Shelf Drilling Ltd

Good day and thank you for standing by. Welcome to the Shelf Drilling Q2 2024 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please note that today's conference is being recorded. I would now like to have the call over to your speaker, David Mullen. Please go ahead.

Thank you, operator, and welcome everyone to Shelf Drilling's Quarter 2 2024 earnings call. Joining me on the call today is Greg O'Brien. Yesterday, we published the Q2 24 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 a 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 in the call. If we do, you will find a supplemental disclosure for these measures on the associated reconciliation in our financial reports. I will provide an overview of the company's performance for Q2-24 before sharing my latest views on the Jackup rig market. I will then hand over to Greg for his remarks and to walk you through the second quarter results and our updated guidance before opening the floor for 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 year-to-date total recordable incident rate as of Q2 24 was 0.10, showing continued improvement over our full year 23 results of 0.12. Our Make It Safer Today program is a key element in driving employee engagement. Our year-to-date uptime at the end of the second quarter was 99.4%, further demonstrating the effectiveness of our operating platform to deliver outstanding service to our customers. As previously announced in early June, we received confirmation that our application for the acknowledgement of compliance for the sheltered in Barsk was rejected by Haftel, the regulatory authority in Norway. We have since assigned significant additional resources to address the issues that were raised, and we resubmitted a new application early this week. We have also been in constant dialogue with our customer and are confident that we will complete this process and commence operations in the fourth quarter of 2024. In late July, we received a suspension notice from Saudi Aramco and the Harvey Ward rig. This is in addition to the four rigs that were suspended in April of this year. We are currently seeking clarity as to the timing and other details associated with this suspension notice and anticipate that the rig will be released before the end of September. With the number of opportunities available in West Africa, we mobilized the Shelf Drilling Achiever and the main pass forward to the region. and subsequently issued notice of termination for the remaining contract term for these two rigs with Saudi Aramco. We expect both rigs to commence operations soon after their arrival in West Africa. The Trident 8 is currently in Equatorial Guinea following an incident which resulted in severe damage to one of the legs on the rig. We are working with our insurance providers on an insurance claim and expect to have a resolution in the coming months. Subsequent quarter end, the Baltic rig completed its contract in Nigeria with an indigenous operator and a binding agreement has been signed to sell the Baltic rig for a consideration of 60 million to a buyer in Southeast Asia. The buyer intends to deploy the rig in P&A activity We view this as a value accretive outcome for this standard specification jack-up rig and we expect to close this transaction in September. The Shelf Drilling Perseverance arrived in Vietnam in late July and commenced its new contract with Petro Vietnam soon after. The Shelf Drilling Fortress recently completed a contract with CNOC in the UK and has commenced in direct continuation a new contract with Total Energies also in the UK. The adjusted revenue for quarter two 24 was $231 million. The adjusted EBITDA for the quarter was $71 million, resulting in a margin of 31%. The sequential step down in revenue and adjusted EBITDA was largely the result of the suspensions in Saudi Arabia. We have substantially maintained our adjusted EBITDA margin despite the lower sequential revenue due primarily to cost reduction efforts across the company. The delay in the Shell Green Bars contract commencement has created a significant shortfall in our projected earnings and a need for a liquidity injection into Shell Green North Sea before the end of the year. Greg will provide you more details on our quarter two results and financial outlook for the full year 2024. Brent crude oil prices averaged $83 a barrel during the first seven months of 2024, which is a constructive level for E&P investments in shallow water sector. Despite some recent volatility to the downside, the discipline showed by OPEC combined with the escalation intentions in the Middle East have helped oil price to rebound to $80-plus level. We remain confident in the long-term fundamentals of global energy demand growth, particularly in non-OECD countries, and believe, as a result, there will continue to be demand growth for hydrocarbons for years to come. The global number of jack-up rigs declined marginally from 406 in January 24 to 404 in August 2024, and a market utilization at 93%. These figures do not fully reflect the impact of the recently announced rig suspensions in Saudi Arabia, as a number of suspended rigs remain under contract with Saudi Aramco while those rigs remain in Saudi Arabia. Approximately half of the 22 rigs suspended in Round 1 are expected to be redeployed in the near term. We believe there is sufficient demand globally to absorb the majority of the 27 rigs, and that global market utilization will remain above the 85% threshold. The jack-up activity in India with ONGC recently reached an all-time high of 37 rigs under contract. This elevated activity level was designed to slow the decline in production from the Greater Mumbai High Complex. However, the production targets were not achieved, and the combination of escalating service costs prompted ONGC to reconsider their near-term rig requirements. The last two tenders, a