Shelf Drilling Ltd

Good day and thank you for standing by. Welcome to the shelf drilling first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star 11 on a telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw a question, please press star 11 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to our speaker today, David Mullen. Please go ahead.

Thank you, operator, and welcome everyone to Shelf Drilling Quarter 1 2024 earnings call. Joining me on the call today is Greg O'Brien, Shelf Drilling CFO. Earlier today, we published our Q1 2024 financial statements for Shelf Drilling Limited and Shelf Drilling North Sea Limited, as well as our latest fleet status report on the investor relations page of our company website. In addition to our press release and the financial statements, we also published a presentation with highlights from the quarter. A recording of this call will be made available on our website within the next few days. Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for the full year 2024 and beyond. Activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future are forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. Also note that we may use non-GAAP financial measures on the call today. If we do, you will find supplemental disclosure for these measures on an associated reconciliation in our financial reports. I will provide an overview of our company's performance for Q1 2024 before sharing my latest views on the jack-up market. I will then hand over to Greg for his remarks and walk you through our first quarter results and our updated guidance before opening the floor to Q&A. As always, I would like to start my commentary on our earnings call with our safety and operating performance. Across the fleet of 36 rigs, our total recordable incident rate for Q1 2024 was 0.06, and the uptime for the first quarter was 99.5%, an outstanding safety and operating performance. In early April, four of our nine rigs under contract with Saudi Aramco were issued notices of suspension for up to one year at zero rate. All four suspensions are now in effect, and the four rigs have been mobilized to the IMI shipyard in Saudi Arabia. We are in active discussion with customers regarding contract opportunities for three of these rigs, the Shelf Drilling Victory, the Shelf Drilling Achiever, and the Main Pass Forth. And we anticipate that we will secure new contracts in the coming months with commencement dates before the end of 2024. We will stack the main pass 1 in Saudi and reduce costs to minimal levels. We believe there will be opportunities for this rig in 2025 once the market absorbs the currently available capacity. In late April, the Trident 8 experienced an operational incident resulting in the damage to the port leg whilst the rig was under contract to Chevron. No one was hurt and the rig has been safely mobilized to the quayside location to further assess the damage. We are in close dialogue with our customer and insurance underwriters to develop a plan to fulfill the work program with Chevron and to assess the cost to repair the Trident 8. We will provide further updates as this situation unfolds in the coming weeks. The Shell Drilling Barsk in Norway has concluded its contract preparation project and is awaiting final clearance for the authorities before commencing its new contract with Equinor, which we expect to take place before the end of the month. The Shell Drilling Perseverance arrived in Singapore and is undergoing contract preparation before the commencement of its new contract with Petro-Vietnam. Expected date of commencement remains late July. The adjusted revenue for Q1 2024 was $252 million. Adjusted EBITDA for the quarter was $80 million, resulting in a margin of 32%. The sequential step-down in margin was primarily the result of the Shelf Drilling Bars being out of service for the entire quarter. We were very pleased with the placement of the $315 million of new Senior Secured Notes at Shelf Drilling North Sea, which addresses the funding requirement discussed on our most recent calls and extends the maturities to 2028. The SD&S funding is a great outcome for the company. Greg will provide more details on our quarter one financial results and outlook for the full year 2024. Brent crude oil prices averaged $82 a barrel during the first four months of 2024. The ongoing conflicts in the Middle East the higher than expected oil production from non-OPEC, specifically onshore U.S., Guyana, and Brazil, a robust global oil demand, and extended OPEC production cuts have all essentially canceled one another out, resulting in a stable oil market. Oil demand is expected to continue to increase through 2024 on the back of an improving economic outlook for the United States and continued growth in energy consumption in the developing and emerging markets around the world. The global number of contracted jack-up rigs increased marginally from 406 in January 2024 to 409 in May 2024. And the market utilization held steady at 94%. The 94% utilization does not reflect the recent suspensions in Saudi Arabia. We will see some near-term pressure on day rates as the Middle East contractors look to redeploy rigs in other regions. However, we see significant incremental demand in most regions, most notably in West Africa and Southeast Asia, so we anticipate utilization will recover and remain at elevated levels for the foreseeable future. The Middle East will see a reduction in activity in the short to medium term. following an unprecedented increase in activity in Saudi Arabia through 2022 and 2023. The number of working rigs in Saudi Arabia is still higher than at any point prior to 2023. The current level of activity is required to sustain current