Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome to the Odfjell Drilling Q4 2018 Investor 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. Welcome to the investor conference call for Odfjell Drilling, where we will present the 2018 fourth quarter results. Together with me, I have Investor Relations Officer, Eirik Knudsen. We will take you through the highlights and material events, the segment reporting, the financial information before we end this call with a short summary and then open for a Q&A session. If we then turn to Page 3. The key summary in fourth quarter is the delivery of Deepsea Nordkapp. We had the migration of ODL to United Kingdom. More work to secure for Deepsea Bergen. BP awarded platform drilling contracts on the U.K. Continental Shelf. Strong operational performance across the MODU fleet. Continued strong performance of Odfjel Drilling & Technology. And Well Services with increased tender activity, however still pressure on prices. If we move then over to Page 4 and go into the highlights and material events in and after the fourth quarter of '18. Start with the extension of the drilling services bank facility. And Odfjell Drilling has, on 6th of November, entered into an amendment agreement with its lenders in the Odfjell Drilling facility, to extend the facility to November 2019. Additionally, the waiver consent regarding the debt service coverage ratio of the Odfjell Drilling Service group has been extended to new maturity date of the facility. The amortization profile of the loan will be unchanged with semi-annual installments of $20 million in November 2018 and May 2019. The balloon will consequently be $250 million at the new maturity date. Additional work secured for Deepsea Bergen. Odfjell Drilling has, on the 16th of November 2018, signed a drilling contract with MOL Norge for 1 exploration well in direct continuation of Deepsea Bergen's contract with OMV Norge estimated to expire in Q3/Q4 2019. Expected duration is approximately 50 days plus possible well testing. In addition of the well with MOL Norge, we keep Deepsea Bergen continuously employed throughout 2019. Contract value is estimated to be approximately $9 million plus potential incentive bonus. Migration to the United Kingdom. Following a strategic review, the shareholders at a Special General Meeting held on 11th of December 2018 approved the company's migration to the United Kingdom, which means that Odfjell Drilling Limited is now managed and controlled from the United Kingdom by a U.K. resident Board of Directors with the company's head office being in Aberdeen, United Kingdom. Then we move over to Page 5, delivery of Deepsea Nordkapp. Odfjell Drilling has, on the 7th January 2019, taken delivery of its latest newbuild, the Deepsea Nordkapp, from Samsung in Korea. Semi-submersible is an enhanced Moss Maritime CS-60 design, winterized and built for harsh environment areas. The unit will meet Odfjell Drilling's requirements for delivering highly efficient operations. Deepsea Nordkapp is currently mobilizing to the Norwegian Continental Shelf for its 2 plus 2 year contract with Aker BP. Commencement of drilling operation is expected to take place in second quarter 2019. BP extends platform drilling services on the U.K. Continental Shelf. Odfjell Drilling will continue to provide platform drilling services on the U.K. Continental Shelf to BP. On 29th of January 2019, BP awarded Odfjell Drilling a contract for platform drilling and maintenance services on 3 of its platforms in the U.K. North Sea. Contract period is for 2 years with an additional 2x 1 year options. The new contract commenced in February 2019. And the firm contract period has an estimated value of USD 50 million. Then we turn over to Page 6, which is the mobile offshore drilling units financial utilization both in the quarter and year-to-date '18. And we are very satisfied with our operational performance in 2018 with an average of 98.5% financial uptime across the fleet. I will take you through the contract status for each rig on the following slide. On Page 7, we start with the contract status for Deepsea Bergen, which will operate from Equinor until late February this year and will thereafter move to the U.K. Continental Shelf for 1-well drilling contract for Ithaca starting in February, early March this year. Thereafter, the unit will return to Norway and commence a 1-well contract for OMV in second quarter, followed by a 1-well contract with MOL. This will keep Deepsea Bergen in operations throughout 2019. Deepsea Altantic commenced its current drilling contract under the Master Frame Agreement with Equinor on 24th of January 2019 after successful