Odfjell Drilling Ltd

OSE:ODL

Earnings Call Transcript 2022-Q4

[James Crothers, executive]

Okay, thank you. And thank you to everyone who's joined the call and everybody who's listening to the call via webcast or on the telephone. This is the first time we're presenting via webcast, so hopefully, you haven't had any hiccups. If you have had any issues, please do get in touch.

As an introduction: My name is James Crothers, and I'm the Investor Relations Officer for the company. And I'm joined today by Kjetil Gjersdal, Chief Executive Officer; Frode Syslak, Chief Financial Officer; and Håkon Klepsvik, Chief Technology Officer.

Delighted that you joined us for today's call after another strong quarter which, as we can see from our already published results, we are very pleased with. And your attention is brought to the Important information slide of our presentation, and we invite all participants to read this at your leisure. Today's presentation will begin with Kjetil summarizing the key highlights of the quarter before moving on to discuss the company's operations and outlook during the period. Following this, Frode will go through our financial results for the quarter. And finally, Håkon will go through our upcoming S (sic) [ SPS ] programs as well as giving an update on our sustainability initiatives.

With that, I will pass over to Kjetil to summarize the quarter.

[Kjetil Gjersdal, executive]

Thank you, James. And a very good afternoon, everybody. As James described, this has been another strong quarter for our company. And combined with our performance throughout 2022, it adds up to a strong year.

We can go to Slide #5. And looking at our operational highlights, first of all, we can see strong performance across the business during a year which saw a steadily improving industry environment. During this period, we achieved strong utilization across our own fleet, achieving 97.9% financial utilization during the quarter, which equates to 98.1% financial utilization across our own fleet during the year in total. This is rock-solid performance and is something that we are very proud of. Keeping our fleet and staff active, up-to-date and challenged have been a focus of ours for years; and this now position us well as our sector ramps up activity. This strategy has resulted in our 5-year financial utilization averaging 97.8%.

Also during this period, we saw several new contracts and option agreements being signed with existing customers like Equinor and Neptune Energy but also with new clients ExxonMobil and TotalEnergies. I would also like to mention the 5-year extension on the Semi Alliance agreement that we did with Aker BP and Halliburton. We are really proud of -- to be working with these majors, and we see it as a direct result of our strong operational reputation.

Our backlog remained strong with around 1 billion (sic) [ $1.9 billion ] of firm and optional orders. And finally, we are pleased to welcome the Hercules into our fleet during the period; and that expands our fleet of sixth-generation rigs to a total of 8.

We can then go over to Slide #6 and our financial highlights. We maintained our focus on financial discipline and cost control and are pleased by the results. Looking at some of our key financial highlights, we are seeing continual improvements on most of our metrics. Our revenue during the period was $167 million, facilitating a total revenue of the year for $650 million. Our EBITA -- EBITDA during the period was $80 million, resulting in $308 million of EBITDA for the year. And we have $157 million of cash and cash equivalents.

Further, our leverage ratio as at the end of the quarter was 2.5x, and our equity ratio was 54%. And another key highlight that I would like to flag for the period was the repurchase of the preference share from Akastor. And this repurchase explains the slight changes in the equity ratio and leverage ratio. And this was the first planned step in the refinancing of the company, which we will [ walk through ] later.

Turning to Slide #8, our fleet activity during the period. As you can see, the majority of our fleet was operating in offshore Norway. And we're working with Equinor, Aker BP and Neptune Energy. Notably, however, we are beginning to see the movement of rigs out of Norway, starting with the Deepsea Bollsta beginning operations offshore Namibia; and as discussed earlier, the Mira and Hercules going on to contracts in West Africa and Canada, respectively. And I think this clearly demonstrates the flexibility that we have in our fleet and our ability to utilize deepwater opportunities as they appear.

This trend of increased activity for our fleet outside the Norwegian continental shelf is positive one and reflects both on the increased interest in high-spec sixth-generation semi-subs and also the value of our operational experience. And while this not highlights the harsh and ultra-harsh environments, I would take a moment to remind stakeholders that our fleet is also very capable in operating in deepwater environments.

We can then move to Slide #9, looking at our backlog. We are pleased to see that -- our continued high backlog of $1.9 billion, out of which 1 firm -- $1.4 billion is firm. And in particular, we are pleased to see our external fleet beginning to restart operations and going back on contract. We do expect the continued demand for our fleet to be -- to remain strong, particularly on the Norwegian continental shelf, [ where ] the number of high-spec units is reducing in this basin. And in particular, from 2024 and onwards, where much of our fleet's firm contracts begin to end, we expect to see an increased activity as new fields are commencing development.

