Diamond Offshore Drilling, Inc.

Good day and welcome to the second quarter 2023 Diamond Offshore Drilling Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Brodowski, Senior Director, Investor Relations. Please go ahead.

Thank you, Abigail. Good morning or afternoon to everyone, and thank you for joining us. With me on the call today are Bernie Wolford, President and Chief Executive Officer, and Dominic Savarino, Senior Vice President and Chief Financial Officer. Before we begin our remarks, I remind you that information reported on this call speaks only as of today, and therefore time-sensitive information may no longer be accurate at the time of any replay of this call. Some of the information referenced on our call today is included in a slide presentation that you can find in the Investor Relations section of our website under Calendar of Events. In addition, certain statements made during this call may be forward-looking in nature. These statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control. These risks and uncertainties may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed in our 10-K and 10-Q filings with the SEC. Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday evening and please note that the contents of our call today are covered by that disclosure. In addition, please note that we will be referencing non-GAAP figures on our call today. You can find a reconciliation to GAAP financials in our press release issued yesterday. And now I will turn the call over to Bernie.

Thanks, Kevin. Good day to everyone, and thank you for your interest in Diamond Offshore as we present our results for the second quarter of 2023. Today I will cover the financial and operating highlights for the second quarter, our operational outlook for the remainder of 2023, and our view on the market, including near-term fleet opportunities. I will then turn it over to Dominic to provide a review of our second quarter financials, as well as guidance for the upcoming quarters and full year. Let me start by thanking the entire Diamond team for delivering strong safety, operational, and financial results while securing significant new backlog across multiple geographies and asset classes. During the quarter, we secured term work for the Black Hawk, added a two-well contract for the Patriot, extended the endeavor by two wells, and our customers exercised options for the Great White and the Black Rhino. These wins, which total more than $229 million in additional backlog, are a testament to our team's performance and provide increased visibility to our 2024 revenue stream. As we enter the second half of the year, tightening rig supply, improving day rates across multiple asset classes, and changing operator procurement behavior are among the signs indicating the strength and potential duration of this upcycle. Our results for the quarter reflect growth in both revenue and adjusted EBITDA. Total revenue and adjusted EBITDA for the quarter were $282 million and $36 million, respectively. The revenue and EBITDA growth were driven primarily by the Great White and Endeavor operating for the entire quarter and recognition of substantially all the early termination fee for the Patriot in the second quarter. Dominic will provide further details on these results in his remarks. I'm pleased to report that our rig crews and operations support team delivered revenue efficiency of 96% across our fleet during the quarter. This efficiency number is notable, having now completed two wells with the Great White since its successful reactivation and contract startup in late March. Looking at second quarter operational highlights across the regions, in the UK, we received a well-based performance bonus on the Endeavor for its first well following its shipyard period, highlighting the team's project delivery capability and strong execution. Also, the Patriot concluded its multi-year program with Apache during which the rig achieved the highest customer satisfaction scores in the fleet. I'd like to thank the Apache organization for its long-term relationship as we look forward to commencing the Patriot's next program with Repsol, which is anticipated to commence by the end of September. Turning to West Africa, the Blackhawk successfully concluded its year-long campaign in Senegal for Woodside Energy. The rig delivered a 30% reduction in drilling time as compared to plan while delivering solid HSE performance. The Black Hawk's performance has set the stage for the Black Rhino to potentially earn future bonuses as it completes these wells. Following the campaign in Senegal, the Black Hawk arrived in Las Palmas on July 19th to undergo a five-year special periodic survey, or SPS, and certain regulatory and customer required upgrades, including the installation of a managed pressure drilling system, or MPD. On completion of the shipyard scope, we will mobilize to the U.S. Gulf of Mexico for our next customer with contract commencement anticipated in November. Also in West Africa, further options on the Black Rhino were exercised. We expect the rig will conclude Woodside Energy's Senegal program late in the second quarter of 2024. During the quarter, we proactively made the decision to procure an MPD system for the Black Rhino, which we expect to install following the conclusion of its current contract. This decision reflects our continued commitment to provide best-in-class drill ships for work at the top end of the market. With this upgrade, all of our black ships will be equipped with identical MPD systems and therefore are ideally positioned to maintain high utilization while earning leading edge day rates. Turning our attention to the operational outlook for the remainder of 2023, the APEX recently completed its shipyard scope in Singapore and is in transit to its next well location in Australia, where we expect contract commencement with