Shelf Drilling Ltd

Good day and thank you for standing by. Welcome to the Shelf Drilling First Quarter 2025 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 then hear an automated message advising your hand is raised. To withdraw a question, please press star 1-1 again. Please be advised that today's 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, operator, and welcome everyone to Shelf Drilling's first quarter 2025 earnings call. Joining me on the call today is Douglas Stewart. This morning, we published our Q1 financial results and our latest fleet status report. In addition to our press release and the Q1 2025 financial statements, we 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 start with an overview of the company's performance for the first quarter and provide our latest views on the market environment I'll then hand over to Douglas to walk you through our Q1 financial results and provide updated guidance for 2025 before we open the call for Q&A. As always, our number one priority is the safety and well-being of our people. In Q1 2025, we reported a total recordable incident rate of 0.24 with three recordable incidents during the period. This result is below our expectations and led to the implementation of a structured HSC turnaround action plan, which we believe is taking hold as we had no recordable incidents in March or April. Our operating execution remains strong with fleet-wide uptime of 99.4% for the quarter, continuing our excellent operating results from 2024. In Norway, the Shell Drilling Barsk commenced drilling operations at the Sleipner B platform for Equinor earlier this month following its role as an accommodation and support unit since November last year. We are committed to delivering outstanding operational performance for Equinor. We are also working closely with them and the regulatory authority to address the recent audit observations related to IT systems on board the rig, and we do not foresee issues in completing the remaining scope in the coming months. We've also successfully completed two additional rig relocations. The Highland 2 and Shelf Drilling Victory mobilized from the Middle East and arrived in West Africa in April, with both rigs now well-positioned for near-term programs in the region. Following the sale of the Main Pass 1 and Q1, we have now completed the disposal of the Trident 8 for recycling as part of our ongoing strategy to streamline our fleet. We intend to divest one to three additional units this year for non-drilling applications to generate additional cash, reduce costs, and support market balance in key regions. During the quarter, as we previously announced, Chevron extended the contract for the Shelterlink Scepter in Nigeria for an additional year. In Egypt, we added three months of backlog to the Trident 16 contract with Petrobel. In Saudi Arabia, we're in advanced discussions to extend the Highland 5 contract with Saudi Aramco for a multi-year term. And in India, the JT Angel was L1 in category two of ONGC's recent tender and is well-placed for a three-year award, with negotiations underway to try to agree pricing and finalize a contract. Meanwhile, in West Africa and Southeast Asia, we continue to see healthy demand with a steady pace of new opportunities in tendering activity. As of March 31st, our backlog was $1.6 million, with 29 of our 33 rigs contracted at a weighted average rate of approximately $100,000 a day. Our backlog includes nearly $300 million associated with our final two suspended rigs that remain in Saudi Arabia, the Harvey Ward, and the Highland IV. Of the remaining $1.3 billion in backlog, we have strong geographic diversification with a solid mix of IOCs, NOCs, and independents. and we have a series of contract awards that we expect to secure in the next two to three months across our fleet and locations. Adjusted revenue for Q1 was $243 million. Adjusted EBITDA for the quarter was $96 million, resulting in a margin of 40% and a significant sequential improvement following two contract commencements during Q4. Quarter end cash stood at $207 million, up $55 million from year end 2024, driven by strong EBITDA generation and reduced CapEx in the quarter. Douglas will provide more details on our results and financial outlook for full year 2025. The oil and gas market continues to evolve against the backdrop of geopolitical tension, introduction of global tariffs and shifting trading policy, and short-term price volatility. The recent announced increases in production from the OPEC Plus Group have contributed to this near-term uncertainty. Brent crude averaged $75 a barrel in Q1 and have traded in the $60 to $65 range in recent weeks as a result. Despite this near-term volatility, we believe the industry's solid fundamentals remain intact. Various agencies continue to forecast incremental oil demand growth globally in both 2025 and 2026, albeit at a more moderate pace. With the recent reduction in oil prices, supply out of the U.S. is likely to be impacted, as