Dolphin Drilling ASA (OTC:FOEAF) Q1 2023 Earnings Conference Call May 9, 2023 4:00 AM ET
Company Participants
Bjørnar Iversen – Chief Executive Officer
Stephen Cox – Chief Financial Officer
Conference Call Participants
Bjørnar Iversen
Hello everyone. First of all, welcome to the Dolphin Drilling First Quarter 2023 Presentation. This is our second presentation since the company was listed at Euronext Growth on the 28th of October last year. It’ll be not possible to ask question throughout the presentation. But if you look at the top, there is a Q&A button where you can submit your questions.
Let’s then move quickly through the disclaimer. As always for those, who wants to read about risks, please read through Page 2 the disclaimer called important information. Today’s presenters, my name is Bjørnar Iversen. I’m the CEO of Dolphin Drilling. And with me today I have Stephen Cox, our Chief Financial Officer in Dolphin Drilling. Let’s then have a quick look at the agenda. The agenda for today, I will take you through the Q1 2023 highlights. Stephen will take the slides on the quarterly results and the key metrics, and I will take the operational slides and also do a deep dive into the market outlook, and then end this session with a quick summary before we go through the submitted Q&As from you guys.
So let’s have a quick look at today’s Q&A, sorry – Q1 highlights. Blackford Dolphin commenced for drilling contract in Nigeria for General Hydrocarbons on March 25th. And Blackford also signed a new contract with Peak Petroleum in Nigeria. This increased our firm revenue backlog by $39 million and approximately $100 million in additional option backlog. This will secure continuous work for Blackford in Nigeria until August 2025 subject to that all option periods are exercised. We also executed the special periodic survey for the Blackford that was completed during the quarter, and we spent $14.88 million in February. And we have limited CapEx plan for the next four or five years for the asset. We are very happy with that. We had a budget on 15 and we came in on 14.8. So the team did a really, really good job with the SPS at Las Palmas.
We have continued strong support from our main shareholders. They are providing a $15 million unsecured loan at interest rate of 8.5%, and this is to secure bid bonds for current and future tenders that we’re currently working with. Commenting on subsequent events, we had a successful startup on Blackford following the completion of all approval and licenses in Nigeria. And we have also received the first monthly payment from our client, GHL.
Let’s then go more into the specific figures and the key metrics. Stephen, please.
Stephen Cox
Yes. Hello everybody. So Q1 2023 results for Dolphin Drilling as presented here. I will just run through the main points and the drivers behind the numbers. So as Bjørnar mentioned, we were successful in getting the Blackford on contract in late March. We have approximately seven days of revenue showing in the P&L as a result of that giving us the $1.5 million of charter revenues. As everybody will know, there are certain elements in Nigeria of withholding taxes that are deducted directly from the revenue numbers here.
We also received our full mobilization payments. And as we entered Nigeria and through the course of Q4 last year and Q1 this year. And we’ve followed the appropriate accounting on that, so the majority of the mobilization revenues are deferred in line with the mobilization costs. Those revenues and costs will come back through the P&L in future quarters as we execute on the contract.
There are some impacts as we enter into the forward months with the licenses. We do expect to experience a few days of zero rates through the month of April. But those numbers are not yet finalized.
OpEx is as expected. Again, as you dive into the details of those and look inside our income statements, you will see there are impacts from project costs. Again, those are related to the mobilization. And as IFRS requires us to do what we have done there is expense out any costs in Q1 2023 that are in excess of the mobilization revenues that we’ve taken. So there’s no lost carry forward in the mobilization. That does have a onetime impact on the Q1 results. The number is approximately $1.6 million. So you should consider the operating expenses in Q1 higher than the normal run rate by approximately that number.
Our view right now on how the Blackford is operating, how our G&A looks, and how our stacked cost against our Bideford and Borgland assets are very much in line with expectations, and that’s around about the 200,000, just below 200,000 per day number. So things are holding there.
Cash flow is obviously as we completed the SPS as Bjørnar referenced and got up and running we are paying down our supplier base there. So negative impact on cash from operations as we went through the quarter, we did obviously pay down the CapEx. Capex is a combination of the SPS work and some operational upgrades that we wanted to do to the asset to ensure we have a nice clean five years of runtime on the rig. We have no CapEx on either the Bideford or the Borgland in the quarter.
And as Bjørnar already mentioned we have received very strong shareholder support. We did pull some liquidity in during Q1 the $8 million that you see here. And that’s for supporting liquidity as we look to some of the longer term work we are now seeing and contracts we’re seeing becoming evident in the international markets. But more on that to follow.
