Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2021-Q3

[Operator]

Good day and welcome to the Odfjell Drilling Third Quarter 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, sir, and welcome to this investor conference call for Odfjell Drilling, where we will present the third quarter of 2021. My name is Eirik Knudsen. I'm Head of Investor Relations in Odfjell Drilling. As usual, Simen Lieungh, CEO, will go through the first part of the presentation today; and then Jone Torstensen, our CFO will go through the financials in part 2. Thereafter, we will have a Q&A session.For the sake of good order, we make reference to our disclaimer on Page 2 of the presentation.I will then leave the word to Simen. Please go ahead.

[Simen Lieungh, CEO & President]

Thank you, Eirik, and good day to all of you. Thank you for calling in. I'll give you the -- as usual, the headlines for the performance in Q3 and start with a key summary. Let me go through the different segments. And Jone will take you through the financials after I'm ready.So what I'm going to do here is just give you the -- if you have the presentation, I'll just announce the page and -- for you to follow. I'll go to Page #4. That's the picture we have used for the last quarters. We have the key numbers for the quarter is 275 -- USD 227 million for revenue. We have an EBITDA of USD 88 million. The cash position is still comfortable and improving, so cash of $135 million. The leverage ratio has been again reduced to 2.6, and we have maintained the backlog of about $2.3 billion. The equity ratio is close to 50% now.The company has the same structure with the mobile units providing 80%, 85% of the balance sheet. Well Services, we'll come back to that and energy. So it's the same structure.Page 5, the key summary. We still have -- we see a strong performance across all rigs. I'll give you more details later. We had during the quarter, as agreed with Equinor, to move Deepsea Stavanger into the same system as we have with Atlantic, and now Aberdeen. The continuous optionality with kind of rolling into new operations.We also had the pleasure to agree with Neptune Energy in June, the framework for a frame agreement, and we have signed a frame agreement with them for their development in the future. Yantai is a rig we do the management, though, has performed quite well. So Neptune is quite pleased with the operations. And by that, we also hope we can progress more into a more established relation with them.We have also developed an alliance internally with energy and Odfjell Well Services for P&A campaigns. We are currently bidding P&A campaigns in the U.K. And we see that market segment will maybe now, we think, going to be better and that -- so that's why we have combined our internal forces also with external partners to provide a complete solution on P&A activity, which will -- which we see is a growing market.We also were able to get -- in the sustainability report, we scored an A. I'll come back to that. It means a lot for us. because that type of recognition is significantly more important than it used to be, to be competitive in the market. So I'll come a little back to that why and how we did that.Page #6, we see that the message for that page is the very strong uptime performance by about 99% in average, which is great. And we never take that for granted. But good people, good operation, good assets, means that we get this.On Page #7, we see how now -- the coverage of the fleet, how that is. Atlantic, we'll start with Sverdrup Phase 2 in January next year. And after that, look, there's some period of options there. And we expect that Atlantic will just continue with Equinor in the future. We have seen the potential scope of work for that rig, and we are not really concerned about the engagement.Stavanger is, I would say, unfortunately, available just now has 1.5, 2 months white space this until 1st of January, reason being is just drilling too fast at well campaigns. That's the negative thing with well campaign, when you have an efficient machine like this. It's difficult to plan for everything, and we drilled quite effective with Lundin. We have agreed with Lundin to start up again early January, 1st of January, and then Equinor will take over.Aberdeen again, we are working for Wintershall now, and we will start with Breidablikk in April as a back-to-back to the campaign we do with the Wintershall. Nordkapp has contracted until '23. There's an option there. And we expect now Aker BP to call the option actually already late this year. And everything in that option is agreed and the scope is agreed. So that's going to be dark blue in the close future.Deepsea Yantai, the same. We have had an extension until summer next year and with more options to comment. And the reason we signed the frame agreement was, of course, to make sure that we have a net and get the stability that can kind of roll that rig further into the new programs they have already identified. So again, a quite predictable backlog. The EBITDA -- the level of EBITDA and the backlog and we -- it's our job to make that happen -- make that potential happen.Moving over to energy platform drilling. We see that really they are the same rigs we operate. Equinor, Wintershall, ConocoPhillips, BP and TAQA is the most active ones. We operate 16 rigs. And these options are very much based on performance. If we perform, the options are called. So it's a different mechanism in platform compared to the modules. And so far, we are quite okay with operations. We have -- we are earning bonuses. We are implementing new technologies. Sverdrup is now implementing new technologies to make it more efficient, more automatic drilling controls and so forth. And so we are continuously developing also the technology and the performance on these assets. We have hunger for more. So if possible, we are fighting for more to operate more assets. And that's quite positive.We also have seen a better market within engineering technology, and more projects to come. And we also will support our ESG activity, for example, with Oceanwind. And energy is a significant contribution area for supporting that initiative. And that's going to be, I guess -- and hope I mean, in the future, we'll see more of that to come, more diversification.Well Services has certainly been through a tough period. I mean we have been -- we still have Norway that we didn't have too much impact of COVID . It's been tough. I mean it's definitely not over, but we operate in more than 20 countries. We