Noble Corporation

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation PLC fourth quarter 2021 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It is now my pleasure to turn today's call over to Mr. Craig Nearhead, Vice President of Investor Relations and Treasurer. Sir, please go ahead.

Thank you, Brent, and welcome everyone to Noble Corporation's fourth quarter and full year 2021 earnings conference call. We appreciate your continued interest in the company. You can find a copy of Noble's earnings report issued yesterday evening, along with the supporting statements and schedules on our website at noblecorp.com. Joining me today are Robert Eifler, President and Chief Executive Officer, and Richard Barker, Senior Vice President and Chief Financial Officer. Also joining are Blake Denton, Vice President, Marketing and Contracts, and Joey Kawaja, Vice President of Operations. For today's call, we will begin with prepared remarks, followed by a question and answer session. During the course of this call, we may make certain forward-looking statements regarding various matters related to our business and companies that are not historical facts. Such statements are based upon current expectations and assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements. Please refer to our SEC filings for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. including risks and uncertainties associated with our previously announced business combination with Maersk Drilling. Investors should carefully read our previous and ongoing disclosure with respect to such business combination, including in our press release issued yesterday and in our upcoming annual report on Form 10-K that will be filed with the SEC. Also note, we are referencing non-GAAP financial measures in the call today. You will find the required supplemental disclosure for these measures, including the most recently comparable GAAP measure and an associated reconciliation on our website. And with that, I'll now turn the call over to Robert Eifler, President and Chief Executive Officer of Noble.