We can then move to Slide #10 and summarize the market outlook. We are, as you understand, very positive about the market. We are seeing continued high cash flow generation among E&Ps, and this is driving increased investments. Despite this, though, there remains a significant lack of meaningful investment to arrest the production decline globally, which will further increase the demand. And the COVID-19 tax incentives in Norway, as we know, resulted in multiple new PDOs being submitted at the end of 2022. And similarly, we saw significant interest in the U.K. 33rd licensing round.

I think the focus on energy security, which was a massive topic during 2022, continues. And we are seeing an increased trend of regions looking towards harsh-environment rigs for work due to a tightening drillship market, water depth flexibility and proven performance.

I will now pass on to my CFO, Frode, who will continue the presentation with the financial review.

[Frode Syslak, executive]

Thank you for that. We'll start with the income statement on Page 12.

As Kjetil said, the operating revenue was $167 million in Q4. That is an increase from $143 million in Q4 2021. The operating revenue for the own fleet in the quarter was $139 million, while the external fleet generated $26 million. EBITDA was $80 million in Q4 '22. And of this, the EBITDA from the own fleet was $77 million, with all 4 units having more or less full financial utilization operating in Norway in the quarter. The EBITDA for the external fleet was $4 million, while corporate overhead and other adjustments were minus $1 million in the quarter. The net profit was $29 million.

For preliminary full year figures, we report an EBITDA of $308 million compared to $258 million for 2021.

Moving to Page 13 and the balance sheet. Per year-end, the net interest-bearing debt was $685 million, which is a slight increase from Q3 due to the repurchase of preference equity which was funded primarily by debt. Company has a robust balance sheet. We have an equity ratio of 54%. That is based on total assets of approximately $2.2 billion. Cash position is sound with $157 million per end of 2022.

It's also worth noting in our report, on Note 12 (sic) [ 10 ], regarding contingencies, that Odfjell Offshore, which was a subsidiary of Odfjell Drilling until the spin-off of Odfjell Technology, received a tax ruling from the Norwegian tax authorities in December where the tax loss on the realization of certain shares in 2017 was denied. The group will appeal that ruling, yes, and is of the opinion that the most likely outcome of a court case is that the denial of the tax loss should be revoked. Despite this, Odfjell Offshore has made an upfront payment in Q1 2023 of $31 million in taxes and interest for the financial years 2017 through to 2021, which Odfjell Drilling have covered in accordance with the indemnity letter issued to Odfjell Technology in March 2022. It's important to note that the company has reported this matter in previous years and quarters and also that the contingency has been included in our long-term financial planning.

Moving then to the cash flow from operations at -- on Page 14, we see that we have a strong cash flow from operations in the quarter with $58 million generated after capital expenses. Of the $20 million specified as CapEx in Q4, it's worth noting that the CapEx -- of the CapEx, approximately $7 million are related to client-funded modifications, which has previously been reported as changes in working capital. And therefore, there is no net cash effect in Q4. Also, $5 million of the CapEx is green rig CapEx which has or will be covered by the NOx fund and contractual fuel incentives. The rest, being $8 million, is maintenance CapEx and SPS CapEx primarily related to long-lead items.

And with that, it's fitting to leave the word to Håkon to add further color on our SPS program going forward.

[Håkon Klepsvik, executive]

Thank you, Frode.

My name is Håkon Klepsvik, and I'm the Chief Technology Officer in Odfjell Drilling. I'm going to spend a few moments on presenting the company's SPS programs but also briefly present the upcoming CapEx for the years and also update stakeholders on initiatives on the energy transition which we are progressing.

If we go, move to Slide 16. From this slide, you can see our upcoming special periodic surveys over the next 3 years across our own fleet. These have deadlines ranging from end -- or beginning of next year until mid-2025. It's important to note that this does not include our external fleet, but with all rigs included, ODL would carry out 8 SPS programs in the next 3 to 4 years. It's also worth mentioning that the slide illustrates the sequence of the SPS rather than the exact due date [ is processed ]. And I will come on to later -- and as I'll come on to, we see our SPS programs not just as a short window where we invest and focus on the rigs but rather a long-term day-to-day investment strategy.

Looking at our own fleet specifically, we estimate that our average CapEx allocation is approximately $40 million per unit. We also expect that the off-hire time for each rig will be between 2 to 4 weeks. In addition to the SPS programs, we expect an annual maintenance CapEx of between $3 million and $5 million per rig; and we also see some further potential contract-specific CapEx, in addition to other value-enhancing investments. This includes, but it's not limited, installation of new technologies, increased efficiency and marketability of our rigs.

If we turn to Slide 17. We thought it might be valuable to define how Odfjell Drilling see our SPS programs. The key take, however, is that, the 8 SPSes in the next 3 to 4 years, we saw it as important to standardize the way we perform these SPSes. To do this, we have implemented several mitigating measures. And this includes adhering to increased use of our offshore-class scheme, establishing a specific fit-for-purpose SPS organization and deploying the value over -- of the expanded fleet. So what do we mean by that?

