Odfjell Drilling Ltd

Good afternoon, everybody, and welcome to the Oddfell Drilling Q2 2024 results presentation. My name is James Crothers, and I'm the Investor Relations Officer at the company, and I'm joined today by our Chief Executive Officer, Jetta Gerstahl, and our Chief Financial Officer, Frodo Sislak. Before we begin, your attention is brought to the important information slide of our presentation, which would encourage participants to read info. Note that the presentation is only a summary of the quarter and the more comprehensive quarterly report should be read separately. Both that report and today's presentation are available on our website, www.oddfieldrilling.com. Our call today will begin with a brief summary of the quarter, with Chet taking us through some of the key highlights. We'll then move on to discussing our operations during Q2 and then move on to our financial review with Rhoda. We'll then summarize the presentation and close the call. Following the presentation, we'll open the Q&A session and we'll invite all participants to submit a question either via the telephone line or electronically via the webcast tools which are available. And with that, I'll hand over to Chetil who will take us through the key highlights.

Thank you, James, and good afternoon, everybody. Once again, Oddfield Drilling is pleased to report another successful quarter. Operationally, all of our fleet performed well, with our own fleet achieving a financial utilization of 98%. Combined with our managed fleet, delivered an EBITDA of $85 million from a revenue of $191 million. And in addition, we were delighted to secure further backlog on our own fleet, agreeing a new contract with Equinor for the use of Deep Sea Abaddon. That is for eight wells at a contract value of 121 million. This will see the Deep Sea Abaddon working on the trawl field for a total of eight wells. Further to this award, we also agreed to add additional scope from the Breidablik contract to the end of this period on troll. This has resulted in the Deep Sea Aberdeen now having a firm backlog until early 2027. And altogether, this has resulted in our order backlog now increasing to $2.1 billion and means that now all of our units have firm backlog until at least mid-2026. Also during the quarter, we completed preparations for the Deep Sea Atlantic SPS and upgrade projects. And as we mentioned several times before, this was a key focus of us this year. And we are extremely pleased to successfully complete the Deep Sea Atlantic SPS in early Q3. And that was completed ahead of schedule and on budget. And finally, we once again have declared a dividend for the quarter of 14.4 million. That equals to six cents per share. Moving on to our operations. In the previous quarters, the Aberdeen, the Atlantic and the Stavanger were all working with Equinor. The Atlantic and the Stavanger were working on the Johan Stradlup phase two and various explorations projects respectively. While the Dipsy Aberdeen had returned to the Berdabäck field, having worked on the Svalind field in Q1. The Dipsy Nordkopp remained working with AKBP on the Alfheim development, and the Dipsy Yantai was working with Neptune Energy and War Energy on exploration and operational campaigns. The Dipsy Mira remained with Total and was operating in Congo, whilst the Dipsy Bosta was working with Shell offshore Namibia until midway through the quarter. Following completion of operations with Shell, the Dipsy Bossa then started its SPS in Valdez Bay in Namibia. And finally, the Hercules completed operations with Gulp offshore Namibia before it was mobilized to Las Palmas and further moved to Canada to start its contract work for Equinor there. Then we can turn to our backlog, and as you can see, we remain very well positioned for significant revenue generation, particularly from 2025 and onwards. All of our old fleet now has firm backlog until 2027, except the deep sea Atlantic, which has firm backlog until mid-2026. Thereafter, it has priced options agreed until mid Q4 2026. And as you can see from the lower charts, in the second half of 24, we start to move off legacy day rates and onto higher rate contracts. This has already begun with the Deep Sea Atlantic, which after completion of its SPS has now gone to a new higher day rate. And in 2025, our units will significantly be above a $400,000 per day average. In addition to this, there will be performance incentives. So if you compare that to this quarter, the Q2, it will go up to $100,000 on average per rig. So a significant step change in day rates ahead of us. Then we move on to the Deepsea Atlantic project. And I wanted to highlight this successful completion and upgrade project. And speaking to the whole project organization and the crew on board the rig, I think we would agree that this was easily the most technically challenging yard stay that we have ever done in Oldfield Drilling. This was not just a five-year classification survey, but a significant upgrade and maintenance project that has materially increased the capability of the rig. And as we mentioned, the Atlantic SPS and upgrade project was a key focus for our business and required significant planning and project management to complete effectively and within time and budget. And despite having to delay the execution into the beginning of the art stay into July, which is, of course, the Norwegian summertime vacation in Norway, the crew and everybody involved in the project were able to do this and completely transform the unit within the allotted time. And as such, the Deep Sea Atlantic now has a new, brand new BOP for deep water operations. It has an increased VDL, variable deck load, as well as several other upgrades. And it has cleared its classification survey. And the Deep Sea Atlantic is now beginning a new contract with Equinor. And as mentioned, this is at a higher data that it was on before. Further, we can go to the total SPS updates. So with Atlantic and Nordkapp, SPS is now completed. We have two down and two to go. And in particular, with the Atlantic completed, we have now de-risked the most complex and capex demanding projects. And as such, we have moved closer to increased dividends. our capex allocation for the remaining two SPS programs that remains around $50 million per unit, with an estimated two to four rigs of hire time per rig. The timing of the Deepsea Stavanger remains unchanged at Q2 2025, and the Deepsea Aberdeen is still expected to begin in Q4 2024, However, the company is considering optimizing the timing, which could result in the Aberdeen SPS beginning in 2025. But I want to highlight that this will not impact the timing of increased dividends. Okay, then we can look at the market. And we remain unchanged in our view that the outlook looks bright for our units. We see no reason that day rates for the use of our units should not continue to climb upwards to increase, and particularly for work in our core market here in Norway. And we're also listening to our remarks of our peers earlier this week and last week. And we will also agree that we anticipate the need for more rigs to meet the demand in Norway, where we continue to see growth ambitions and increased activity levels on the Norwegian continental shelf. Internationally, we expect demand to pick up in 2025 and in 2026 particularly in West Africa. We also expect to see longer-term contracting opportunities in 2025 and 2026, as some of the new exploration projects, such as the one in the Orange Basin offshore Namibia and South Africa, are beginning to mature. To summarize the market, we maintain our positive outlook for our fleet to command very healthy day rates. And with that, I will now pass on to Frode to go through our financial review.