completion of its Special Periodic Survey, which started middle of December of last year. Deepsea Stavanger concluded its contract with Aker BP on 11th of October 2018 and started thereafter the preparation and mobilization for the 1-well contract with Total in the South Africa. After successful pre-operation phase, Deepsea Stavanger commenced the Total contract on the Brulpadda field offshore South Africa on 14th of December 2018. Unit concluded this contract with Total on 13th of February '19 and is currently demobilizing to Norway. We expect Deepsea Stavanger to commence its next Cormorant contract with Aker BP during the first part of second quarter this year. The Deepsea Aberdeen is contracted until April 2022 for BP for work west of Shetland. Finally, the newbuild Deepsea Nordkapp was delivered early January and is now mobilizing for operations with Aker BP on the Norwegian Continental Shelf with expected commencement, as mentioned, in second quarter this year. The affirmed mobile drilling units contract backlog of USD 1.1 billion at end of December '18 with additional price options of $200 million at the same time. If we then go on to Page 8, which is the Platform Drilling & Technology. And difference from drilling is secured by medium- to long-term operations on the U.K. and Norwegian Continental Shelf for BP, TAQA, Serica Energy, Equinor and Wintershall. We started operations on the Johan Sverdrup field during third/fourth quarter last year and estimate to commence operations on Mariner in second or third quarter this year. New BP contract also commenced end of January this year, taking firm operations into beginning of 2021. We are very pleased that the platform drilling continues to provide safe and efficient drilling services to all clients and that now also can deliver healthy financial performance. Platform Drilling operations secured by medium to long term contracts with a backlog of $1.1 billion where USD 800 million is priced options. Then we move over to Page 9, Well Services. Well Service is presently operating in around 20 countries worldwide including North Sea market, mainland Europe, Middle East and Southeast Asia. And 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 very promising for this service area. And if we move over to next, Page 10. We have the earnings visibility through $2.4 billion in order backlog. It was the order backlog at end of December last year where $1.4 billion is firm contracts. Revenue from frame agreements and call-off contracts in Well Services and revenue from Technology and MODU management is not included in the reported backlog. Then we go to Page 11, market outlook. And 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 cost 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 currently 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, we've grown from the market. This has led to an increased utilization of the harsh environment fleet. Ultradeep water market, however, 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 the scrapping of all the mid-water 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 during the next few years. Well Services is still facing fierce competition for its services globally. 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 low 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 Page 13. The group operating revenue was $168 million compared to $171 million in fourth quarter 2017. The operating revenue decreased somewhat due to decreased revenue in Drilling & Technology as well as in the Well Services segment, offset by an increased revenue in the mobile drilling unit segment from Q4 '17 to Q4 2018. The group EBITDA was $68 million, at the same level as for the fourth quarter '17 and the third quarter '18. The EBITDA margin was 40%, also at the same level as fourth quarter of '17 and the third quarter of '18. The depreciation was $40 million, same level as in the same quarter in '17. Net financial expenses were $7 million compared to $15 million in fourth quarter '17. The decrease of $8 million is explained by a $10 million gain from sale of bonds and burns in golden close realized in 2018. This quarter, the tax expense was $2 million compared to approximately same level in both the fourth quarter '17 and the third quarter '18. This ending up with a profit for the period of $19 million compared to $14 million in fourth quarter '17. This is the blend figures from the capital intensive mobile drilling unit segment, the unit capital intensive platform drilling segment. We will now look into each of the business segments separately. And start off on Page 14, with the MODU financials. The operating revenue for