communicated by several of the larger domestic producers in recent weeks. In addition, according to Reistad, offshore project sanctioning continues, with nearly $67 billion in spending projected for 2025, with 70% of these projects viable below $60 a barrel. We're also seeing a disciplined returns-focused investment approach from the majors, who have collectively added $25 billion in upstream CapEx through 2027, reinforcing that current prices remain supportive of continued investment. With energy security and affordability driving decisions across key regions, we remain confident in the long-term resilience of the offshore drilling sector. The jack-up market continues to display healthy utilization, with marketed utilization still north of 90%. Many of the suspended rigs in the Middle East have been absorbed into other regions. Adjusted for the remaining suspensions, utilization is still in the mid to high 80s. Despite a slowdown in new contract awards this past quarter across the industry, we continue to see a positive activity outlook in key markets. The demand profile remains concentrated in short cycle brownfield activity, a segment that is less sensitive to oil price fluctuations and continues to support stable rig activity. Long-term contracts, including the recent extensions announced by Valeris in the Middle East, and active NOC-led tendering further signal ongoing offshore investment appetite. Day rate pressures have intensified in recent months, with softer oil prices a contributing factor. We will likely see these competitive bidding levels continue for the next few quarters until the remaining rig capacity from the Middle East has been absorbed. Over the longer term, we expect to see growth in global jack-up demand as shallow water production will continue to play a crucial role in meeting the world's expanding energy needs. In addition, we anticipate further rig attrition and limited risk of future new builds, which help maintain balance on the supply side. As a result, we expect a much better day rate environment in future years. West Africa remains structurally tight, with eight rigs having relocated from the Middle East in the past year. tendering for 2026 programs is underway, and we continue to see strong demand and more resilient day rates in this region. Six out of our eight rigs are contracted beyond 2025. The Highland 2 is expected to commence its short-term contract this month while we continue to pursue longer-term opportunities for it and the shelf-dwelling victory. We are actively engaged with multiple operators across the region to secure near-term opportunities and extend coverage into 2026 and beyond, including potential deployments under our strategic alliance with Arabian Drilling. In Southeast Asia, tendering activity has held up well, particularly for 2025 and 2026 starts. Despite day rate pressures due to the influx of rigs from the Middle East, rig demand continues to remain solid across Thailand and Vietnam in particular. We are pursuing multiple opportunities for the Shelf Drilling Enterprise, which is expected to complete its contract in Thailand in Q3 of this year. We are confident that the unique capabilities of our rigs and our successful track record in the region, particularly for factory-style offline drilling operations, give us a clear advantage in pursuing upcoming opportunities. Tendering activity in India slowed in 2024, and ONGC's recent tender resulted in a surprisingly low day rate level, dampening the overall market sentiment. As I mentioned earlier, the JT Angel remains competitively positioned for a three-year award. While the recent tendering slowdown will lead to a temporary reduction in the number of working rigs. India remains a core long-term market for shelf drilling. Both the government and key operators have expressed a strong commitment to reversing the decline in domestic production from recent years. In this context, we see a constructive medium to long-term outlook for this historically resilient market, supported by initiatives such as ONGC's partnership with BP and increased policy focus on domestic energy security. Of our nine rigs in the country, six are contracted until 2026 or beyond. The Middle East remains the anchor region for global Jacob activity with over 160 rigs. While the market experienced significant disruption in 2024 due to the reduced expansion program in Saudi Arabia, we believe Aramco has now reached or is close to its baseline rig requirement to meet current production needs. A modest rebound in regional demand is expected from 2026 and beyond, supported by continued activity and multiple long-term NOC-led tenders in progress in the region. We remain closely engaged with customers, leveraging our strong operating history and the additional fleet access we have through our alliance with ADC to actively pursue opportunities. The Mediterranean and North Africa market remains stable. We see opportunities for additional work for both of our rigs currently working