Odfjell Drilling Ltd

Good afternoon, everybody, and welcome to the Oddfield Drilling Q3 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, Cheta Garzdal, and our Chief Financial Officer, Frodo Sislak. Turning to our important information slide, before we begin, your attention is brought to this slide, which we would encourage participants to read in full. Note that this 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.oddfielddrilling.com. Our call today will begin with a brief summary of the quarter with Chet taking us through some of the key highlights. We will then move on to discussing our operations during Q3 and then move on to our financial review with Frodo. We'll then summarise the presentation and close the call. Following the presentation, we'll open a Q&A session and invite all participants to submit a question either via the telephone line or electronically via the webcast tools which are available. With that, I'll hand over to Chet who will take us through the key highlights.

Thank you, James, and a very good afternoon to everybody. So we're quite pleased today to present the Q3. It was what we would describe as a successful working quarter for us. And looking at the result, despite the SPS on Deep Sea Atlantic, which resulted in 19 days of net downtime, that is after being adjusted for rate compensation during the yard stay, We ended up delivering a strong result of 83 million of EBITDA and 186 million of revenue during the quarter. Minus the Deep Sea Atlantic SPS, our own fleet achieved a financial utilization of 97%. Our strong EBITDA generation is partly down to the Deep Sea Atlantic moving on to higher rates following its SPS. And this is the first of our units to transition off what we describe as legacy day rates. And as many of you are aware, we have much more to come in this regard. Our company maintains a good, solid order backlog with 1.1 billion of firm contract coverage until at least mid-2026. And finally, we are again pleased to once again announce a dividend for the quarter of US $14.4 million, equal to six times per share. Looking ahead, we now have clear visibility and our intention is changed from last quarter. We still very much intend to increase our quarterly dividend from our Q4 results. And then we move on to our operations. As per previous quarters, the Deepsea Aberdeen, the Atlantic and the Stavanger were all working for Equinor. The Atlantic and Stavanger were working on various projects on the Norwegian continental shelf, while the Aberdeen was working on the Breideblik field. The Deep Sea Noor Cup remained working with RK2P and was also working on various projects on the NCF. The Yantai was working with Shell throughout most of Q3 and is now, as we speak, in the yard completing its SPS program. And the Deep Sea Yantai is expected to complete its SPS shortly before it begins work with its next client, which is PIGNIC. The Deepsea Mira remained with Total Energies and was operating in Congo before it began mobilizing back again to Namibia. The Deepsea Bolster was completing its SPS during Q3 and has since sailed away to begin work with Springfield Group offshore of Ghana. And finally, Hercules was working with Equinor throughout Q3 on an exploration campaign offshore Canada. It has completed its work post-period and is now on its way to Norway. Then we move on to look at further to our backlog and that one remains as secure as ever. And as you can see from the charts, we are gradually getting into increasing day rates for our own units. All of our own units have firm backlog now until except the Atlantic, which has a firm backlog until mid-2026, whereupon it has priced options until near the end of 2026. We remain very positive about our forward backlog, and with 1.1 billion of firm backlog ahead of us in total, Q3 saw the start of our units moving off the legacy day rates. with the Deep Sea Atlantic moving on to a day rate of 400,000 after the completed SPS. And with more of our units then transitioning to higher rates in early 2025, we really much look forward to this generating significantly increased revenue going forward. Then I will give you an update on the SPS. Our SPS programs are ongoing. There is a flight change of plan, which we highlighted also in the last quarter's fall. The Deep Sea Aberdeen will now begin its SPS in first half of 2025 rather than in Q4 2024. Absolutely no drama to this. The postponement is an agreed schedule change with Equinor in order to optimize offshore operation, and it is not anticipated to change any capex allocation for the RIGS SPS or impact the company's forward dividend strategy. And as we noted in previous quarters, our capex allocations for the remaining two SPSs, that remains around $50 million per unit and with two to four weeks of off-hire time per RIGS. The timing of the Deep-Sea Stavanger remains unchanged at Q2 2025. And also our external fleet has been going through SPS programs with the Deep-Sea BOSTA have completed its SPS in late Q3. And Deep-Sea Antalya, as mentioned earlier, is undergoing its SPS at CCB outside of Bergen as we speak. So then we turn to the market outlook and we maintain our view that the demand in Norway remains consistent. Demand for rigs in our sector we anticipate to continue to increase in Norway particularly from 2026 when our fleet begins to come off contract. There are multiple developers in Norway who are actively seeking to grow on the shelf and we expect this demand alone that there will likely be need for more rigs in Norway from 2026 compared to the rig count as per now. Also in the coming months, it's worth noting that we are drilling three carbon capture and storage wells for clients. CCS is in an early stage in Norway at the time, but given the interest and requirements to increase the amount of CCS projects, we expect CTX wells could add further demand to our expectations. Internationally, we expect demand to pick up in late 2025, and in 2026 particularly, and particularly then 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 Orange Basin off of Namibia and South Africa begin to mature. In addition, operators continue to consider developing projects in Suriname and the Falkland Islands, to name a few. So ultimately on the market, we maintain our view that we expect day rates for use of our units should remain at high levels and further increase from 26 and onward. And with that, I will now pass it on to our CFO Frode to go through the financial review.

