Odfjell Drilling Ltd

OSE:ODL

Earnings Call Analysis

Record Quarter with Revenue and Dividend Hike

The company achieved a record with an operating revenue of $186 million, up from $165 million in the previous year, and a robust EBITDA of $87 million due to exceptional fleet utilization and cost control. Also notable is a hefty net profit of $184 million, including a significant reversal of impairment losses totaling $163 million, signaling confidence in future market prospects. Liquidity remains strong at $274 million with a reduced net debt of $620 million, underpinning a healthy leverage ratio of 2.1. The company maintains a formidable order backlog of $2.1 billion and declared a $14.2 million dividend, evidencing strong performance and a positive market outlook.

Record Quarter and Strong Financial Performance

Odfjell Drilling presented their Q3 2023 results, marking a record quarter with the strongest results since the company's strategic spin-off. A robust EBITDA of $87 million was achieved, even when based on what was recognized as low legacy day rates. The revenue for the quarter was $186 million, and the company boasted a maintenance of an impressive $2.1 billion order backlog. Additionally, for the first time in Odfjell Drilling's 50-year history, eight units have been operating simultaneously, resulting in a remarkable financial utilization of 98.4% across their fleet.

Solid Liquidity and a Growing Backlog

The company strengthened its liquidity position to $274 million and maintained a reassuring $2.1 billion order backlog. The equity ratio hit an admirable 60%, while the net debt stood at $620 million, leading to a leverage ratio of 2.1. This showcases a robust balance sheet and indicates the company's capacity for sustainability and growth.

Optimism in Market Dynamics and Potential Upswing in Demand

Looking at the market trends, Odfjell Drilling sees indications of a long-term upcycle. The supply side remains disciplined and tight, particularly for Tier 1 harsh environment rigs that are largely sold out. A significant reduction in the harsh environment fleet since 2015 supports the idea that we are at the cusp of a very healthy market, with the demand remaining consistent and a preference for high-efficiency rigs. Additionally, recent U.K. licensing rounds suggest potential market rebounds from 2025 onwards.

Strategic Financial Planning and Dividend Payout

The anticipated increase in day rates is expected to generate more cash for Odfjell Drilling, with EBITDA projections showing significant growth, especially from 2025. An illustration of EBITDA forecasts based on different day rate levels conveyed confidence in the future cash generation potential. Coupled with the completion of the majority of SPS (Special Periodical Surveys) programs, the company believes this will lead to a strong free cash flow, enabling them to increase dividend payments while continuing to deleverage the balance sheet. The net profit for the quarter was reported at $184 million, including a reversal of previous impairment losses amounting to $163 million.

Robust Results Leading to Dividend Declaration

The compelling financial performance and positive market sentiment fueled the declaration of a quarterly dividend of $14.2 million, which translates to $0.06 per share, set for payment in November.

Future Outlook and Growth Prospects

CEO Kjetil Gjersdal expressed satisfaction over the record quarter and indicated a positive outlook for the medium to long term. The company is actively considering expansion through M&A activities, provided that any such transactions are accretive and strategically align with shareholder interests. With no plans for ordering newbuilds, the growth is expected to emanate from operating their strong fleet at high levels, securing solid backlogs, and pursuing other viable opportunities.

Earnings Call Transcript 2023-Q3

[James Crothers, executive]

Good afternoon, everybody, and welcome to the Odfjell Drilling Q3 2023 Results Presentation. My name is James Crothers, and I'm an Investor Relations Officer of the company. And I'm joined today by our Chief Executive Officer, Kjetil Gjersdal; and our Chief Financial Officer, Frode Syslak.

Before we begin, your attention is brought to the important information slide of our presentation, which we'd invite participants to read in full. The presentation and reports that have been filed to Euronext and are also available on the website where you can read this documentation as well.

Our call today will begin with a brief summary of the quarter with Kjetil taking us through some of the key highlights before we then move on to reviewing our operational performance and move on to our financial review with Frode. We will then summarize the presentation and close the call. [Operator Instructions]

With that, I'll hand over to our CEO, Kjetil, who will take us through the key highlights from the quarter.

[Kjetil Gjersdal, executive]

Thank you, James, and good afternoon, everybody. I'm very pleased to present what has been another record quarter for our company and with the strongest results we've seen since the -- we did the spin of last year. Based on what we regard as low legacy day rates, we were able to achieve an EBITDA of $87 million. Revenue was $186 million, and we have maintained an order backlog of $2.1 billion.

