Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and welcome to the Odfjell Drilling Q4 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 so much, and welcome to this investor conference call for Odfjell Drilling, where we will present the fourth quarter of 2021. My name is Eirik Knudsen, and with me today, I have CEO, Simen Lieungh; and CFO, Jone Torstensen. As usual, Simen will go through the first part of the presentation, and then Jone will cover the financials in part 2. Thereafter, we will conclude with a Q&A session. For the sake of good order, we make reference to our disclaimer on Page 2 of the presentation, and I will then leave the word to Simen.

[Simen Lieungh, CEO & President]

Thank you, Eirik. Simen Lieungh here. Welcome to the Q4 conference call. I will go through -- we have the same agenda as we have earlier, I go through the key summaries, segment reporting and Jone will take care of the financials, as we have said. So I'm going to refer to the pages when we go through the presentation. I guess as many of you have that presentation in front of you, so please follow that while we announce the pages.On the Page number 4, that's the summary of the quarter. We had revenue of $222 million. We have a cash position of $175 million. We have EBITDA of $85 million and gearing above $3 million. And we have an equity ratio of just above 50%. With the company, the businesses, we have seen a small change there. We have also earlier announced that we have now taken in management on West Mira and West Bollsta and that brings the number of assets we control up to 7. I'll come more into the details somewhat later in the presentation.I also like to -- on the page number 5, to address the process we are in the middle of regarding the splitting of the company. We have worked with that concept for quite some time now. And our intention is to list the spin-off Odfjell Technology at Oslo Stock Exchange in March. The basis for the split is mainly adapt to the market dynamics and to better respond to what we see business opportunities. This is something we have discussed quite some time. Those 2 areas on to drilling and Odfjell Technology are -- has, over time, different drivers.The module side is very strong on CapEx. It's a very capital intense asset heavy, whilst the technology part is clearly a totally different setup. And we have also earlier as we have announced we have successfully issued a bond of NOK 1.1 billion. And we also have raised super senior revolving credit facility of $25 million to replace the bank debt on technology side, what we earlier referred to as services side. The intention here is clearly that we believe we will, by that, have a clearer financial structure.We will hopefully, and we believe we will unlock valuation where we have not seen the valuation in the company on the technology side. We believe that will be better unlocked now. And we also see that we have a much, much clearer capital structure of the company. Upon the listing, we have decided to split the company and dividend out shares in ratio, 6 to 1, meaning that shares dividend out to technology getting to own share in technology. And that is to meet the requirement for listing of the company and other elements.I think that is enough to be said about the split. As I said, we believe the execution of the process are well on schedule, and we have a target to be listed at Oslo Stock Exchange in 29th of March and launched a new company 1st of April. On page number 6, just a little more sum up of the 2 businesses. As I said, we have identified the split between asset and asset heavy asset light, while regarding the business model is also very different, which is also giving more focus to develop the businesses on technology side with a business model of the modules of the Odfjell Drilling part.There are more medium- to long-term contracts, whilst the technology side is more, I would say, mixed with long-term contracts and more short-term contracts add-on sales and also to address new opportunities, especially within potentially green ventures where we have addressed the potentially new activities. We also, as you know, are working with the Odfjell Oceanwind and Odfjell Technology will currently have together with the Odfjell Group controlling part of the Odfjell Drilling Oceanwind company, which where we see a quite interesting development in that market also.Key summaries at page number 7. We have, as we said, issued a bond of NOK 1.1 billion that was successfully executed quite short actually in, I would say, demanding market, but we did that okay. The Deepsea Stavanger has drilled more well with Lundin and is now engaged with Equinor on the Master Frame Agreement we have there, and we'll come back to the prospects going forward there. We have also announced that we have taken the marketing and management services with the Northern Ocean Limited for West Mira and West Bollsta.The Deepsea Yantai has secured additional work in '22. So we have covered that part of the year. Deepsea Nordkapp has also secured firm options into Q1 '24 for Aker BP and Equinor has also exercised Johan Sverdrup and Heidrun platform drilling operations for our engagement within platform from drilling. We have also announced that we have made an agreement with SFL to take management services of the jack-up West Linus, which today operating for ConocoPhillips at Ekofisk. So a lot of things have happened over the last period, which gives both companies of drilling of the technology, a good start of regarding backlog and predictability.On page #8, which just to sum up, there has been a good operational uptime on all the assets. There's some -- has been some issues on Yantai regarding some trouble with the BOP, but that is over now and all the assets are operating on the level of 98% to 99% uptime, which is absolute acceptable. With the -- on the page number 9, I can share with you that the Deepsea Atlantic has now started the campaign on Johan Sverdrup Phase 2, which is expected to last for a while. It's a well campaign, and it's going to continue for Equinor afterwards.The Deepsea Stavanger, the same has now engaged with Equinor and we are in