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spk03: Good morning and thank you for participating in the Board Drilling Third Quarter 2022 Earnings Call. I'm Patrick Schorn talking to you from Bermuda and with me here today is Magnus Fahler, our CFO. Next slide. First, covering the required disclaimers. Here we go. I would like to remind all participants Some of the statements will be forward-looking. These matters involve risks and uncertainties that could cause actual results to differ materially from those projected in these statements. I therefore refer you to our latest public filings. Next slide. I'm pleased with our performance this quarter. With continued operational success, we have further optimized our cost lines, leading to an improved adjusted EBITDA, while our revenues were up only slightly. Apart from executing on the current operations in the field, the technical team also completed the activation of several of our rigs that have started operation in the fourth quarter. With the extra capacity coming online, we expect the fourth quarter revenue to be at least 25% higher than what we have generated in the third quarter. Our fleet of 24 rigs has gone through some adjustments after the sell-off of four units related to our recent refinance. resulting in a delivered fleet of 22 units, of which 20 are currently contracted. Apart from these 22, we have two further units in the shipyard to be delivered in 2025. Our cash position at the end of the quarter was high during the equity raise that was completed in relation to our recent finance as well. Magnus will now step you through some of the details of the third quarter.
spk01: Thanks, Patrick. We're now on the Next slide, key financial Q3 2022. The Q3 2022 revenue came in at 107.9 million in the quarter, an increase of 2.6 million or 2.5% compared to Q2 2022. This was split in 90.5 million in day rate revenues for our regular contracts and 17.4 million in related party revenue, which is bearable earnings in our Mexico joint ventures. Rig operating and maintenance expenses for Q3 was 60.4 million, a decrease of 5.1 million from Q2. The decrease is mainly due to a decrease in amortization of deferred costs. Impairment of non-current assets for the third quarter was 7.3 million, a decrease of 117.1 million compared to the second quarter. Impairment recognized in the quarter relates to the rig GIMI as the rig was classified as held for sale in Q3. The impairment in the second quarter related to the three new build rigs at Keppel, which we have agreed to sell. Total financial expenses net was 54.1 million in the third quarter, an increase of 17.2 million. The increase is primarily a result a $7.5 million one-off costs related to a financing fee, a $4.3 million increase in interest expenses, $3.1 million decrease in interest income, and $2.2 million increase in FX losses. The net loss for the quarter was $54.9 million, a decrease of $110.4 million from Q2. Excluding impairment, our net loss increased by $6.7 million. The adjusted EBITDA for the quarter was $43.9 million, which is an increase of $6.9 million, or 19% from the second quarter of 2022. As Patrick mentioned, our free cash position at the end of the quarter was high, $279 million, and our restricted cash was $7 million. Our free cash increased by $249.3 million in comparison to the prior quarter and is primarily driven by The cash proceeds generated from operating activities of $9.3 million, which includes the impact of $9.9 million cash interest paid and the payment of $7.5 million financing fee. Cash used in fixed asset additions of $20.4 million, mainly driven by activations of three rigs, and $260.4 million of net proceeds from our August 2022 equity offerings.
spk05: Moving to the next slide.
spk01: These graphs show the significant quarterly progression in both revenue and adjusted EBITDA we have made since the beginning of 2021. The revenue in Q3 2022 is nearly double that seen in the first quarter of 2021. Year-to-date revenue has increased 68% compared to the year-to-date revenue in 2021. and EBITDA almost 600%. We have previously guided our adjusted EBITDA for the full year 2022 to be between 115 million and 140 million. However, based on our 2022 performance this far, we currently estimate to generate adjusted EBITDA in excess of the upper limit of that range, i.e.
spk05: above 140 million. Moving to the next slide,
spk01: The current delivered fleet consists of 22 modern jackup rigs, all built after 2010, and we have additional two rigs under construction at Keppel. This follows the anticipated completion of the sale of four rigs in the fourth quarter of 2022. Since the second quarter 2022 report, we have secured new contracts, extensions, and LOAs for 10 of our active rigs, maintaining the company's contracted and committed fleet at 20 units. This includes long-term contracts for five of our premium jacket rigs in Mexico, now contracted until the end of 2025, and the prospect of five contracts awarded by ENI in Congo. Year to date, the company has been awarded 22 new contracts, extensions, exercise options, LOAs and LOIs, representing 31 years and 1.36 billion of potential backlog. During the same period, Our operating rigs have consumed approximately 14 years of backlog, so we are maintaining a backlog replenishment ratio at a multiple of two. It's also worth noting that these calculations include the contracts through our Mexico JVs on a 100% basis, in addition to any mobilization compensation in the contracts. With that, I will pass the word back to Patrick again.