And for the first time in our 50-year history of the company, we have now 8 units operationing during this quarter. All of them drilling in both harsh environment and on deepwater locations. And I'm particularly pleased to see that we now have achieved a financial utilization of 98.4% across the fleet, which I think is quite impressive. As I said, the managed fleet is also now fully deployed.

Hercules during July before it started, it's moved to Namibia towards the end of the period. And I think it actually arrived in Walvis Bay in Namibia today. And in addition, as a result of the strength of our market and the value of our units, we have made an impairment reversal of $163 million. And finally, we also declared another quarterly dividend of $14.2 million for Q3 2023, which will be paid out to shareholders on the 22nd of November.

So we can then move on to our key financial results, and we continue to demonstrate strength and future capability in our business. The liquidity position is increased with available liquidity now $274 million. Future earning capability remains strong with an order backlog of $2.1 billion. And our balance sheet remains robust. The equity ratio is now 60%. Net debt is $620 million, that gives us a leverage ratio of 2.1. I think this is all signs of a healthy, robust and strengthening business.

So we can then move on to our operations and start to show first where our fleet has been operating. And as I said already, first time that we have 8 units operating at the same time in the company. I think it's fair to say that the last year has been very busy for our organization. It's a huge amount of work to get these rigs that we've taken into our fleet up and running and get them to perform at the, what we like to see as Odfjell Drilling standards, and I'm very, very pleased to see and proud to see the result of that.

And looking more specifically at the fleet and the one operating in Norwegian continental shelf, the Deepsea Aberdeen has been working on the Breidablikk project. The Atlantic has been on Johan Sverdrup Phase 2, and Deepsea Stavanger has done various exploration projects. And all of these rigs has been with Equinor. And just to give you a sort of a hint towards how we're doing efficiently, I can mention that Deepsea Stavanger looks to be completing 13 wells during 2023, which is an impressive number.

Deepsea Nordkapp continues to be on contract with Aker BP and has been working on the all-time fleet. And when you look at the managed fleet, the Yantai has been on the NCS as well, working for DNO and Wellesley. As I said, the Hercules was in Canada for Exxon, ExxonMobil and has now just arrived in Namibia and is getting ready to start its new contract with Galp. And Bollsta and Mira were working offshore in Namibia with Shell and Total on their will say very exciting projects in Namibia. These are -- for the rigs that are in Namibia, these are deepwater wells, and we are very pleased to see how these rigs are performing down there.

Then we can move on to the backlog. I'm not going to dive into all the specific here, but you can see that we continue to enjoy a strong revenue backlog of around $2.1 billion. Our own fleet remains well booked into 2024 with firm contracts secured well into '25 as well. On our managed fleet, similarly has a good backlog secured. Hercules and Yantai booked into late '24, and the Bollsta, Mira have backlog until mid-'24, whereafter there are options, both with Total and Shell for both rigs.

Also on this slide, we can see guidelines for when our SPS are due to begin. And I have another good story from this quarter is that we're very pleased to share that the SPS for Deepsea Nordkapp, that is now 90% completed. And we've done all of that work offshore while the rig is in operation. This means that we do not expect to see any SPS idle time for that rig in 2023. However, there remains some whole work particularly to the thrusters that we plan to do in 2024, which we expect to take somewhere between 5 to 10 days. We have to go in calmer waters in short to do that. But this is -- the team has done a fantastic job with this SPS. And this is really a step change in how we execute SPS, and all credit to our SPS team and everybody involved with that.

So then we can go on to take a look at the market. We continue to see a strong market going forward. And just to repeat our preview, we believe that we are in the beginning of what is a very healthy long-term up cycle. And as you can see from this chart, supply side remains tight and utilization is increasing. For all practical purposes, the Tier 1 harsh environment rig, they are sold-out. And you can also look at the -- in line with our views, the harsh environment fleet has been reduced by around 30% since 2019, and 40% of 2015. And I think that is really paramount to the situation that we're in, that I've never seen supply side being in the situation that we are today and being really disciplined.

35% of the harsh environment semi subs are above 4 years old. 7 have departed from the North Sea. And as we also communicated earlier, we don't see any realistic chance of any newbuilds short to medium term. And as I said, the supply side remains very tight and disciplined. I would say that the demand remains consistent. There is a clear preference for the Tier 1 rigs. And when you look at the efficiency that these rigs are able to offer, you can understand why. And we see both North Sea and international demand to continue going forward. And also worth noticing that the latest U.K. licensing round, so 27 new licenses being awarded. With the government, the U.K. is continuing to show support for the U.K. Continental Shelf. And I would not rule out but this could lead to a rebound of the U.K. market from 2025 and onwards.