If we flick to the next page, headline data then backlog for the company increased approximately $122 million. Market cap, everybody can see obviously impacted by general market conditions right now. That number is around about $130 million to-date. And we remain at net debt zero, and obviously we remain very focused on maintaining that position and ensuring the company has sufficient liquidity as we move forward.
Bjørnar Iversen
Thank you, Stephen. Let’s then jump into a quick operational update to give you a little bit overview of where we are. As we said Blackford commenced a drilling campaign for general hydrocarbons on the 24th of March, currently drilling a 7.5 inch section on the first round after a successful mobilization and startup of operations in Nigeria. On the right side of the slide, you see our current fleet, the Borgland, the Blackford, the Borgland and Bideford, that’s our current assets and then of course, the two assets at the capital yard.
We are currently of marketing heavily the Borgland and the Bideford, but also the two capital assets. We see an increased interest in the two capital assets that we have the marketing rights for. As I mentioned also in our last presentation, I will come back to the specific markets in the market section. And what should I say, the summary, from that it’s increased demand basically in all segments, but we would have a deep dive into that shortly.
Commenting quickly on the five year SPS on the Blackford, we had the execution over five year SPS, at Las Palmas with zero accidents. We spent approximately 110,000 man hours in that SPS, which is a significant number. The guys and girls did a fantastic job including the yard. I think it was close to optimal execution, and we were able to deliver that SPS and mobilization on budget. So – and the budget was 15 million and we executed it on 14.8 million. So I would say, the organization did a fantastic job there.
Let’s look a little bit on a little small dive into how we basically take in a rig into a new market. And during the quarter, of course, we took the Blackford into Nigeria and to bring in a rig, it’s complicated and particularly in some countries, extra difficult and cumbersome. And of course, Nigeria is one of those countries, but we have been in the industry for 58 years and we have built up a robust procedure and execution model for bringing assets into different markets.
So this process, and let me take you through a typical process for Blackford entering Nigeria, first local company accreditation. Step one, establish relationship with local partners, obtain the local permits in some countries harder than others. We’ve done that in Nigeria, well done by the team. And then of course, we have the inspections from the local authorities to approve the rig technically and operationally and the systems. And then typically when we operate in the market, we have a down to assistant driller.
We have typically the standard and the Dolphin Drilling crew and then we have local crews that we recruit locally. So an extensive recruitment campaign for local crews. Then we train the crews ahead of the contract in line with our standard, and that standard is equal all over the world.
Then we establish the Dolphin subsidiaries in the local country. And of course, all the details related to bank accounts and bank bonds and all the other formalities that needs to be done. And then we manage intragroup transfers of the rig, and of course, to get this optimal for the group. And that’s a typical setup. And of course, this takes up to I would normally take up to I would say, three months to six months to do. And this was also successfully done now in the setup – over set up in Nigeria, and of course, built on that 58 years of experience.
Let’s then have a closer look at the markets and the latest development in the market. If we look at the global offshore rig fleet, I would say it’s sold out or close to sold out and that is basically in all markets and I will have a comment on how this plays out. If we look at the next page, we see an improving market in the step out of the day rates, and we see basically day rate increase in all segments, of course, with the ultra deepwater market leading the way and shocking the harsh environment assets with the deepwater capacities out of the harsh segment.
And this is creating and will create a welcome [ph] in the harsh environment segment for 2024, 2025 and onwards. This is particularly driven by a very good UDV market, ultra deepwater market in Namibia, West Africa, Australia, Brazil, and some other international markets.
Here we see on this page, we see some of the ongoing harsh environment rig inquiries in process. There are more than 20 in here, and there’s more in the make. So we see a strong market. We see demand in South America, we see in West Africa, we see in India, we see in Asia, including Australia, we see Norway, we see in the Med, and we see Coastal Africa and there’s more to come. And we will have a deep dive a little bit into the Moored semi fleet on the next page.
If we look at the Moored fleet, and as we said in the last quarter that fell from 140 rigs to 36 rigs. And here we have the 36 rigs available in the market. 15 on them are tied up in China or landlocked in the Caspian Sea. So 15 of the 36 is not available. Then we have 12 per today, 12 on contract, which is out of the market. And we have five rigs with higher reactivation cost.
That means there’s four rigs available, free and available rigs in the market or which Borgland and Bideford are two. And of course, both of them warm stacked, smart stacked in addition to that, we have the important not to lose and so wildcat on that list, which brings the free and available fleet up to four rigs. We think there’s a high probability with the current opportunity set that I just showed you on the last page, that the rigs will get a job in the future or in the near future.