in Italy. For our two jackups in Egypt, we continue to engage with the current customers and other operators and expect both units to continue working beyond the current terms. In the North Sea, we see different drivers across the countries in that region. Norway remains stable with consistent rig activity supported by long-term programs with three major operators. Government policy continues to encourage offshore development, providing a supportive backdrop for the ongoing drilling campaigns. The UK has seen a slowdown in activity due to political and fiscal uncertainty, which has delayed operator decision making. However, recent M&A activity in the UK is driving a renewed focus on field life extensions and infill drilling, particularly by independents, as well as alternative demand, such as P&A and carbon capture, supporting stable jack up demand in the near to medium term. In addition, we are seeing an increase in gas directed activity in the Netherlands and expect to see demand for similar projects in Denmark As announced in early April, we received an early termination notice for the Shelf Drilling Winners contract in Denmark. The rig will now complete its contract in August of this year. We are actively marketing the winner, along with her sister rig, the Shelf Drilling Fortress, for opportunities both inside and outside of the North Sea. Our fit-for-purpose operating platform is designed for flexibility, and our sole focus on shallow water ensures that we're well aligned with where the bulk of demand is concentrated. Our core regions are among the lowest cost basins globally, where operators have demonstrated a consistent commitment to production, regardless of oil price cycles. Our redeployment of four rigs to West Africa in the last nine months demonstrates the agility of our platform. Three of these rigs have now secured contracts. which demonstrates our ability to respond quickly to shifting demand and secure backlog. In addition, our backlog coverage in 2025 offers a degree of earning stability amid broader market volatility. Our fleet of high-performing rigs is well positioned to capture near-term opportunities in key basis. While we fully recognize the current macro uncertainties and impact on investor sentiment, our priorities remain clear. Operational excellence, capital discipline, and proactive marketing to secure key near-term contract opportunities. We operate in an inherently cyclical industry, and Shell Drilling has a long and proven track record of managing costs and navigating through market downturns. That experience combined with our sole focus on shallow water, our presence in resilient low-cost basins, and our unique operating platform positions us to execute and create long-term value. Above all, we remain confident in the ability and commitment of our teams across the world. They're the reason we continue to deliver. With that, I'll hand it over to Douglas for his remarks.

Thanks, Greg. Reported revenue for Q1 2025 of $246 million included $3 million for amortization of an intangible liability related to the five rigs we purchased in 2022. We will continue to focus on and refer to adjusted revenue which excludes the impact of this item. For the first quarter of 2025, adjusted revenue was $243 million. This included $221 million of day rate revenue, $12 million of mobilization and bonus revenue, and $10 million of recharges and other revenue. Adjusted revenue for Q1 increased by $17 million, or 8% compared to Q4 2024. The sequential revenue increase was primarily driven by the contract commencements of three rigs in late Q4 2024 and Q1 2025. That's the main Pass 4 in Nigeria, the Shell Trilling Barsk in Norway, and the Trident 16 in Egypt. This was partially offset by lower revenue in Saudi Arabia due to two suspended rigs, the Highland 2 and Highland 4, which earned no revenue in Q1 2025. as well as in India following the contract completions of the JT Angel and Parameswara in late Q4 2024 and Q1 2025, respectively. The contract completions in India and the impact of the suspended rigs in Saudi Arabia contributed to a marginal reduction in effective utilization to 79% in Q1 from 80% in Q4. Average day rate, however, increased to $94,000 per day in Q1 from $88,000 per day in Q4, mainly due to higher revenues for the two rigs in Norway and Nigeria that started new contracts in late Q4 2024. Operating and maintenance expenses of $129 million in Q1 were relatively unchanged from the prior quarter. Lower operating costs for the two suspended rigs in Saudi were partially offset by higher operating costs for the main passport in Nigeria that started a new long-term contract in late Q4 2024, and mobilization costs for the shell-throwing Victory, which was redeployed from Saudi Arabia to West Africa in Q1 2025. G&A expenses of $17 million in Q1 increased from $16 million in Q4 primarily due to an increase in compensation and benefit expenses that was partially offset by a decrease in provision for credit losses. And as a result, adjusted