Shelf Drilling Ltd

Good day and thank you for standing by. Welcome to the Shelf Drilling Fourth 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 1-1 on your telephone keypad. You will hear an automatic message advising your hand is raised. To withdraw a question, please press star 1-1 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to our first speaker today, Greg O'Brien, CEO. Please go ahead.

Thank you and welcome everyone to Shelf Drilling's fourth quarter 2024 earnings call. Joining me on the call today is Douglas Stewart. This morning, we published our Q4 financial results and our latest fleet status report. In addition to our press release and the 2024 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 2025 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. If we do, 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 fourth quarter and touch upon the full year 2024, including some recent developments and achievements, and also provide our latest views on the market environment. I will then hand it over to Douglas to walk you through our Q4 financial results and provide guidance for 2025 before we open the call for Q&A. Our number one priority is the health and safety of our employees and contractors. Our safety performance is a key measure of our success and is fundamental to who we are as a company. We are constantly looking for ways to improve the safety on our rigs and in 2024 rolled out a focused effort to understand and improve on human factors or human behavior to eliminate incidents from our operations supported by technology, including AI. For full year 2024, our total recordable incident rate was 0.18%, with 10 recordable incidents across our fleet. While the incident rate increased slightly year over year, the number of high severity and high potential severity incidents decreased as compared to the previous year. Notably, in 2024, 28 rigs operated without a recordable incident, including the entire Saudi and India divisions, a clear indication that our vision of incident-free operations is achievable. We had another very strong year of operational performance, with our fleet-wide uptime reaching 99.3%, an outstanding achievement given the increased number of premium rigs in our fleet. Our Saudi division's performance was particularly impressive given the challenges faced in 2024, with our two rigs, the Highland 5 and Highland 9, finishing the year with zero downtime. We finished the year on a strong note with the Shell Drilling Bars commencing its contract with Equinor in Norway in mid-November. The rig has been initially serving as an accommodation and support unit and is expected to begin its drilling campaign next month, which will keep it busy through 2026 and likely beyond. In addition, the Maine Pass 4 commenced its two-year contract in Nigeria in December and is performing very well. This rig had already mobilized from Saudi Arabia to Nigeria, along with the Shelterling Achiever, which commenced its three-year contract in October 2024. Since our inception, we have focused on having the right assets in the right locations, which has resulted in a significant transformation of our fleet over time. We continue to believe that having a blend of standard and premium jackups is the right approach to serving our customers. and that most of our standard rigs will continue to operate efficiently and generate cash flow for many years to come. However, we constantly evaluate market dynamics and opportunities and capital requirements for our rigs that can result in the disposal of certain of our less competitive units. In December, we signed an agreement to sell the main pass one for $11 million for non-drilling purposes, and we closed this transaction in January. We will likely sell two to three additional units in 2025 for similar applications, which can generate near-term cost savings and cash flow and also improve regional rig supply and demand balances. The tri-nates insurance claim process is almost complete. We have now collected $48 million of the $50 million claim and expect to receive the remaining portion in the first half of this year. The rig has been moved from West Africa to the UAE and will be sold for recycling in the near term. On the contracting front, we continue to see strong demand for jackups in West Africa and Southeast Asia, with contracting momentum exhibited in both regions since last year. On the back of awards for the Shelterling Achiever and Main Pass 4 and Q4 in Nigeria, we announced last month that the Shelterling Scepter had secured a one-year extension of its contract in West Africa, keeping the rig contracted into July 2026. In addition, we are now mobilizing the ShelterLink Victory and the Highland II to West Africa, as we expect both rigs to commence new programs by the middle of 2025. The backdrop in West Africa and Southeast Asia has given us the confidence to search for and the need to access additional premium jackups, as we face the possibility of missing out on opportunities in both regions. As a result, we, along with Arabian Drilling Company, the largest onshore and offshore drilling contractor in Saudi Arabia, recently announced a strategic alliance to deploy ADC's available premium rigs outside of the Middle East. Our initial focus will be on contracting one to three rigs in West Africa and Southeast Asia. We're very excited about the prospects for this alliance, as we will leverage ADC's high specification modern jackups and our extensive international presence and diverse customer base. As of December 31st, our contract backlog was $2.1 billion across 31 rigs. This includes approximately $600 million associated with four of our rigs suspended that remained in Saudi Arabia at the end of the year. For all of 2024, we added approximately $900 million in new contract awards at a weighted average day rate of $129,000 per day, which included $500 million of new backlog in the fourth quarter