So to sum it up, ultimately, we believe that we will continue to on a longer-term basis to see higher day rates in the medium to long term.

And then we can move on to sort of what does this mean for us as a company. So we try to illustrate this here, and it should come as no surprise to you as a result of increasing day rates, we do generate more cash. We worked out some illustrative EBITDA forecast on the chart here and with different day rate levels. And here if you look at the dark blue column at the left, you can see our current EBITDA over the last 12 months has been $325 million. This is a legacy low day rates.

And as we gradually move into higher day rates to average $400,000, $450,000. And this is not if that happens, that is when it happens. It's already booked backlog. We will generate more and more cash, particularly from 2025 and onwards. And this, in combination with completing the majority of our SPS program, this will generate a strong free cash flow, making us able to meaningfully increase dividend payments as we move into 2025. And at the same time, we do continue to deleverage our balance sheet. I would like to mention that if we didn't pay any dividend at all, the company would be net debt-free in 2026.

And with that, I'll give the word to my CFO, Frode.

[Frode Syslak, executive]

Thank you, Kjetil. I will begin with the income statement on Page 12. As can be seen, operating revenue was $186 million compared to $165 million in Q3 '22. Operating revenue for the own fleet segment in the quarter was $147 million, while the external fleet was $39 million. EBITDA was $87 million in Q3 '23. EBITDA for the own fleet was $83 million, with strong achievement of performance incentives, good cost control and solid financial utilization. The EBITDA for the external fleet was $6 million. We were earning full management fee on Hercules only during parts of the quarter, and incentives earned from the managed fleet were low during the quarter, meaning that there is upside potential beyond the $6 million.

After depreciation, net financial items and income taxes, the company delivered a net profit of $184 million, which includes a reversal of previous impairment losses of $163 million. Based on significant favorable changes in the estimate used to determine the recoverable amount when the rigs were impaired back in 2015 and 2016, we have, in Q3, recognized reversal of impairment of $71 million for Deepsea Atlantic and $92 million for Deepsea Stavanger. The changes in estimates mainly relate to expected future day rates and the longevity of the up cycle.

Moving to Page 13 and the balance sheet. We see continuing deleveraging of the balance sheet with net interest-bearing debt of $620 million as of the end of the quarter and a leverage ratio of 2.1. The company has a robust balance sheet with an equity ratio of 60% following the impairment reversal, based on total assets of approx $2.3 billion. We have a sound cash position of $121 million with available RCF taking the total available liquidity to $274 million. Post period beginning of October, we utilized the term loan on Deepsea Stavanger of $121 million after amort and repaid the $95 million direct loan. This resulted in another $25 million of liquidity.

Moving to the cash flow on Page 14. We had a strong cash flow from operations of $80 million of the changes in working capital. CapEx for the period was $18 million, mainly related to the SPSs of Deepsea Nordkapp and Deepsea Atlantic. Repayment of borrowings were $35 million in Q3, where $9 million was scheduled installment and $26 million was repayment on the RCF.

Moving on to dividend. As a result of our performance during the quarter and continually positive market sentiment, we are pleased to declare a dividend of $14.2 million for the quarter, sorry, $0.06 per share. This will be paid on the 22nd of November. As noted previously, dividends will be declared in U.S. dollars with actual NOK payment per share determined based on the exchange rate at the record date. Combined with our Q2 dividends, Odfjell Drilling has paid $28.4 million to its shareholders since we instituted the quarterly dividend program in August.

And with that, I'll pass you back to Kjetil to summarize the presentation.

[Kjetil Gjersdal, executive]

Thank you, Frode. So obviously, we are very pleased to what has been a very strong and a record quarter for us. Operations have remained strong with good bonuses recorded during the quarter. Our entire fleet was active and performed well for our clients. And as a result, our EBITDA and revenue has once again hit new heights that has allowed us to continue to pay a dividend for the quarter.

The outlook remains positive in the medium to long term. And this quarter has resulted also in an impairment reversal. Our order backlog looks good as we progress through secure contracts. We look forward to moving on to continually higher day rates.

And with that sort of summary, I will pass it up to you, Jess, for the Q&A.

[James Crothers, executive]

Thank you very much. Operator, Jess, would you help us open the Q&A session, please? Thank you very much.

[Operator]

[Operator Instructions] We currently have no questions on the phone lines, so I will now hand over to James for some webcast questions.