EBITDA was $96 million in Q1. This represented a margin of 40% compared to $85 million of adjusted EBITDA and 38% margin in the previous quarter. Of the $96 million in EBITDA in Q1 2025, Shelterland North Sea generated $28 million of adjusted EBITDA. while the rest of the business generated $68 million of adjusted EBITDA. Income tax expense was $12 million in Q1, representing 5 percent of revenues, up from $7 million in Q4. Net interest expense of $36 million in Q1 was in line with the prior quarter. Non-cash depreciation and amortization expenses totaled $41 million in Q1, down from $48 million in Q4. This is mainly due to the lower amortization of deferred costs for the suspended rigs in Saudi Arabia. Net income for the first quarter in 2025 was $14 million. Turning to CapEx and deferred costs, these were $16 million, sequentially down by $15 million in Q1. This included $4 million at Shell Trilling North Sea. The decrease was mainly due to an increased utilization of existing fleet spares across the fleet. as well as lower contract preparation expenditures for the Shelter and Barsk in Norway and Main Pass 4 in Nigeria, ahead of the commencement of their long-term contracts in late Q4 2024. Our consolidated cash balance as of March 31st was $207 million, up from $152 million at the end of December 2024. Cash at the parent level increased from $131 million to $172 million, mainly due to a sequential decrease in capital spending, a reduction in debt service payments, and the sale of the main pass 1 in Q1 2025. Cash at shelf trillion North Sea increased from $21 million at the end of December 2024 to $35 million at the end of March 2025, mainly due to a higher sequential quarterly EBITDA and, again, a decrease in capital spending. In March, we also amended the $25 million term loan agreement to reflect the transfer of the loan to new lenders and extend the maturity date to March 31, 2027. As of March 31, 2025, our total consolidated liquidity was $332 million, which included $207 million of cash and $125 million available under our undrawn revolving credit facility. As a result of the recent announcement of the early contract termination for the shelf drilling winter in Denmark, we have revised our financial guidance for full year 2025 in our release today. Fully consolidated adjusted EBITDA is now estimated to be between $310 million and $360 million. This compares to our initial guidance provided earlier this year of $330 million to $380 million. At the Shelf Drilling North Sea level, we now anticipate full-year EBITDA between $65 and $80 million, a decrease of $20 million from our original guidance, which assumes the Shelf Drilling winner is idle for the rest of the year. The change in our guidance for full-year EBITDA at Shelf Drilling North Sea implies a level for the rest of the business in 2025-2022. of $245 million at the low end and $280 million at the upper end, which is unchanged from our initial guidance range. We anticipate revenues and effective utilization to improve in the second half of 2025 as rigs mobilized from the Middle East to West Africa in Q1 are expected to return to service. Our total capital spending guidance and deferred costs in 2025 is revised and now estimated to be between $85 million and $115 million, compared to our initial guidance earlier this year of $110 to $140 million. At the shelf-drilling North Sea level, capital spending is estimated to be between $20 to $25 million, compared to our initial guidance of between $25 and $30 million. This implies an expected spending level across the rest of the business in the $80 million range, down $20 million from our initial guidance earlier this year. This reduction is primarily explained by the lower capital spending associated with the mobilization from Saudi to West Africa of the Shelf Drilling Victory and Highland II, as well as the deferral of planned major out-of-service projects in India on one rig. While our updated guidance shows lower EBITDA range by 20 million, our guidance for CapEx is lower by 25 million, resulting in a higher level of expected free cash flow in 2025 than originally estimated. Our strong first quarter results demonstrate the business's strong resilience in the face of challenges as well as our operational excellence and our ability to execute. While oil prices have been volatile during 2025 as a result of certain macroeconomic uncertainty, we believe current prices remain at constructive levels to support activity across our key markets. Though the global jacket market continues to be impacted by contract suspensions in Saudi Arabia from 2024, we believe there to be sufficient opportunities to absorb most of the available rigs. For shelf drilling, we anticipate activity to improve in the second half of the year as several redeployed rigs begin new contracts. We believe we are well positioned to navigate the near-term uncertainty and capitalize on the positive long-term outlook in our sector. We'd like to now open the call for questions.