have quite many bases, about 15 bases around the world. And we have seen very much up and down, things being postponed, countries shut down, can't move people in or equipment in, can't move people out or equipment out. It's been a struggle for that case. And that has also hit the bottom line for that area.Nothing has been canceled, but very much postponed. Things was prepared, been postponed by COVID, start up again, postponed over again. For example, in Asia Pacifics, like Vietnam, Malaysia, Central/East Europe, Romania, Middle East, Kuwait, others, has been very much uncertain. We do believe this is now getting more -- as long as you get more vaccine, more -- you get more predictability about operations. And we certainly see that things are improving in that connection.On Page #10, you see the backlog. $2.3 billion, nothing more to say. That includes the options. The options are quite -- this is the backlog from platform drilling and module. We do not count backlog from engineering or well Services because that's more call-offs. That will be higher if you count that in, but it's not the, as you perfectly know, I've said that before. But the $2.3 billion backlog, and more to come, gives us predictability into the future, absolutely.On the Page #11, I think that what we are quite proud of. I have to say that we have been able to get an A score from the ESG evaluation. This governance group is doing that every year. They are evaluating the hundreds of the biggest stock-listed companies in Oslo Stock Exchange. And some years ago, we were absolutely at the bottom. And -- but we have done a lot since then, reporting installation of equipment. You can't really -- you can't cheat here. It's impossible. You have to follow the rules. You have to show by KPIs. You have to do kind of, say, do what you have said and perform, measure emissions, implement technology for that and report it accordingly according to a structure. And we have done that, and we have reached an A score.This is, in a way -- going forward, it's more or less equally important as doing the performance of HSC. ESG and HSC is the key to make your client look good, and they evaluate your performance directly. They are depending on us doing this to meet their own targets for governments and other stakeholders. So I think that -- this, for us, I believe, is the license to operate in the future and to maintain an A will be -- is the money, but we're going to make it. And we have done significant upgrades of our assets in the whole value chain to show that we are moving down to CO emission targets. We have a CO emission target in the company, CO emission drilling, we said 3 years ago, and that's definitely within range within some very few years. It's important for competition and ourselves.The market outlook on Page #12, we just say that. It's -- clearly, finally, we believe we will see an upswing in the rig market. That's been said for quite many years. And now we have seen that many, many years now, 7 years plus with very little investments, finally, we see -- but gas price, which has gone sky high, and the oil price to a level where quite a lot is positive, profitable. And we also see that this tax regime in Norway has released much more willingness to invest. And there are quite many many PDOs, Platform Development Operation, to be treated in a very few months' time. So even though we believe '22 is -- if we look at the local market for -- all over the place, '22 is a different year, a difficult year. '23, we see an upswing; '24, '25, '26, and maybe quite much longer, we certainly see that the market will stabilize.And harsh environment has been relatively okay. It's going to be better. The deepwater market has been terrible. It's going to be much better. Doesn't say too much because it has been almost flat, but it's picking up a lot now. And the jackup market is also following. So we see more activity, and that's a good thing. That will also generate better rates.There's been a lot of cap-level discussions and consolidation discussions. We have recently read that 1 of the 2 major rig players have merged -- plan to merge at least, which is an interesting move. We believe more to come. And I think, finally, there will be more balance between the supply and demand. That's the key for a better market. We believe that clearly, the client will clearly prioritize high-spec assets, clearly. With a lot of, as much as possible, according to what's mature technology for emission reduction, very important. All the clients we speak to, international, prefer assets high-spec with the right technology, performance on emission and so forth. All that story is told. Everybody is kind of pushed by their own ambitions and also by government requirements.But I think that also rig owners now will -- they don't need to be told what to do. We just do it because we want to do it. That means that we want to reduce emissions. So that's all the type of conferences that we have been through over the last half year, and everybody talk about this now. And somebody talks, every -- acts, but I think certainly that really to make the right moves for the installed technologies that to reduce emissions is clearly quite important.Well Services, the same. We see a better market. We have looked into the crystal ball for the next year and the year after. And if we don't get the full new wave of COVID shutdowns, the market looks much better. Based -- it's kind of depending on that, too, and with the increased vaccine around the world and kind of more experience with the virus, we believe clearly that the market with OWS is getting better.The same with energy and engineering technology. As I said, it's actually quite much better now, and we are striving to employ enough people. Like the PSA Norway said, the capacity and competence is the key for safe operations, and that's very, very true. We see that to make sure we keep a high level of safety and quality, there will be a struggle to get the right resources with the right competencies. After many years of just bleeding and reductions and so forth, now it's back again. And including the green shift, we clearly will see a tough job now in the future to get the right resources without going again and controlled our cost levels. So to keep to cost level to create activity, I mean the best companies with the best activity level or the right focus will probably the winners.So with that, more positive than from -- in a long time. I'll leave the word to Jone for financial updates. Thank you.