three-rig requirement for high-pressure, high-temperature rigs, and a more recent four-rig tender were cancelled following a round of unsuccessful pricing negotiations. ONGC is currently re-evaluating the future rig requirement. However, we do believe ONGC will maintain a level of rig activity above historical norms. And with the addition of smaller indigenous companies that were awarded marginal fields, there is room for incremental growth in 25 and 26. The Trident 16 remains idle in Egypt, and we continue to have dialogue with a number of customers for potential opportunities in the area. However, owing to the economic challenges facing Egypt, we believe that the rig could remain idle for an extended period of time. and are therefore exploring opportunities outside of Egypt for the Trident 60. In contrast, the outlook in West Africa and Southeast Asia suggests strong incremental demand in 2025 and 2026. In West Africa, we are seeing incremental demand in all the major hydrocarbon-producing regions, Nigeria, Angola, and the equatorial plate region, from traditional EMP operators, And we are also seeing a pipeline of new opportunities with indigenous operators in Nigeria. Since our last update, the Shelf Drilling Tenacious secured a 15-month contract extension with Chevron in Angola. The Shelf Drilling Achiever and Main Pass 4 are expected to commence operations in West Africa in early quarter four. We believe our track record in delivering operational excellence and value for our customers has helped us realize these contract opportunities at attractive day rates. Southeast Asia, and in particular, Vietnam, Thailand, and Malaysia are showing incremental demand for jack-up rigs. To date, we have seen a number of idle premium rigs from the Middle East secure work in the region. And we are seeing a wave of new tenders for work commencing in 25 in the region. The CJ70 market in Norway has stabilized following the departure of other rig designs. And the outlook is positive for 26 and beyond. Other sectors of the North Sea market are now largely in balance due to a number of rigs leaving the UK and demand showing modest improvement across the region principally driven by plug and abandonment activity and carbon capture and underground storage. We expect the rig demand in this market will continue to improve and slowly outstrip supply in the coming years. As of the 30th of June, 24, our contract backlog was 2.1 billion across 33 rigs with a weighted average day rate of $89,000 a day. and a market utilization of 92%. The backlog number reflects approximately $500 million of value on the three rigs that were suspended with Saudi Aramco, where those contracts have not yet been terminated. As announced earlier, Greg will now replace me as CEO, and this will therefore be my last earnings call. I've now assumed the role of executive chair of the board and look forward to supporting Greg in my new role. I'm extremely proud of what we have accomplished since the inception of Shelf Drilling in 2012. And I would like to thank our investors and all other stakeholders for your support over the past 12 years. I'm confident in the long-term prospects for our sector and excited about the opportunities for our company under Greg's leadership as we continue to deliver safe and best-in-class operations to our customers. I will now hand it over to Greg for his remarks.

Thanks, David. Reported revenue for Q2 2024 of $234 million included $3 million for amortization of intangible liability. We'll continue to focus on and refer to adjusted revenue, which excludes the impact of this non-cash item. Adjusted revenue for Q2 of $231 million included $212 million of day rate revenue, $12 million of mobilization and bonus revenue, and $7 million of recharges and other revenue. Adjusted revenue for Q2 declined by 21 million or 8% relative to Q1 2024. The sequential revenue decrease was entirely at the parent company, with lower revenue in Saudi Arabia following the contract suspension of four rigs, the main pass one, main pass four, shelf drilling achiever, and shelf drilling victory. Lower revenue in Nigeria following the leg damage incident on the Trident 8, and lower revenue in Egypt due to the contract completion of the Trident 16 in Q1. This was partially offset by higher revenue for two rigs that started new contracts, the Trident II in India in March and the Baltic in Nigeria in April. Revenue at Shelf Drilling North Sea of $28 million was substantially in line with the prior quarter. Both the Shelf Drilling Barsk in Norway and Shelf Drilling Perseverance in Vietnam were out of service for all of Q2 preparing for their new contracts. Effective utilization decreased to 80% in Q2 from 86% in Q1. Effective utilization at the parent company was 84% down from 91% in Q1, mainly due to the suspensions in Saudi and the leg damage incident on the Trident 8 in West Africa. Effective utilization for the five-rig fleet at SDNS was 58% in Q2 due to the two rigs that were out of service. Average day rate was $82,000 per day in Q2, unchanged from Q1. Operating and maintenance expenses of $142 million in Q2 decreased from $150 million in Q1, primarily due to lower operating costs on two suspended rigs in Saudi and cost reduction and deferral measures taken across the company. This was partially offset by higher costs for the other two rigs that were suspended in the Middle East that are now mobilizing to West Africa. At the SD&S level, operating expenses increased sequentially by $3 million to $38 million in Q2, mainly due to higher shipyard costs for the Shelf Drilling Perseverance, which commenced its contract in Vietnam on August 1st. G&A expenses of $16 million in Q2 decreased from $18 million in Q1, mainly due to a net decrease in provision for credit losses at the current level. Adjusted EBITDA was $72 million in the second quarter, representing a margin of 