spk05: Thank you, Magnus. The following graphs
spk03: highlight some of the benefits of shallow water resources. Firstly, on the left, it can be seen that it is highly cost efficient with only Middle East land production with a lower breakeven cost. Secondly, it continues to be a very large resource base that is largely in the hands of national oil companies that will be producing these strategic resources for a long time into the future. Thirdly, on the right-hand side, It shows the increasing portion of total offshore production that will be produced in the Middle East, which is currently the region with the fastest growing activity.
spk05: Next slide.
spk03: Since the second quarter 2022 report, the market continues to experience increased contracting activity and fleet utilization, particularly among modern rigs. Utilization level for modern rigs has now reached 95%, a level not seen since 2014. While 28 new builds have entered the market, since the beginning of 2020, demand continues to outpay supply increases. Currently, only a limited number of new builds remain in the yards, with an order book that is next to empty. High utilization levels and limited availability of high-quality assets have resulted in a sharp inflection on day rate levels for modern rigs. The recovery in day rates has been quite steep from the lows of $50,000 to $60,000 that we have seen previously to recent fixtures that are consistently reaching and exceeding the $120,000 to $130,000 per day level. A trend that we expect to continue as asset availability becomes further restricted.
spk05: Next slide.
spk03: In the last quarters, and more pronounced in the Middle East, several customers have taken active steps to secure incremental capacity on the long-term contracts, leading to an increase in the forward utilization of the fleet. This implies high confidence in the outlook for oil and gas demand and the national oil company's strategic approach to secure additional rig capacity in a scarce market. Three-year forward utilization levels have returned to previous year peak levels. With fewer assets rolling off contracts in the future, this also leads to a longer-term market that is tight for a long time going forward. While several multi-rig, multi-year tenders have concluded, the demand pipeline as measured by the number of open demand days from customers has remained on a strong upward trend and roughly doubled the levels experienced in the recent trough in 2020.
spk05: Next slide.
spk03: This slide gives three data points per region. the number of contracted rigs, the number of rigs still available, and in the small font, it shows the number of rigs that is the difference between the peak rig count in a specific region versus what is contracted today. All of these data points leading to the fact that very few rigs are still available and that demand has not yet reached the peak in every region yet.
spk05: Next slide.
spk03: Availability of modern rigs at low levels and adjusted capacity continues in the single digits. As customers continue to show clear preference for modern assets, we anticipate this segment to be undersupplied in the near future. The record low order book at shipyards for new builds is unlikely to give reprieve, while the new build prices are increasing quite rapidly with limited capacity at the yards available. In summary, customer demands remain strong. Oil and gas prices, although volatile, remain at a range attractive for further investments amidst declining production levels resulting from years of lower EMP investment. With these fundamentals locked in place, we are already experiencing significant and accelerating increases in day rates, in some cases more than double for the rigs. We are increasingly confident that this trend will continue for a longer period as limited incremental supply is available in the foreseeable future to offset the fast increasing demand for rigs.
spk05: Next slide. So in conclusion,
spk03: We have completed the large refinance of the secured creditors successfully. As communicated previously, the convertible bonds will be addressed by early next year, and we have various options on how to deal with this. The asset utilization in the market continues to increase, which has a positive impact on day rates. Based on our performance thus far and the outlook for Q4, the revenue and adjusted EBITDA for 2022 will be closing above the guidance previously given. High utilization with a positive market outlook will eventually lead to new capacity coming to the market. However, with the order books at the shipyards being next to empty, any new assets ordered today will only enter the market is 30 to 36 months the earliest, and new build pricings are rumored to approach $300 million per unit. Our technical team has been fully dedicated, getting the new rigs to our customers on time and in the best possible condition. This while the operational team continues to have an extreme focus on safe operations at high efficiency to create the maximum value for our customers. I would like to end here our prepared remarks and we can go to the Q&A.