Let’s take a deeper look into the UK semisubmersible market. And here we see it’s close to sold out with our two rigs available in addition to two cold stacks rigs, the Transocean Leader and the Ocean Valiant, which has a higher mobilization cost than over rigs, which are capped warm. And of course, the windfall tax has postponed some of the contracts awards, but doesn’t change the direction vaccine of the travel of the market. However, we think there are more opportunities for over rigs at higher day rates outside the North Sea than in the North Sea. So that what I’m saying there is that we see more activity on higher day rates than in the UK outside the North Sea.
Let’s have deep time into the Norwegian market, and we see some extreme changes going on over the last, I would say 24 months. And I use the word extreme. We have available rigs are now being reduced as you see from the figure to the left there from 32 rigs available in 2020. And that has come down to now 10. That means NCS might not have the necessary capacity to deliver the expected capacity needed from 25, where the consensus level is 18 to 22 rigs going on going forward from 2025. And what we – this is basically driven by the UDV, where we have – UDV market with rigs with ultra-deep water capacity has left or in the process of leaving the market. This will be a demanding situation we think for the Norwegian market, but of course it is good for our two newbuilds that we are currently marketing from the Keppel yard in Singapore.
Let’s then move over to a summary. If we look at this slide, we see improving market from our existing rigs, and we see more than 20 opportunities in the pipeline to take out the current rigs. And as we just show, there’s four rigs in that market, which we have two. We see due to this extreme change on the NCS, we see an increased probability and interest for the Keppel newbuilds on the NCS. And we are currently of course bidding and in dialogue with several old companies on the NCS. We are also – see there, we are still chasing several management opportunities outside Norway to bolt-on to over organizational structure. And we are still chasing opportunistic growth for the company.
We are working on all cylinders here on A, B, C and D. As I said, improved market conditions for incumbent fleet, capital newbuilds has increased probability and a better market from 2025 and onwards in Norway, created by this UDV market who has created a big vacuum in the market from 2025. We have management opportunities, concrete management opportunities that we’re currently chasing. And we are still looking for opportunistic growth. So we are – the strategy, the core strategic priorities, we’re still chasing all four of them.
Next, please. During this quarter, we have also prepared our first annual sustainability report. The company has worked to improve the environment for the last 58 years, and this year we have decided to publish our first annual sustainability report, and that will be released shortly and of course, focusing on spill prevention, emissions, health and safety, diversity and equality and anti-corruption to mention some of the core focus areas.
Then the summary slide. One, Dolphin Drilling generates positive cash flow with Blackford Dolphin on contract in Nigeria. That means the company’s not leaking cash anymore. And Blackford is the cash generator. We have increased the order backlog by $33 million in the quarter, and we have added options for a $100 million in total. We have increased interest from for the capital new builds, and we see significant increased standard activity for Borgland and Bideford to all of the few remaining available units in the more semi-submersible market.
And of course, we strive to build more on top of the efficient organization that we have with 58 years of in-house and licenses. And of course, that is chasing growth opportunities both when it comes to management and also other growth opportunities.
That sums up our quarterly Q1 2023 presentation. And now we are opening up for that Q&A. And to repeat this a Q&A button on top there, it says Q&A, and you can write your question to us there and we will try to answer as good as we can. Thank you very much so far.
Question-and-Answer Session
A – Stephen Cox
Thank you everybody. And as Bjørnar says, if you, if you please type your questions in it does lag a little bit unfortunately, so I will do my best to monitor and ask those questions through to Bjørnar. So I’ll just kick this off now.
I will combine a couple of things here just to make sure we don’t repeat the same questions. So your question come in. Can you please explain what seventh-generation, like Keppel new builds, mean in terms of what they can do and their situation in the marketplace? And related to that, with several harsh environment semis leaving the NCS for work elsewhere, do you believe the future for the Keppel units will be in Norway, are you chasing opportunities for the peer outside the NCS as well?
Bjørnar Iversen
Very good question. If we, what is a seventh-gen? I’ve been so lucky to work with her harsh environment for 30 years, and you can say the seventh-gen takes into the newest technology and the sixth-gen that was delivered and designed I would say from 2003 to – I would say 2010. They did not take a couple of things into the equation. Number one, there’s a lot of new technology that has risen – arised during those years, so that is coming in. So it’s, and particularly related to communication and technology and automation. So that’s number one. It has a higher degree of automation and digitalization.
Number two, when we design the fifth and sixth generation rigs, there were no design criteria for green for – and that means no regeneration of power, no batteries. And as I simplistic always say it’s – you are not becoming a Tesla just to put battery in the trunk of diesel car. And it’s a little bit the same here. The seventh generation rigs are designed to have an optimal energy consumption.