productive capacity. Furthermore, we believe there will be incremental demand for offshore rigs over time, as onshore fields continue to decline and offshore remains the source of incremental productive capacity. Egypt has shored up its foreign reserves with capital injection from UAE and other sources. The Rig 141 has secured a two-year contract extension in the Gulf of Suez. And we are confident the Trident 14, currently idle in the Gulf of Suez, will also secure a new contract with an Egyptian customer in the coming months. There has been a number of new fixtures in Southeast Asia, driven primarily by Petronas in Malaysia and PTTEP in both Malaysia and Thailand. Available rig supply in the region is limited, with further incremental demand expected to draw rigs from the Middle East. We expect ongoing and upcoming tenders to materialize into additional contracts, awards in Thailand and Vietnam for programs commencing late 2024 and early 2025. The market in West Africa remains strong and reutilization in the region is expected to remain tight for the foreseeable futures. Several new requirements have emerged in the last six weeks across multiple countries with start dates before the end of 2024. We are in advanced discussions with a number of international and indigenous customers in the region for extensions as well as new contracts at attractive day rates. In India, there are a number of tenders under negotiation. ONGC is expected to conclude commercial negotiation in the coming weeks with bidders under four-rig tender. All four rigs are incumbent rigs. CARN have recently issued a tender for two rigs with targeted commencement in quarter four, 2024. Other indigenous Indian companies are looked for relatively short-term programs with start dates in H1 2025. The North Sea market has strengthened significantly. In the UK sector, the Shell Trading Fortress secured a 400-day contract expected to commence in quarter three in direct continuation with its current contract. We are also in advanced discussions regarding follow-on work with the Shell Trading winner beyond its current contract end date in March 2025. In Norway, the Shell Trilling Barsk secured a two-well firm contract with three-well optional extensions with Equinor at the Gunderen Field, as well as first two-well options exercised on Sleipner Vest Field all ahead of contract commencement. We see this as a high degree of trust Equinor has placed in Shell Trilling's operational capabilities. And we are pleased to secure additional firm term that will keep the rig busy beyond 2025. As of the 31st of March, 2024, our contract backlog was 2.2 billion across 35 rigs with a weighted average day rate of $84,000 per day and a market utilization of 97%. In closing, The suspension of our four rigs in Saudi Arabia will have a short-term impact on the company's results, and we have revised our 2024 financial guidance to that effect. However, we are confident that we will secure attractive opportunities for several of these rigs in the near term, and we anticipate start dates before the end of 2024. We are very encouraged by our discussions thus far with potential customers, We view this as an opportunity to strengthen our footprints in other core markets by fixing contracts at more favorable day rates. A recent contracts award in the North Sea and debt refinancing at SDNS have significantly improved the outlook for this part of the business. As such, we anticipate that SDNS will contribute a meaningful amount of earnings growth and cash generation as we move into the second half of 2024. I would like to thank our investors for their interest in the company. And as always at Shelf Green, despite our near-term uncertainties, we are committed to delivering safe and best-in-class operations to our customers. I will now hand it over to Greg for his remarks.

Thanks, David. As a reminder, our earnings release yesterday also included standalone financial reports for Shelf Drilling North Sea. We'd encourage you all to review the results presentation on our website, as this includes additional metrics for both Shelf Drilling and SD&S. Reported revenue for Q1 2024 of $255 million included $3 million for amortization of intangible liability. We'll continue to focus on adjusted revenue which excludes the impact of this non-cash item. Adjusted revenue for Q1 of $252 million included $232 million of day rate revenue, $12 million of mobilization and bonus revenue, and $8 million of recharges and other revenue. Adjusted revenue for Q1 increased by $13 million, or 5%, relative to Q4 2023. The 31-rig fleet at the parent company drove substantially all of this growth, with increased revenues in both Saudi Arabia and Nigeria. In Saudi Arabia, there was a sequential reduction in planned out-of-service days, primarily for the main pass 4, which was out-of-service most of Q4. In Nigeria, the Adriatic 1 and Shelterling Mentor commenced new contracts during October and were in operation for all of Q1 2024. Revenue at Shelterling North Sea of $28 million was substantially in line with the prior quarter. Effective utilization for the quarter increased to 86% from 85% in Q4. Utilization at the parent company was 91% up from 87% in Q4 due to the improvement in Nigeria and Saudi. Effective utilization for the five-rig fleet at SD&S was 59% in Q1, as both the Shelterling Barsk and Shelterling Perseverance were preparing for new contracts for the entire quarter. Average day rate was $82,000 per day in Q1, up from $80,000 in Q4, mainly driven by higher rates in West Africa and Egypt. Operating and maintenance expenses of $150 million in Q1 increased from $135 million in Q4, partially due to higher maintenance costs for certain rigs in India and Saudi