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spk00: Good morning, everyone. Welcome to Noble Corporation's second quarter 2022 earnings conference call. We appreciate your continued interest in the company. You can find a copy of our 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 CEO, and Richard Barker, our Senior Vice President and CFO. Also joining on the call 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 Q&A. 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 on 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 OBL 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, and including risks and uncertainties associated with our previously announced business combination with Merce 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 other filings with the SEC. Also note, we are referencing non-GAAP financial measures in the call today. You can find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation in our earnings report issued yesterday and filed with SEC. With that, I'd like to turn the call over to our CEO, Robert Eifler.
spk05: Thank you, Ian, and welcome to Noble. We're very glad to have you with us. Welcome also to everyone joining us on the call today. I'll start with commentary on our business environment and follow with highlights on the offshore drilling market and Noble's global operations before turning the call over to Richard to review our financial results for the quarter. Starting off with some macro context, concerns of inflation interest rates and recession have frequented global headlines, but the view through our lens appears quite positive. The frequency and nature of customer conversations, as well as global tender activity, all point to an improving market for offshore rigs. This year has been far better in our industry than 2021. Next year is shaping up to be better than this year, and we have visibility to continuing improvement from there. Data from RISDAD indicate nearly a trillion dollars of oil and gas project sanctioning to occur over the next five years, the majority of which will be directed offshore. 98 percent of those projects break even at an oil price below 60 dollars per barrel and perhaps more compellingly over 80 percent work sub 40 dollars per barrel the world needs affordable and reliable energy and offshore oil and gas developments represent some of the most economic sustainable and secure sources of energy on the globe over the last two quarterly calls We've stated that Noble's financial results would meaningfully improve as we progress through 2022 and our contracts reset to higher day rates. That step up is evident in our second quarter results with further improvement in sight through the second half of the year. Revenue, EBITDA, and free cash flow all increased materially quarter over quarter as our business benefited from improving day rates, improved utilization, and solid cost management by the Noble team. Richard will give some more detail on our results in a moment, but let me first comment on the current state of the offshore drilling market, where we continue to see improvement across all re-class segments. In the floater space, the global ultra-deepwater market is increasingly tight as we look into 2023 and 2024, with marketed utilization for high-spec drill ships well above 90%. This past quarter saw meaningful drill ship contracting activity in West Africa, with approximately six years of work committed across six ships, signifying a material demand recovery in that important region. Here in the U.S. Gulf of Mexico, there were approximately two rig years contracted during the quarter, mostly comprised of options and extensions for follow-on work, and the region continues to produce leading-edge rates, with UDW rates now in the range of $400,000 per day. Contract activity in South America during the quarter was dominated by our previously announced 7.4-year extension with ExxonMobil, and the announced discoveries in the region continue. Further south, we also expect significant demand growth in Brazil over the coming years. Speaking more specifically about the Noble Fleet, in the Gulf of Mexico, the Noble Faye Kozak was awarded a one-well contract by LLOG at a rate of $420,000 per day, which includes managed pressure drilling services and approximates $400,000 per day on a clean basis. Also in the Gulf, the Noble Globetrotter 1 completed its 10-year contract with Shell in Q2 and is now undergoing routine maintenance, after which the rig will mobilize to Mexico for future contracts with CNOC and Petronas. Moving south, the Guyana Suriname Basin holds unmatched potential and is critical for meeting the world's growing energy demand. Noble is proud to play our role in exploring and developing these prolific fields and will continue to invest in our operational capabilities and the local communities to support our market leading position. Our regional contracting activity in the second quarter included APA Corps exercise of its second option for the Noble Jerry D'Souza in Suriname and the exercise of the first two of six options for the Noble Regina Allen in Trinidad and Tobago. Across the Atlantic, The North Sea Fleet garnered much of our attention throughout the second quarter as the Noble team worked to address the UK Competition and Market Authority's concerns regarding our planned combination with Maersk Drilling. As previously announced, we've entered into an agreement to sell Noble's North Sea Fleet of five jackups to Shelf Drilling for $375 million. The sale agreement is conditioned on the CMA's final ruling on the proposed investment's adequacy in addressing their competition concerns, and we expect their final decision this month. We look forward to closing the Maersk transaction in early October, and I'll share some further thoughts on the transaction after Richard provides an overview of our financial results.
