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.

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star 11 again. Please stand by. We'll compile the Q&A roster. This will take a few moments. Now we're going to take our first question, and it comes from the line of Frederick Stent from Clarkson Securities. Your line is open. Please ask your question.

Hey, David and Greg, hope you're well and thanks for a very helpful caller in your prepared remarks. I wanted to touch a bit on the guidance you are talking about, you know, high confidence in redeploying those three rigs that everyone, except for the main pass, won by end of the year. But I think in your your highlights you're talking about, and this is relating to the guidance, that it includes anticipated redeployment of two of the suspended rigs in Q4. So I was just wondering if, you know, how should you reconcile the talk about three rigs and the two rigs and how much of Q4 will be covered, et cetera? Any caller would be super helpful.

Yeah, no, it's a fair question. And look, the answer is we don't have perfect visibility right now. We haven't secured contracts for any of those three rigs yet. We're actively... in discussions on all three of them and multiple opportunities. And I think we made a comment in the prepared remarks that we hope to have work for all three of them relatively soon. But there's generally a lead time or lag between executing work and having rigs actually start. Because I think with all three, we'd expect them to work in places outside of the Middle East, and that's going to take a bit of time. So I think the hope is we have two of the rigs working. sometime in Q4, potentially the early part of Q4. Is it possible that one of those rigs could start before then? I think that's possible. So yeah, kind of base case assumption is we do find work relatively soon for all three rigs. We're hoping that two are margin contributors before the end of the year, call it two months or more, and then the third rig potentially an early 25 start. Could it be better than that? Possible. Could it be a bit worse? Yes, that's obviously possible too. And part of the reason we still have a relatively wide range on guidance for this year.

That's generally how we're thinking about it. Thanks for the clarification. I think that's kind of in line with how I expected it to be, but it's good to hear. With that in mind, when we're thinking about the guidance and for shelf-treating LTD in particular, I think if you do the math here, you're ending up at somewhere between 303 debate on what you've provided today. Can you give some color on what's needed or not needed to hit the low end or the high end of that range?

Sure. So we did 91 of UBITDA in Q1. We gave directional guidance in the comments in our presentation that we expected something like a 15% reduction in revenue in Q2 and Q3. That doesn't necessarily mean the exact same level in both quarters, but we're clearly going to have more idle time on those rigs at a minimum during the middle of the year. We've spent a lot of time trying to find ways to reduce costs. The main pass one's an example of that. We're going to try to get costs down on that rig Our OPEX was 115 or just under 115 in Q1. You're probably not going to see a huge difference in Q2, but by the second half of the year, we hope that's, you know, reasonably lower, call it 5 to 10 million a quarter below. That level is a reasonable assumption. And then, yeah, the expectation that we put, you know, two of these rigs back into service and therefore generating revenue second half of the year is, sorry, in Q4, not the second half of the year, is embedded in the assumptions here. as well. The places where we still have some open capacity is the one rig in Egypt that's idle today. David mentioned that we're hopeful we can put that rig back into service in the coming months, so call it sometime in Q3. We think we can have that rig back in service. That would be the goal, but that's still not done. And then there's some uncertainty around this incident on the Tri-Mate. I think we're assuming there's at least a couple of months where that rig is not working, but obviously it's pretty early. With that asset, we tried to build that into the range as well. So I think the key swing factors are, you know, what happens and when with these three rigs that we're, you know, marketing in other places that are suspended in Saudi, and then the couple of rigs in those other markets where we're still not fully contracted for the rest of the year.

That's very helpful. But it seems like, you know, Coca-Cola taking Corker is, not set in stone necessarily, but that the swing factor on that range is going to be heavily weighted towards the second half and even more so in the fourth quarter.

That's right. I mean, that's generally the case, right? We're halfway through Q2.

We have a good possibility for this quarter. No, I think that's right.

That's right.

Yeah. And a final one for me, just switching gears to India here. There's reports out from multiple sources that the ONGC canceled their high pressure, high temperature tender. But, you know, I think for you guys, that was only relevant for, potentially relevant for the Baltic, while the JK Angel and Trident 12 are potentially, you know, in position to get something on the tender that you mentioned is going to be concluded over the next couple of months, at least the commercial discussions. So do you have any commentary on the cancellation of that tender, your ability to win contracts for these two other rigs, and also how ONGC has behaved on the back of the Aramco suspensions? Because personally, I would guess that the cancellation of this tender, which I think was released in August last year, is... maybe to get more owners to bid on that now that there's more rigs that could potentially do so. So any call you have there will be helpful as well.