the mobile drilling unit segment was $119 million. That is the same level as in Q4 '17 and in Q3 '18. The change in revenue for Deepsea Bergen due to increased direct and utilization compared to the corresponding period in 2017 was offset by lower revenue for Deepsea Atlantic and Deepsea Stavanger. The slight reduction in revenue for these units was due to commencement of the special survey for Deepsea Atlantic in December 2018 and limited recognition of total revenue on the Total Brulpadda project for Deepsea Stavanger based on the number of days actual drilling operations in 2018. The Deepsea Stavanger, we have recognized whole revenue related to mobilization, demobilization and weak modification over time during the actual drilling periods according to the new IFRS 15 standard. EBITDA was USD 60 million, approximately same level as in Q4 '17 and in Q3 '18. The EBITDA margin was approximately 50%, which is also at the same level as in previous periods. Based on the depreciation of $33 million in the period, we end up with an EBIT of $27 million compared to $25 million in Q4 '17. We then move over to Page 15. Segment reporting for Drilling & Technology. If we start with the operating revenue, which was $37 million in the fourth quarter '18 compared to $32 million in fourth quarter '17. The increase in revenue was primarily attributable to increased activity in Technology segment compared to Q4 '17. EBITDA was $5 million compared with $3 million in fourth quarter '17. Increase in the Q4 of 2018 EBITDA is mainly affected by higher volume within the engineering and projects. EBITDA margin in the period was close to 15% compared to 11% in Q4 of '17. EBIT was $5 million compared to $3 million in comparable quarter last year. Turning to Page 16, which is the Well Services financials. Operating revenue was $25 million compared to $27 million in Q4 '17, which also is the same as in Q3 '18. The decrease in revenue for the OWS segment in fourth quarter is explained by lower income levels in the Norwegian and the Middle East markets. Fortunately, offset of higher activity in the continental European market. EBITDA was $6 million compared to $9 million in the fourth quarter of '17. EBITDA margin was down to 22% compared with 32% in the fourth quarter '17. If we then move to Page 17. This slide is included used to show the group eliminations and reconciliations have been included on Page 17. Then we move on to Page 18, which is a summary statement of financial position by year end '18. And here, you can see that the group's gross interest-bearing debt by year-end was approximately $1.1 billion. We have a $175 million in cash by year-end. And the equity ratio as of end of December '18 is approximately 45%. Then we move on to Page 19, which is the summary statement of cash flows and here, we can see that net cash flow from operations in fourth quarter '18 was $97 million compared to $53 million in the same quarter of '17. Net cash from investing activities was negative at $38 million mainly mainly related to Deepsea Nordkapp newbuild in progress. Net cash from financing activities was negative with USD 63 million mainly related to installments on existing credit facilities. This ends up with a cash position of USD 175 million at the end of December '18 compared to $166 million at the end of December '17. Then we go to Page 20, which is the summary of the fourth quarter 2019. And we start with the mobile drilling units where we can see that the fleet is secured by medium- to long-term contracts with the solid clients. We have strong operational performance and financial utilization, both for the quarter and for the full year 2018. The market for harsh environment units is improving and we observe an increasing demand for the ODL fleet. If we then move over to the Drilling & Technology. We have continued a strong financial performance with an EBITDA margin close to 10% for the total 2018. Platform portfolio secured with medium to long term contracts and near term increase in activity level within -- with the mobilization of Mariner in third quarter 2019. We then continues with the Well Services. We have an increased tender activity in the -- both in the European and the Middle East markets. Oversupply of equipment, however, keeps the prices at low levels. But the turning point when it comes to activity level has been passed. If we then look at the key financials by year-end '18. We have a earnings visibility through $2.4 billion order backlog. We have a book equity ratio of 45% and a cash position of USD 175 million at end of December '18. As this concludes our presentation, we will now open for Q&A session. So please, anybody?

