Shelf Drilling Ltd

Welcome everyone to Shelf Drilling's third quarter 2024 earnings call. Joining me on the call today is Douglas Stewart. Yesterday we published our Q3 financial results and our latest fleet status report. In addition to our press release and the financial statements for both Shelf Drilling and Shelf Drilling North Sea, 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 remainder of 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 today. You will find supplemental disclosure for these measures and an associated reconciliation in our financial reports. I will provide an overview of the company's performance for the third quarter of 2024, including some recent developments and achievements, and also provide our latest views on the market environment. I'll then hand over to Douglas to walk you through our third quarter financial results and our updated guidance before opening the call for Q&A. Fundamental to our business is ensuring the health and safety of our people, protecting the environment in which we operate, and ensuring that our rigs achieve optimal performance for our customers. This will always remain our number one priority, and we're very proud of our track record of continuous improvement over many years. In Q3, our year-to-date total recordable incident rate rose slightly to 0.16 following several incidents in August and September. We have used these events to reinforce our focus on planning, and we have operated incident-free thus far in Q4. During the third quarter, we continued to drive strong operational performance with year-to-date uptime across our fleet remaining at 99.4%. We believe our focus and consistent execution differentiate shelf drilling as we deliver outstanding service to our customers. 2024 has been a challenging year in many respects. Against a difficult backdrop, our team has achieved a series of critical milestones over the past few months. In October, we received confirmation that our application for the acknowledgement of compliance for the shelf drilling Barsk was accepted by Habtil, the regulatory authority in Norway. We were clearly disappointed by our initial failure to meet the regulator's expectations with our first application, but our team demonstrated the necessary resilience and dedication to comprehensively address the areas that were identified, allowing us to complete the audit process in a timely and professional manner. I'm pleased to report that the sheltering Barsk is now on location and expected to commence the contract in the next few days. We'd also like to thank Equinor for their trust and support through this process. When we established Shelf Drilling North Sea in late 2022, our ambition was always to fully integrate the fleet of rigs and simplify our capping structure. The delay in the commencement of operations for the Barsk resulted in a cash shortfall at SD&S, which created a potential opportunity to bring the business completely into Shelf Drilling to provide the necessary funding. We successfully completed the merger in October, and Shelf Drilling North Sea is now a wholly owned subsidiary. This transaction significantly enhances our fleet composition on a fully consolidated basis, and these rigs will be an important driver of earnings and cash flow for shelf drilling in 2025 and beyond. The Trident 8, as previously reported, experienced an incident earlier this year that resulted in severe damage to one of the rig's legs. In October, we reached an agreement with our insurance providers declaring the rig a total loss for an agreed payment of $50 million. We have now collected a portion of the proceeds and expect to receive the remaining balance by the end of this year. We also announced during the quarter that we had completed the sale of the Baltic to a buyer in Southeast Asia for $60 million, reflecting what we believe to be a value-accreted creative outcome and a strong valuation marker for a standard specification jacket rig. In addition to the sale, we are finalizing arrangements to provide rig management and operation support for a minimum period of 12 months. The rig will be deployed on a multi-year contract to perform plug-in abandonment work in Malaysia, a type of activity where we have extensive experience. We look forward to assisting the buyer and their customer as they begin this campaign. Turning to Saudi Arabia, the suspensions of our rigs by Saudi Aramco have had the biggest impact on our financial results in 2024. Despite the changes in activity, we continue to demonstrate superior safety and operational performance in Saudi, and I'm very proud of the way our teams have responded and managed through this challenging time. As previously announced in April, four of our rigs were initially suspended. The Shelf Drilling Achiever, Main Pass 4, Main Pass 1, and Shelf Drilling Victory. Then in late July, we received a suspension notice for the Harvey Ward. We moved quickly to