spk02: Thank you, Robert, and good morning all. In my remarks today, I plan to provide some brief highlights of our second quarter results and then discuss our outlook for the remainder of the year. Contract drilling services revenue for the second quarter totaled $262 million versus $195 million for the first quarter of 2022. This quarter's revenue was positively impacted by a full quarter of operating days for the Noble Jerry D'Souza, the commencement of the Noble Regina Allen operations in Guyana, and a full quarter impact of the March 1st day rate increases for the four rigs operating in Guyana under the CEA. Adjusted EBITDA for the second quarter was $84 million compared to $27 million in the previous quarter. This translates to an adjusted EBITDA margin of approximately 30% for the second quarter. Net income for the quarter was $37 million, or $0.45 per diluted share. Capital expenditures totaled $31 million in the quarter, which includes $4 million of client reimbursable investments. Free cash flow in the second quarter was positive $56 million. Our balance sheet remains extremely strong, with net debt of just over $50 million and total liquidity of over $800 million. We continue to see increases in our revenue backlog, and as of June 30th, our backlog stood at $2.1 billion. This does not include the two three-and-a-half-year jack-up contracts in the Middle East, which were signed post-quarter end, and it does not adjust for the potential sale of the divestment rigs. Our backlog today is almost double where our backlog stood at the end of last year. The combination of this backlog and ongoing customer discussions give us more visibility and confidence in our financial profile than we have had for a long time. The second quarter was an important inflection for the company as we realized a significant step up in our financial results. As we move into the second half of the year, we expect to see further step ups. The third quarter is expected to benefit from the two Jacobs, the noble Houston Colbert and the noble Sam Hartley returning to work. a pickup in the CEA rate on September the 1st, as well as an increase in the rate for the Noble-Fay-Kozak. We anticipate that this will be partially offset by the Noble-Globetrotter 1 that is undergoing maintenance work before mobilizing to Mexico to start its new contract with CNOC. The fourth quarter is expected to benefit from a full quarter contribution of the two Jacobs returning to work in the third quarter, as well as a full quarter of the higher CEA rate. Turning now to our full year outlook for 2022, we are maintaining our previously disclosed guidance. It is important to note that our guidance does not take into account the divestment rigs or the MRS transaction more broadly. As can be implied by our full year guidance, we expect to average over 100 million of adjusted EBITDA per quarter in the second half of 2022, with the Q4 exit rate above Q3. We continue to be impacted by inflationary pressures and supply chain challenges. Our expectation for the financial impact of these pressures has not changed from last quarter. We expect our total rig-level expenses to increase on average in the high single-digit range in the second half of this year as compared to the second half of 2021. We remain encouraged by the outlook for our business and the extremely compelling financial profile of Noble after closing the Merce combination. In simple terms, we believe that the company is and will continue to be well positioned to generate attractive levels of cash flow in today's market while also being able to realize cash flow and earnings growth from improving markets without the need to spend meaningful capital expected to support this unique combination will be a conservative balance sheet and real scale diversified across different regions blue chip customers and premium asset classes we look forward to sharing more specifics about the financial qualities of the company after closing of the transaction That concludes my prepared remarks, and I'll now hand the call back to Robert. Thanks, Richard.
spk05: 2022 will truly be a transformational year for Noble as we continue to execute on our strategic priorities to create a new and dynamic leader in the offshore drilling market. The combination with Marist Drilling is central to these priorities. We have two remaining milestones before closing the transaction, which is anticipated to be October 3rd. Firstly, as I mentioned previously, are waiting for final clearance from the uk cma which we are hopeful to receive in the coming weeks secondly we need to complete the danish tender offer which will officially launch tomorrow and run through mid-september when the transaction was announced in november last year i was excited about the potential for the combined company and the overwhelmingly strong transaction rationale since then the outlook is stronger And as we have mapped the capability of the combined company to lead the industry in operational performance, technology, innovation, and sustainability, my excitement and belief in the merits of the transaction have grown even further. On close of the transaction, Noble will have scale and a platform to generate strong free cash flow, driven by excellent assets, the best people, and a culture committed to best-in-class safety performance and customer satisfaction. The two companies individually already had industry-leading utilization, which combined with at least $125 million of synergies and a highly conservative balance sheet will allow us to deliver on our stated priority to return capital to shareholders. The outlook for the offshore market remains stronger today than at any point in the recent past, and Noble is a critical component of that offshore value chain. I'd like to thank the entire Noble organization, both offshore and onshore, for their dedication to our customers and to operating safely every day. And I look forward to working with the Marist Drilling organization in the very near future.