Yeah, I'll take that. Look, just to start with on the canceled high pressure, high temperature tender. So that was really what happened there was the L1 bidder choose not to extend the his contract beyond the period where it basically ran out. And ONGC doesn't have a legal basis for negotiating with L2. So the way the tender requirement works is they have to negotiate with L1. I do believe and the market believes that they're short these high pressure, high temperature rigs. Whether they need all three or not remains to be seen, but I do believe they will come out with a bid in the near term, for one to two HPHT rigs. With respect to the ongoing four-rig tender, I believe all the communication we get, these are all incumbent rigs. They're not incremental activity. And ONGC has a firm program for them. So they want this tender to happen. But your observation is correct in light of the suspensions coming out of Aramco, ONGC believes there should be some pullback in the market and they'll try to negotiate the rates down from where they were. If you recall, those rates came in in the low to mid 90s, depending on the quality based system score. But so we expect to see some negotiation. I won't really talk around that. It's an ongoing process, but I'm fairly confident that we will contract the two rigs that we have in that tender. Does that clarify the question? Does that answer the question?

Yes, that's very, very helpful, David. Thanks to the both of you. Have a good day, and that's it from me. Thank you.

Thanks, Fredrik. Thanks.

Thank you. Now we're going to take our next question. And the next question comes from the line of Alexandra Simeonidia from William Blair. Your line is open. Please ask a question.

Hi. Thank you for taking my question. So I have three questions. I'll take them one by one if possible. So on High Island Fine, the contract ends in May 2025. Do we have any guidance that you can give whether you believe this will be renewed with Ramco or given the suspension, we expect this to be mobilized elsewhere. That's my first question. Thank you.

Okay, so the Highland 5 has some... There's a lot of background noise. The Highland 5 has some unique capabilities and I do believe that that contract will be renewed. So there's very few rigs in the Aramco fleet that allow what they call simultaneous operations, which allows them to work over platforms with exposed wellheads and not require that the platform shuts in production. So this has got a pretty material impact to Aramco. I believe there's only three rigs in the entire fleet that have this capability, and the Highland 5 is one of them. So yes, I do believe that this rig will get extended. because it's a very strategic asset to Saudi Aramco.

Thank you. You mentioned there is pressure in day rates in the region. Can you give us a sense of how, to kind of quantify that pressure, how much lower do you think it is now?

Sorry, are you talking about the ONGC?

Sorry, can you repeat? Sorry, there is a lot of background noise here.

You just asked about some steer on day rates?

Yeah, yeah. So let me repeat my question. So you mentioned that there is pressure in day rates in the region. So I was wondering if you can give us a sense of how much lower do you see this rate at the moment?

Yeah, look, it's a live negotiation, so we're not really going to comment on... on day rates or even where we think they're going to go. But look, I don't think this will be a dramatic change in, in, in day rates. You know, you look at the fundamental market backdrop, it remains very good. I mean, we, we see a lot of incremental activity, as I mentioned in my remarks in various geographies around the world, we see incremental activity in, in West Africa to quantify that, you know, there's, there's, angola is going from one rig to three rig nigeria should go from five to seven and we expect that the equatorial plate region will add at least another two rigs so that's a pretty sizable increase and all those increases will happen between now and the year end maybe some of it will creep into early 25 and in southeast asia it's a very similar picture so you know we can't necessarily understand how different contractors will react. But if there is a level of discipline, the day rate shouldn't move very much.

I think we'll probably see a wider range of data points over these next three to six months. We've already seen a little bit of that. Like you take the premium jackup market in Southeast Asia, West Africa, even the Middle East. It felt like There was pretty good progress seeing rates to 150,000 a day, a bit higher in a few cases. We've already seen a few new fixtures in the low 100s. That doesn't mean everything is going to reset there. We just think they're going to be, you know, sort of a wider range of prints in the next few months. So could you see some contracts in the 110 to 130, 140 range? I think that's possible. But the sooner this capacity is reabsorbed and redeployed, the better. And then you're back in a really tight position. So we believe this is going to be more of a short-term issue than a structural long-term change in the rate environment.

Okay, great. Thanks for that, Colur. And then my follow-up question is about, you mentioned that some rigs have more progress than others when it comes to redeployment. Do you expect to redeploy them in the region or elsewhere?