spk04: Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star 1 and 1 on your telephone. We are now taking the next question.
spk05: Please stand by.
spk04: The next question from Fredrik Steen, Flo Caxon.
spk00: Hey guys, hopefully you can hear me okay. I wanted to touch a bit more on the convertible here. I think the report and your performance this quarter was better than at least what I expected. So all in a good report operationally, but at least initially today, I think the stock soared. a bit downwards pressure. I'm not asking you to speculate in your own stock price. I just thought it could be because parts of the investor community may have expected some, you know, more color on this CB refinancing. So I was wondering, are we able to, I know you have this, you call it the January deadline, but are you able to give a bit more color on what type of options you are exploring and maybe when we should expect to hear something in relation to this, other than the maturities.
spk03: Absolutely, Frederik. Let me ask Magnus to comment on this.
spk01: Yeah, thanks Frederik. I think we have several options for the refinancing of the CB, the way we see it. In the connection with the August refinancing, We communicated that we would address the CV closer to maturity as we expected asset values and day rate earnings to further increase. And this has materialized, so it's improving our financing opportunities the way we see it. So we still have three unencumbered rigs with capacity to put on further debt. And on these, we're awaiting contracting status for some of these, which we're likely to get some clarity on in the near future. So once this is resolved, this will dictate the amount of leverage that we can put on these rigs, whether it's around 50 to 60 million per rig level or a higher level, depending on the contracts. Additional to that, with the rising day rates and the asset values, we should have excess debt capacity on the five rigs that we have in the bank facility. these five rigs are only levered with 30 million each asset today. So if you just kind of as a calculation exercise supply 50 to 60 million secure debt per rig for these eight rigs, this means that we can have additional debt capacity of 250 to 330 million on this package. And I mean, in addition to that, we should have significant unsecured debt capacity also to cover any potential shortfall if we find that interesting.
spk00: That's super helpful. And do you think, just as a follow-up on that, do you think that with the cash on hand on the equity rates from earlier, is there any
spk01: other liquidity needs from the from the equity side as you see it given your visibility on the the credit side to tackle the the 350 here in the cb i think just as i said i think we have very good um space for what we have already in the assets and um outlined them with three unencumbered rigs and the other five rigs on the on the bank bank facility so
spk00: I think that's kind of leaning to the answer on that question. Yeah, no, that's fine. Thank you so much. Super quick one to add. Thank you. Just on Mexico, super quick. The 46, 47 million you've received so far in Q4, did they include the upfront payment of new contracts or not? That includes the upfront payment, yes. Thanks. That's all for me. Thank you, guys.
spk04: Thank you for your question. Thank you. We are now taking the next question. Please stand by. The next question from Jack Lewis from BTIG. Please go ahead.
spk06: Hey, thank you, and good afternoon, everybody. I did have a question around the last comment around opportunities in the rig market and the ongoing financing. As I look at your fleet status report, clearly there's a lot of customer options on some of these rigs, given when they were fixed. I imagine that some of those customer options are maybe below leading-edge day rates. Are those options viewed as backlog, given the fact that they're in the money for the customer, do you think?
spk03: So, I think that at this moment, the way you need to see the option 1st, there's a blend in the options, right? That we have options that are allowing the customer to continue on the on the existing contract rate, which clearly at the moment makes a lot of sense. So, for most of these customers, we would expect them to continue some of the options that we have and that our customers have. are at mutual agreement of market price so some of them will be renegotiated even though they are seen as an option so it is really a a blend in that and i think that it is clear that uh the more unpriced options that we have the better it is to have a discussion with the customers today but i think that that goes similarly for any long-term contract that you have out of the past these rates are likely to be lower than um what you see in the market today. Also a reason for us that we are clearly very careful with the two remaining rigs that we have. We absolutely want to make sure that they are having market representative rates when fixed and not that we are fixing them for the sake of fixing them at a rate that is not optimal for the investments that we have made so far. So I think that is the best way to look at it. But speaking specifically about the options, There is a blend of price and unpriced options in that.