alone. Briefly touching upon the financials, adjusted revenue for the quarter was $225 million and adjusted EBITDA was $85 million, representing an increase of 23% over the previous quarter, excluding the acceleration of mobilization revenue in Q3 for two suspended rigs in Saudi. sequential increase in ebitda was mostly driven by higher revenue in nigeria and norway following the commencement of new contracts in q4 douglas will provide more details on our q4 and full year 2024 results as well as the outlook for 2025. the medium to long-term outlook for global oil and gas demand is forecasted to remain strong as development in emerging economies is expected to drive continued growth Shallow water production is expected to remain a critical component of a diversified and reliable energy mix required to address the increasing demand for decades to come. Brent crude oil prices, a key driver of jack-up rig demand, have been relatively stable in the last two years, averaging $80 a barrel in 2024 and trading in the mid-70s and recent weeks. Global jack-up market utilization in 2024 was adversely impacted by the 34 rig suspensions in Saudi Arabia, although strong incremental demand in other regions continues to absorb some of this rig capacity. Adjusting for the suspended rigs in Saudi Arabia that still remain idle, the year ended with market utilization of 88%. Turning to specific regions where we operate, two operators in Qatar have indicated that there will soon be multi-rig tenders some of which will be against incumbent rigs, and mostly for gas development. We currently have one rig contracted in Qatar into early 2026. We expect to leverage its presence in country and our operational performance for these opportunities. In addition, a four-rig tender was recently launched for operations in the neutral zone between Kuwait and Saudi Arabia. It's positive to see incremental requirements reemerge in the Middle East. In India, ONGC recently relaunched its highly anticipated tender for four standard specification rigs, with bids due later in March. Awards are expected before the end of Q2, with contracts scheduled to commence in Q4 2025. We will participate in this tender with two of our rigs that recently completed their previous contracts, the GT Angel and Paramasuara. The slowdown in tendering in 2024 will result in a short-term reduction in the number of working rigs in India. We remain very optimistic on the long-term activity outlook, given the strong desire and motivation from both operators and the government to reverse the recent trend of declining production. Capital flows in Egypt improved during 2024, which has positively impacted oil and gas development activity in the country. As a result, Petrobel, the joint venture between the Egyptian state-owned operator and E&I, recontracted the Trident 16 for a three-month program with the rig commencing operations in February. We are in discussions with this customer and others to keep the rig working beyond the current term. As mentioned earlier, we continue to see an elevated level of activity in West Africa, increasingly driven by the indigenous producers, followed by the IOCs. Operators in Nigeria are tendering for contracts from one well up to multiple years, offering our fleet in the region a good balance of long-term backlog coverage and short-term opportunities. Our local presence and scale and long-term track record provide a competitive advantage in this market. We are mobilizing two additional rigs from the Middle East to West Africa to capitalize on the growing rig demand and near-term commencements. We have secured a short-term contract for the Highland II in Nigeria and are in dialogue with multiple operators regarding follow-on work for this rig. For the shelf drilling victory, we hope to be in a position to confirm the program for this rig in the coming weeks. The demand pipeline in Southeast Asia also remains strong with new opportunities in Vietnam, Thailand, and Indonesia. Operators in Vietnam in particular are seeking rigs with factory-style offline drilling capabilities capabilities found on several of our rigs. While there is near-term pressure on day rates due to rigs competing from the Middle East, we are confident that the unique capabilities of our rigs and our successful track record in the region will be critical in our marketing efforts. In the North Sea, two of our three rigs are contracted well into 2026. The program for the Shelterland Fortress in the UK is now expected to finish in May, and we are actively marketing this rig for opportunities both inside and outside of the North Sea. The activity outlook in late 2025 and into 2026 in both the UK and the Netherlands remains solid. The recent rumors of a few additional potential rig suspensions in Saudi Arabia, along with payment challenges and short-term suspensions in Mexico, have contributed to the short-term uncertainty in the jack-up market. However, we believe that Saudi Aramco is at or very near the baseline level of jack-ups it will require for its operation. In addition, the recent reports that Pemex is committed to a payment plan for its suppliers should help address concerns over any long-term rigged demand impact in Mexico. We are focused on execution, successfully securing a series of market opportunities that represent near-term priorities for shelf drilling, and working with Arabian Drilling to capitalize on opportunities that create value for both companies. While there are some short-term headwinds, we continue to see strong long-term fundamentals in the jacket market. Supply will likely be flat to shrinking in the years ahead and demand is concentrated in low cost short cycle basins and in countries with a strong desire to produce hydrocarbons for the foreseeable future. We believe utilization will stabilize and improve as we progress through 2025 and be strong for years to come. I will now hand it over to Douglas for his remarks.