[Operator]

[Operator Instructions] We'll take our first question from Hector Blackstone with Bybrook Capital.

[Unknown Analyst]

Yes. You've actually got [ Jaime ] on at Bybrook here. Just a couple of quick questions. One, do you -- when do you expect to be able to provide more detail around the refinancing and what you're going to do with the 2 facilities that are maturing on the credit side later this year? I understand there's potential to upside them and there's lots of positive sentiment. When can you provide more information around that? And then secondly, wondered what your view was on what you've been seeing in the market on the tender side. And the odds particularly on the harsh environment side, as to kind of the next couple of tenders, when they might be out? And what the type of day rates being discussed might be?

[Atle Saebø, CFO & Executive VP]

Let's start with the refinancing and we are now working to put together this growing bank syndicate for this financing with banks that know the rig and the oil service market. And as you know, based on our balance sheet with them, acceptable equity ratio close to 50%, leverage taken down to a more normal level and also a loan-to-value improving only recently, we feel quite confident that this will be secure and we are now working with a plan to have this ready before summer break. We can't give more details of this as you understand, we are in the process. But based on the facts given, we believe strongly that this is absolutely doable.

[Unknown Analyst]

And is that -- is there a potential to upsize it, the existing facility or how are you thinking about that?

[Atle Saebø, CFO & Executive VP]

Yes, I couldn't go in detail. But we are indeed working to improve or maintain our financial flexibility through the prolongation of the plants. And it's important now to put together a group of strong banks who know the industry and that we could maintain at or improve the flexibility in the loan agreements. Your next question was regarding the market expectation. And as you know, we have seen an increasing utilization of the harsh fleet. That is due to the fact that a lot of the older units had been out of the market for long period. Some of those are even are closed right now would be very hard to bring back and it's not on the preferred list by the clients. We have lately seen that you have seen an increasingly lead-to-time, clients stopped asking about available units with a couple of years into the future. Favorite level is, for these units, is still in the 300 level. We expected this will increase. But I will be a little bit careful to say how fast and how much it will increase. But based on a supply increasing lead time with high utilization, we indeed see a possibility for increased day rates based on a good or high beat utilization of this market. This is the harsh market, which we follow closely. There are other markets, which we -- also is improving like the ultra deepwater market. But as you know, the oversupply is higher in this market so it might take more time.

[Unknown Analyst]

Very good. And just quickly, just as a follow-up on that, given obviously the sizeable potential find by Total and the need for 1 aid, long term drilling program there, but also some work next year. And you've obviously got full utilization. If you've been looking to try and do some of them because they were obviously very happy with with what you're able to provide in South Africa?

[Atle Saebø, CFO & Executive VP]

As you know, we had a very successful operation in South Africa. This is a very harsh environment. It is a demanding environment to do drilling in. And also, as you know, from the information released by Total, this is a very promising discovery at the Brulpadda field. Yes, we hope this may lead to further activity in the area but we are are uncertain if and when this is going to happen. I guess, the client is now looking into the existing data and analyzing this before they come back and and make up their mind for finding next step. We have that -- are working to see available units, make units available and this is the kind of work we indeed would like to participate, also if there should be a next step.

[Unknown Analyst]

Perfect. And sorry, just one last one for me, Stavanger. Are you still bidding the Chinese units? I think there's rumor that you've been bidding the Chinese units in 2 or at least 1 of the units into tenders and that's obviously the last stranded parts unit out there. Are you still bidding those into tenders?

[Atle Saebø, CFO & Executive VP]

Actually, you're -- we sold all of our on-capacity. We are looking for available drilling capacity in in the market. I couldn't go into detail who we are talking to. But that we are indeed looking at units that we could include in our fleet. We could do that by management, we could do that by having at first write or a purchase option for the units. So we are looking at potential ways to meet the demand in the market, which could be hardly meet by our fleet.

[Operator]

And we'll take our next question from Lillian Starke, Morgan Stanley.

[Lillian Starke, Research Associate]

It's a bit of a follow-up made to the last one asked. In terms of what you're looking and will these be continued to remain on sort of the harsh market? Or you're also looking at options to maybe compliment the rigs that you already have in your fleet.

[Atle Saebø, CFO & Executive VP]

We regard ourselves to be more competitive in the harsh market. There we have it -- our advantage, there we have our fleet today. And we would look rather to increase our activity in that market where we have a competitive edge to some of our competitors.

[Lillian Starke, Research Associate]

Okay. And the second question I had is with regarding your other businesses. Are you considering any sort of, making any changes or consolidating or partnering of or doing alliances of maybe you have in the mode of business in order to enhance the profitability of either Drilling & Technology or Well Services?

[Atle Saebø, CFO & Executive VP]

Within Well Services, we are looking at adding new products to our product line. We have done that well with Well Intervention Services lately, that despite developing equipment ourself, working this into the market. And we rather prefer a strategy where we base undeveloped owned equipment not going into major merger or acquisition with existing competitors or in the market. That's a quite complicated business. We think we are good at developing the business, growing the business on the existing clients and in the existing markets.

[Operator]

[Operator Instructions] We'll take our next question from Magnus Olsvik with Kepler Cheuvreux.

[Magnus Olsvik, Equity Research Analyst]

It's Magnus from Kepler and Swedbank. Just a couple of questions for me please. First on Stavanger and Atlantic. When can we expect further extension on these 2? I guess there is a deadline for the client to exercise or extend this contract? And secondly, on Aberdeen, I guess we can -- we see an SPS coming up later this year. Is it possible for you already to provide any more specifics on the timing of that SPS? And would you expect budget and auto service time similar to the Atlantic?