Woodside before the end of August. The APEX is firmly committed to a number of clients through the first quarter of 2025 with the potential for options that extend well into the third quarter. The ONIX remains stacked and has yet to secure an opportunity that meets our reactivation investment criteria. We will remain disciplined in our approach to securing a contract for the ONIX, assuring that we can recover our reactivation costs and deliver meaningful cash flow and EBITDA in its next contract. In Brazil, the Courage is scheduled to mobilize to a shipyard in September following the conclusion of its current contract. While there, it will undergo a five-year SPS and certain regulatory and customer-related upgrades before starting its four-year campaign with Petrobras late in the fourth quarter of 2023. In the North Sea, we look forward to the Patriot going back on contract in late September with However, the opportunity following this work that we discussed on our previous call did not materialize due to the operator's decision to postpone that campaign. At the conclusion of 2023, six out of 10 of our actively marketed own rigs will have completed their five-year SPSs in the last 18 months. Looking forward, we have only two rigs with surveys due in 2024. the Black Rhino, and Black Hornet. As a result, next year we will spend significantly less time in the yard and more time earning higher day rates. During the quarter, we boasted our sustainability reporting to better measure and assess our operational footprint. We recently published our 22 Sustainability Report, highlighting our ESG progress in accordance with recognized industry standards and paving the way for improved ESG transparency for our many stakeholders. Turning to the market outlook, the continuing pivot to offshore basins as a source of incremental supply is driving improvements in the market with increasing momentum. Recent activity continues to support our view that we're in a longer duration up cycle, supported by persistent strong commodity pricing, continued FID growth, significant subsea infrastructure commitments, and positive day rate trends not seen since 2013. In particular, subsea tree awards have historically been a key indicator of future activity. In 2022, 348 subsea trees were awarded, the most since 2013 when the offshore floating rig count was about twice what it is today. This positive trend is staged to continue with analysts estimating more than 350 subsea trees being ordered in 2023. The large number of these orders indicate a long tail of future deepwater drilling activity. Since our last call, the demand picture continues to improve as operators are contracting rigs for more term and with longer lead times, several with 2025 and 2026 start dates. These longer terms and lead times correlate with up cycle behaviors by our clients and may signal their concern as to rig availability for programs two or more years out. Average duration and lead times for floater contracts signed are approaching one year, which is on par with 2022 and at a level not seen since 2013. Very recently, additional multi-rig, multi-year tenders have been released for West Africa and Brazil. We anticipate that in the near term, offshore drillers will announce a number of drill ship contract awards for long-term jobs with effective day rates in the low to mid $400,000 range. These for work with longer durations and mobilization provisions supportive of reactivation investments. Following these awards, we anticipate only a handful of competitive seventh generation stranded rigs will remain uncontracted. Beyond these contract awards, increasingly visible demand coupled with a tightening rig supply picture, will likely put further upward pressure on day rates, resulting in contract awards that are likely to cross the $500,000 per day mark. Turning our attention to upcoming prospects for our fleet, the increasing demand for top tier drill ships is frankly exciting as we evaluate our opportunities for our drill ships up for repricing in 2024. The Black Rhino is currently working offshore Senegal with availability commencing in the third quarter of 24. We are currently pursuing multiple opportunities for the rig across the Golden Triangle. Thanks to the constrained supply of ready-to-work rigs, the high specification of the Black Rhino, and our recent NPD commitment, we have a great pipeline of opportunities to pursue. Following that will be the Black Line, currently working for BP in the U.S. Gulf of Mexico, with availability commencing in the fourth quarter of 24. Similarly, this high-specification MPD-equipped rig is well-positioned for multiple opportunities. In the North Sea, we continue to pursue short-term programs for the Patriot this year and early next, and more importantly, two longer-term P&A opportunities in the UK North Sea commencements in 2024 and 2025. Demand for DP harsh environment semis outside the North Sea region has resulted in an exodus of rigs while pushing rates for the most capable semis into the mid $400,000 per day range. These fixtures support our positive outlook for the Ocean Great White with availability as early as the second quarter of 2024 or subject to options exercised as late as early 2025. Growing demand for high specification semis in Norway, coupled with demand in Canada, West Africa, and Australia have positive implications for the balance of our harsh environment semi-submersible fleet as this segment of the market begins to tighten. Wrapping up, excluding our cold stacked rigs, we now have almost 70% of 2024 marketed capacity contracted. If we include priced options, that number grows to 80%. As this market continues to gain momentum, we lack the prospects for our fleet and the opportunity for significant EBITDA improvement beginning in Q4 2023. I will now turn the call over to Dominic before returning with some concluding remarks.