Odfjell Drilling Ltd

OSE:ODL

Earnings Call Analysis

Strong Q3 Performance with Dividend Increase Expected

In Q3, Odfjell Drilling achieved a solid $186 million in revenue and $83 million EBITDA, despite minor downtime from maintenance on the Deepsea Atlantic. Financial utilization of the Own Fleet was an impressive 97%. The company holds a robust order backlog of $1.9 billion, ensuring stability until mid-2026, with expectations for higher day rates as contracts transition. A quarterly dividend of $14.4 million was announced, and company leadership anticipates a potential increase by mid-February based on strong forward earnings, possibly doubling the 2025 dividend. Overall, optimism surrounds future operational growth, particularly in the Norwegian market.

Financial Performance of Q3 2024

The earnings call revealed a stable performance for Odfjell Drilling in Q3 2024, with operating revenue remaining flat at $186 million, consistent with Q3 2023. The company's Own Fleet generated $144 million of this revenue, while the External Fleet accounted for $42 million. Significantly, the adjusted EBITDA totaled $83 million, with margins reflecting a strong performance—53% for the Own Fleet and 17% for the External Fleet. After the deduction of corporate overhead, the net profit stood at $19 million.

Strong Backlog and Future Revenue Expectations

One key highlight from the call was the company’s robust backlog of $1.9 billion, securing contracts through at least mid-2026. Kjetil Gjersdal emphasized confidence in sustaining high day rates for their fleet, showcasing a positive revenue outlook, especially as the Deepsea Atlantic transitioned to a higher rate of $400,000 per day after a successful SPS (special periodic survey) program, which has now concluded.

Operational Efficiency and Changes in Maintenance Schedule

Despite some downtime from the SPS activities, operational efficiency remained high. The Own Fleet achieved a 97% financial utilization rate, underscoring effective management of resources. However, there's a minor shift in the planned SPS schedule, moving the Deepsea Aberdeen's maintenance to the first half of 2025 instead of Q4 2024, which was done to optimize offshore operations. This decision is anticipated to have no adverse impact on CapEx allocation or the dividend strategy.

Dividend Policy and Expected Increases

In alignment with their dividend policy, Odfjell Drilling paid out a dividend of $0.06 per share for Q3. Management expressed optimism about increasing the dividend in the upcoming quarters, with expectations for a potential doubling by 2025. The management is committed to maintaining a stable dividend distribution owing to the stable cash flow generated by ongoing operations.

Market Trends and Future Demand

The company anticipates increasing demand for rigs in Norway, projecting a shortfall where 1–2 additional rigs may be needed by 2026. This growth potential is underpinned by ongoing discussions with clients focusing on expanding operations, especially within carbon capture and storage (CCS) interests. The international market is expected to pick up by late 2025, specifically in West Africa, signaling positive long-term prospects.

M&A and Market Positioning

Management indicated ongoing engagement in assessing merger and acquisition opportunities, although strategic restraint remains paramount to ensure deals are accretive to shareholder value. The focus is on identifying attractive targets that would enhance operational capabilities without diluting dividend potential.

Closing Remarks and Future Outlook

Odfjell Drilling is marked by a strong operational performance in Q3 2024, ensuring stability amid scheduled maintenance. With a firm contractual backlog, increasing day rates, and plans for higher dividends, the firm is well-positioned for growth in a recovering market. Kjetil Gjersdal's optimism, coupled with strategic operational decisions, suggests a favorable horizon for both existing and prospective investors.

Earnings Call Transcript 2024-Q3

[James Crothers, executive]

Good afternoon, everybody, and welcome to the Odfjell Drilling Q3 2024 Results Presentation. My name is James Crothers, and I'm the Investor Relations Officer at the company, and I'm joined today by our Chief Executive, Kjetil Gjersdal; and our Chief Financial Officer, Frode Syslak.

Turning to our important information slide. Before we begin, your attention is brought to this slide, which we would encourage participants to read in full. Note that this presentation is only a summary of the quarter, and the more comprehensive quarterly report should be read separately. Both that report and today's presentation are available on our website, www.odfjelldrilling.com.

Our call today will begin with a brief summary of the quarter with Kjetil taking us through some of the key highlights. We will then move on to discussing our operations during Q3 and then move on to our financial review with Frode. We'll then summarize the presentation and close the call. Following the presentation, we'll open the Q&A session. [Operator Instructions]

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

[Kjetil Gjersdal, executive]

Thank you, James, and a very good afternoon to everybody. So we're quite pleased today to present the Q3. It was what we would describe as a successful working quarter for us. And looking at the results, despite the SPS on Deepsea Atlantic, which resulted in 19 days of net downtime, that is after being adjusted for rate compensation during the yards day, we ended up delivering a strong result of $83 million of EBITDA and $186 million of revenue during the quarter. Minus the Deepsea Atlantic SPS, our Own Fleet achieved a financial utilization of 97%.