the same type of discussions there. So we believe that we're not too fine to the future, more activity will be announced for Deepsea Stavanger under the same Master Frame Agreement. The Deepsea Aberdeen is currently working for Wintershall before we start up Breidablikk for Equinor and we expect the startup will be in late April in our May-ish area. And beyond that, there's also the continuous optionality and more to come, I guess.At the same with Deepsea Nordkapp for Aker BP, we have recently announced another extension of the contract until 2/01/24 and there are also potentially for further extensions with Aker BP. And the same with Yantai, more activity has been announced. And so we find that we have a good coverage of all our own assets. Regarding Mira, Deepsea Mira, I'm sorry, West Mira and West Bollsta we have just taken over the management services for West Mira, and we will take over the management services for Bollsta when Bollsta finally concludes the campaign with Lundin in Norway.And we are now for the time being mapping all the opportunities that is potentially available for those 2 contracts, rigs to be employed. And we come back to that when we talk about the market. The market looks much, much better in '23, '24 and onwards. And we are quite optimistic that we will have capabilities to bring those to rigs into the market, I would say, as soon as possible. So when you move over to page number 10, we have recently said -- announced that Equinor has extended the options on Johan Sverdrup. These are contracts which is long-term contracts.There are a lot of options but there are different mechanisms behind these options so very much these options are very often executed. So I think that the coverage with platform from drilling is quite good. On that slide, we have not yet put in West Linus. But Linus, as you know, are working with -- on Ekofisk for ConocoPhillips. We will take over the operations there after we have done the so-called AOC. And the [indiscernible] to work for Conoco and Ekofisk until I guess, end of '28 or something. It's a long-term contract. So we look really forward to start that engagement.It's a great rig, and we already operate drilling operations and well services at Ekofisk. So this is just very in line with the same type of services. And we see a lot of potentially for more efficiency and of course, also a lot of synergies as long as we are already engaged on the portfolio of Ekofisk platforms. On the page 11, well services, well, it's the same setup. We operate globally. Of course, the market is getting better within the oil services sector. I guess that many of you have questions about what's happening with Ukraine and Russia and the conflict there.We can come back to that to answer questions about that. Currently, we have no operations either in Russia or Ukraine, but of course, it will affect the global market. And of course, the energy market will be affected by the fact of these kind of conflicts, good or bad, one can say, but it's a fact that it will be affected. We believe that this will -- that the market or the energy need is there and the market is -- we operate in more than 20 countries. So we see the activity level is increasing, and we kind of look -- foresee an increased level of rigs in operation and by that, more well services activity. So that's the short version for that part.We have a great earnings visibility with more than $2.1 billion -- of that, the $1.3 billion are for contract and the rest is options. This is the backlog for the MODU side and Platform Drilling. As usual, we are not reporting the backlog of well services or engineering/technology in that picture.So if we go to the Slide #13, in general, I have to say that we say that the market, the oil and gas market, where we primarily work in the energy market is stronger. There are more visibility. We see the lead time from our clients when they ask for capacity until they need capacity is longer. That's the first good indicator. They are much more balanced in the market. We see now more balance within Ultra deep water market. We see a much better market within jackups and the harsh environment market has been quite okay for many years already, but not that okay, but absolutely acceptable. But the balance in the harsh environment is also getting there between supply and demand, and we hope that that will reflect the level of earnings and rates down the road.So we have our fleet now with the managed fleet. We have a great fleet. We have the most advanced drilling rigs in the world. They are highly spec, they're highly asked for, and we have a very good dialogue with the clients and all the clients have applauded that we are getting more capacity to serve with the same efficiency and quality as we have done already with our own assets. And we certainly look forward to bring these management assets into operations and finally discuss potentially an end game for that.Well Services, I see the activity, as I mentioned, are much, much better and more -- very important KPI for Well Services is a number of rigs in all type of segments, onshore, shallow water, deepwater, harsh environment. The more reach in operations, the more activity, and more well services activity also. And we serve a great number of clients in that picture from them. Very big majors to many others, and they are actually quite many clients we are working with globally.We also see a much better market in Southeast Asia and the Middle East and areas like has been slow for years, is now coming much better back.With energy, we see the same more activity, more engineering activities. We see more SPSs coming up, and we are more willing and able to serve that kind of activity. So we also see that the energy market with the technology, engineering and so forth is coming much stronger back into play. So I guess that one of the challenges we all will see, obviously, do we have enough capacity and resources and capabilities to serve what we asked for to serve?So with that, more optimistic picture than for a long time, isolated to the energy market. I can leave the word to Jone, to take care of the financial information. Jone, go ahead.