So one, it’s higher degree of digitalization taking new technology and automation in. Two, it’s greener because the energy and optimization of energy fuel, and emissions are in the design itself. And number three, it – this rig has combination of DP two and the 12 points mooring, which basically makes it super, gives it super stability and extremely low carbon footprint. And in addition to that, it also takes – it has the highest degree of safety and bad [ph] in the design based on this new technologies. So it’s safer by design, it’s smarter by design, it’s greener by design. That’s the seventh gen.
Question number two. Oh, answering question number two. With this rigs leaving Norway, is it a better market or higher probability to bring the couple rigs into [indiscernible]. The answer is a crystal clear, yes. We think based on the latest moves with rigs leaving and more living is that creates an opening for the rigs from 2025 and onwards. So the probability for those rigs entering and drilling in Norway has increased significantly over the last six months. So we think, yes, they will arrive in Norway and will come to Norway, but there are also opportunities outside Norway also for these rigs. But we think they belong in Norway and we think they – and hope they will end up in Norway on the NCS. I think that’s my answer, Stephen.
Stephen Cox
Perfect. Thank you. A couple of financial ones, I’ll just answer quickly here. So there’s one question around the 200,000 number that I quoted. So total expenses of G&A [ph] and smart stacking of the other two rigs plus the Blackford. So all of our assets and our cost base across the entire company, OpEx plus G&A amounts to the approximate 200,000 per day figure. So just to clarify that one again, the 200,000 quoted for cost is the entire cost base of the business. So hopefully that clarifies that one.
There’s a question around the krona exchange rate. How did that affect the financial result? And the answer to that [indiscernible] it’s relatively minimal. And we incur costs in Norwegian krone mainly on our onshore base in Norway, which is a relatively small number of people when compared to the OpEx in Nigeria and the UK expert crew and the local crew that we have down in Nigeria.
So we have got effective hedging in place that’s worked well for us. Although our currency flows in Norwegian krone are minimal so there’s not any concern from me on that perspective. And then I’m going to try and combine these two questions and these are in relation to Bjørnar to the Borgland and the Bideford. So the question is what’s a fair timeline for employment on these units given the tenders and opportunities? And related to that, how many tenders have been completed during Q1 that we have lost out on, that Dolphin has lost out on for the Borgland and the Bideford?
Bjørnar Iversen
Okay, let me try to answer that. Let’s start for the first one. When do we think we can bring them back to work? Of course, it’s always a difficult question to answer and we maybe a little bit too positive at the end of last year due to this windfall tax in the UK that came and delayed a lot of projects in the UK. But as we said that doesn’t change the direction of the market in the UK. It’s flattened out, but there’s still things that, that is coming. How many we have lost out on? I think we are talking about two, I think two tenders that has been awarded that we have been bid-on in there. Now I think we have more than 10 tenders submitted and I think we are in the process or now from now on to the rest of May.
I think we have one, two, three, four tenders in process. And that’s seen in additional, of course this is the standard mode segment that we’re talking about. And you saw the analysis there, we are talking maybe for around four plus minus rigs available in that space. So when will those be awarded? Very often the oil companies are indicating when they will award, but it has a tendency to slide a month or two down the line.
But we think and hope, that we will have something. I would say we are now in May. End of the quarter, is end of June that is two months. Probably, I would say between two and four, five months to process the 10 to 14 tenders that are in the pipeline, something like that. Not to – I’m not too specific, but I think between two and six months is something that is highly likely.
Stephen Cox
Yes. And just related to that couple of questions just popped in now, why didn’t you bid any rigs in the recent Brazil tender ranked?
Bjørnar Iversen
Yes, the reason Brazil tender is for ultra-deepwater activity, so it’s outside the scope, but there’s another tender for the mid-water scope coming up in Brazil and we are qualified to be on that round and we will participate in that round.
Stephen Cox
Perfect. And there’s another question approximate OpEx per day in Nigeria, so I’ll take that one. So we were anticipating when we went in, we would be in the 135-ish range. We are actually seeing coming in a bit less than that. So we have a higher proportion of local crew and the way that we’re managing our transit of our crew as well. So we think range wise will probably be in the 120,000 to 130,000 per day and to answer that question for OpEx in Nigeria.
And again, if anybody has any questions, please go ahead and drop them in because, we have now covered everything that’s there. So maybe just give it another 30 seconds or so to see if anything comes. Nope. Okay. Well I think that’s, yes, that’s everything now covered in the Q&A session. So I think Bjørnar, if you want to close up, we are complete.
Bjørnar Iversen
Yes. That is the complete presentation of the First quarter 2023 from Dolphin Drilling. We are very pleased to see that so many has called, have called in. And we are looking forward for the next quarter presentation. And thank you for following-up and for supporting and showing interest for the company. And as we said in the summary, we see improved activities in all segment and there’s a lot of interest around our current assets. So just hang on and follow us going forward. Thank you very much.
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