redeploy the Shelf Drilling Achiever and the Main Pass 4 to Nigeria, with the Achiever commencing operations in late October, while the Main Pass 4 is expected to commence operations in December. Separately, we began to market the Main Pass 1 for sale to third parties for non-drilling applications, and we expect to reach an agreement to sell the rig in early 2025. We're actively marketing both the Shelf Drilling Victory and Harvey Ward and believe these rigs will return to service by early to mid 2025. We continue to see incremental jack-up demand in the areas where we operate, particularly in West Africa and Southeast Asia. We recently received another suspension notice from Saudi Aramco for the Highland 4 with an expected effective date before the end of November. We are evaluating options and developing a forward plan for this rig. Against this backdrop, we've achieved some important marketing successes. In September, we secured a contract for the Shelf Drilling Mentor covering 10 wells and an estimated duration of 450 days in direct continuation of the rig's current campaign in Nigeria for a value of $60 million. In October, we secured two multi-year contracts in Nigeria, a two-year extension for the Adriatic One commencing February 2025, and a three-year contract for the Shelf Drilling Achiever. These awards add $234 million in backlog and an average rate of nearly $130,000 a day. In addition, we expect to execute a multi-year contract for the main pass four in the coming days, with operations scheduled to commence in Nigeria before the end of the year. In Southeast Asia, we secured two extensions with Chevron Thailand for the sheltering Chapraya and Krathong, representing $197 million in backlog for the incremental firm term. In the North Sea, we secured in July an extension for the ShelterLink winner with Total in Denmark for a value of $68 million. These awards collectively reflect our customers' recognition of our excellent safety and operational performance. As of September 30th, our backlog was $2 billion across 32 rigs. This does include approximately $650 million associated with four of our rigs suspended by Saudi Aramco that still remain in Saudi Arabia. But since the end of Q3, we've built strong momentum with more than $400 million of backlog added in Nigeria and Thailand. That provides further revenue and earnings visibility for 2025 and beyond. Adjusted revenue for the third quarter was $265 million, and adjusted EBITDA was $114 million, up from $71 million in the prior quarter. The increase in adjusted EBITDA was primarily the result of the acceleration of mobilization revenue for the Shelf Drilling Victory and Harvey Ward, resulting from their suspensions in Saudi Arabia, as well as a sequential reduction in operating costs. Douglas will provide more details on our third quarter results and the financial outlook for full year 2024. Brent oil prices averaged $80 a barrel during the first 10 months of 2024. And while there has been some recent volatility, prices remain at a constructive level for E&P spending in the shallow water sector. The OPEC Plus Group continues to demonstrate discipline with recent extensions to production cuts, but supply has remained resilient and further increased from non-OPEC producers. Upward price momentum is also under pressure due to slowing global economic activity and softer fuel demand, particularly from China. As a result, global oil demand for 2025 is now expected to grow at a lower rate than previously expected. Some uncertainty remains on the supply side following the recent presidential election in the U.S. and the ongoing conflict in the Middle East. Notwithstanding these near-term uncertainties, we remain very confident in the long-term fundamentals of demand for hydrocarbons, particularly from the developing world, which is expected to grow for years and likely decades to come. Global jack-up market utilization reached 95% in the first quarter of this year, with 406 rigs contracted, but it's now expected to temporarily fall below 90% due to the multiple rounds of contract suspensions in Saudi during the year. Approximately 50% of the 27 rigs suspended in rounds one and two have been redeployed or cold stacked. However, additional rigs likely to be released in the near term may add some further short-term pressure on day rates as contractors seek to redeploy many of these impacted rigs to other markets. Demand for jackups outside of Saudi remains strong. In other parts of the Middle East, there are multiple tenders ongoing or planned with start dates expected in 2025. In India, jackup activity remains elevated with 37 rigs under contract. ONGC continues to evaluate its rig requirements going forward after canceling two tenders earlier this year following a round of unsuccessful pricing negotiations. They have recently launched a tender for one high specification rig and we expect a tender for four standard jackups