in terms of the CapEx out like?

[Simen Lieungh, CEO & President]

We haven't experienced now with the SPS of these assets that we have. It's a process that we start with all the SPS activity within those very few days. We have already done quite a lot, but typically an SPS with these assets is about $35-plus million.

[Lukas Daul, Analyst]

Okay, that's good. And then on the contract. The last contract you signed for Deepsea Bergen, you sort of mentioned that you have been able to put in some performance-related bonuses. And without being too specific, can you sort of talk a little bit about the structure? What is it related to? And whether you think that's going to be a feature on the future contracts as well?

[Simen Lieungh, CEO & President]

Regarding Bergen, we have worked quite hard to have a back-to-back operation -- continuous operation. Now we have, as Atle explained, we have a continuous operation till the end of '19, and we also see quite -- we are quite optimistic, frankly, to continue that into '20. So -- and there are bonus elements in there. I won't speculate too much then because bonus is bonus and you have to earn them. The base rates are, we have indicated, we are -- most of it very satisfied with the rate, going to be a little lower in the U.K. but when you come back here to Norway, we are at the level where we certainly are okay. And the bonus elements in this is linked to performance based on estimated days to drill the wells, complete the wells. And those targets will be set by the clients, together with ourselves. And if we're able to do better, we are okay, if worst, it's not. So it's a -- base rate is the floor. I've never speculated bonuses.

[Lukas Daul, Analyst]

Okay. And I guess -- yes, that makes sense. Okay. And then on just in Stavanger, as it's moving to South Africa. How should we think about sort of how are you going to record the revenue on that rig during that contract down there?

[Simen Lieungh, CEO & President]

First of all, we are -- right now, we expect to start -- hopefully, mid-December, we hope to be -- to complete it. And on January -- second half of January, I see a lot of uncertainty around there, so it's a -- so we have to wait and see how that goes. We are quite optimistic that, that's going to be okay. And Atle, you can just comment about how we are phasing the income on that operation.

[Atle Saebø, CFO & Executive VP]

Yes. We are now -- as we're following the new IFRS standard hope to book the income. And we then have to book the income throughout the days we are in drilling operations. So if we mobilize for 2 months and we drill for 2 months and we have a demobilization for 2 months, we have to book the income for the whole period during the 2 months of operations. So over the period, it will give an okay picture, but you can't see it from the mobilization or demobilization phase alone, you have to look at the whole period because the income will be taken during actual drilling period.

[Lukas Daul, Analyst]

Yes. And does the same apply -- does it apply to OpEx as well, that you defer the OpEx, and sort of account for it during actually executing the contract? Or is OpEx going to flow through the P&L as normal and you just have to defer all of the revenue?

[Atle Saebø, CFO & Executive VP]

No. The OpEx during the mobilization will be kept on the balance sheet and included in the actual drilling phase because the demobilization will be taken as cost during the demobilization.

[Operator]

[Operator Instructions] There are no further questions. I would like to turn the conference back to your host for any closing or additional remarks.

[Atle Saebø, CFO & Executive VP]

Okay. If it's no more questions, thank you from Odfjell. I want to thank for the attention.

[Simen Lieungh, CEO & President]

Thank you.

[Atle Saebø, CFO & Executive VP]

Okay, thank you, everybody.

[Operator]

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