Thanks, Greg. Reported revenue for Q4 2024 of $229 million included $3 million for amortization of an intangible liability 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 non-cash item. For the fourth quarter of 2024, adjusted revenue was $225 million. This included $212 million of day rate revenue, $5 million of mobilization and bonus revenue, and $8 million of recharges and other revenue. Adjusted revenue for Q4 decreased by $39 million or 15% compared to Q3 2024. This was primarily due to the one-time acceleration in Q3 2024 of $45 million in mobilization revenue in respect of two suspended rigs in Saudi Arabia related to future years. It is worth noting that without this acceleration, adjusted revenue would have increased from $219 million in the third quarter of 2024 to $225 million in the fourth quarter of 2024. Due to higher revenue in Nigeria and Norway following the contract commencements of the Shelf Drilling Achiever in October of 24 and the Shelf Drilling Barsk in November of 24, respectively, as well as a full quarter of operations of the Shelf Drilling Perseverance in Vietnam. With the commencement of these three new contracts, effective utilization increased to 80% in Q4 from 77% in Q3, and the average day rate increased to $88,000 per day in Q4 from $82,000 per day in Q3. On the cost side, operating and maintenance expenses were $130 million for the fourth quarter, decreasing $3 million from $133 million in Q3, primarily due to lower mobilization costs for the shelf-drilling achiever ahead of its new long-term contract in Nigeria, as well as lower operating costs for the Baltic, which we sold in September of 2024. G&A expenses of $16 million in Q4 decreased from $17 million in Q3, primarily due to a decrease in compensation and benefit expense, partially offset by an increase in provision for credit losses. Adjusted EBITDA was $85 million in Q4, representing a margin of 38% compared to $114 million and 43% in the previous quarter. The decrease in adjusted EBITDA quarter over quarter was mainly driven by the one-time acceleration of 45 million of MOBE revenue in the third quarter, as mentioned earlier. Of the 85 million in adjusted EBITDA in Q4, SD&S generated $17 million of adjusted EBITDA, while the rest of the business generated 68 million of adjusted EBITDA. When looking at full year 2024, we had adjusted revenue of $972 million, and the business generated an adjusted EBITDA of $351 million, including $364 million from the parent company and a negative $13 million from SD&S. This compares to a guidance range of $320 to $345 million set in the prior quarter. The positive variance between our actual results and the upper portion of our guidance range was mainly driven by higher utilization and uptime during Q4, primarily in West Africa, lower maintenance and operating expenses across our fleet during the quarter, as well as lower corporate G&A expenses, all of which contributed to mitigating the impact of the Highland 2 and the Highland 4 suspensions in Saudi Arabia during the quarter. Income tax expense of $7 million in Q4 brought the full-year tax expense to $32 million, or 3.2% of 2024 revenues. Net interest expense of $36 million in Q4 was in line with the prior quarter. Other net represented a gain of $5 million in Q4 from an expense of $2 million in Q3, mainly driven by gains from foreign currency exchange. Non-cash depreciation and amortization expenses totaled $48 million in Q4, down from $53 million in Q3, mainly due to lower amortization deferred costs for the suspended rigs in Saudi Arabia. The quarterly net income attributable to controlling interest was $24 million in the fourth quarter and included a $31 million gain on the Trident 8 insurance recovery. Turning to capital expenditures and deferred costs, we spent $31 million in the fourth quarter of 2024, including $10 million at SB&S. This compared to $35 million of CapEx and deferred costs in the prior quarter. The decrease was mainly due to lower planned maintenance and shipyard costs for the High Line 9 in Saudi and lower contract preparation expenditures in Nigeria for the Shelterly Mentor and Main Pass 4. which started their new contracts in late Q3 and Q4, respectively. This was partially offset by higher spending on fleet spares and higher contract preparation spending for the shell drilling Barsk in Norway, which commenced its new contract in Q4 2024. As a result, our full year 2024 capital spending was $152 million, including $48 million at SD&S. Capital spending for the year at SD&S comprised of anticipated investments in fleet spares buildup. Excluding SD&S, actuals included the cost to redeploy the shelf-drilling achiever and the main passport to West Africa for new contracts, after they were both suspended in Saudi Arabia earlier in 24, and contract preparation costs for the shelf-drilling Perseverance in Vietnam and the shelf-drilling Barsk in Norway. Actual spending levels came in at the lower end of the guidance range of $145 million to $170 million communicated in early 2024. Our consolidated cash balance as of December 31, 2024, was $152 million, as compared to $220 million at the end of September. Cash at the parent level decreased from $193 million to $131 million, mainly due to interest and amortization payments made in Q4 2024, and a $30 million payment to the former SD&S shareholders for the then remaining 40% shares in SD&S, which was partly offset by $44 million cash collected in relation to the Trident 8 insurance claim. Cash at Shelf Filling North Sea decreased from $27 million at the end of September to $21 million at the end of December 2024. As of year end, our total consolidated liquidity was $277 million. This included $152 million of cash and $125 million of undrawn revolving credit facility. Turning to 2025. We included financial guidance for the full year 2025 in our release this morning. Fully consolidated adjusted EBITDA is estimated to be between 330 million and $380 million. At the FD&S level, we anticipate full year EBITDA to come in between 85 million and $100 million. With the five rigs expected to operate for most of the year, the run rate EBITDA is expected to be significantly higher than in 2024. We expect revenues and effective utilization to improve in the second half of 2025 as rigs mobilizing from the Middle East to West Africa are expected to return to service. Total capital spending in 2025 is estimated to be between $110 million and $140 million. This includes $25 million to $30 million spending at the SD&S level. with the SD&S rigs expected to remain in their current locations in 2025. This implies an expected spending level across the rest of the business in the $100 million range. The largest components include the redeployment costs for the sheltering victory in Highland 2 to West Africa from Saudi Arabia, as well as two major out-of-service projects contemplated in India. Our results in the last quarter of 2024 show how we responded to the unexpected short-term challenges faced last year as we secured new backlog, 500 million in the quarter alone, repositioned certain assets, realized efficiencies, and preserved cash. In Q4, several of our rigs started new long-term contracts at attractive day rates, and we remain confident in our ability to redeploy in 2025 additional assets that were suspended in 24. The recent announced alliance with Arabian Drilling is a testament to the confidence we have in the markets where we operate and to our unique operating platform, which we believe will allow us to create additional opportunities in these regions. Despite the short-term challenges, the medium to long-term outlook for our industry continues to be very positive. And we believe shelf drilling is well-positioned to drive value for its stakeholders. 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 a 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. Once again, if you wish to ask a question, please press star 1 1 on your telephone keypad. And now we're going to take our first question. And it comes from the line of Matthew Farwell from FA Advisors. Your line is open. Please ask your question.