I think I said that the base case is outside of the Middle East, really, for all three of those rigs. None of that is done. But, you know, David mentioned we see opportunities in all of Southeast Asia, India and West Africa. So it's fair to assume those are the three primary target regions for us, but still pretty fluid. But we see good opportunities for all three of those rigs, but probably not in the Middle East if we find new work in the very short term.

Okay, great. Thank you. And then can I ask, have you mentioned mobilization goals? Approximately how do you expect them to be given that these are going to be deployed elsewhere?

Yes, there is. I mean, you know, it depends how far you're mobilizing it. It depends on the contract.

Yeah, more like if you have a number that you could share.

Just the transportation costs can be, you know, if it's a short one, it's around $3 million. If it's a longer one, it's more like $5 million. And then the rest is very variable depending on what level of contract prep is required by the change in geography and change in customer.

Okay, thank you. Thank you.

Now we're going to take our next question. And the next question comes from Carl Blunden from Goldman Sachs. Your line is open. Please ask a question.

Hi. Thanks so much for your time. Just a question on the guidance ranges that you have here for CapEx and also for EBITDA. Would those include all of the expected mobilization costs? I realize there can be some variation there, or are you leaving some room for some of those to fall into 2025 also?

Yeah, I mean, I said 15 to 20 was embedded at the kind of midpoint of the guidance range for the parent company. I think if we moved all three rigs and that was all done before the end of the year, we would not be less than that range. Would we be miles higher than that? Probably not. The places we're targeting tend to have lower contract prep requirements than a place like the Middle East. So I think that's a decent number. Could there be a little bit of drag cost into early 25 possibly? But hopefully that's some helpful context.

Yeah, that's helpful. And then when you discuss the three redeployments, I hear some uncertainty as to final destination, exact timing. But should we come away here thinking that you're fairly confident that it will be three and not two from here, that there's enough options for you to ensure that three are working? Perfect.

Yeah, look, I think at this point in time, we feel pretty confident that we find a home for three rigs. Whether we get them all done in calendar year 2024, maybe we'll look for the right opportunity rather than chase a timeline. But we do see good opportunities and discussions are progressing well. So, yeah, I mean, that's pretty much, in my head, that's my base case.

That's right. I think the nuance around... You know, two regs in the guidance was more around start dates, not so much around confidence of finding good opportunities. So I think that's the one kind of nuance. Yeah, that's helpful. Thanks.

Thank you. Dear participants, just a quick reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for a name to be announced. And now we're going to take our next question. And the question comes to the line of Martin Carlsen from DNB. Your line is open. Please ask your question.

Hi there. I had a quick question on the Trident 8 situation. Can you talk a little bit to potential outcomes of that event, including the possibility of replacing the rig with another unit in your fleet? And secondly, could you also remind us on your insurance policy including how deductibles work in a situation like this.

Thanks. Yeah, Martin, I mean, it's early days. The event just happened, but we wouldn't report it if it wasn't a serious event. So there is a possibility that it's a destructive loss. And if that were the case, the insured value of the rig is $50 million. But, you know, we are... We're assessing the situation. We're not really in a position at this point in time to give a likely or not unlikely outcome. If the rig is to go back to work, as Greg mentioned, there would be a pretty significant out-of-service period to repair the rig. But we are looking at how do we fulfill the current work program with Chevron. And that's, to be honest, that's our priority here. and I think we're well progressed on that, but that's the key priority here. The damage of the rig will put the rig out of service for an extended period of time, and it may result in a destructive loss.

The rig had four months left on the contract, so obviously that's a period of time we'd want to try to fill. It's important to our customer. We do think there's potential work beyond that as well. So this is clearly a priority for us. The goal is to try to find the best solution. And obviously, you know, think about what the right plan is for that particular rig as well. But yeah, if it is a significant damage, as David mentioned, this is the type of incident that would be covered. You know, standard jackups tend to have less value in the markets relative to earnings capacity, we insure them at values that we think are reasonable, typically in the kind of 40 to 50 million range for the standard fleet. But yeah, I think we'll have more, we'll have a better handle on the situation in the next few weeks or kind of a month to six weeks. And we'll obviously provide more updates when we have.

Yeah, understood. Follow up on that one with respect to the contractors, it was on the Chevron who said, any liabilities towards Chevron to fulfill the program in case this rig specifically could not go back to work itself?

No, look, we're confident we can fulfill the program. Okay. And there is no real liability there, but we're not looking at that. We're confident we're going to be able to fulfill the program.

Okay, good. All for me, thanks.

Thank you. Now we're going to take our next question. And it comes from Greg Brody from Bank of America. Your line is open. Please ask a question.