Beginning with the offshore-class scheme. At ODL, we adhere to a continuous maintenance scheme where we have incorporated SPS tasks during the 5-year period between each SPS. This means that, between SPS programs, we regularly inspect, [ update ] and invest in our rigs to keep a continually high maintenance level. Up to approximately 2 years ahead of the SPS being due, we perform conditional assessments and implement corrective measures to comply with the SPS code in due time before the certificate expiry date. The objective of these measures are to avoid uncertainty, surprises and costly project expediting. Another benefit of having the offshore-class scheme in place is reducing the remaining scope and resulting in minimum off days or days off hire.

In addition, we took the measure to establish a specific and fit-for-purpose SPS organization which is responsible for all the upcoming SPSes. This organization was set up with the aim of implementing and managing this offshore-class scheme and also to define execution plans identifying lead times and [ settle ] replacement strategy on critical equipment. This organization is strongly drawn on the experience from previous SPS organizations and experienced people in our organization.

Further, with these 8 upcoming SPSes, we are able to draw on the value of the increasing economies of scale. This has meant that our buying power has expanded such that ODL have made agreements with the major suppliers to ensure capacity and competence for the upcoming SPSes. And we can also deploy a system of rotation of critical equipment between the rigs.

So the SPS program, that's the key focus of ours in the years ahead. If you have any questions about how we see the SPS program evolving, I'll be delighted to answer any questions in the upcoming Q&A.

If you flip to Slide 18. And before we finished, we also want to highlight what we are doing on the energy transition. As you can see from the video on this slide, one of the most exciting developments we have completed during the period has been installation of several tailored, hybrid power system containing flywheel and battery technology. And all our own units now have installed this system, which has the potential of reducing emissions between 10% to 15%, on top of other energy savings initiatives. Further, the development of this unique hybrid power system and corresponding direct current grid system have been designed with the future use of zero-emission power sources in mind such as if short-power or fuel cell technology are available.

Finally, the Deepsea Nordkapp has also been outfitted with an exhaust cleaning system that limits CO2 (sic) [ NOx ] emissions.

So flipping to the next part of this slide. And we are very proud of what we have achieved, so far, and the resulting efficiencies created. We see our ESG and zero-emission drilling strategy as simply good business. We look forward to updating you on further development on our fleet going forward.

So with that, I would like to pass back to you, Kjetil.

[Kjetil Gjersdal, executive]

Very good, Håkon. Thank you.

So a summary of our presentation and summary of the quarter. We are very pleased with our achievements. We maintained our strong financial performance and discipline -- and earning an EBITDA of $80 million during the quarter. Our operational performance and backlog remained strong, with our client number and contract variety increasing. And we do see a continually more positive market developing for our company in both deepwater and harsh environment segments, and we are beginning to see this being realized in higher day rates. Our backlog remains solid and positions us well for the coming year.

With that, I will now pass back to the operator and open up for the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Fredrik Stene from Clarksons Securities.

[Fredrik Stene, analyst]

Congratulations on a strong quarter. I have 2 questions for you today. First, let's start with the market. The North Sea dynamic, I think, has been a recurring theme lately. It's been a market where we didn't necessarily see the traction that we expected in '23 for short-term work, but we have still seen quite a few good data points for fixtures starting in '24 and '25. And some of that comes from you guys, so I guess my question is this: On the back of a kind of, call it, weaker short-term North Sea dynamic and the moving of the -- or some assets out of this region, how have -- or have you noticed any change in behavior with E&Ps? Are they starting to get truly worried about not having enough supply in '24 and maybe even '25, '26 and onwards? And when you were talking about higher day rates, and I think you were quite explicit about that also in the report, what do you think we'll end up seeing here? We've seen the $400,000 mark in some harsh environment regions -- sorry, harsh-environment fixtures. We have seen the $400,000-plus mark in some ultra-deepwater regions. What's next?

[Kjetil Gjersdal, executive]

Yes, I'll answer that, Fredrik. And I'm pretty sure our clients are aware of the supply picture. And whether or not they're really worried, I'm not going to comment on that, but I'm pretty sure they are very informed. And I do think that, especially for these big development programs that are coming up, they have a clear preference for the Tier 1 rigs. And I'm sure they have a good overview of that. And as we get a more correlated picture between supply and demand, you're right, we do expect the day rates to go up. And we're not going to speculate too much on that, but I think we've been clear earlier that we expect, from '24 onwards, that we for sure see the $400,000. I know there's been a lot of speculations way higher than that as well, but I think we're going to stick with that for now.