Thanks, Craig. And thanks to everyone joining us on the call today. I'll kick off today with a recap of the key strategic milestones we achieved in 2021, followed by some commentary on our global operations in the rig market, before turning the call over to Richard to review our financial results for the quarter. The last year has been transformative for Noble. I'm proud to be a part of an organization that can execute a high-paced and challenging strategic plan such as the one we delivered in 2021. In February, Noble emerged from restructuring and quickly closed our acquisition of Pacific Drilling. Our stock was relisted on the New York Stock Exchange in early June, while the management team and board explored various strategic growth opportunities. In the second half of the year, our operations team successfully entered Norway, concurrent with the divestiture of four jackups in Saudi Arabia. To cap off 2021, we announced an historic agreement to combine Noble Corporation with Marist Drilling, which is on track to close mid 2022. This combination will create a world-class offshore driller with the youngest and highest spec fleet and a combined track record of industry-leading utilization. Together, our complementary cultures with unwavering commitments to safety, operational excellence, and customer satisfaction, will allow us to better serve our customers. We expect to realize $125 million in annual run rate synergies within the first two years after closing, which makes this combination accretive to both sets of shareholders. As a combined company, we will have a robust balance sheet to serve our best-in-class fleet, creating a strong platform for cashflow generation in today's offshore market and even further as the recovery continues. Beyond Noble, the broader offshore rig market made a remarkable recovery in 2021. After being written off for dead during the depths of the pandemic, ultra deep water market rates grew by over 50% in just the last three quarters of 2021, led primarily by fixtures in the US Gulf of Mexico. Commodity prices obviously supported the demand growth, and we expect offshore rigged demand to improve going forward in all market segments. On the back of strong cash flows, our customers drilling budgets are generally up by double digits in 2022 versus 2021, and project sanctioning in 2023 is on pace to be beyond pre-pandemic expectations. We expect 2022 to bring continued day rate improvement across market segments, as well as an increase in longer-duration programs in the UDW segment. With that as a backdrop, we will transition to some perspective on the global market, highlighting NOBLES activities in each region along the way. The U.S. Gulf of Mexico continues to lead the floater recovery in utilization and rate appreciation. Also, driven by elevated ultra-deepwater demand and limited rig availability, we have seen an increased operator preference to direct negotiate their programs as opposed to running open tenders. With respect to our activities, Noble currently operates four drill ships in the U.S. Gulf of Mexico, and we are very pleased to announce the continued relationship with Murphy on the Noble Stanley LaFosse through the exercise of two optional wells at $300,000 per day. We also look forward to commencing work for Quarter North Energy with the Noble Fay Kozak in the very near future. The U.S. Gulf of Mexico's continued strength presents a number of additional opportunities for us We are encouraged by ongoing discussions with customers around their forward plans in the basin. Dropping down to South America, the deepwater demand is largely located in two key regions, Guyana, Suriname, and Brazil. Let's visit Guyana and Suriname first. As many of you know, Noble has four drill ships operating in Guyana under a Commercial Enabling Agreement, or CEA, with ExxonMobil. We've recently received a conditional award of 7.4 rig years under that agreement, which continues to build on the collective value achieved through close collaboration between our two organizations. This value is further evidenced by the positive impact to the local community where Noble employs nearly 300 Guyanese nationals as one of several initiatives underway to benefit the communities in which we operate. To provide supporting detail, The award specifies the additional rig years are subject to government approvals and final project sanctions for the Yellowtail project and also reallocates the existing term evenly across all four rigs. Once the conditions are satisfied, the extended CEA will provide utilization visibility into the fourth quarter of 2025. As mentioned on previous calls, this agreement includes a periodic pricing adjustment mechanism that keeps day rates in line with current market conditions. In addition to the four CEA rigs for ExxonMobil, the noble Jerry D'Souza is preparing to mobilize to Suriname for its contract with APA Corp, where the work history between our two companies in the basin is expected to deliver exceptional drilling results. This legacy Pacific drilling rig has been upgraded with a second BOP and an MPD system, enhancing both its capabilities for this contract and its competitiveness against seventh generation drill ships for future drilling programs. Finally, as depicted in yesterday's fleet status report, we are grateful for the opportunity to drill a well in Guyana starting in the second quarter for Repsol using our jackup, the noble Regina Allen, which recently concluded its contract in neighboring Trinidad and Tobago for BHP. Further south, Brazil continues to play an important role in the deepwater segment with significant potential for demand growth. The potential demand is estimated to require as many as 10 incremental floaters in Brazil over the next several years, representing almost a 50% increase to the 21 floaters under contract there now. In West Africa, the deepwater market recovery lags the Americas as this key offshore basin was particularly impacted by the downturn. West Africa's active drill ship supply slid from over 25 in 2014 to as low as 5 in 2020, but indications of a demand recovery are emerging there too. the tendering activity increased through the fourth quarter with a bulk of opportunities in Ghana and Nigeria. Noble, both directly and through legacy Pacific drilling, possesses significant operational history on the continent and are actively competing there today. I would like to now offer a few thoughts on the harsh environment jack-up market, starting with the Norwegian continental shelf. Norway and the customers and suppliers operating there are at the forefront of technology and policy innovation to build a sustainable energy future in oil and gas. Going forward globally, the barrels with the lowest carbon intensity and lifting costs will be produced, and Norway's are among the lowest on Earth, making this a new and important part of Nobel's future. The Nobel-Lloyd-Nobel, a CJ-70 design jackup, began its first well in Norway for Equinor in the fourth quarter. This design of jack-up is the largest, most efficient, and operationally capable in the world. We expect our customers in Norway to continue to prefer these ultra-harsh jack-ups for shallow water projects, and even competing in the transition zone between shallow and mid-water. These rigs are more comparable to drill ships than jack-ups on several financial dimensions, including new build costs, maintenance, and operating costs, as well as premium day rates. we've signaled in previous quarters we acknowledge that 2022 will be a transitional year for demand in norway as the activity law created by the pandemic works through the pipeline of projects however the exercise options on the noble lloyd noble keep the rig working into 2023 and recent market announcements only bolster confidence in the norway market long term we look forward to serving equinor and new customers there as activity normalizes over the coming years Elsewhere in the North Sea, such as the UK, Danish, and Dutch sectors, rig demand remains steady. This region is highly competitive at present, with many drillers working hard to string together continuous work. Noble has four jackups currently located in the region, and we expect some idle time this year on the two uncontracted rigs. For the rest of the globe, Noble currently has operations in Australia and the Middle East. The Noble Tom Prosser continues to operate in Australia for our client Santos, who has now exercised three of its nine one-well options, keeping the rig busy into the fourth quarter of this year. We also remain hopeful to secure additional work in the Middle East on the Noble Mick O'Brien, which has spent the last three and a half years working for Qatar Gas. Lastly, in a challenging Southeast Asia deepwater market, the Noble Claude Boudreau has concluded its contract with Premier and mobilized to Malaysia. Despite the rig's great operational history, The inconsistent utilization and depressed rate environment prompt us to divest of the asset, and we are currently making plans to do so. In summary, market movements over the quarter are clear and strong indications of recovery, and we expect continued demand improvement across all market segments. Noble is focusing on executing on our strategic priorities and is well positioned to benefit from the recovery. I'll now turn the call over to Richard to provide an overview of our financial results and guidance.

Thank you, Robert, and good morning all.