Our strong EBITDA generation is partly down to the Deepsea Atlantic moving on to higher rates following its SPS. And this is the first of our units to transition off what we describe as legacy day rates. And as many of you are aware, we have much more to come in this regard. Our company maintains a good solid order backlog with [ $1.9 ] billion of firm contract coverage until at least mid-'26.

And finally, we are again pleased to once again announce a dividend for the quarter of USD 14.4 million, equal to 6p per share. Looking ahead, we now have clear visibility, and our intention is unchanged from last quarter. We still very much intend to increase our quarterly dividend from our Q4 results.

And then we move on to our operations. As per previous quarters, the Deepsea Aberdeen, the Atlantic and the Stavanger were all working for Equinor. The Atlantic and Stavanger were working on various projects on the Norwegian continental shelf, while the Aberdeen was working on the Breidablikk field. The Deepsea Nordkapp remained working with Aker BP and was also working on various projects on the NCS. The Yantai was working with Shell throughout most of Q3 and is now, as we speak, in the yard completing its SPS program. And the Deepsea Yantai is expected to complete its SPS shortly before it begins work with its next client, which is PGNiG. The Deepsea Mira remained with TotalEnergies and was operating in Congo before it began mobilizing back again to Namibia. The Deepsea Bollsta was completing its SPS during Q3 and has since sailed away to begin work with Springfield Group offshore of Ghana. And finally, Hercules was working with Equinor throughout Q3 on an exploration campaign offshore Canada. It has completed its work post period and is now on its way to Norway.

Then we move on to look at further to our backlog, and that one remains as secure as ever. And as you can see from the chart, we are gradually getting into increasing day rates for our owned units. All of our own units have firm backlog now until '27, except the Atlantic, which has a firm backlog until mid-'26. And whereafter it has priced options until near the end of '26. We remain very positive about our forward backlog and with $1.9 billion of firm backlog ahead of us in total, Q3 saw the start of our units moving off the legacy day rates, with the Deepsea Atlantic moving on to a day rate of 400,000 after they completed the SPS. And with more of our units then transitioning to higher rates in early '25, we really much look forward to this generating significantly increased revenue going forward.

Then I will give you an update on the SPS. Our SPS programs are ongoing. There is a slight change of plan, which we highlighted also in the last quarter's call. The Deepsea Aberdeen will now begin its SPS in first half of '25 rather than in Q4 '24. Absolutely no drama to this. The postponement is an agreed schedule change with Equinor in order to optimize offshore operation, and it is not anticipated to change any CapEx allocation for the rig's SPS or impact the company's forward dividend strategy. And as we noted in previous quarters, our CapEx allocations for the remaining 2 SPSs that remains around $50 million per unit and with 2 to 4 weeks of off-hire time per rig. The timing of the Deepsea Stavanger remains unchanged at Q2 2025. And also, our External Fleet has been going through SPS programs with the Deepsea Bollsta completed its SPS in late Q3. And Deepsea Yantai, as mentioned earlier, is undergoing its SPS at CCB outside of Bergen as we speak.

So then we turn to the market outlook. And we maintain our view that the demand in Norway remains consistent. Demand for rigs in our sector, we anticipate to continue to increase in Norway, particularly from 2026 when our fleet begins to come off contract. There are multiple developers in Norway, who are actively seeking to grow on the shelf, and we expect this demand alone that there will likely be need for more rigs in Norway from 2026 compared to the rig count as per now.

Also in the coming months, it's worth noting that we are drilling 3 carbon capture and storage wells for clients. CCS is in an early stage in Norway at the time, but given the interest and requirements to increase the amount of CCS projects, we expect CCS growth could add further demand to our expectations.

Internationally, we expect demand to pick up in late 2025 and in 2026, particularly and particularly then in West Africa. We also expect to see longer-term contracting opportunities in '25 and '26 as some of the new exploration projects such as the Orange Basin offshore Namibia and South Africa begin to mature. In addition, operators continues to consider developing projects in Suriname and the Falkland Islands to name a few.

So ultimately, on the market, we maintain our view that we expect day rates for use of our units should remain at high levels and further increase from '26 and onwards.

And with that, I will now pass it on to our CFO, Frode, to go through the financial review.

[Frode Syslak, executive]

Thank you, Kjetil. I'll start with a summary of the income statement. As can be seen, operating revenue in Q3 '24 was $186 million, same number as in Q3 last year. Operating revenue for the Own Fleet in the quarter was $144 million, while the External Fleet was $42 million. EBITDA for the Own Fleet was $77 million, a margin of 53%, and the EBITDA for the external fleet was $7 million, a margin of 17%. Less corporate overhead and other adjustments, the group EBITDA was $83 million. And the company delivered a net profit of $19 million in Q3.