31% compared to $80 million and 32% in the prior quarter. Adjusted EBITDA was negative $14 million at Shelter Lane North Sea and $86 million from the rest of the business in Q2. Income tax expense was $8 million in Q2, down from $9 million in Q1. And year-to-date tax expense of $17 million represents nearly 4% of revenues. Net interest expense of $46 million for the quarter was $10 million higher than the prior quarter due to $10 million of one-time expenses associated with the SD&S debt refinancing transaction completed in Q2, the majority of which was non-cash. Non-cash depreciation and amortization expenses totaled $48 million in Q2, up from $41 million in Q1, mostly due to higher amortization of deferred costs for two of the suspended rigs in Saudi Arabia. The quarterly net loss attributable to controlling interest was $15 million in Q2. Capital expenditures and deferred costs were down sequentially by $11 million to $38 million in Q2, which included $16 million of spending at SD&S. At the parent company, lower expenditures were incurred on the Trident II, which returned to operations for its new three-year contract in India, and on the main pass one following its contract suspension. Spending at SD&S continued to be driven by contract preparation costs for the Barsk in Norway, ahead of its new program, now expected to commence in Q4, and for the Shelterlink Perseverance, which started its new contract in Vietnam at the beginning of this month. Our consolidated cash balance as of June 30th was $138 million, which was $37 million higher than the balance at the end of March. Cash at the parent company increased from $88 million to $101 million, primarily due to a sequential decrease in capital spending and a reduction in working capital. Cash at Shelterway North Sea increased from $14 million in March to $37 million at the end of June, mostly due to the net cash inflows from our debt refinancing transactions. Following the announcement of the delayed contract commencement of the Shelf Drilling Barsk in Norway, we have revised our financial guidance for full year 2024 in our release yesterday. Fully consolidated adjusted EBITDA is now estimated between $290 and $335 million compared to our last guidance in May between $330 and $375 million. At the SD&S level, we now anticipate full year EBITDA between negative five and negative $10 million, a decrease of 40 million from the last guidance range. This reflects a start date for the shelf drilling Barsk in late October or November, 2024. We were very disappointed with the delayed startup in Norway, but we are confident that we will complete the regulatory approval process and commence the RIGS contract in Q4. This is a critical priority for us in the coming months. This delay does create a funding need at SD&S of approximately $40 million that we intend to address in the near term. The full year 2024 EBITDA guidance for the rest of the business remains unchanged between $300 and $340 million. We expect revenues to decline sequentially in Q3 following the suspensions in Saudi, but anticipate an increase in Q4 once the two rigs mobilize from the Middle East to West Africa, commence new programs. The recent announcement of the additional contract suspension for the Harvey Ward in Saudi is not expected to have a material impact on full-year 2024 EBITDA. We've also revised our 2024 guidance on capital spending, now expected between $135 and $160 million. This represents a $10 million decrease from our prior guidance range. based on targeted savings and reductions across the fleet at the parent level, for which our guidance is now between $95 million and $115 million. This does include the mobilization costs associated with the redeployment of two rigs to West Africa for new programs that we expect to start in Q4. At the SD&S level, full-year 2024 guidance on capital spending is unchanged between $40 and $45 million. We expect to have more clarity on the insurance claim process for the Trinade before the end of Q3, and we'll provide further updates when we have them. We expect to have more clarity on the insurance claim process for the Trinade before the end of Q3, and we expect to have more clarity on the insurance claim process for the Trinade before the end of Q3, These two events on the Baltic and Trident should result in a material cash inflow to the company between now and the end of the year. We announced in late July that Douglas Stewart will join Shelf Drilling as CFO. Douglas has extensive experience in our sector and will be a fantastic addition to our team. We're excited to have him officially on board in the coming weeks. I'd also like to thank David again for his great leadership since we started Shelf Drilling, and I look forward to his continued support in his new role as Executive Chair. The developments in Saudi Arabia and Norway have created some short-term headwinds for us in 2024. However, we are encouraged by the increasing levels of activity in West Africa and Southeast Asia and expect to quickly redeploy the majority of our rigs that were suspended in the Middle East. In addition, we have built strong earnings and cash flow visibility at Shelf Drilling North Sea for 2025 and beyond, with the backlog additions in Norway, the UK, and Denmark in recent months. Despite these near-term challenges, we maintain a very optimistic long-term outlook for our sector and specifically Shelf Drilling. Oil and gas production from our core shallow water markets will continue to play an essential role in meeting the world's ever-expanding energy needs for decades to come. And we expect jack-up supply and demand to remain tight for the foreseeable future. As always, we will be extremely focused on operational execution, as well as free cash flow generation, and believe the business will be well-positioned as we head into 2025 and beyond. We'd now like to open the call for Q&A.