Contract drilling services revenue for the fourth quarter totaled 192 million versus 231 million for the third quarter. The decrease in revenue was largely due to the sale about four jackups working Saudi Arabia in November. The noble Jerry D'Souza completing its contract and mobilizing to the shipyard for upgrades shipyard time on the Noble Hans Dual, and the impact of Hurricane Ida on the Noble Globetrotter II. This decrease in contract drilling services revenue was partially offset by the start of the Noble Lloyd Noble contract in Norway in late October. Our contract drilling costs were $183 million in the fourth quarter and were down slightly compared to third quarter, largely due to the removal of OPEX on the Saudi jackups. We included a lot of information in our press release around the impact to our fourth quarter and full year results of the Noble Globetrotter II and the Noble Hands Dual incidents. Instead of repeating all the detail, I will share what we think are the two key takeaways. Firstly, the incidents had a combined negative impact on our fourth quarter adjusted EBITDA of approximately 20 million. This includes reduced revenue associated with both rigs and the repair-related expenses on the Noble Hands Dual. Secondly, both rigs were back operational in December. We have a few minor loose ends to tie up, but the impact is really limited to 2021. These events had no impact on our 2022 guidance. Adjusted EBITDA for the fourth quarter was 12 million, down from 47 million in the third quarter. At full year 2021, adjusted EBITDA was 97 million, which is towards the low end of the previously guided range. Capital expenditures for the full year 2021 were 170 million. This is slightly below our previous guidance range, as certain projects totaling about 15 million were delayed into 2022. I'll discuss our 2022 guidance in a moment. In early November, we closed on the sale of our Saudi jackups, which generated approximately 290 million in cash, net of transaction fees, expenses, and settlement of working capital. We also received the remaining portion of the CARES Act tax refund of approximately $17 million in December. This additional cash inflow allowed us to pay down the full amount borrowed under our revolving credit facility. At the end of the year, we had net debt of $22 million comprised of cash of $194 million and debt in the form of second lien notes of $216 million. Our revenue backlog at the end of the year stood at $1.2 billion. This backlog number does not include the conditional award of 7.4 years of contract term with ExxonMobil in Guyana. Turning now to full year 2022 guidance. We maintain our previously announced ranges for adjusted revenue of 1.05 billion to 1.125 billion and for adjusted EBITDA of 300 to 335 million. Importantly, we expect meaningful sequential improvements in our financials as we move through both the first and second quarters of 2022. The first quarter improvement is driven by three main drivers. Firstly, a return to operations and a full quarter contribution from the Noble Globe Trotter 2 and the Noble Hands Dual. Secondly, a full quarter contribution from the Noble Lloyd Noble and the Noble Fay Cozac. Thirdly, the impact of improving ultra deep water day rates, which will be directly reflected in our rigs operating in Guyana, as those rigs reprice on March 1st per the CEA. These improvements will be partially offset by the fourth quarter contract completions for the Noble Clyde Boudreau and the Noble Sam Hartley. As we move into the second quarter, the biggest drivers of the sequential improvement are expected to be a full quarter contribution of the improved day rates for the rigs operating in Guyana, as well as improved day rates for the Noble Fay Kozak and Noble Stanley Lafosse. Additionally, we expect a full quarter contribution from the noble Jerry D'Souza. At Cross Athlete, we currently project 87% of our calendar days to be operating days in 2022. This excludes our cold stacked rigs, the Meltem, the Scirocco, and the noble Clyde Boudreaux. Of these operating days, we currently have 77% under firm contract. The remaining assumed operating days are made up of options or ongoing customer discussions. Our updated 2022 capital expenditure guidance net of client reimbursables is $130 to $145 million. This increase is related to approximately $15 million of capital that rolled over from the fourth quarter of 2021. Excluded from this range is approximately $25 million of capital for new projects that are directly requested by our customers and will be reimbursed by our customers. Including this reimbursable capital, our total capital expenditures for 2022 is expected to be $155 to $170 million. In 2022, we expect stock-based compensation of approximately $27 million. Our adjusted EBITDA guidance includes stock-based compensation expense. Additionally, we expect cash taxes of approximately $40 million in 2022. We continue to remain focused on controlling costs and exercising strict discipline when making capital-related decisions. To that end, we have decided to scrap the noble Clyde Boudreau. The go-forward economics for this rig are extremely challenged when factoring in its opportunities set for new work in Southeast Asia versus its stacking costs and required upcoming capital investment. Inflation clearly remains a concern for most industries moving into 2022. We are seeing increased inflationary pressures in various areas of our global business. especially in North and South America. On the labor side, we are experiencing the familiar demand-driven challenges associated with a cyclical industry in addition to the well-publicized broader labor market challenges. A large component of our workforce is international, which hasn't yet seen the magnitude of the inflationary pressures that we are starting to experience in the Americas. From a supply chain perspective, we are starting to see inflationary pressure, and we expect that to increase through 2022. We continue to aggressively manage our business and our costs in this inflationary market. 2022 is expected to be a pivotal year for Noble from a financial perspective. Through a combination of strong cost control, smart economic and capital-related decisions, and improving market dynamics, we expect to generate an attractive level of free cash flow. That concludes my prepared remarks, and I'll now turn it back to Robert.