[Jone Torstensen, Chief of Staff, Executive VP & Interim CFO]

Thank you, Simen. Starting with the group summary financials on Page 14. Group operating revenue was $227 million compared to $210 million in Q3 '20. Group EBITDA was $88 million compared to $87 million in Q3 '20. The increase in operating revenue is mainly due to increased revenue in the energy segment from Q3 '20 to Q3 '21. More comments on that to the segment figures.After depreciation, net financial items and income taxes, the group delivered a net profit of $30 million compared to $19 million in Q3 '20.Page 15, MODU segment. Operating revenue for the MODU segment was $153 million compared to $151 million in Q3 '20. EBITDA was $78 million compared to $76 million in Q3 '20. The change is mainly explained by higher revenue for Deepsea Aberdeen and Deepsea Nordkapp, partly offset by reduced revenue for Deepsea Stavanger and Deepsea Atlantic compared with Q3 '20.Page 16, energy. Operating revenue was $56 million compared to $42 million in Q3 '20. EBITDA was $4 million compared to $5 million in Q3 '20. The decrease is mainly explained by reduced utilization of the engineering resource base compared to the same quarter last year. EBITDA margin was 7.5 percentage this quarter, which is an improvement compared to previous quarters this year.Page 17, Well Services. Operating revenue was $28 million compared to $24 million in Q3 '20. EBITDA was $8 million, same as Q3 '20. There was an increase in activity in both Norwegian and Middle East market compared to the same period last year. However, the EBITDA margin was slightly been reduced this quarter due to lower margin on product lines compared to last year.Page 18. In this slide, we have shown the bridge from some EBIT of the segments to the group consolidated profit before tax by adjusting for elimination, corporate overhead and net financial items.19, the balance sheet. Group gross interest bearing debt was approximately $1.1 billion end of September 2021, $135 million in cash end September '21 and equity ratio of 49.3% at the end September 2021.If you then turn to Page 20 and summary of the group cash flow statement, some highlights in this quarter. Net cash from operation was $60 million compared to $56 million in Q3 '20. There was a negative change in working capital of $18 million, mainly explained by payment from social security and other taxes. The investing activities of $70 million in Q3, mainly related to purchases of fixed assets in MODU. Such CapEx primarily relates to green investments and maintenance on all of our MODU units. We paid $42 million in installments of -- on credit facilities and leases. And as I said, the cash position at end September was $135 million compared to $149 million in Q3 '20.To sum up the quarter, MODU continue to build backlog and be a preferred partner in the harsh environment. Attractive harsh environment has set unhealthy outlook; for energy, increased activity in platform drilling focus to develop the service portfolio into new areas; Well Services increased activity in Norway and Middle East; ESG Sustainability Report 2020 scored A by the governance group; and key financials, earning visibility through USD 2.3 million order backlog; continue to deleverage and have a sound cash position.This concludes our presentation. We will now open for Q&A session.