[James Crothers, executive]

We've got a few questions in, so thank you very much for doing that. And if you do have any other further questions, please do just send them on the webcast system.

So the first question is how have the COSL contracts impacted the contracts which you have -- which will be set by market rates? Have these impacted market rates? Are the market rates going to -- on the market rates that we have on our contracts for Stavanger, et cetera, for those optional periods, are they going to be reduced because of these new COSL contracts?

[Kjetil Gjersdal, executive]

I can answer that. We don't see that as particularly relevant. I would like to stress that the cost of rig today represent a totally different type of rig than our high-spec Tier 1 rigs, and there should be a clear difference in day rates between those type of rigs. That being said, I think as many others, we're not really impressed by that level, but we don't see it as impacting us in any considerable way at all.

[James Crothers, executive]

Thank you very much. Another question is coming in. Are you pursuing expansion of your fleet through M&A activities? What factors do you consider to determine if a transaction is favorable for shareholders?

[Kjetil Gjersdal, executive]

Yes. M&A. I mean still very interested in that and are having entertaining dialogues around possible M&A activities. As you know, but I'm just going to repeat what we said there. It has to be accretive deals. It has to be accretive on an EBITDA multiple and on a dividend per share basis. And of course, it needs to be fit on a strategic level as well. But we believe that there are such opportunities out there. But yes, and we are looking into the possibilities there. But it needs to be -- it needs to sort of tick off those boxes that I mentioned there.

[James Crothers, executive]

Brilliant. Another question come in, in regards to Namibia. What is our or what is Odfjell Drilling's outlook given the successful results from Total and Shell? And what about field developments? What can you sort of say about Namibia?

[Kjetil Gjersdal, executive]

Yes. I mean Namibia continues to be a very exciting area for us to be in. I think it's still too early to sort of draw any conclusions. And as you know, there's been no some firm announcement on any field developers and so on. I think they're still in what we like to see as a data collect period, and it hasn't yet firmed up in any long-term contracts or any tenders specifically related to field development. But we're going to have 3 rigs operating in that area now. And yes, we're excited about that, but not any long-term contracts coming out of that region yet.

[James Crothers, executive]

Thank you. Another question has come in. How will Odfjell Drilling look in 3 years' time? What's the growth potential?

[Kjetil Gjersdal, executive]

Yes. The growth, I mean, obviously, that has to come from M&A. We're not going to order any newbuilds, I could say that. It's hard to say. We have a very strong fleet at the moment. We want to continue operating that at the highest levels and secure strong backlogs, and we will pursue other interesting opportunities out there. I won't speculate on how exactly we look in 3 years. But I think you can say that we are very positive about the future.

[James Crothers, executive]

Thank you. Another question that's come in here in regards to the remaining SPSs that we have upcoming. Are we able to do similar amounts of work offshore as we have for Deepsea Nordkapp?

[Kjetil Gjersdal, executive]

You have to keep in mind that Nordkapp, that was this 5-year SPS. That was the first SPS for that rig. So the scope of work for that is somewhat easier that, for instance, for the Atlantic which is up next, which is doing it's 15 years SPS. So we will do, we will take the learnings, of course, from Nordkapp and do as much as we can with the other rigs as well offshore. But there are a different scope of work on the remaining one that probably will require some more [ key set ] time on those rigs. But we for sure take out learnings from Nordkapp and implement on the other ones as well.

[James Crothers, executive]

Thank you. We'll take one more question from the submitted question on the webcast, unless something else comes through. [Operator Instructions] Asking about Norway, we say there are 13 semis currently and more are likely to depart. How do we see that affecting the supply-demand picture in Norway looking ahead?

[Kjetil Gjersdal, executive]

Yes. And that, of course, comes the demand picture, how does that pan out from '24, '25 and onwards. But I think it's fair to say, the only thing I can say that we expect it to be very tight. We might even, it's not unlikely, I would say, more than likely that you have, will have a lack of availability, particularly Tier 1 units for '25 and onwards which, of course, represents a very interesting situation. So my comment is going to remain tight going forward.

[James Crothers, executive]

Great. Thank you very much. I think we might close the webcast Q&A. Jess, unless we have any other further questions on the telephone line.

[Operator]

We have no questions on the telephone line.

[James Crothers, executive]

Great. Well, thank you very much, and thank you to everybody for submitting your questions and for joining the call. If you have any further questions or want to get in touch with us directly, my contact details are on the last page of the presentation and online. And please get in contact with my -- on my email address or phone line. In the meantime, I think we can close the call there. So thank you very much, operator, and thank you for joining the call.