Moving to Page 12, on the balance sheet, we continue to see deleveraging with net debt reduced by $12 million to $532 million during the quarter. The leverage ratio is 1.7. The company has a robust balance sheet with an equity ratio of 63% based on total assets of approximately $2.2 billion. The available liquidity is $227 million, including the undrawn RCF of $109 million. The available liquidity remains unchanged from last quarter despite CapEx payments of $31 million during Q3.

We'll take a closer look at the cash flow movement as we now move to the next slide. We're continuing to see consistent generation of operating cash. Q3 produced cash flow from operations of $75 million. Net interest paid was $7 million, which is a reduction from last quarter due to bond interests being paid semiannually in Q2 and Q4. As mentioned, CapEx for the quarter was $31 million, with close to 2/3 of that pertaining to the Deepsea Atlantic SPS. Net cash flow from financing activities was minus $17 million. There were no drawings made on the RCF during the period. Dividends paid in Q3 were $14 million related to the Q2 results.

In accordance with our dividend policy, we maintain a dividend payment of $0.06 per share for the quarter with the last day, including rights being 14th of November and payment to be made on the 27th of November. Our intention to increase future dividends remain intact, and we see a strong potential for this as we have now begun to move over to higher revenue contracts. A dividend increase is now expected to be announced in relation to the Q4 results mid-February.

With that, I'll pass back to Kjetil to summarize.

[Kjetil Gjersdal, executive]

Thank you, Frode. So all in all, Q3 has been a good working quarter where we have achieved our operational goals and generated strong results despite the downtime due to the SPS done on Deepsea Atlantic. I'm very proud of the SPS team and the people that were involved with that. It was -- the project was completed ahead of time and on budget, a very complicated SPS, and the unit is now back in operation. It is working excellently, and it has also moved on to a higher day rate. Our future revenue remains well secured with our firm backlog of $1.9 billion until at least mid-2026. And the company remains confident about the forward market condition and for its units to command continued high day rates at renewal.

And finally, we have declared another dividend for Q3. And as I said before here, we do have a clear intention to increase that from Q4 results. So ultimately, we are very pleased with our performance in Q3 and look forward to a new year with strong optimism. Thank you very much.

[James Crothers, executive]

Thank you, Kjetil. [Operator Instructions] Our operator, Sergey today, can you help us open the Q&A session, please, Sergey?

[Operator]

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

[Fredrik Stene, analyst]

Kjetil and team, good performance as always. So I have a couple of questions relating to the future, obviously. And I thought it would be good to start with your own contracted fleet. You are, as you highlight, contracted firmly through the mid-2026 on all of your vessels. When should we expect the next data point or next contract on any of those 4 units since it's effectively 2-plus years until most of them are available. Is that something that can happen imminently? Or do we have to wait a year to see anything on the news front for those?

[Kjetil Gjersdal, executive]

Yes. Fredrik, thank you for the question. It's a bit -- the answer is a bit -- there's 2 answers to your questions. Some of our contract models and particularly the Nordkapp, for instance, then we have sort of a model with Aker BP, where we sort of just add on a year at a time. And typically, we enter into those discussions and to agree on day rates approximately 15 months ahead of the contract ending -- or the firm period ending.

However, there is discussions with clients about adding more firm back to some of our rigs, so which could sort of, yes, lead to earlier announcement typically the 15 months ahead. So I would say, yes, it's possible that we can announce some more backlog in not too long. But normally, as I said, many of our rigs are -- we enter into those discussions typically 15 months ahead of firm period ending.

[Fredrik Stene, analyst]

Yes. That's very helpful. And second to that, you seem to be quite positive on the outlook both for your own rigs, and I guess, particularly in the Norwegian market in general saying that the market probably needs more rigs than it has -- that's currently there. So I was wondering, are you able to quantify that a bit more? Does this mean 1 incremental rig? Does it mean 4 incremental rigs? What are you currently seeing?

[Kjetil Gjersdal, executive]

Yes. So when we -- we like to approach this to do sort of what we like to call a bottoms-up analysis. So we sort of -- we talk to all our potential clients, and we see what they have in the pipeline and then we sort of add up everything. And what we see is that particularly from '26 and onwards, there's a need for more rigs in Norway compared to the number that are here today. And it's at least the need of 1 to 2 rigs as we see it, at least compared to today's number.

[Fredrik Stene, analyst]

Okay. That's good to hear. And finally, if you're able to share any color, you are, I think, much more firm in your -- in how you're talking and writing about a potential dividend increase from next quarter. So are you, at this point, able to say something about how much -- is it fair to expect -- is it $0.02 up? Is it a doubling? What's kind of on the drawing board for how you're approaching that dividend step-up?