spk00: Thank you, Robert. Angela, we're ready now to open the call for questions and answers.
spk10: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for a moment to compile the question and answer roster. We will now take our first question from Frederic Steno with Clarkson Securities. Please go ahead.
spk06: Hey, guys, and congratulations on a very strong financial performance this quarter. I have a bunch of questions, but I'll limit myself to begin with. So I wanted to touch a bit more on the expected performance going into the second half of the year. You're saying that we should expect some other step-ups here, and I'm sure that the CEA rates, et cetera, will help a lot there. So let's start with those. If I remember correctly, you're doing this every March and September and then you have this lag before you start to see whatever rate you negotiated beforehand. So in addition to getting a new rate in September, I'm sure you'll also be meeting with Exxon to negotiate what's going to happen into next year. So I was wondering if you could give any color on what to expect on that part of your fleet when we're going to see the re-pricing in March next year from whatever you're agreeing this September. Given what we see in Brazil and Mexico now.
spk05: Right. Yeah. Thanks. So the rate that, just to be clear, the rate that kicks in September 1st, of course, is already set. That rate was set in the kind of April timeframe this year. It's a market rate at that point. And then What will come through includes the discount. We will set the rate that will come into effect in March of next year, won't be set until later this year. So those conversations haven't started. That's, let's call it a fourth quarter conversation. And so, you know, that'll take into account all of the available market data when that conversation kicks off in the fourth quarter.
spk08: Okay.
spk06: It seems like we should expect another step of them, I presume, given where the market rates are going. Following up on the rest of the fleet here, you have had some nice new data points, but you also have now a few of the rigs rolling off their firm contracts in the later part of this year, such as the Gary de Souza and, for example, the standard levels in november so i was wondering are you in addition to looking at new work for for those uh contracts if you can comment on that and also if you are looking given what's happening in brazil for example are you now seeing any opportunity for the the the two stacked assets as well to bring them back to work thank you
spk04: Yeah, sure. So thanks for the question, Frederick. This is Blake here. So when you look at the drill ships you mentioned, there is some white space, particularly on the legacy Pacific drilling ships. I would say we're encouraged by the nature of the conversations we're having and the different opportunities that lay in front of those, both with their current operators as well as others. So we feel like we've got good visibility for ongoing programs after that. I would say with respect to your second question on Petrobras, I mean, we've been watching Brazil closely. Obviously, we have quite a history there, both in the country and specifically with Petrobras. I think the dynamics are now such that it's an interesting opportunity for us. So we look forward to participating in the tender here that's due in a couple of weeks. And it does bode an opportunity for reactivating rigs. Yeah, the dynamics are there.
spk05: Yeah. So I think that it's going to be I'll just add on to that. That's that's it's interesting because the public nature of that tender, I think everyone will get visibility pretty quickly about how the market is looking at those longer term opportunities. It's the it's the the term could justify some reactivation. And so we'll we'll see what what comes through. I would reiterate for our part, Nothing has changed about the discipline manner in which we're going to approach any opportunity that could justify a reactivation, which I'm happy to repeat, but we've said a few times would be quite conservative.
spk08: That's a very helpful call, guys. Thank you so much.
spk06: That's it from me for now. Thanks. Thanks.