Thank you, Kjetil. I will begin with a summary of the income statement. This is on page 12. As you have seen, operating revenue in Q2 24 was 191 million compared to 184 million for the same quarter last year. Operating revenue for the own fleet in the quarter was 145 million dollars, while the external fleet was 45 million dollars. EBITDA for own fleet was 80 million, a margin of 55%. The EBITDA for the external fleet was 7 million, a margin of 16%. Less corporate overhead and other adjustments, the group EBITDA was $85 million. The company delivered a net profit of 16 million in Q2 and 30 million for the first half year. With the deep-sea Atlantic SPS and yardstay now entirely contained in Q3, our next quarter will be slightly impacted by this, albeit offset by the increased day rate the unit is on now. Moving to page 13 on the balance sheet, we see continuing deleveraging with a net debt reduced by $31 million to $544 million during the quarter. The leverage ratio is 1.8. The company has a robust balance sheet with an equity ratio of 63% based on total assets of approximately $2.2 billion. The available liquidity is $226 million, including the undrawn RCF of $115 million. As planned and expected, this is reduced from prior quarters as the company repaid the five-year seller's credit of $53 million to Samsung back in January, and also with the company's SPS CapEx program ongoing. We are continuing our consistent generation of operating cash. Q1 produced cash flow from operations of $99 million, adjusted for change in working capital. Net interest paid was $24 million, up from last quarter due to payment of half yearly interest on the outstanding bonds. Net tax paid was $3 million. Cap ex for the quarter was $30 million, mainly pertaining to Deep Sea Norcap and Deep Sea Atlantic. Net cash flow from financing activities was minus 25 million, including the Q1 dividend payment of $14 million made in Q2. In accordance with our dividend policy, we maintain a dividend payment of 6 cents per share for the quarter, with the last day including rights being 29th of August and payment to be made on the 19th of September. Our ambition is to increase future dividends that remains intact. And we see a strong potential for this as we are soon starting to move over to higher revenue contracts. With that, I'll pass back to Gertil who will summarize the presentation.

Thanks, Loda. So everybody, all in all, another great quarter for our business with multiple highly important milestones completed. Our business was active and performing at high levels once again, which has created a good EBITDA and revenue. The Atlantic SPS, which was very important for us to get right, was completed successfully and within budget time. And we have now secured a new contract at industry-leading rates and increased our forward backlog to 2.1 billion. And the outlook for our business and wider market remains strong, meaning we can once again issue a quarterly dividend of 6 cents per share. And as Frode mentioned, our ambition is to increase our further dividend level as our units continue to roll over onto higher day rates, reflecting the cash flow generation going forward and the capability that we have for generating cash flow in the business. And I know you can't see me lying, but I'm smiling when I say this. It is now our ambition to begin increasing dividends in combination with the Q4 results of the company. To summarize, Oddfjord Drilling is extremely well pleased for the years ahead with increasing cash generation and deleveraging secured. This is an exciting time to be in Oddfjord Drilling. And with that, I will pass back to you, James.

Thank you very much, Chef Anfra. And as a reminder, if you'd like to ask any questions, you can do so either via the telephone line controls or via the webcast tools. We'll try to go through as many questions as we can. And operator, if you could open the Q&A session, that'd be very handy. Thank you.

Certainly. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. And please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. If you wish to cancel your request, please press star two. Again, it is star one to ask a question. And our first question comes from Frederik Sten from Claxon Securities. Please go ahead.