Thanks, Richard. Before we close and move to Q&A, I want to reiterate how transformative 2021 was for Noble. We completed our restructuring, relisted on the New York Stock Exchange, closed two strategic transactions, and announced our historic plans to combine with Marist Drilling in mid-2022. The whole Noble organization remains focused on drilling safely and efficiently for our customers and creating value for our shareholders. In addition, we've taken a number of steps to reduce the environmental footprint of our fleet. For example, recent investments in the Noble Lloyd Noble have reduced NOx emissions by over 90%. Additionally, we have several initiatives that use automation and digital technologies to improve the safety and efficiency of operations on the rigs across the fleet. We will continue to do our part to be responsible in the decisions we make to protect the environment. I'm proud of the Noble team and excited about the year ahead, and 2022 will truly be a pivotal year for Noble. As the market recovery continues, our combined, excuse me, Our company combined with Marist Drilling will be the platform to invest in offshore drilling. The combined noble will have one of the youngest and most technically advanced fleets driven by a culture of safe and efficient operations, unrivaled customer service and sustainability. The company will also benefit from attractive diversification across customers, assets and geographies. All of these serve to create a platform that has tremendous upside and significant cash flow potential. As shown in the presentation given on the announcement of the deal, the combined company would generate well over $1 billion in EBITDA under an illustrative scenario that now seems quite plausible. I believe strongly that offshore oil and gas will continue to be an important component of global energy supply for years to come, and Noble will be an industry leader in serving our part of exploring for and developing these critical resources. That concludes our prepared remarks. Thank you for participating in our call today, and I'll now turn it back for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Greg Lewis with VTIG. Your line is open.

Hey, thank you.

Thank you, and good morning, everybody.

Morning, Greg.

Robert, I was hoping, realizing that the rig pricing in Guyana doesn't reset for a couple weeks. Kind of curious if you could give us any color how we should be thinking about that. Clearly, one of your competitors recently announced some $300,000 plus a day rates in Gulf of Mexico. Is this something where we should kind of just be looking at broker or estimates and averaging, any kind of color you could give us around there because, you know, it's just such a big driver of, you know, future revenue and, you know, and then there's that reset coming up in September also. So just kind of curious how you're thinking about that.

Sure, Greg. It's a good and fair question. And so we've agreed with our customer there not to disclose rates. And so with, I guess, a couple of things. First, we've got our revenue guidance and tried to make that tight to help out with that because we've got, as you said, such a big driver there. Secondly, I guess just to remind that those rates are set kind of five or six months prior to when they kick in generally. And when they're set are intended to be a rate that a prudent contractor would contract under at that time for work in Guyana. And so, you know, it's a fast-moving market, which is a good thing. And I think, you know, to your point, kind of looking at curves and some of the information out there I think is a fine way to look at it. I'm sorry we're not going to disclose more specific information on it. But but I do think I do think it's you know, it follows a market curve that's that's that's applicable at the time of negotiation.

And really not to not to focus on this too much, but basically, you know, based on those comments, it sounds like the bigger step up should be. Is it fair to say that there's probably a bigger step up in September than there is in March?

We hadn't negotiated September yet. Um, okay. And, um, you said six months in it. That's fine. That's fine. Okay. Um, yeah, five, five, five, four to six months, kind of that range. Um, and, and so that hadn't, hadn't been done. And, and, you know, in Richard's comments, you know, he made, he made some comments about the step ups we see, uh, in, in, in Q2, uh, that Q1 and Q2, uh, this year, um, you know, that are driven by the entire fleet, of course, but, uh, But yeah, we'll start to see some step up early, first half of this year.

Okay, great. And then just as I think about the Globetrotter one in the Gulf of Mexico, I mean, clearly that rig is coming up for renewal this summer. The Gulf of Mexico seems to be an extremely tight market, any which way you look at it. Do we kind of have any sense for, you know, or should I say, do we think that rig kind of goes into the spot market or are we kind of seeing signs that maybe this rig could continue to be extended?

Yeah, so that rig is going to go into the spot market. We are bidding it both in the Gulf of Mexico, the U.S. and Mexico side. as well as some other places around the globe where it's uniquely capable. So we have a number of conversations on it, and I feel pretty good about continuing work for that rig, but it is going to go into the spot market.

