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Transcript : Odfjell Drilling Ltd., Q3 2022 Earnings Call, Nov 24, 2022

11/24/2022 | 08:00am

Presentation Operator Message
Operator (Operator)

Good day, and welcome to the Odfjell Drilling Ltd. Q3 2022 Investor Call. Today's call is being recorded.

I would now like to hand the call over to Mr. James Crothers, Investor Relations. Please go ahead.

Presenter Speech
James Crothers (Executives)

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

Today, I'll be going through Odfjell's presentation, which you will find on our website. Before we begin, I'd like to highlight the disclaimer on the important information section of the presentation, which can be read at your leisure.

The agenda for today's call will include Kjetil going through our key highlights for the quarter and also providing a commercial update for the company. Frode will then take you through the details of our financial results for the quarter before summarizing today's presentation and opening the call for a Q&A session. We highly encourage all [ analysts ] to take part in that.

I'll now hand over to Kjetil to take you through our highlights.

Presenter Speech
Kjetil Gjersdal (Executives)

Yes, hello, everybody. And I'm very pleased to present what we see as a strong operational quarter where we delivered an EBITDA of $81 million. Our fleet utilization was 97.1%, both the Stavanger, Atlantic and Aberdeen operated for Equinor throughout the whole quarter while Deepsea Nordkapp operated for Aker BP. I do want to mention that both Stavanger and the Atlantic had some downtime due to some planned maintenance in the quarter.

Our balance sheet is robust, and we continued the deleveraging with gross debt of $803 million and a cash position of $155 million. And looking ahead, our order backlog of $2 billion, out of which $1.4 billion is firm. This provides us with a strong cash flow security in the years ahead.

We'll shift to Slide #5, talk a little bit about what we do on the technology side. So in tandem with driving strong financial growth returns through operational excellence, we remain focused on reducing our carbon emissions and meeting our leading net zero emissions ambition and strategies. And just as a reminder to all stakeholders, our ambition is to reduce our carbon emissions by 40% by 2026, 70% by 2035 and before eventually becoming a net zero emission company by 2050.

And to achieve this, we will maintain increasing the already strong efficiency of our rigs and by trailing and implementing industry-leading technologies and alternative fuel sources. And we have made significant progress on this so far, and we expect further efficiencies to be made in due course.

And I also want to highlight another big technology strategy for us, and that is to further develop our digital solutions in our drilling systems. We now see that we are significantly improving in this area as well. And we see that with the latest update that we've done together with our vendors, we are now really performing well. We are, for example, seeing a domestic stripping with [indiscernible] performed manually.

Also on this slide, you can see some statistics highlight that we did a recent study recently based on the drilling data based on Rushmore, which shows that Odfjell Drilling was significantly ahead of the peers in regards to normalized well deliveries. I think this emphasizes our already strong efficiency from which we intend to improve.

So we will then move to Slide #6, which is our backlog slide. And at this time, rather than commenting on old news, I will focus on what's new this time. So I'll actually start with the Deepsea Yantai that is currently on contract with Neptune, and we have managed to secure several short contracts for that rig in 2023 with a various number of operators such as Wellesley, OMV, DMO, Neptune and Shell, and we have been dully achieving back-to-back work with the smaller companies in Norway for both exploration and [indiscernible] work.

Then we have the Deepsea Bollsta. I'm pleased to announce that, that rig arriving in Windhoek in Namibia, not tomorrow but the day after. And there will be a short mobilization period there and we expect to be -- commence that connected Shell early December. So this is a 12-month term contract with the 6-month option thereafter. On the Deepsea Mira, we are still being -- that rig is being marketed, and we remain optimistic with regards to getting that to work and we hope to be able to announce a contract on Mira very soon. And as it looks today, it is most likely that this will leave Norway as well for rigging in international waters.

The Hercules contract that was announced last week, awarded by ExxonMobil in Canada. And this contract is expected to commence in the second quarter in '23. That's a firm duration of 135 days with an option of -- another option of 60 days. That rig will soon arrive in Norway, where we will take over as manager, and the rig will undertake its 5-year [indiscernible] before it's returning to Canada.

And I want to say that all in all, this provides us with a solid back -- order backlog with further upside potential. And we have, as mentioned, an order backlog, $2 billion where of $1.4 billion is tied to firm contracts, and this gives us a strong cash flow security going forward.

So we can move to Slide #5 (sic) [ Slide #7 ] where we take a look at markets. And we remain very optimistic when we see the markets ahead. We see high energy prices, focus on energy security and measures with ample capacity to increase the spendings and to meet the oil and gas demand growth. But as forecasted, we all know that substantial new investments are required to compensate for decline of existing fields.

