Diamond Offshore Drilling Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

Key Takeaways

  • Q1 Financial Results: Revenue rose to $232 million with adjusted EBITDA of $21.7 million, driven by higher day rates on the Ocean Black Hornet contract.
  • Operational Excellence: Delivered 95.9% fleet utilization, reactivated the Ocean GreatWhite, completed the Endeavour special survey, began new Gulf of Mexico operations, and won two IADC safety awards in the North Sea.
  • Market Outlook: Offshore tender demand is at its highest since 2012 and industry capex is expected to grow ~10% annually through 2025, supporting increased global drilling activity.
  • Backlog Expansion: Announced $212 million of new contract awards, lifting total backlog to $1.8 billion and securing 89% of 2023 and 59% (70% with options) of 2024 marketed capacity.
  • Updated Guidance and CapEx: Q2 revenue is forecast at $240–250 million with EBITDA of $20–25 million; full‐year 2023 revenue guidance is $950–990 million and EBITDA $160–180 million, with CapEx now at $120–135 million due to the Ocean Black Hawk award and MPD system installation.
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Earnings Conference Call
Diamond Offshore Drilling Q1 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning and thank you for standing by. Welcome to the First Quarter 2023 Diamond Offshore Drilling Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Bordaske, Key's Senior Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Michelle. Good morning or afternoon to everyone and thank you for joining us. With me on the call today are Bernie Wolford, President and Chief Executive Officer and Dominic Sabarino, Senior Vice President and Chief Financial Officer. Before we begin our remarks, I remind you that information reported on this call speaks only as of today, and therefore, time sensitive information may no longer be accurate at the time of any replay of this call. Some of the information referenced on our call today is included in a slide presentation that you can find in the Investor Relations section of our website under Calendar of Events.

Speaker 1

In addition, Certain statements made during this call may be forward looking in nature. These statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control. These risks and uncertainties may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed in our 10 ks and 10 Q filings with the SEC. Further, we expressly disclaim any obligation to update or revise any forward looking statements.

Speaker 1

Refer to the disclosure regarding forward looking statements incorporated in our press release issued yesterday evening, and please note that the contents of our call today are covered by that disclosure. In addition, please note that we will be referencing non GAAP figures on our call today. You can find a reconciliation to GAAP Financials in our press release issued yesterday. And now, I will turn the call over to Bernie.

Speaker 2

Thanks, Kevin. Good morning or afternoon to everyone and thank you for your interest in Diamond Offshore as we present our results for the Q1 of 2023. I'd like to start by recognizing that during the Q1, Diamond reached its 1 year anniversary A relisting on the New York Stock Exchange. Since relisting, we have seen significant trading liquidity in our shares and our shareholder base has grown to nearly 200 Today, I will cover financial and operating highlights for the Q1, Our operational outlook for the remainder of 2023 and our view on the market for our services. I'll also provide more detail on our commercial Successes achieved after the Q1 and then turn it over to Dominic to provide a review of our Q1 financials as well as guidance for the upcoming quarter.

Speaker 2

Our results for the quarter reflect growth in both revenue and adjusted EBITDA. Total revenue And adjusted EBITDA for the quarter were $232,000,000 $21,700,000 respectively. These improvements were driven primarily by the Ocean Black Hornet moving to a substantially higher day rate during the Q1. The Q1 was an active one for our company. I'm pleased to report that our rig crews and operations support team delivered revenue of 95.9 percent across our fleet during the quarter.

Speaker 2

This efficiency number is notable considering the startup of the Ocean GreatWhite, which safely commenced operations west of the Shetlands in late March and the redelivery of the Endeavour following completion of its special survey. These important milestones give us 3 harsh environment rigs working in the region and are a testament to our team's project management capability. In addition, we successfully commenced operations with a new client in the U. S. Gulf of Mexico, utilizing the 7th generation drillship Vila, And we received a well based performance bonus in Senegal for the 3rd consecutive quarter.