[Operator]

[Operator Instructions] We'll now take our first question from John Abraham, a private investor.

[John Abraham]

What is the plan for dividends?

[Simen Lieungh, CEO & President]

The plans, we have the same solvency with 30% to 50% of net profit. We have still -- as we said, we have still the same ambition to pay dividend according to the result of the -- after the Q4. So that's the ambition. And let's say what -- let's see what's going to happen, but that's the ambition we have, same as we said.

[Operator]

[Operator Instructions] And we have a question from Karl Pedersen from ABG.

[Karl Pedersen]

A question regarding consolidation and what we will see now with Maersk and Noble pairing up. What kind of consolidation do you find to be most likely from your end? Is it full company consolidation? Will it be taking up some assets from other parties? What's your thoughts around it? And how are discussions progressing with the various partners?

[Simen Lieungh, CEO & President]

You are deep into the deepest strategic thinking in the company. So I can't kind of share with you all the details. But in general, we -- I think, first of all, the merger with Noble and Maersk into Noble cooperation makes sense. It looks quite interesting and probably a good way to consolidate, much better than what happened some years ago. So this is a good timing for them. They probably create a strong balance sheet and a strong fleet. They do not compete with us. So with -- I expect more of that really. I think that within the deepwater and jackup market, there will be more to come, I guess, after other companies also have left Chapter 11, a clean balance sheet, can do more kind of a restructuring of the fleet composition and create a better balance between supply and demand.In-house environment where we are mostly working, we certainly see that our company is a small company compared to many others. And -- but we have a healthy company and we have a strong balance sheet, and we do have predictability through a strong backlog. So we are quite open for different ways of working. And then you are into the very details how we think. Obviously, we have taken a pragmatic view on things. We believe we could be consolidated down the road under the right umbrella or terms. We can consolidate under right umbrella with the right assets and terms. But we don't want to kind of do it for just do it. The good thing with us, we don't need to do anything, and that's an okay position. But we certainly are looking for -- and that's no secret. We have been looking for some more capacity with the right assets. And that has been played around over the last few months.As you also know in the market, there's not too many of them. And the ones that are potentially available, many several companies are looking for that kind of capacity. So we are just one of the -- one among others. So I'm really sick and -- how should I say it, we will not kind of buy and raise too much capital, create more debt, dilute existing shareholders, blah, blah, blah. We will not do that. So we need to find a balanced way to create value. So if we pick up other assets or other things happen, it's going to be related to value creation. It sounds like -- so everybody say that, but that's true. That's true. And if we don't find the right solution, we don't do it.So maybe that's -- but I expect things to happen over the next year, at least. It will be a changed picture in 2022 compared to December '21. It's a different -- it's going to be a different picture in the market.

[Karl Pedersen]

And your areas of operation, what will you be looking to look beyond -- will you be looking beyond your current areas of operations? Or is it continued in your core competencies?

[Simen Lieungh, CEO & President]

No. It's -- the harsh environment is a relatively limited market. Also with players, it covers the Norway, U.K., North Bergen, South Africa, Canada. And we have been looking at other areas. We have looked at type of potential jackup operations. We have also looked at potentially support candidates with management support of deepwater drillship type of operations. And -- but we do not have any ambition to jump into the deepwater market now because they are so many of those that has been through Chapter that they are strong and -- quite strong players traditionally and with the Noble and Maersk, you see a great player of deepwater and jack-ups. So to go head-to-head with them, it's not -- it's definitely not a target for us.We will try to play our competencies, where we are good and where we see a long program. And within the horse area, we certainly see a decade-plus of okay business. And that's enough for us.

[Operator]

There are there currently no further questions in the queue. [Operator Instructions] And we have a question from Magnus Scherman from Reorg.

[Magnus Scherman]

You mentioned you wouldn't want to raise new money either in shares or new debt. Is that a hard no from your banks and from shareholders that, that will actually to not happen? Or if the right opportunity comes along to, say, buy a larger competitor, either within harsh environment or outside, then they would be open to that depending on that? How should we think about that?