spk01: thank you your next question comes from the line of greg lewis with btig please go ahead hey good morning good morning everybody thank you for taking my questions um you know robert or blake i guess i guess my first question and and i'm not looking for you to comment specifically on on any of the mers rigs per se but just as we look across the drill ship fleet let's just say And when we look at it as a whole, or maybe we even go by market, as we think about pockets of strength in the market, and clearly the Gulf of Mexico is strong, West Africa is picking up. I guess globally there's a pickup in rates and tightness. As we think about rigs rolling off over the next few quarters, I guess two questions around that. One is... Does location matter in terms of thinking about whether there's going to be, I think you mentioned white space in between contracts starting up, i.e., is it, hey, you know, we should be thinking about a 30 to 60 day kind of air pocket, or are we now in a market that's tight enough where we should be thinking more about that, you know, more of a bull market continuation of rig utilizations? And does that differ by region, i.e., obviously in the Gulf of Mexico, I assume it doesn't, but maybe in parts of Asia, maybe it does. I don't know.
spk05: Yeah, I think I'd say something, Blake, feel free to jump in. I think the short answer is I don't think we're back to 100% utilization market. One of the reasons that we see so much value and are so proud of the CEA in Guyana because we have that visibility. Regionally, I think it does matter a little bit. I think that the U.S. Gulf of Mexico, there are, you know, a higher number of opportunities. But that region remains very, very short-term in nature. So, you know, there is white space there. I think the difference is in West Africa just by nature of the operation. Those tend to be longer-term opportunities, and I think that just makes more sense there. So there are fewer of them, and they're longer in general. I think the same can be said for Brazil. But I do think, generally speaking, rigs have some white space when they're switching customers. So it's significantly better than a year ago. But we're not to a point where you can count on 100% utilization if you're switching customers. I'd also note in the very highest days, if you recall, Greg, you know, we were able to get some contribution on mobilization for white space. I think where we are today in the market, mobilization conversations are coming very much back into play. You know, they're probably still a little bit more weighted towards cost recovery than they are revenue protection in the white space.
spk04: Yeah, I would only add a couple things. I wasn't trying to forecast with white space forecast gaps. It was more just talking about our contract coverage thus far. I think in the UDW space, when we see a tightening market, we've continued to see a customer preference for hot rigs. Robert mentioned mobilization coverage. So, again, we're encouraged on the outlook for our fleet today and certainly look forward to marketing some really high-quality assets after the close of the transaction with Maersk.
spk01: Yeah, absolutely. And then just more of a question around the pending asset sale of the five North Sea rigs. Obviously, there's a cash buyer, and I believe the agreement is a cash agreement. I guess a couple things. One is, have there been or any deposits required? And $375 million is still a lot of money. I realize maybe the rigs could have sold for more. But in the event that, I guess what I'm wondering is, could we see any seller financing in the event that there's not a, does that change anything in the event that the counterparty is unable to come up with $375 million in firm cash.
spk05: Yeah, so there is a deposit. It's kind of industry standard 10% deposit. There is no seller financing available, and that is by law, by rule, out of the UK. So the competition authority there does not want to see any continuing link that could affect competition going forward. Okay.
spk01: Okay, great. Okay. Hey, everybody, thank you for the time.
spk08: Thanks. Thanks, Greg.
spk10: Thank you. Your next question comes from Samantha Ho with Evercore. Please go ahead.
spk11: Hey, guys. Congrats on a really great quarter. I wanted to maybe just dig back to one of Greg's questions. Um, the, uh, the say, uh, Prozac, uh, that 400 clean rate seems really unusual for a one well contract. Um, I was just wondering if maybe you could talk a little bit more about that. Was that just a very opportunistic scenario where, you know, they wanted it, um, in a certain white space that you guys had available?
spk04: Yeah, sure. Samantha, thanks for the question. This is Blake. I think it's just the nature of the capabilities of the rig and the demands of this particular program against the available rigs in the Gulf of Mexico at the time. It's a great contract. We look forward to working with ELOG. we have a long-standing relationship with them, and we've been trying to do some work for them for some time. So it's an exciting opportunity, but again, I think the rate is just a depiction of the alignment of the rig specs required versus the rigs available.
spk11: Okay. And then maybe more broadly, can you talk about how day rates are trending geographically? I realize that the U.S. is sort of pushing the leading edge on the ultra-deep water side, but You know, where are we in terms of the other geographic basins? You know, is West Africa kind of going to be catching up to them sometime next year? Or how do you guys see the day rate progressing?