[Atle Saebø, CFO & Executive VP]

The SPS for Aberdeen will be done later this year or next year. We haven't decided the time exactly yet. We are working on that and to make it to fit into the drilling program for the units. That's just where we try to do adapt that to fit in.

[Magnus Olsvik, Equity Research Analyst]

And then on the Stavanger and Atlantic extensions, possible extension?

[Atle Saebø, CFO & Executive VP]

Yes. The Stavanger wouldn't now is number was in from South Africa to the North Sea and will then start on the first 12 months period for Aker BP. And earlier this summer, we expect that the next 12-month period or at least an additional period will be called on that contract. For the Atlantic, it's 18 months fixed period. And I think it's approximately 12 months ahead of this period burning out. It should be added on more time to that contracts. So both these should be up for renewal or prolongation by, let's say, mid-summer this year.

[Operator]

And we'll take a follow-up question from Hector Blackstone from Bybrook Capital.

[Hector Blackstone]

Yes, just a quick follow-up just on those, the 2 extensions as you mentioned. For June, given that top performance for the client and you have regular interaction, do you have a view and a feeling as to -- obviously, you can't give any firm confirmation, but the fact that those will be extended?

[Atle Saebø, CFO & Executive VP]

As you understand, I couldn't give any firm answer to that. But the whole idea of alliance agreement or master frame agreement is that you should be able to secure work on a permanent basis with those clients. We are discussing with the clients. But we have to revert to the market if and when these products are decided.

[Hector Blackstone]

Right. So you're -- what you're saying is kind of the whole understanding, the whole agreement at this point is that it's very much likely that these continue working at the rates or market rate? But oversea firmness wise, you can't say anything until that's signed?

[Atle Saebø, CFO & Executive VP]

Yes. As long as these clients have drilling requirements, which they indeed are today for the next periods coming up and then we should have a preferred right to do this but it has to be at market terms and conditions and of course that has to be decided when we are closing -- closer to the renewal time.

[Hector Blackstone]

Fantastic. And just -- sorry, just on the rates of those. I forget, how did it work again? It's a -- the rates based on the market rate? Or it's a negotiated rate? How does it work under the agreement again?

[Atle Saebø, CFO & Executive VP]

The day rate will be set that we go to independent brokers to estimate the market rate for these specific units or the market value for these specific units. So it is brokers who estimate the direct based on comparable units, the market development, the future requirement, et cetera. So that should reflect the market day rate at any time.

[Hector Blackstone]

So the market day rate for a super high spec new harsh environment rig, are not -- and your view, when you look at brokers, that's in the -- what is that, in the $300,000 to $400,000 range when you look a year or 2 out?

[Atle Saebø, CFO & Executive VP]

Well, you have seen that the values, the broker estimate values for this unit has been increasing for the last year and 1.5 years. So the values are on increasing level. You have seen the same on day rates from -- coming from a low level. Today, you have a day rate of approximately $300,000 of these units. And with an increasing utilization and it is our believe, indeed, that we will see an increase in day rates from the existing level. With how fast that it is going and for what level it is taking us to, I would be careful to say something about. But indeed, we expect that the day rates for the years to come will be higher than the existing level.

[Hector Blackstone]

Brilliant. And just -- sorry to hog the question. Just on that, the day rate, obviously, when they call it off under the framework agreement, is that a -- to what does it look at a 12-month forward day rate? Or is it the spot day rate they use? So say, the 2021 day rate is higher for when it actually starts that contract. But when you agree, the spot day rate's lower, what's the reference day rate?

[Atle Saebø, CFO & Executive VP]

They should give their expected day rate for the period in question. So if they give a day rate in summer '19, they should give a day rate what they expect it to be in -- from summer '20 until summer '21.

[Operator]

There are no further questions at this time. I turn it back to you for any closing or additional remarks.

[Atle Saebø, CFO & Executive VP]

Okay, if there is no more questions, we thank you for the attention. Thank you, everybody.

[Operator]

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