[Fredrik Stene, analyst]

Perfect. And second question: Refinancing. You mentioned upward, briefly, in the introduction. You have some debt coming up in late '23 and '24, a majority of your debt. You are paying down -- or have paid down a lot of debt over last years, reduced your NIB, but I'm sure there -- even with $400,000 per day, you're probably not going to have enough cash to take out all that debt at maturity without doing some sort of refinancing exercise. So are you able to share any thoughts, comments, et cetera on the process there going forward?

[Frode Syslak, executive]

Yes. Frode here. That is an ongoing process. You're correct in that we have some debt, a small portion of our debt, maturing in December '23; and the rest maturing -- or majority of the rest maturing in second quarter of '24. Of course, given the low leverage we have, the strong contract backlog we have and the strong bank relationships we have with long-standing lenders, we're in a good position to do that refinancing. And that is currently work in progress.

[Operator]

The second question comes from the line of Tommy Johannessen from SB1 Markets.

[Tommy Johannessen, analyst]

Yes. Fredrik talked about this in his first question, but just on the demand side, can you elaborate a little bit about how the dialogue with E&P companies have been now recently following increased E&P budgets? And seismic spending is increasing. Have you seen any change in behavior and requests and -- in the very short term from your clients?

[Kjetil Gjersdal, executive]

I think we have a very good overview of the sort of decision-made projects that's coming up, and we are in close dialogue on several of those. And whether or not we see a change in behavior, I don't know, but I think we've discussed the markets. They are aware of the position as we are, so I think there's a shared view that we are -- that there will be a more, as I said, correlated supply-demand picture going forward. And they are also taking that into their plans.

[Tommy Johannessen, analyst]

Yes. And on rigs leaving Norway, do you expect more rigs to leave, either of your own or from your competitors, going forward?

[Kjetil Gjersdal, executive]

I can't speak for them, but I wouldn't -- for sure, not rule it out. I know there are interesting opportunities out there. We see that on several tenders coming up, so I, for sure, would not rule out that more rigs would leave Norway for a period or even permanently.

[Tommy Johannessen, analyst]

Okay. And lastly, on dividends, you talked a lot about your intention to pay dividends at the Q3 presentation and which you didn't do now. Can you just elaborate a little bit around that and your plans for dividends?

[Kjetil Gjersdal, executive]

Yes. And no, it is high on our agenda and -- but we need to complete the refinancing process first. And as Frode said, we have started that. And that's going to be we are looking at several opportunities on how to execute that, but we made ourselves a plan and we expect that to be done in the second half of 2023. And once that's done, we should have the flexibility to both look at a dividend and other opportunities that might arise. So yes, dividend is, for sure, high on the agenda; and it is part of the plan with the refinancing to get that flexibility.

[Operator]

[Operator Instructions] I currently have no questions on the line, so I'll hand the call to you, James, for questions coming through the webcast.

[James Crothers, executive]

Thank you, yes. We have a similar question to one that's been -- come up before, but it's from [ Stig Erik ]. The Mira, Bollsta and Hercules are moving into West Africa and Canada. Do you see other floaters from the North Sea exiting the region in the next 12-month period? And how do you see E&P companies reacting to this trend of capacity moving out of the region?

[Kjetil Gjersdal, executive]

I think we have already touched upon that. I can just then be repeating myself, but if we speak of our fleet, we are considering all opportunities, also internationally. Although we don't have any firm plans yet to exit more rigs on our own fleet, we are constantly considering that. What our competitors are doing, it's not for me to comment, but I will not rule out that they are considering it too, so -- and further, to the E&Ps' reaction on this, as I said, I'm quite sure they have a good picture of the supply picture that's in the industry.

[James Crothers, executive]

Thanks. We've had another question from [ Russell ]. And from upstream, you mentioned the lack of supply and interest in newbuilds. What do you think is needed for someone to make that commitment to investing in a newbuild?

[Kjetil Gjersdal, executive]

Yes, interesting question. And we don't see any newbuilds happening in the near future and the immediate-term future. And that is purely due to the reason that there is currently not day rates or a market that support this. There is not lengthy contracts. [ You will need ] quite a lengthy contract with a substantial higher day rate than we see in the market today. And further, we know that, yards that traditionally have been into building rigs, they have shifted their focus. They have turned to other, yes, sectors. And so I -- and even if you could get the yards to start a newbuild process, I think we are looking at prices close to $1 billion for a rig and, I'm sure, with totally different payment schemes that the industry has been -- seen before. So -- and so at the moment, it's very difficult to consider any newbuilds.

[James Crothers, executive]

Great. Thank you, everyone. And thank you, everyone, for your questions. Thank you for joining the call and for your continued interest in the company. We'll close the Q&A for now. I hope we've answered all your questions you might have had. And we'll look forward to keeping in touch and speaking again at our Q1 results call on the 11th of May. If you have any questions in the meantime, please do get in touch via regular channels, our website; or contact myself directly. My contact details are at the back of this presentation or on the website.

And with that, I think we'll close the call. Thank you, operators.