spk05: Yes, and jump in, Blake, too. I think we said at the beginning of the year, one thing we expected to see this year was were other regions catching up with the U.S.? ? and less of a discount for term. I think that has proven out as we've progressed through this year. There is, I think, still, and remember, in a couple weeks when these Brazil tenders come through, it will be a great visibility, I think, for everybody. But I think there is still probably some slight discount for term. Don't think we've inflected into a market where there's a premium for term yet. But I do think also that rates have normalized somewhat this year between the South America and West Africa and the U.S. Gulf of Mexico.
spk04: Yeah, I don't have anything further to add, Samantha. I mean, we'll see the fixtures both in Brazil, as Robert mentioned, and West Africa. I think we'll show they're catching up.
spk11: Okay, and just remind us again, like, what are you guys seeing in terms of reactivation costs and, you know, how quickly you could get a cold stack rig reactivated? Sure.
spk05: So we have the two. As a reminder for anyone else, we've got the Meltem and the Sroco. Of those, the Meltem is really the more capable rig overall. That's a seventh generation rig that had actually mobilized to the U.S. just before the pandemic. under Pacific. So that's almost certainly the first one that would come out. And if you think about an all-in cost, which includes labor and all the expenses associated with performing the shipyard work, that's kind of a $75 to $100 million price tag. And at this point, it's, let's call it a year's work. It could creep a little bit longer than a year, but we would say right around a year.
spk09: Okay, great. Thanks so much, guys, and congrats again.
spk08: Thanks, Sam.
spk10: Thank you. Your next question comes from the line of David Smith with Pickering Energy. Your line is open.
spk07: Thank you. Hey, good morning.
spk08: Congratulations on the solid quarter, and thank you for taking the question. Thank you, Dave.
spk07: So just bigger picture, seeing deep water demand visibility growing, forward availability of premium drill ships is shrinking. I'd be getting more nervous if I were a rig procurement manager. I'm curious if you could give us any color on what you're seeing in customer conversations to secure forward availability maybe compared to a year ago? Maybe in terms of lead times, you know, are they stretching out? Are you seeing any interest in longer contract terms?
spk05: Sure. So contract term has ticked up. And we track lead time as well. It's ticked up. It's actually ticked up in the U.S. Gulf of Mexico. You know, so yes, behaviors is changing. There is still because there is still, I think, a persisting hesitation to contract longer than necessary. So I think the behavior is still to try to contract on a more short-term basis. So I don't think we're to a place yet where customers are truly nervous to continue with your description. But I do think we're in a transition where people are starting to pay a whole lot more attention to what things look like a year out from now.
spk07: I appreciate that. And follow on to that question, recognizing that in some countries, customers have to tender. But for instances where they don't, are you seeing any change in their approach to the market in terms of pursuing direct negotiations versus inviting a more competitive tender process?
spk05: So we've seen an increase in direct negotiations in the U.S. Gulf of Mexico. I cannot say necessarily that that has followed in the same kind of to the same degree in other markets. And, of course, other markets are restricted in most cases from that. But customers do want the rigs that they want, and there is less availability today. So we have also seen this trend where customers are selecting fewer people to go through a tender process, where maybe the numbers are two to four instead of five to seven, something like that, which I think is a similar way of achieving some level of control over customers. over the rigs that win that.
spk07: Great. Appreciate that caller. If I could sneak one more in. You touched on this with the comments on mobilization cost recovery. Just noting that historically when we see day rates moving up, contract terms and conditions are probably improving in the background. Just curious if you can give us any color around some other TNCs, especially around bonus opportunities, non-productive time allowance and cancellation provisions.
spk04: It's a good point there, and we have seen the improvement in contractual provisions. The risk allocation and the protection of the revenue, you know, those suffered in the downturn as we fought hard for work. As the market improves and it tightens, we're able to improve the T's and C's as well.
spk08: Great. Thank you so much. Thank you.
spk10: There are no further questions at this time. Mr. Ian McPherson, I turn the call back to you.
spk00: Thank you, Angela, and thank you, everyone, for your participation on our call today and for your continued interest in Noble. We'll look forward to speaking with you again soon.
spk10: This concludes today's conference. You may now disconnect.
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