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

Thank you, Simen. Starting with the group summary financials on Page 15. Group operating revenue was $222 million compared to $355 million in Q4 '20, a decrease of $133 million. The decrease is mainly due to drilling operations South Africa in Q4 2020.Revenue recognition requirements meant the revenue for the whole contract was recognized in 2020, whereas the cost of transit and demobilization was recognized in Q1 2021, hence, much higher revenue and margin in Q4 2020.Group EBITDA was $85 million compared to $171 million in Q4 '20, a decrease of $86 million, mainly in the MODU segment in relation to the drilling operations in South Africa Q4 2020. After depreciations, net financial items and income taxes, the group delivered a net profit of $28 million compared to $108 million in Q4 2020.Going to MODU segment on Page 16. Operating revenue for MODU segment was $143 million, compared to $292 million in Q4 '20. This is explained by Deepsea Stavanger's highly successful drilling campaign for Total in South Africa Q4 '20, resulting in a revenue difference of $166 million. The negative difference is partly offset by Deepsea Aberdeen being on full operating rate this quarter compared to key quayside activities in quarter 2020. EBITDA was $74 million compared to $161 million in Q4 for the same reason I just mentioned. The EBITDA margin was 52% in Q4 2021 compared to 55% in Q4 2020.Going to Page 17, the Energy segment. Operating revenue was $62 million compared to $45 million in Q4 '20. EBITDA was $6 million compared to $3 million in Q4 '20. The increase is mainly explained by more operating units in operation and high incentive bonus in Q4 2021.Well Services segment on Page 18. Operating revenue was $31 million compared to $28 million in Q4 '20. The increase is driven by high activity in the Middle East, Africa and Asia. EBITDA was $9 million compared to $9 million in Q4 '20. EBITDA margin for OWS segment in Q4 was $29 million compared to $32 million.On Slide 19, we have shown the bridge from the sum EBIT of segments to the group consolidated profit before tax by adjusting for elimination, corporate overhead and net financial items.Moving to Page 20. The balance sheet for the group. Group gross interest-bearing debt was $1.036 billion end of December 2021. We had $173 million in cash in December and the equity ratio of 50.4% in December 2021.If we turn to Page 21, the summary of the group cash flow statement, some highlights in the quarter. Net cash from operation was $109 million compared to $157 million in Q4 '20, was a positive change in working capital of $33 million, mainly explained by reduced trade receivables and increase of payable social security and other taxes. Investment activities of $90 million in Q4 '21, mainly due to purchases of fixed assets.We paid $48 million in installment on credit facility and leases. As I said, the cash position end December '21 was $173 million compared to $207 million in Q4 of '20.If we summarize the quarter on Page 22, spinoff announced strategic move to split Odfjell Drilling Group into 2 separate entities by end Q1 2022, added 2 new management units to the fleet on MODU, continued MODU, continued to build backlog to be a prepared partner in the harsh environment, and attractive harsh environment assets and healthy outlook.Energy, Equinor exercised platform drilling contract on Johan Sverdrup and Heidrun. Management service on West Linus and focus to develop the service portfolio into new areas.For Well Services, increased activity in Norway and Middle East. And for the key financial, earnings visibility through $2.1 billion order backlog, continue to deleverage and a sound cash position.This concludes our presentation. We will now open up for Q&A session.

[Operator]

[Operator Instructions] And we take the first question from Karl Pedersen with ABG.

[Karl Fredrik Schjøtt-Pedersen]

Regarding rigs on management contracts, is there a strategic rationale for expanding your footprint there? Or what's the ambitions going forward? Would you look to pick up more contracts in this manner?

[Simen Lieungh, CEO & President]

Well, it's clearly a strategic ambition behind taking management. These assets we are talking about are the -- some of the most advanced drilling machines in the market, new and very well equipped. So clearly, we are happy to have now engaged the management side. Our ambition is to work out more contracts, win more contracts and by that also maybe discuss some sort of an end game there. That's no secret. We're not doing this management forever as an ambition. We are looking for a way to involve those 2 on a permanent basis into the company but must be in the right sequence.So the first thing that must happen, we need to have -- we always do things based on contracts. We never do speculation. That's one of the reasons we are not ending into any other financial trouble. When we get contracts, we can actually find ways to move in that direction. But first of all, we need to get the control of them and to -- well, we do have control, but we need to find the right way of getting them engaged. That's the first step.

[Karl Fredrik Schjøtt-Pedersen]

Okay. So how long contracts will we then require in order to -- I guess what you're actually saying is that you are eager to buy them if there is a contract. So what would such a contract look like?

[Simen Lieungh, CEO & President]

Longer the better with good rates. Must be bankable at least, very well bankable.

[Operator]

[Operator Instructions] And it seems we have no further questions at this time. Gentlemen, I will turn the call back over to you for any additional or closing remarks.

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

Thank you so much, everybody, for calling in. And if you do have any further questions, please call us, and we wish you all a nice afternoon. Thank you.

[Simen Lieungh, CEO & President]

Absolutely. Thank you.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.