around the end of the year. We continue to believe that ONGC will maintain a level of rig activity above historical norms, though there may be some reduction in demand in the short term due to the slowdown in tendering during 2024. The economic situation in Egypt has further improved following the injection of capital from the IMF and the GCC countries earlier this year. The Trident 16 rig remains idle in Egypt, but we're in dialogue with several customers for potential opportunities in the area and expect this rig to return to service sometime in 2025. West Africa and Southeast Asia continue to show strong incremental shallow water demand into 2025. In Nigeria, the government is seeking to raise oil production in the short term from both indigenous operators and the IOCs. We expect this to bode well for increased Jacob activity given the current shortfall to historical production levels from shallow water. With our leading position in the region and our long-term track record of delivering operational excellence and value for our customers, we believe we're well positioned to capitalize on further improvement in Jacob activity in the region. Southeast Asia also remains an important market for us. While there have been some indications of day rate pressure due to competing rig supply from the Middle East, we see incremental demand, particularly in Vietnam, in 2025. In addition, we have strong backlog coverage for our three-rig fleet in the North Sea and see attractive long-term opportunities beyond the existing contracts in their respective countries. While the suspensions in Saudi have created short-term headwinds for the jacket market in 2024, we see strong demand fundamentals around the world and believe utilization will stabilize and begin to improve in 2025. With that, I'll hand it over to Douglas for his remarks.

Thanks, Greg. Reported revenue for Q3 2024 of $268 million included $3 million for amortization of intangible liability that's related to the five rigs we purchased in 2022. As such, we'll continue to focus on and refer to adjusted revenue, which excludes the impact of this item. Adjusted revenue for Q3 2024 of $265 million included $197 million of day rate 62 million of mobilization and bonus revenue, and 6 million of recharges and other revenue. Adjusted revenue for the quarter increased by 34 million, or 15% relative to Q2 2024. The sequential revenue increase was mainly driven by the $45 million one-time acceleration of mobilization revenue on two suspended rigs in Saudi Arabia related to future years. Without this acceleration, adjusted revenue would have been $216 million for the quarter, compared to approximately $231 million of adjusted revenue in the second quarter of 2024. The change in adjusted revenue quarter over quarter reflected higher revenue in Vietnam following the contract commencement of the shelf-drilling perseverance in August of 2024, partly offset by lower revenue in Saudi on three other suspended rigs, the Main Pass 1, Main Pass 4, and Shelf Drilling Achiever. and lower revenue in Nigeria as a result of the sale of the Baltic during the third quarter and the end of operations of the Trident 8, which resulted from the structural leg damage incident we discussed earlier. Effective utilization decreased to 77% in Q3 from 80% in Q2. This is mainly due to the suspension of the operations of five rigs in Saudi Arabia, the planned shipyard for one rig in Saudi Arabia, and the sale of one rig previously operating in West Africa. Average day rate of $82,000 per day in Q3 was largely unchanged from the previous quarter. Operating and maintenance expenses of $133 million in Q3 decreased from $142 million in Q2, primarily due to lower operating costs on four suspended rigs in Saudi, on two rigs in Nigeria, that was the Baltic and Trident 8, and lower shipyard costs on the shelf drilling Perseverance, ahead of its new contract commencement in Vietnam, in August. This was partially offset by higher mobilization costs for the Shelterland Achiever, which started a long-term contract in Nigeria in October. Turning to G&A, G&A expenses of $17 million in the third quarter increased marginally from $16 million in the second quarter. Adjusted EBITDA was $114 million in Q3, representing a margin of 43%. This compared to $72 million and 31% in the previous quarter. Adjusted EBITDA was negative $5 million at Shelf Drilling North Sea, with the Shelf Drilling bars not working throughout the quarter, and $119 million generated from the rest of the business in Q3. Again, the sequential increase in Adjusted EBITDA for Shelf Drilling, excluding ST&S, was mainly driven by the $45 million acceleration of mobilization revenue for the two suspended rigs in Saudi. Income tax expense was $8 million in the third quarter in line with Q2, and year-to-date tax expense of $25 million represents 3% of revenues. Net interest expense of $36 million for the quarter was $10 million