Hi. Thanks for taking my question. I was wondering if you could elaborate a little bit more sort of how the revenue flows or how the profitability of the partnership with Arabian Drilling will occur.

Greg, do you want to take that? Sure. Great. So this will be determined on a contract-by-contract basis. So it's a little bit early to do that. But the typical structure will involve a type of management fee for a shelf, a type of bare-boat charter for ADC, and a sharing in the profits. But it will depend on each contract, but that's kind of how the thinking is today.

Okay, great. Can you break out the backlog between SDNS and SDL?

Yeah, give me a, shortly I'll get back to that. Why don't you ask the next question, I'll come back to you on the backlog split. We've got that here.

Okay, sure. Can we expect any revenues from the suspended rates that are mobilizing to West Africa in the second quarter? I know you're guiding to an improvement in revenues in the second half, but I'm wondering if you can provide a little bit more color there.

Yeah, I think from a day rate perspective, day rate revenue, that would be second half, as we'd indicated. That would be Q3, the earliest.

It's possible that one or both of the rigs could start before the end of Q2. I mean, obviously, the earlier the better. And part of the reason we've gone ahead with the mobilization process. But clearly, the goal is to get them both there, both contracted and started working. And the hope is we have continuous activity second half of the year. So, yeah, some contribution in Q2 is possible, but we're more optimistic about H2.

So you've pushed out the term loan A extension to March 31st. Is there a possibility that that could be extended further, or do you expect to pay that down by the end of the quarter?

So, yeah, you're exactly right. We extended to the end of March. We're in discussions, and we're considering extending that for additional term. Basically, under the S shelf drilling bonds, 2029 bonds, There's capacity for super senior debt of 175 million, the greater of that, and 10.5% of our total assets. Here's the key point. At maturity of the term loan, that capacity ratchets down to the greater of 150 million and 9% of TLA. So the thinking behind this is, as we consider extending, is preserving that capacity of super senior debt going forward.

Got it. That's helpful. I think that's all for now. I will hop back in the queue. Thank you.

Great. And we'll come back to you on the backlog question. Appreciate that. Thank you.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone keypad. And now we're going to take our next question. And the question comes from the line of Greg Brody from Bank of America. Your line is open. Please ask your question.

Good morning, guys, and thank you for all the information.

Hi, Greg.