[Simen Lieungh, CEO & President]

Well, I think was the way -- the following way. I think -- the one of the reasons we have survived with no Chapter 11 because we have been very disciplined to do our investments based on contract and backlog. So we do have a cash flow before we do the investments. And that goes for example the recent one. And if we ever should take -- for example, people ask me frequently, do we take the Deepsea Yantai over? Yes, maybe. When -- if we get a longer and bankable contract, then it's different, sir.It's -- if we are able to establish a backlog for certain assets, those assets are certainly more easy to finance and just do it because you want more assets. So it will always be based on creating a reasonably bankable backlog and then act on that based on certain things. We don't -- we see a bank market extremely difficult these days. So we are certainly looking for other instruments to finance what we are doing.We are -- we open for using our share as a value paper. We are open to use other instruments going forward if we find the right investment case. But we don't want to create any expectations and certainly in the investment base that we will start to speculate on things because we believe things are coming. I don't believe it until I see it. And that's the kind of a rule we have now, and that's the way we have survived.We have built on performance and our financial performance on backlog. That's the key. That's why we have gone into alliances. That's why we have entered Aker BP. That's why we entered Equinor. That's why we entered Neptune, for example, Wintershall. So we are sitting with the table and knowing what's coming and then we are more straight to the table and maybe even negotiate contracts like we do with -- have done with Equinor based on master frame agreements.So when we have that map ahead of us, we can start to plan A, B, C, D. We don't -- we miss E and F, so we need to find E and F. So that's the thinking. We are not -- a good investment will always be supported.

[Operator]

And we have a question from Rune Eliasson from -- a private investor.

[Rune Eliasson]

If you can hear me, congratulations with yet another solid quarter there, Simen. My question is really, can you add some color on the dividend that you mentioned? You have a strong cash balance, $137 million. You're probably around a net profit this year of $70 million, $80 million. So what can investors expect in payouts in Q1 in dividend?

[Simen Lieungh, CEO & President]

I can't give you that -- confirm now for reasons which I can't, unfortunately, share with you. But as I said, we have been quite open that we will prioritize dividend. We haven't paid dividend in many, many years. I think the last year was '14. Based on certain outcome of certain strategic discussions for the time being, we -- our ambition is to pay dividend. And that means 30% to 40% of net profit. That's what we have said. That's what we agreed with the Board. That's the ambition. But it depends on certain things that need to be cleared and -- addressed and cleared. So more specifically than that, I can't tell you. But I can assure you that the ambition is to share dividend, it is.

[Rune Eliasson]

Okay. I appreciate that. Just a quick follow-up. You're saying that you see the market tightening and inevitable. Before we see '23, you should think that the rates will start climbing. Have you seen any evidence in your ongoing discussions and contract negotiations that, that is the case?

[Simen Lieungh, CEO & President]

Well, currently, I haven't seen any data points given a higher dayrate. I have not done that. The reason being that -- but what we see is a longer lead time. We now discuss programs in '23 and '24. The lead time before action is longer and longer. That's a good sign.But then clients wants to secure assets, and then you are in a different discussion, right? So what is a good sign? Lead time is longer and longer. The dayrate have not been focused or established yet. But I expect that the dayrate will follow. Longer lead times is followed by high dayrates, that's -- at least has been the history. So -- and why shouldn't it repeat? I mean gravity works always. So that's a good sign. And that goes for many of the players over competition, too.But it's currently only for high-spec assets in our market. I'm quite sure that within deepwater market, the best 6, 7 general assets will go first on high dayrates and then kind of how much will come after. We see the same in harsh environment. We see the same in jackups. So now, it's important to show 3 things: high performance, ESG focus, reduce emissions and the traditional HSE. That's the key that drives you to the table.

[Rune Eliasson]

Again, solid quarter. Congratulations.

[Simen Lieungh, CEO & President]

Well, thank you. Thank you so much.

[Operator]

And as there are no further questions in the queue, I would like to hand the call back over to our speakers for any additional or closing remarks.

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

Okay. Thank you so much for participating. If you do have any further questions, do not hesitate to contact me or either of us, and we wish you all a nice afternoon. Thank you so much.

[Simen Lieungh, CEO & President]

Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.