[Frode Syslak, executive]

See, we can't -- yes, Frode speaking. We can't be specific on the Q4 dividend. I think still, it's fair to say that if you look at 2025 as a whole, there is certainly capacity to at least double the dividend compared to the current level. I think that, at least, partly answers your question, Fredrik.

[Fredrik Stene, analyst]

Yes. I appreciate that. I was actually going into this thinking that I would get no comment whatsoever. So I'm very happy.

[Operator]

[Operator Instructions] It appears there are currently no further questions at this time over the phone. I will hand back over to our host for any webcast questions.

[James Crothers, executive]

Great. Thank you very much, Serge. Thank you so much for the questions we've had so far. I think we'll come to this question first. Have you considered refinancing and replacing it with a new bond without amortization?

[Frode Syslak, executive]

Yes. I think, of course, we have several debt facilities in the group. The bond covering Deepsea Atlantic and Deepsea Aberdeen that has a maturity in 2028, of course, has a make-whole period until November 2025, meaning that calling that bond prior to November 2025 is extremely expensive. I think it's more relevant to look at doing something with the existing repayment profiles on some of the existing facilities or alternatively look at tapping the bond market. But there are no imminent plans to increase the leverage of the group. But given our strong balance sheet and contract coverage, it's certainly something that can be considered.

[James Crothers, executive]

Great. So another -- we've had a few questions on CCS, but I suppose one here is probably most relevant. Can you elaborate on the size of the CCS opportunity in the future? And is there any difference between a CCS well and an oil and gas well in terms of contract terms? And a similar question, how long does it take to drill CCS well?

[Kjetil Gjersdal, executive]

Yes, I can talk a little bit about it. I think it's still early days when it comes to the sort of how big is this going to be drilling of the CCS wells. But we are seeing that there are some wells that's going to be drilled now. And I think we're sort of in waiting mode to see how this pans out further. When it comes to -- is there any difference between the CCS wells? In all practicality, it is not. You need a rig, you need a BOP. It's basically a similar well design as a normal well, and also the duration that it takes to drill a well like that is quite normal. I would estimate just on top of my head, 30, 40 days on a standard CCS well. And there's no difference in contract terms. It is just like any other contract that we have. So yes.

[James Crothers, executive]

Another question here is, what is the Falkland Island opportunity? Is there any active tendering? And is there more than one operator in the Falkland Islands?

[Kjetil Gjersdal, executive]

Yes. So there is -- the opportunity at Falklands is a company called Navitas that they have been communicating their intentions out there, and it's -- they are in the tender process for a rig, and that is ongoing. And I wouldn't be surprised if we see some decisions being made around that before Christmas sometime.

[James Crothers, executive]

Great. We've had a few questions here as well on M&A. I suppose 2 salient ones is, are you looking to acquire some of the management rigs in their portfolio? And can you talk about M&A opportunities more generally? How do you value M&A opportunities as well?

[Kjetil Gjersdal, executive]

Yes. Nothing changed there. I mean we are still actively looking at what opportunities are out there. And -- but we stick to our strategy and our plan there. We need to be a deal that's accretive for the shareholders in Odfjell Drilling. Do such opportunities exist? We might -- we think they might do, but we have been actively involved in some that didn't work out, and then we look at some new ones. But in general, yes, we like all our managed rigs good, but there's also other opportunities. So this is like constant being addressed and -- but we will make sure to communicate if something happens there.

[James Crothers, executive]

And Frode, do you want to speak a little bit about how we might value M&A and what we're looking for in terms of acquisition targets?

[Frode Syslak, executive]

Yes. I think this is a recurring question in our calls. And I think it's important to stress that any opportunities we consider or may take on, of course, they will be evaluated along different parameters, but the most important one being the free cash flow to equity per share. We will not be doing anything that will dilute that and reduce the dividend or distribution capacity going forward.

[James Crothers, executive]

Great. Thank you very much. Looks like we have maybe one more question. What's your view on adding further backlog from our position of $1.9 billion just now?

[Kjetil Gjersdal, executive]

Well, I think I touched upon that earlier. We have the contracts with the options that we have some. We follow a plan, but this will be sort of added on 15 to 12 months ahead of the firm period expires, but we are also in discussion about other solutions that might sort of come with another story around that. So -- but we remain positive and are actually very relaxed about adding work to our own rig fleet going forward.

[James Crothers, executive]

Great. Thank you very much. I think we might wrap up there. I'm very conscious that today is quite a busy day, not just with our own results, but with some other results, which came out today, too.

I think we can probably close the call there. If you have any other questions, please do submit them either through the webcast portfolio. I'll try and come back to questions that you asked on that, which we haven't answered. And in the meantime, if you want to, please just e-mail myself, [e-mail] if you have any other questions. But in the meantime, I think we can close the call there. Thank you very much.