Good afternoon, guys. Thanks for the caller. Just one question. In terms of the Saudi-Ramco mindset or the Saudi mindset, the suspension of 12 months, you talk about... What do you think the risk is that they continue that? And I know there's an argument that they're growing, so they're going to come back again. Just help us think through sort of the decision-making there and what they may have communicated to you. And then can you speak a little bit to the rig that remains, why you left it there, and then just potentially talk about the gas opportunity that they've talked about? and how your rigs could fit into that opportunity.

Okay, let me take the gas opportunity first because that's the easiest one to answer. So the real opportunities on gas are onshore, not offshore. So Saudi Aramco is chasing a lot of the unconventional gas offshore, sorry, onshore, which is where they're looking for most of the gas production. I think today in the At the time, the fleet of 90 rigs, there was probably four rigs working on gas projects. There may be a possibility to increase that to five, but it's not going to move the needle. So gas is principally onshore. Sorry, remind me of the second part of your question.

Oh, yeah.

Just the mindset. Yeah. yeah look the way around club communicated this is that they wanted to put the rigs on suspension to allow contractors the ability to leave the rigs in kingdom uh it doesn't necessarily mean that these rigs are going to go back to work uh after the 12-month period uh they see this as a more long-dated step down in activity in other words I don't think they're going to go back to 90 rigs after one year. I think there's a possibility that some of them may come back, which is why we are looking at moving three rigs out. And once we move the rigs out, we will move from suspension to termination because it's the only thing that makes sense. And Aramco provided everybody that flexibility that they would put the rigs on suspension to start with that allows you to leave the rig in the kingdom, and then you can elect to terminate at any point after that and find alternative work for the war. So, you know, I did mention in my remarks that I believe over time offshore activity will continue to increase in Saudi Arabia. And let's remember that the activity they have, it's around 70, 75 rigs. it's the highest level of activity that they've ever had with the exception of that brief period of time in 2023. But that will grow over time because the offshore does remain the only source of incremental barrels. But I don't imagine that it's going to go back to 90 rigs after 12 months. So that suspension period is just... given out there as a guide. They may well take a handful of rigs back after 12 months, but it will be a handful of rigs rather than all 22 rigs, whatever the number is that they have suspended. Does that answer the question?

Yes, just one follow-up there on that. So the one rig you left, I guess you're leaving that option open. I guess in a year from now, you would determine what you would do with that if you didn't see an opportunity in the kingdom. Is that fair to say?

Maybe even less than that. What we're looking at doing is just we see what's in front of us and we feel very confident we can redeploy three rigs outside of Saudi Arabia. We see opportunities for them. So our confidence level is pretty good. To take all four rigs out, I just think it's one rig too many. And I think I mentioned in the remarks that in 2025, Early 2025, we will reassess the situation with the main pass one and decide whether we want to take it out at that point in time, having redeployed the other three rigs. So it's a question of looking, you know, if we find an opportunity, we'll take it out and redeploy it. And we have the option value to keep it in the kingdom.

I mean, I think the other key variable is rate, obviously. Could we find work for all four of these rigs? We could, but there's finally been really good progress in the rate environment the last two years after many years of really challenging pricing. And I think the balance is trying to keep utilization in a good place and keep that pricing momentum long-term where it was a few months ago. So that's part of the balance as well, trying to get costs lower this year. It has a real impact on us this year. and not be in a rush just to find jobs at any rate.

Got it. And the other rigs you were being asked about, the other rigs expiring next year that were not part of the suspension, I think you feel pretty good about recontracting those, or any one of them you've highlighted is pretty unique. But I think there's one other. Is that correct? Correct.

That's the only rig we have expiring in 2025. We had two others, but those were part of the four rigs that were suspended that we're actively marketing elsewhere, the MP4 and the Achiever. I mean, David talked about the Highland 5. There's a reason it wasn't suspended. We think it's particularly well suited to that market. We're not having active dialogue right now, but Aramco has obviously been very busy trying to complete these suspensions and get rigs off higher. But yeah, we feel good. We think those discussions should start at some point later this year. But yeah, I feel pretty good about it. That's a strategic long-term asset there.

Great. And then just one clarifying question on the balance sheet. I noticed you pushed out the term on maturity, which seems prudent. You also drew on the revolver post-quarter, just a small amount. Was that just all to sort of bridge through this period, or do you think there's a chance you may use additional capital or just an amendment or anything like that?