Hey, can you, just as you think about managing your cost structure this year with some rigs not working and some being mobilized, how do you, how should we think about operating costs, you know, sort of warm stack costs? How do you help us think through that?

Yeah, I think as we think about it, let me talk about it in two pieces. On the G&A side, we've been very focused on bringing that down, and that was trending around, shall we say, $70 million, but we're pushing it toward the lower end of $60 million-ish. And so we're very focused on maintaining a cost structure that's commensurate with activity on the ground. On the OPEX side, I think it's fair to look at Q4 2024, as you can see that we brought costs down sequentially, and we'll continue to look at doing that. But that's a decent proxy for the year.

And then you gave some excellent color on the regional dynamics. Maybe a little additional color on Saudi Arabia. I think you said there's some rumors of rigs. additional rates being suspended. What can you tell us happening there and just the mindset of the kingdom from here?

Yeah, we had three different rounds of cuts in 2024. And I think that was a bit of a surprise to everybody, including some folks within Saudi Aramco. There continued to be changes. And I think the fact that activity continued to move caused folks to continue to speculate. And that hasn't really stopped. But it seems like in the last week to 10 days, there's been a lot of chatter. It's really just that, it's chatter and rumor. We don't know anything more that's in the public domain. I think there've been a number of research notes speculating something like two to up to five incremental offshore rigs in the last two weeks. that seems to be kind of the consensus rumor. The third round from October, November, when we got, when we had two more rigs that were impacted by high two and high four, that round ended up being a little bit smaller than we were told it was going to be by a couple of rigs. So that's the only thing that we could point to that would seem consistent with some of the chatter in the last couple of weeks that, The rig count was kind of mid-50s before all this started three years ago. We're high 50s today, so still calling a couple rigs higher than where we were before the big offshore expansion kicked off. You do have to believe that going much lower wouldn't start to have an impact on oil supply and kind of medium-term oil production capacity there. So we think we're in good shape. We only have two rigs left in operation. One is up for renewal, so we're having live discussions on that rig. But, yeah, that's kind of all we know at this point.

And you touched on the High Island 5, which is up for renewal. Is it your expectation that that likely stays working? And for the few rigs that are left in country, what do you expect to happen once the suspensions roll off?

So yeah, so the two rigs that are still in operation, Pylon 9 is on a long-term contract. Pylon 5 is up for renewal at the end of May. We are in discussions on that rig. We do believe that there's a desire for both those rigs to continue working. We'd like to see that happen too. There are a number of other rigs up for renewal with other contractors. I think there's a fair amount of dialogue ongoing now regarding renewals, but we think we're in pretty good shape. We'd like to see the rig get renewed. So hopefully we'll have clarity in the next month or two. We have four other suspended rigs at the end of the year, too. We have just started the mobilization process to get to West Africa. So expect to have those rigs working here pretty soon, next few months. The last two, we're debating options, to be honest. We mentioned that we would consider selling a few additional idle standard jackups for non-drilling purposes. You know, we now have three rigs that have just come off in India. One's about to finish, and those last two in Saudi. We're kind of, you know, looking at options for each of those units. We obviously see contract opportunities in India. So no explicit plan, but each individual asset, we may look to dispose a couple of additional rigs this year, which, again, we think helps, you know, supply and demand globally, but also on a regional basis, depending on where those rigs are taken out.

Excuse me, Greg, any further questions?

That's it, thank you.

Thank you. And now we're going to take our next question. Just give us a moment. And the question comes from the line of Antonia Segura from BCP Securities Incorporated. Your line is open. Please ask your question.

Hi, thank you very much for the presentation and I wanted to ask about the shaft during North Sea. and wanted to understand if its shares are still listed or de-listed in the All Software Exchange.

Yeah, that company is still listed. We completed the merger in October. You know, Shelterline is a 100% shareholder of Shelterline North Sea. But the company is still listed. We produce financial statements on a regular basis. We'll continue to do that. So, yeah, again, it's still listed.

Thank you very much.

Thank you. Dear participants, as a last reminder, if you wish to ask a question, please press star 1 on your telephone keypad.

Operator, this is Douglas Stewart. Just going to close the loop on the last question regarding the backlog that was raised by a caller. The backlog of $2.1 billion that we show, it's $300 million at the SD&S level and $1.8 billion at STL, excluding SD&S.

Thank you. Dear speakers, we'll just give a moment to our participants to press star 1-1 if they wish to ask a question or to make any comments. Dear speakers, there are no further questions. I would now like to hand the conference over to your speaker, Greg O'Brien, for any closing remarks.

Very good. Thanks for the time, everybody. Appreciate the interest, and we'll talk to you next few months. Thanks.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.