Arabia and higher expenses for fleet spares. At the SDNS level, operating expenses increased sequentially to $35 million in Q1 from $26 million in Q4, due entirely to higher costs for the sheltering barsk in Norway, which was previously under a bare boat charter agreement that finished in Q4 2023. G&A expenses of $18 million in Q1 increased from $14 million in Q4 due partly to a net increase in provision for credit losses. Adjusted EBITDA was $80 million in Q1 representing a margin of 32% compared to $88 million at a margin of 37% in the previous quarter. Adjusted EBITDA was negative $11 million for SD&S in Q1 and $91 million from the rest of the business. Income tax expense was $9 million in Q1, representing 4% of revenues from $6 million in Q4. Net interest expense of $36 million for the quarter was $29 million lower than Q4, mainly due to $28 million of one-time expenses associated with our debt refinancing transaction that we completed in October. Other net expense increased to $4 million in Q1 from $2 million in Q4, resulting from foreign currency exchange losses. Non-cash depreciation and amortization expenses totaled $41 million in Q1, slightly up from $40 million in Q4, and the quarterly net income attributable to controlling interest was $4 million. Capital expenditures and deferred costs totaled $49 million in Q1, including $13 million at shelf drilling North Sea. Spending at SD&S was primarily concentrated on contract preparation expenditures for the shelf drilling Perseverance ahead of its new contract expected to commence in Vietnam in July, as well as higher spending for the shelf drilling Barsk in Norway in preparation of its new contract expected to commence in the coming weeks. At the parent company, we completed a major shipyard project on the Trident II ahead of its new three-year contract with ONGC that started in India in March. Our consolidated cash balance as of March 31st was $102 million, marginally up from $98 million at the end of December. Cash at the parent company increased from $70 million to $88 million in during Q1, primarily due to a sequential decrease in capital spending and a reduction in debt service payments. Cash at SD&S declined from $28 million in December to $14 million at the end of March, mainly due to lower sequential quarterly EBITDA and an increase in CapEx. As a result of the recent announcement of the suspension of four of our rigs in Saudi Arabia, we have revised our financial guidance for full year 2024. Fully consolidated adjusted EBITDA is now estimated between 330 and $375 million compared to our initial guidance earlier this year between 375 and $420 million. At the SDNS level, we now anticipate EBITDA between 30 and 35 million, an increase of $5 million from our original guidance. This includes an expectation for the first half of 2024 in the range of negative $15 million and a significantly better and more normalized level of EBITDA north of $90 million on an annualized basis in the second half of the year once all five rigs are in operation. This implies a level for the rest of the business in 2024 of $300 million at the low end and $340 million at the upper end, representing a reduction of approximately $50 million from our initial guidance range. We anticipate EBITDA will sequentially decline in Q2 and Q3 due to the suspension from Saudi. As David mentioned, we expect to secure new contracts for three of these four rigs in the coming months with start dates around the end of the year. As a result of this, as well as ongoing efforts to reduce operating costs, we expect EBITDA to return to a level in line with or better than Q1 2024 by the fourth quarter of this year. Our total capital spending guidance in 2024 is unchanged from earlier this year, estimated between $145 and $170 million. This includes $40 to $45 million at SD&S, primarily due to the ongoing project for the Shelterland Perseverance, as well as contract preparation spending for the Shelterland Barsk, and the planned investment in fleet spares discussed on our last call. Across the rest of the business, we maintain our guidance of approximately $115 million. This now includes $15 to $20 million of assumed mobilization and contract preparation costs for the suspended rigs in Saudi Arabia that we're actively marketing for opportunities in other areas. As an offset, we've canceled a planned out-of-service project for the main pass 1 and identified other reductions across the fleet. The recent debt placement at SD&S was a very positive step for shelf drilling. The issuance of $315 million senior secured notes due in late 2028 is on track to be completed next week. In conjunction with the issuance, we will fully redeem the existing notes due in 2025 and repay the short-term loan that was provided by the parent company in late April. This transaction fully addresses the near-term funding need at SD&S and ensures we have strong liquidity for the foreseeable future. Through the series of steps taken over the past nine months, we've transformed the balance sheet of the company. At closing of the SD&S notes issuance, we have over $100 million of cash, our $150 million revolving credit facility is undrawn, and we've extended all maturities to late 2028 and 2029. We remain committed to further deleveraging our balance sheet through annual debt repayments and expect to generate significant free cash flow in 2025 and beyond. The suspensions in Saudi Arabia will create some short-term uncertainty, but we believe the long-term outlook for the jacket market remains extremely robust. Our leading position across multiple key regions positions us well to capture opportunities in these other markets in the near term. We'd now like to open the call for questions.