Speaker 2

Our industry leading safety excellence was recognized by the IADC North Sea Chapter as it recently declared Diamond Offshore The winner in 2 categories among the active rig fleets in the North Sea. We won best safety performance in the floating rigs category And also best safety performance for an individual floating rig, the Ocean Patriot. These awards demonstrate the company's commitment To honor safety and protect all and are a direct result of the hard work and dedication of the men and women who crew and support The Diamond Offshore Fleet in the UK. Finally, at quarter end, we made the determination to categorize the Ocean Monarch as held for sale. This decision reflects our continuing commitment to capital discipline and our strategic focus on maximizing shareholder returns.

Speaker 2

Turning to the market outlook. We maintain our constructive outlook for our business as the upcycle The offshore drilling sector continues to be supported by strong cash flows realized by oil and gas companies, Continued evidence of growing demand and oil price forecast well above production breakeven costs and FID hurdles. These factors have prompted a significant recovery in offshore upstream capital expenditures. According to S and P Global, New tender demand for floating drilling rigs for the 12 months ended March 31, 2023 was at its highest level since 2012. Industry analysts expect offshore upstream CapEx spend to grow approximately 10% year over year On average from 2023 to 2025, approaching $200,000,000,000 by 2025.

Speaker 2

We anticipate these investments will grow further as the pursuit of supply diversity remains a global priority and gains further momentum. The ongoing pivot to offshore basins as a source of incremental supply is driving the market for our services. Additional capital being deployed for exploration and appraisal may further extend this cycle of investment. Next, I would like to offer comments regarding the markets where we compete. Starting with the North Sea, the UK Government's Energy Profits Levy Our EPL continues to impact brownfield prospects offshore of the UK.

Speaker 2

However, there are a number of shorter term program starting later this year and early next, plus up to 2 significant new programs offshore of the UK starting in 2024 or 2025. Overall for the UK, we expect one additional semisubmersible to be contracted in 2023 And an additional unit late in 2024. Although positive signs have emerged on the back recent contract announcements in Norway, demand there remains relatively soft in 2023. This has prompted a number of high specification rigs to leave the region for attractive opportunities in other areas, a trend that continues with a recent award in the news for work offshore Namibia. In Australia, a consortium for work offshore of the Southeast Coast and a development campaign On the Northwest Shelf, we'll likely add a further 2 rig years of demand in the region.

Speaker 2

Also owing to a mix of P and A, development And exploration work commencing later in 2024, further 3 rig years of demand may materialize. Southeast Asia remains relatively flat with incremental demand for 1 to 2 floaters late this year and into 2024. We expect India to grow modestly adding 1 semisubmersible and 1 drillship in 2024. West Africa is emerging as one of the key areas driving future demand growth. West Africa semisubmersible demand It's being driven primarily by opportunities in Namibia, Equatorial Guinea and Nigeria.

Speaker 2

We expect semisubmersible demand to grow by up to 2 units in 2024. Drillship demand in the region is expected to grow by up to 3 rigs in 2024, driven primarily by activity in Angola, the Ivory Coast, Namibia, Ghana and Equatorial Guinea. East Africa, particularly Mozambique, has a potential for further upside to drillship demand. We see modest increases in semisubmersible Demand in the Mediterranean and Black Sea were potentially 1 incremental unit through 2024. Drillship demand in the region is In Latin and South America, drillship demand could grow by 8 or more rigs through 2024.

Speaker 2

Brazil is driving the bulk of this new demand with Guyana, Suriname and Colombia contributing. We expect Mexico And the rest of the Latin American region to remain relatively flat through 2024. Finally, in North America, We see drillship demand remaining relatively flat with 1 incremental program in 2023 and possibly another in 2024. It is worth noting that dayrates in the region remain biased to the upside due to the likely exodus of certain 6th and 7th generation units for opportunities in Brazil and West Africa. Canadian harsh environment semisubmersible demand remains a wildcard, but with upside potential subject to exploration success in the region.

Speaker 2

Translating this to a global perspective And factoring in some conservatism to allow for slippage in start dates, options not exercised and potential adverse final investment decisions, We foresee incremental demand for semisubmersibles growing by 4 to 6 units through 2024 And incremental demand for drillships growing by 7 to 10 units through the same period. A portion of this demand It's already reflected in the number of open tenders we have in house today. Speaking of the strength in the markets, We have had great success in securing additional contract backlog. Yesterday, we announced $212,000,000 of new contract awards across multiple geographies and rig tops. These new contracts are in addition to our $1,600,000,000 backlog reported as of April 1, 2023.