spk06: Okay. And then just, you know, I can appreciate the two rigs that are, you know, in the market being marketed. You know, pricing has clearly inflected higher pretty rapidly. You know, as we think about, you know, demand for these rigs, You know, just given the, you know, if I were to say, hey, you know, we went from a spot market to a one- to two-year term market, maybe three, depending on, you know, let's just think outside maybe the Middle East where contracts are longer. Are we seeing durations or contract durations be ramped higher interest from customers just given the fact that pricing really continues to go up, it seems like, almost weekly? Yeah. i.e., do we think we could see these rigs on three-plus-year contracts or something?
spk03: Absolutely. I think that that is the problem at the moment. I think that from a rig contractor perspective today, the longer contracts carry a significant risk of being priced too low, regardless of what leading edge price you put on them today. So you're absolutely right. that today the customers are looking very aggressively at longer term contracts. The long was now being five plus two years, but we see it in many regions where contracts are fixed for much longer than we had seen before. Clearly with the sentiment that asset availability in combination with better to lock in a price today that you know, then one that you don't know in the future is driving that. That also is coupled with the fact that we see that the prices that people are looking at for new builds seem to be increasing as fast as you've seen some of the shipping new build prices go up so clearly that in those increases then drive the requirement for a much higher day rate before any of these maybe investment ideas um carry any fruit so i think that it is clearly the fact that we in the discussions that we have with customers are having discussions about longer commitments and larger commitments uh than what we have seen in the past.
spk06: Okay, great. Good luck.
spk05: Good luck, everybody. Thank you. We can go for the next question if there is one.
spk02: We don't have any further phone questions, but we have one online. What do you think is the leading edge day rate in the market today for a five-year contract and for a short-term contract?
spk03: So there's obviously a variety of things that we look at when we consider contracts. It is in which area of the world it is. It has to do with contract length, but it also has to do what specific equipment we would have to put on it to get a rig ready to operate. because it's not only the investment you make in new equipment, obviously associated with that is a certain downtime for the rig as well that needs to be calculated into the price. However, if you want a general kind of number, then I would say that today in all areas we are seeing prices for fixing for that long period, you would probably have to think about between the 130 to 165 would be the rates that are being tendered. We have been announcing contracts in just about every geography in excess of the 120, 130 already. So I think that it is clearly something that rates are going up, and it is not just limited to one or two areas. You see it across the board. But I would say if I would have to make a comment around leading prices that people are putting on, it would be anywhere from the 130 to the 165 at this moment. But it is a continuously moving target. And as less rigs get available, obviously, that is something that will continue to go up.
spk05: Any other question online?
spk03: yes we have one more what upfront payment are yards asking to put the new build order for 300 million and what day rates and contracts would lead to this so I don't want to be perceived as the experts of dealing with yards on new builds at this moment because as we have stated before we are not anticipating to lean into this cycle and start building assets because we think there's other options for us. However, from what we understand the pricing to be is that rapidly it is increasing towards the 300. We understand that about 50% will have to be paid down before start, which is just in comparison of the past is very different, which clearly then becomes of a large down payment. And if you think about rigs costing that kind of initial investment, you would have to think about day rates in excess of $200,000 to actually justify a rig in the high 200s. And you would probably have to have a contract in hand for something like seven years before somebody gets into it. So I think from the speculative behavior of our industry in the past where people would build rigs, without having contracts in hand, because the capital intensity increasing as much as it's doing today, I don't think people will do that. But it will require contracts of seven-year-plus, and I would say day rates well over $200,000 per day for that to make sense. Once we reach that point, we'll have to see how the market behaves, but that is what you would have to get before you would want to get in those type of day rates. Any other question online?
spk02: Yes, there's one more. Ref, you're earlier guiding to have the entire delivered fleet contracted by year end 2022. Is this still the target and achievable?
spk03: Yes, I will continue to keep that as the target for myself and the team. Obviously, there is a large variety of tenders that we have our two remaining rigs on offer. But it is also a time where we want to make very sure that we don't take a day rate that is not in line where we see the market or not in line with the investments that we have made on the units so it is going to be a balance between making sure that we get the appropriate day rate for the units but clearly the opportunities are still there and we'll continue to pursue them until the end of This year, and if necessary beyond that, but I think that if I look at the demand that is there in the markets today, we can still place these units.
spk05: Any other question online? No.
spk03: All right, then I would like to thank all participants for participating in this call. I'd like to thank the board team for the fantastic work that's being done in the field for our customers and preparing all the equipment. And we look forward to talking to you again at the end of the next quarter. Thank you very much.
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