Thank you, Kjetil. I'll start with a summary of the income statement. As can be seen, operating revenue in Q3-24 was 186 million, same number as in Q3 last year. Operating revenue for the own fleet in the quarter was $144 million, while the external fleet was $42 million. EBITDA for the own fleet was 77 million, a margin of 53%. And the EBITDA for the external fleet was 7 million, a margin of 17%. Less corporate overhead and other adjustments, the group EBITDA was $83 million. And the company delivered a net profit of 19 million in Q3. Moving to page 12 on the balance sheet, we continue to see deleveraging with net debt reduced by $12 million to $532 million during the quarter. The leverage ratio is 1.7. 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 $227 million, including the undrawn RCF of $109 million. The available liquidity remains unchanged from last quarter, despite CapEx payments of $31 million during Q3. We'll take a closer look at the cash flow movement as we now move to the next slide. We're continuing to see consistent generation of operating cash. Q3 produced cash flow from operations of $75 million. Net interest paid was $7 million, which is a reduction from last quarter due to bond interests being paid semi-annually in Q2 and Q4. As mentioned, capex for the quarter was $31 million, with close to two-thirds of that pertaining to the Deep Sea Atlantic SPS. Net cash flow from financing activities was minus 17 million. There were no drawings made on the RCF during the period. Dividends paid in Q3 were 14 million related to the Q2 results. 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 14th of November. and payment to be made on the 27th of november our intention to increase future dividends remain intact and we see a strong potential for this as we have now begun to move over to higher revenue contracts a dividend increase is now expected to be announced in relation to the q4 results mid-february with that i'll pass back to chetel to to summarize

Thank you, Frode. So all in all, Q3 has been a good working quarter where we have achieved our operational goals and generated strong results, despite the downturn due to the SPS on Deep Sea Atlantic. I'm very proud of the SPS team and the people that were involved in that. The project was completed ahead of time and on budget, a very complicated SPS project. The unit is now back in operation. It is working excellently and it has also moved on to a higher day rate. Our future revenue remains well secured with our firm backlog of 1.1 billion until at least mid-2026. And the company remains confident about the forward market condition and for its units to command continued high day rates at renewal. And finally, we have declared another dividend for Q3. And as I said before here, we do have a clear intention to increase that from Q4 results. So ultimately, we are very pleased with our performance in Q3 and look forward to a new year with strong optimism. Thank you very much.

Brilliant. Thank you, Chetil. As a reminder, if you'd like to ask a question, you can do so either via the telephone line controls or via the webcast tools. Our operator, Sergei, can you help us open the Q&A session, please, Sergei?

Certainly, sir. If you wish to ask a question over the phone, 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, please press star one to ask a question. We'll take our first question from Fredrik Stene from Clarkson Securities. Please go ahead.

Hey, Kjetil and team. Good performance as always. So I have a couple of questions. relating to the future, obviously. And I thought it would be good to start with your own contracted fleet. You are, as you highlight, contracted firmly through the mid-2026 on all of your vessels. When should we expect the next data point or next contract on any of those four units? since it's effectively two plus years until most of them are available. Is that something that can happen imminently or do we have to wait a year to see anything on the news front for those?

Yeah. Hi, Fredrik. And thank you for the question. It's a bit... The answer is a bit... There's two answers to your questions. Some of our contract models... And particularly the Nordkapp, for instance, then we have sort of a model with AKBP where we sort of just add on a year at a time. And typically we enter into those discussions and to agree on day rates approximately 15 months ahead of the contract ending or the first period ending. However, there is discussions with clients about, you know, adding more form back to some of our rigs. So which could sort of, yeah, lead to earlier announcement that typically the 15 months ahead. So I would say, yes, it's possible that we can announce some more backlog in not too long, but normally, as I said, many of our rigs are, we enter into those discussions typically 15 months ahead of firm period ending.

That's very helpful. And second, too, that you seem to be quite positive on the outlook both for your own rigs, and I guess particularly in the Norwegian market in general, saying that The market probably needs more rigs than it has that's currently there. So I was wondering, are you able to quantify that a bit more? Does this mean one incremental rig? Does it mean four incremental rigs? What are you currently seeing?

Yeah. So we like to approach this to do sort of what we like to call a bottoms-up analysis. So we sort of... We talk to all our potential clients and we see what they have in the pipeline and then we sort of add up everything. And what we see is that particularly from 26 and onwards, there's a need for more rigs in Norway compared to the number that are here today. And it's at least the need of one to two rigs as we see it, at least compared to today's number.