Okay, great. And then just one more for me. I mean, you announced the retirement of the Clyde Boudreaux. I mean, realizing that the Maersk – transaction hasn't closed they obviously have a semi over in australia as you think about as you think about the footprint right i mean clearly we're building a you know golden triangle slash plus norway fleet you know how important is the rest of the world i mean robert as you view it like how do you think about that and really what i'm trying to understand is um you know, given where the rigs positioned are, it would seem like, you know, you might want to, is there any thoughts about maybe buying into any of these markets, i.e.

Asia, just, you know, given our footprint, where it is today?

Yeah, it's a good question. And, you know, I guess I'd say we think about asset classes probably before regions in some ways, and there's obviously close communication between those two, but we're focused on really high quality assets and making sure, very importantly, that we can maintain utilization on those assets. That was the thesis with Pacific Drilling, and we put those rigs to work. And, of course, both Marist Drilling and Noble enjoy industry-leading utilization among our two fleets. So, you know, I kind of beat this drum a lot internally, but it's an asset-intensive business. You have to keep the rigs working. That's really what generates cash flow. And so dodging your question a little bit, but I would say, you know, we're focused on both asset types and basins where we feel confident around the utilization.

Okay, perfect for that. Hey, thank you very much.

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from the line of Frederick Steen with Clarkson's Plateau Securities. Your line is open.

Hey, guys, and nice to meet you. have you on again. I have a few questions regarding your COVID legacy Pacific assets, the Meltem and the Scirocco. I was wondering, given how we've seen, and I think I asked the same question actually last time, have you come across any opportunities or any counterparties that would be willing to you know, pay up for those assets to get them back into the working fleet? Or are they still not really a part of your active bidding fleet? That's the first one for me.

Okay, yeah. Thanks, Frederick. So, you know, the short answer is they're not a part of our active bidding fleet right now. We... You know, said previously that we would look to recoup our entire investment within some firm contract if we were going to be willing to reactivate anything, and that includes a return on the investment in almost any conceivable scenario other than some very, very possible, small possible exception. But that, you know, there's a lot involved in achieving that hurdle and obviously the rate, but also term. And I would argue that right now term associated with rate doesn't support reactivation. But you also have to have time between when you sign the contract and when you start it to actually do the work. And you have to have contract terms that support and protect that investment. And perhaps most importantly, It has to be the right use of capital at the time you make the decision. So I think there's a number of missing components right now from our perspective. And, you know, the market's moved quickly since we acquired those assets, obviously in a good direction. But right now I think there's some missing components to putting them back to work.

That's very helpful. On the... That matter you mentioned term here, obviously the CEA and the 7.4 years there is at least on an aggregated basis more term than usually gets signed. To kind of follow up on Greg's question, put it another way, are you able to, the 1.2 billion that you have in backlog is not including these additional years. Are you able to give us any idea as to

know what that backlog would be if you did include it well you know the way i kind of can't we've agreed with customer but um you know we do have various backlog disclosures out there um and we do have to um when that award uh becomes uh concrete and the conditions are met you know we will we will update the backlog numbers then uh we make an assumption but since it's a moving a moving uh rate uh under the cea we we make a uh an assumption and we make uh i would say a very conservative assumption uh and and essentially uh stretch out rates uh through the through the entire term under under that one uh uh conservative assumption so we don't we don't We don't input a number of rates over that term. We just apply one conservative rate to it when we do announce it.

Okay, then I'll wait for that. But, yeah, I tried. Last question from me relates to shareholder returns. So I think, you know, before the merger with Maersk was announced, you seemed to me at least very vocal about your ambition to return money to shareholders if that was through dividend or share buybacks. You're obviously in a very different liquidity position now compared to the legacy cap structure. And I understand that there won't be any dividends paid out while the Maersk work is being completed. But is it fair to assume that When that goes through, paying out to shareholders will be a high priority of yours.

Yeah, I think that's very fair to say. There's obviously, as you noted, certain things that we can't do prior to actually consummating the transaction with Maersk. And obviously, any return of capital policy will be a decision for the new board as well post-closing. But clearly, our view at Noble is that Returning capital is really important to our sector, and I think that obviously will be a keen focus for the pro forma company. We do think that the company is going to be set up fantastically well to be able to do that, just given all of the benefits of the pro forma company. So I think there's more to come here, and obviously any announcement will be after closing of the deal.

All right. Thank you, guys. That's all from me. Looking forward to speaking. Thanks, Frederick. Thanks, Frederick. If there are no further questions at this time, I will now turn the call back over to Mr. Craig Nearhead.

Thank you for your participation on today's call and your continued interest in Noble. Brent, we appreciate your time coordinating today's call. Good day, everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.