No, so the RCF – so I'd say both the RCF draw and that term loan extension were intended to provide funding into SD&S. And then we decided the first, you know, two weeks of April that we thought the refinancing of that bond made a lot of sense. And so, you know, if we had sequenced the steps differently, we maybe wouldn't have extended the term loan, to be honest. But that was done end of March. We think there's, you know, good – value in that it's the cheapest cost of financing we have we could pay it off at any time if not we paid off at the end of the year the rcf draw was to facilitate the short-term loan into sdns that will be repaid and the rcf draw will be repaid next week when the sdns bond closes you know if we were below the low end of our guidance range for this year could we have a slight draw the rcf at the end of the year that's possible um but now we feel very good about liquidity position from here, particularly after getting that STS refinancing done.

And you don't think you need an amendment on the covenant there? No.

We'd have to be well below, we'd have to be well, you know, a reasonable level below 300 million on a kind of rolling LTM basis in the credit group for that to come into scope at all. And no, we don't think that's a risk.

Thank you for all the time and color. Appreciate it, guys. Yeah, thanks, Jerry.

Thank you. Now we're going to take our next question. And the question comes land of Floris Dijkstra from Aperture. Your line is open. Please ask a question.

Hi, thank you for taking my question. Just very quickly on the redeployment expectations for those three rigs that you mentioned. You're seeing demand from Southeast Asia, West Africa and India. Are there expectations that one goes to each region or all three go to one region? Can you give any more transparency on that? Thanks.

Yeah, look, I'd say that's not That's a reasonable likelihood, but we're not hanging our hat solely on that. We see more opportunities than we have rigs, which is a good thing because we're not going to win them all and we're going to basically treat it as we're strategic in the ones we're targeting. So I'd say almost certainly we see We're going to move one, potentially two rigs to Nigeria. And we see good opportunities in Southeast Asia and we see opportunities in India.

Okay, that's helpful. And then in terms of, you know, are you seeing like more competition because you have, you know, I think... 15 or 16 other rigs that are also coming out of Saudi at the moment, probably trying to compete in those areas as well. Are you pretty confident because of the specs of the rigs that, you know, you'll be able to win those contracts?

I mean, it's a little bit having experience in certain geographies that sets us apart. Yeah. So, you know, when you look at places like Nigeria, it's a very challenging place to work. We see incremental activity in that part of the world. I'm just using that as an example. And operators are more inclined to go with the companies that have a proven track record and experience in that. So, yes, there will be competition. But look, we feel pretty confident from the position we're in. And we think we'll be able to get contracts at reasonable day rate levels, which is what's important um so yeah we're we're confident in our position and i can't tell you exactly uh which geographies uh the rigs will go to but i feel pretty confident that we'll have one or two going to west africa

Got it. That's helpful. And one more question from my side. I know you can't be too specific, but when I think of the four rigs that were suspended and the sort of rates they had with Aramco versus, I guess, the three that you might or you expect to get new contracts for potentially at higher rates, if I think about maybe going into 2025, does the uplift in the rate from the three that you expect to recontract kind of make up for what you lose on that fourth rig?

I mean, over time, if you get a better day rate, you recover a more healthier margin. But to imagine that you're going to recover the entire shortfall of 2024 and 2025, I think that would be a bit aggressive.

Okay, yeah, that's understood. Thank you very much.

Thank you. And now we'll take our last question for today. And it comes from the line of Frederik Sten from Clarkson. Your line is open. Please ask a question.

Hello again, David and Greg. Just wanted to, in the context of Aramco and their plans, going forwards, do you think that there are any chance that they'll do more suspensions on top of what they've already done? They seem to have done that in one round, but you never know with them, so I just wanted to hear if you had any additional color or if you feel like this is it and now the market just had to absorb those 22-ish rigs. Thanks.

Yeah, look, it's a great question. I think They have done what they have done, and that's it. But, you know, market conditions can change. And if market conditions were to change, could they do more? Well, potentially. But I think assuming market, you know, broader market, and I'm talking probably more about the oil market than anything else, but assuming there's no big change to what's happening on the oil market, I think they have cut as much as they expected to cut. So I think the plan, my base plan is that there's going to be no further suspensions.

All right.

Thank you very much.

Thank you.

Thanks, operator. I think that should be it. I want to thank everybody for joining the call and look forward to talking on our next earnings call where we have a lot more clarity about the rigs that have been suspended and hopefully we'll be talking about the contracts they're undertaking. Thank you all very much.

That does conclude our conference for today. Thank you for participation. You may now all disconnect. Have a nice day.