Okay, that's good to hear. And finally, if you're able to share, Nicola, you are, I think, much more firm in how you're talking and writing about a potential dividend increase from next quarter. So are you, at this point, able to say something about how much is it fair to expect? two cents up? Is it a doubling? What's kind of on the drawing board for how you're approaching that dividend step-up?

We can't, further speaking, we can't be specific on the Q4 dividend. I think still it's fair to say that if you look at 2025 as a whole, there is certainly capacity to at least double the dividend compared to the current level. I think that at least partly answers your question, Fredrik.

Yeah, I appreciate that. I was actually going into this thinking that I would get no comment whatsoever, so I'm very happy. Thank you very much. Thank you, Fredrik. That's all from me. Have a good day.

Bye. Thank you. As a reminder, to ask a question over the phone, please signal by pressing star 1. We'll pause for just a moment to allow you to signal. It appears there are currently no further questions at this time over the phone. And I'll hand back over for any webcast questions.

Great. Thank you very much, Sergey. Thank you so much for the questions we've had so far. I think we'll come to this question first. Have you considered refinancing and replacing it with a new bond without amortization?

I think, of course, we have several debt facilities in the group. the bond covering Deep Sea Atlantic and Deep Sea Aberdeen that has a maturity in 2028, of course, and has a make whole period until November 2025, meaning that calling that bond prior to November 2025 is extremely expensive. I think it's more relevant to look at doing something with the existing repayment profiles on some of the existing facilities or alternatively look at tapping the bond market. But there are no imminent plans to increase the leverage of the group. Given our strong balance sheet and contract coverage, it's certainly something that can be considered.

Thank you. We've had a few questions. on CCS, but I suppose one here is probably most relevant. Can you elaborate on the size of the CCS opportunity in the future? And is there any difference between a CCS well and an oil and gas well in terms of contract terms? And a similar question, how long does it take to drill CCS well?

Yeah, I can talk a little bit, but I think it's still early days when it comes to, you know, the sort of you know, how big is this going to be, this drilling of CCS wells. But we are seeing that there are some wells that's going to be drilled now. And I think we're sort of in waiting mode to see how this pans out further. When it comes to, is there any difference between a CCS well and in all practicality, is it not? You need a rig, you need a BOP. It's a basically a similar well design as a normal well. And also the duration that it takes to drill a well like that is quite normal. I would estimate just on top of my head, 30, 40 days on a standard CC as well. And there's no difference in contract terms. It is just like any other contract that we have. So, yeah.

Great. Thank you. Another question here is, what is the Falkland Island opportunity? Is there any active tearing during and is there more than one operator in the Falkland Islands?

Yeah, so there is the opportunity in Falklands, it's the company called Navitas, that they have been communicating their intentions out there and they are in a tender process for a rig and that is ongoing and I wouldn't be surprised if we see some decisions being made around that before Christmas sometime.

Great, thank you. We've had a few questions here as well on M&A. I suppose two salient ones is Odbjall looking to acquire some of the management rigs in their portfolio. And can you talk about M&A opportunities more generally? How do you value M&A opportunities as well?

Yeah, nothing changed there. I mean, we are still actively looking at what opportunities are out there. But we stick to our strategy and our plan there. We need to be a deal that's accretive for the shareholders in order for drilling. Does such opportunities exist? We think they might do, but we have been actively involved in some and didn't that didn't work out, and then we look at some new ones. But in general, yes, we like all our managed rigs good, but there's also other opportunities. So this is like constant being addressed, but we will make sure to communicate if something happens there.

And Frodo, do you want to speak a little bit about how we might value M&A and what we're looking for in terms of accession targets?

Yeah, I think this is a recurring question in our course, and I think it's important to stress that any opportunities we consider or may take on, of course, they will be evaluated along different parameters, but the most important one being the free cash flow to equity per share. we will not be doing anything that will dilute that and reduce the dividend or distribution capacity going forward.

Great. Thank you very much. Looks like we have maybe one more question. What's your view on adding further backlog from our position of 1.9 billion just now?

Well, I think I touched upon that earlier. We have the contracts with the options that we have. Some we follow a plan, but this will be sort of added on 15 to 12 months ahead of the firm period expires. But we are also in discussion about other solutions that might come with another story around that. But we remain positive and actually very relaxed about adding work to our own rig feed going forward.

Great, thank you very much. I think we might wrap up there. I'm very conscious that today is quite a busy day, not just with our own results, but with some other results which came out today too. I think we probably close the call there. If you have any other questions, please do submit them either through the webcast portfolio. I'll try and come back to questions that are asked on that, which we haven't answered. And in the meantime, if you want to, please just email myself, jchu.oddfielddrilling.com if you have any other questions. But in the meantime, I think we can close the call there. Thank you very much.