lower than the prior quarter due to the $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 $53 million in the third quarter, up from $48 million in Q1, due to higher amortization of deferred costs for one suspended rig in Saudi Arabia. The quarterly net income attributable to controlling interest was $68 million in Q3 and included a $45 million gain for the sale of the Baltic. Capital expenditures and deferred costs were sequentially down $3 million to $35 million in Q3, which included $9 million at SD&S. The decrease was mainly due to lower expenditures on the shelf drilling for surveillance and preparation of its new contract, which started in August in Vietnam, and on the shelf drilling bars for a planned contract commencement later in November in Norway, as well as lower spending on fleet spares. This was partially offset by higher contract preparation spending for the shelf drilling mentor and shelf drilling fortress, ahead of commencing their new contracts in Q3 in Nigeria and the United Kingdom, respectively. Higher spending on the main pass 4, expected to start operations in Nigeria in December, and on the High Island 9 in Saudi Arabia for a planned maintenance shipyard project. Our consolidated cash balance as of September 30th was $220 million, or $82 million higher than the balance at the end of June. Cash at the parent company increased from $101 million to $193 million, primarily due to the $57 million receipt of net proceeds for the sale of the Baltic and lower debt service payments in Q3. Cash at Shelterly North Sea decreased from $37 million in June to $27 million at the end of September. As a result of the increase in mobilization revenue in Q3, partly offset by delayed contract commencements on the three rigs in Q4 and the impact of further rig suspension in Saudi Arabia. We have revised our financial guidance for full year 2024 in our release yesterday. Fully consolidated adjusted EBITDA is now estimated between 320 and 345 million compared to our last guidance in August between 290 and 335 million. At the SDNS level, we now anticipate full year EBITDA between negative 10 and negative 15 million. representing a decrease of $5 million from the last guidance range. And this shows a start date for Shelterly Barsk in Norway in the second half of November 2024. The full-year 2024 EBITDA guidance for the rest of the business is narrowed and increased between $335 million and $355 million, with full-year revenues expected to improve from the last guidance by approximately $25 million mainly resulting from the $45 million mobilization revenue acceleration on two suspended rigs in Saudi Arabia. Revenues in Q4, however, will be impacted by delayed contract commencements in Nigeria for the Shelterland Achiever, which is already on contract since the end of October, and for the main passport, expected to be on contract by the end of the year, as well as by the recent announcement of the contract suspension of the high on four in Saudi. We've also revised our full year 2024 guidance on capital spending, now established between 140 and 160 million, compared to our last guidance in August between 135 and 160 million. The $5 million increase reflects the additional contract preparation at SD&S for the Shelf Drilling Fortress, Shelf Drilling Perseverance, and Shelf Drilling Barsk. At the parent level, the full year 2024 guidance on capital spending is narrowed between $95 and $110 million. The rigged suspensions in Saudi Arabia and delayed contract commencement of Shelf Drilling Barsk in Norway have significantly impacted our financial results in 2024. The Shelf Drilling Barsk is now about to start its new contract and will contribute in 2025 to deliver strong earnings and cash flow visibility at the SDMS level. with all five rigs under contract. After successfully redeploying two of the rigs impacted by contract suspensions in Saudi, we remain confident in our ability to secure attractive opportunities for several other of the suspended rigs, with anticipated return to service by the middle of 2025. As Greg mentioned, since July, we have achieved several other important milestones for the company, successful completion of the SDNS acquisition, materially enhancing our fleet composition, and simplifying our capital structure. On the back of the recent sales of all tickets in September, the Trident Aid insurance claim process concluded in October will also represent material cash flow for the company in the near term. These milestones and the significant steps taken this year to address the short-term challenges will position Shelterlink well heading into 2025. would like now to open the call for questions.

Thank you. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. That is star 1 and 1 to ask a question. We will now go to your first question. One moment, please. And your first question comes from the line of Frederick Steen from Clarkson Securities. Please go ahead.