Hi everyone on the team. Hope you are well. Good report, as always, with results. And very happy to hear you guys talking a bit more about potential increases in your future dividends. And I look forward to seeing what that might be. But that's not my question. I think some of your peers, particularly on the Ultra Deepwater side, have talked about potential. Well, one thing is the harsh environment market, but for example, in West Africa, some of your managed rigs are working there. And to some degree, it could be competition with all the more benign asset types as well, as long as the price is right. So I completely are aware of the physical limitations of bringing benign assets into a harsh environment world. Do you think there could still be kind of spillover effects on rate to some degree, particularly in the near to medium term as some of these assets try to get work to fill the empty backlog?

Yeah. You might be onto something there. I think we see, especially for some shorter-term work, and there are available B9 units in that area, that we remain confident that these big, harsh semis, they are the right tool to work in that area, especially for year-round operations. But I won't rule out that, and particularly for work in what will be the summer season down there, there might be clients who will use benign units, especially for shorter time work, Fredrik.

Sorry. Okay, super. That's good to hear. I'm confirming what I was thinking. Second, and this might relate more to you, Froda. Now that you are midway in your SPS cycle, you have said, I think, or reaffirmed that the SPS costs for the remaining two assets will likely be around $50 million. But are you able to give some color on how you see the CapEx profile for the remainder of the year and also going into 2025? 2025? And also, is there still capex to be paid on the Atlantic? Definitely, I would assume so. But can we see spillover effects from the Atlantic going into Q4, for example, in terms of payments?

Yes. Yes, you can. I think, of course, the bulk of the capex is typically paid in in the same quarter as the the sbs is completed but there's a lot of lot of long lead items meaning that we will pay a lot of capex also up front and and some sub vendors are not very early with their invoices meaning that we typically see capex payments related to sbs's uh one, two, three quarters after the SPS is complete. If you look at Deeps in the World Cup as an example, SPS completed in December 23. Still around 20% of that capex remains unpaid per June 24th.

Okay, that's very helpful. Thank you. I'm not going to ask about M&A this time. I'll go back to the question.

Thank you. As a reminder, if you ask a question, please signal by pressing star one. We will pause for just a moment to allow you to signal. And there are currently no other questions in the phone queue. And I'd like to hand the call over to James for any web questions.

Great, thank you. So thanks for your questions so far. I think some of them have been answered by the response to Frederick's question there. We've had one question. What areas do you think would drive demand for harsh environment rigs from 2027 and beyond?

Yeah, I can answer that. I think when you enter into 27, I think you will see still a high activity level here in the Norwegian continental shells. However, it will be combined with what we believe an increased activity level in the international part as well. And particularly, we think that when you come to 27, you will start to see much higher activity in the South Africa, Namibian part of the region down there. So we expect it to slowly to be steady. More opportunities coming up in 25. This will increase. I think in 27, we have some exciting projects coming up that will lead to an overall increase in activity level. And longer-term contracts also.

Thank you very much. We've had a few more questions here on the webcast. I suppose we've had a few questions on M&A again. Further to Frederick's question, I suppose... What are our ambitions on M&A? And is there any sort of strategy there, I suppose, that we can talk about?

Yeah, I mean, we still follow this closely. I have looked. I will continue to look into the opportunities that are out there. We think that there might be a few. However, as you can see from our report today and our outlook statement, we are We have a very good story and a very good outlook now in Oldfield Drilling, and we won't do anything to mess with this. But we also think that there might be some accretive deals out there, and we've been crystal clear on this all the way. If we're going to do something, it needs to be accretive for the shareholders in Oldfield. So we have not given up. We continue to follow every opportunity that's out there, but... Obviously, I don't have any concrete thing to share here today.

Great. Thank you. We've had one more question on dividends and messaging around that. I suppose the question is, how do we see our dividend going forward? We spoke about it a bit in the presentation, but maybe you want to reiterate around what we see going there. I can do that.

Yeah. I think everybody, as I said, as we continue to roll over our rigs, we leave this legacy day rates and we move on to market rates. So we will see day rates averaging way above $400,000 per day. There is going to be a significant cash generation in the company from 25 and onwards. And we see high potential to do a lot on the dividend parts going forward. But we see that now we have a clear opportunity to do something already in Q4, in combination with the Q4 results. And we have an ambition to start increasing dividends then. And then we see a further potential to further increase that as we go further into 2025, and particularly 2025, 2026 and onwards, we see an even further potential. So things are looking really, really good on cash flow and potentially increased dividends going forward.

Great, thank you. I think that's all the questions we've had submitted to us today. Unless there's any more questions on the telephone line, I think we can probably look to close the call. Sergei, would you mind just checking if there's any more questions on the telephone line?

Sure. There are currently no questions in the phone queue. And as a reminder, to start one to ask a question, we can pause for just a moment for any last questions. And it looks like we have no further questions. James, over to you.

Great. Thank you. Thank you all for joining again and for your interest in the company. Our next conference call and results will be on the 6th of November. However, as always, if you would like a new color on today's results or any further questions, please do just get in touch with us and with me directly. Thank you, Sergey and all the team. You can close the call now.