We have seen a significant reduction in the supply side and a notable increase in contracting and tender activity, both in Norway, on the U.K. side and globally. And all in all, when we sum up this, we see a continuous strengthening of the global drilling market.

Turning to Slide #8. As many of you know, Odfjell Drilling rigs can operate in all areas globally as we have a very flexible fleet, both harsh environment and with deepwater capabilities. And I think our recent signings with majors like Shell and ExxonMobil shows that we are able to secure contracts with strong international oil and gas companies. And we do see demand from all regions, both in harsh environment and deepwater markets.

And there are interesting opportunities, both in U.K. and Norway internationally. And we are currently bidding on several tenders in all these markets. And as you all know, when you combine the increased activity based on the tax relief package here in Norway, the uptick in the U.K. side and the strong deepwater market where we know, particularly in Norway, we see a preference for our fleet being Tier 1 rigs. We remain very positive on the market outlook ahead, especially from '24 and onwards.

All right. So that concludes my part. I will then hand over the word to my CFO, Frode.

Presenter Speech
Frode Syslak (Executives)

Thank you, Kjetil Gjersdal. We are now on Slide 9 and the income statement. As Kjetil said, the EBITDA in the quarter was strong, $81 million. For the owned fleet segment, there was an increase on performance bonus and fuel incentives compared to the previous quarter. We see increased add-on sales and profits from add-on sales from integrated services in the quarter.

We have some reversals of operating costs, amongst other reversal of COVID-19 related provisions. For the external fleet segment, there was an increase in EBITDA due to more activity for the managed rigs. Want you also to notice that there is a leasing effect of $6 million in our Q3 figures, resulting from long-term leasing agreements related to real estate, wired drill pipe and more on equipment.

And you will see that's reflected in higher depreciation and financial items. We have a negative effect due to a large portion of our liquidity being held in NOK, which has depreciated against the U.S. dollar during the quarter. So you see it not reflected in the net financial items.

Moving to Page 10. On the balance sheet, we see continuing deleveraging of the balance sheet with net interest-bearing debt of $648 million as of end of Q3, leverage ratio of 2.4. The company has a robust balance sheet with an equity ratio of 57% based on total assets of $2.2 billion and a sound cash position of $155 million as of end of Q3.

Moving to Page 11 on the cash flow. We see strong cash flow from operations. On the CapEx side, year-to-date, we have an outlay of $32 million where $17 million has come in Q3. This includes CapEx related to periodic maintenance and green initiatives, including hybrid installations.

Both of these green CapEx will be covered by the NOx fund, with an expected refund of around $13 million due early in 2023. Also in Q3, we have made early commitments for long-lead items related to our forthcoming SPS project in order to mitigate supply chain constraints and be well prepared for the forthcoming projects.

We have repaid debt in the form of scheduled installments in the quarter. Lastly, it's worth noting that our year-to-date cash flow of minus $18 million reflects the USD 50 million that was distributed together with the distribution of Odfjell Technology back in March. Adjusted for this, Odfjell Drilling's year-to-date cash flow as positive $32 million.

Slide 12. As you will be aware, we have maintained our focus on increasing the strength of our balance sheet. As can be seen, our credit metrics remain strong. We have further deleveraged our balance sheet and are now positioning the company to pay a sustained dividend in the future.

Before we open for the Q&A session, let us briefly summarize the quarter on Page 13. It's been a positive quarter for Odfjell Drilling generally. We have a good operational performance, delivered a strong EBITDA. In the quarter, we added significant amount of backlog in Norway with a 5-year contract with Aker BP.

We were also awarded a contract for Bollsta in Namibia, reducing the available supply in harsh environment markets. Hercules was also recently awarded a contract in Canada. We have long visibility, but we see further upside potential beyond 2024. We see increasing tender and contracting activity both in harsh and deepwater markets. This provides a strong backdrop for our flexible fleet, and we are currently involved in Canada under direct negotiations, both in the North Sea and internationally.

This concludes our presentation, and we can then open for the Q&A session.

Presentation Operator Message
Operator (Operator)

[Operator Instructions] There are no questions at this time.

Presenter Speech
James Crothers (Executives)

Okay. Thank you, everyone, for joining the call. If you have any other further questions after this, please do get in touch. We [indiscernible] highly encourage any questions, and I look forward to speaking to you in the near future and certainly on the next conference call as well. Thanks again.

Presenter Speech
Frode Syslak (Executives)

Thank you.

Presentation Operator Message
Operator (Operator)

Ladies and gentlemen, that does conclude today's conference call. We thank you all for your participation, and you may now disconnect.

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