Speaker 2

With these commitments, we are now 50 we now have 59% of 2024 marketed capacity contracted. This excludes price options, which could take our 2024 commitments to 70%. These awards reflect not only the continued strength of the drillship and semi markets, But also Diamond Offshore's reputation for performance and our strategic approach to the markets. Starting with the Ocean Blackhawk, We have secured work with Anadarko Petroleum Corporation, a wholly owned subsidiary of Occidental in the U. S.

Speaker 2

Gulf of Mexico. The rig was awarded a 1 year contract with a 1 year price option and is expected to commence Mid Q4 of 2023 after conclusion of the rig's current contract expected to be in early July, followed by 5 year regulatory surveys, new contract preparations, including the installation of an MPD system And mobilization from Las Palmas. Total firm term contract value, including mobilization, but excluding Any managed pressure drilling services is expected to be approximately $162,000,000 Occidental previously utilized the Ocean Black Hawk for 8 years prior to the rig working for Woodside on its current campaign in Senegal. It should also be noted that the rig should see a reduction in base operating expense of at least $30,000 per day as compared to current levels in Senegal. Diamond also had contracting success in the UK North Sea With the Ocean Patriot securing a 2 well contract with an estimated duration of 60 days and a total contract value of approximately $10,000,000 The contract is expected to commence in September of this year.

Speaker 2

A potential second new contract currently under negotiation Would fill out the remaining availability in late 2023 and keep the rig contracted through the winter season. The Ocean Endeavor was awarded an extension covering 2 wells with an estimated duration of 120 days with its current client. Total contract value for the extension is approximately $24,000,000 and is expected to commence mid contract in early November 2023, after which we will revert to the current contract rate for the balance of the contract term. Further, the Ocean GreatWhite had its first option well exercised by its current client with an estimated duration of 60 days. Total contract value for the option well is approximately $16,000,000 and is expected to commence in mid January 2024 after completion of the initial 5 well firm period.

Speaker 2

There are priced options for up to 7 additional wells remaining. Securing these wins at improved day rates with quality customers further demonstrates the strength in the market and the value our team is delivering to clients And shareholders, I would like to thank all Diamond employees, both onshore and offshore for going above and beyond in securing this backlog. The continued strength in global markets provides Diamond Offshore further upside opportunities in 2024. Our next drillship up for repricing will be the Ocean BlackRhino, currently working offshore Senegal with anticipated availability late in Q2 of 2024. Given the continued demand for top tier drillships And relatively constrained supply, great opportunities exist for the Ocean BlackRhino to secure work at rates that are significantly higher than the recent current contract.

Speaker 2

Also, as previously mentioned, we are pursuing multiple opportunities for the Ocean Onyx in Southeast Asia and Australia. Commencement for these projects is anticipated to take place in the first half of twenty twenty four. Growing demand in Brazil, West Africa and Australia continue to put upward pressure on day rates, while providing substantial opportunities for drillships and semisubmersibles alike. Through the Q1, the resilience, breadth and depth of the upcycle has only become more evident. With that, I will turn the call over to Dominic before returning with some concluding remarks.

Speaker 2

Thanks, Bernie, and good morning or afternoon to everyone.

Speaker 3

In my prepared remarks this morning, I'll provide a recap of our results for the Q1, discuss the outlook for the Q2 and full year 2023 as well as provide some comments on our capital structure. And as Kevin alluded to in his opening remarks, We have a presentation on our website that includes some of the financial information I will refer to today. For the Q1, We reported net income of $7,200,000 or $0.07 per diluted share. The reported income consists of a net loss before tax of $18,400,000 and a recorded tax benefit of $26,000,000 The tax benefit recorded in the Q1 is based on the computation and application of the company's annual effective tax rate in accordance with U. S.

Speaker 3

GAAP Accounting Standards adjusted for discrete items. Taxes will continue to swing significantly quarter to quarter as our earnings before tax move from a net loss position to a net profit position over the course of the year. Despite these big swings, our total cash outlay for income taxes this year is expected to be below $10,000,000 The results for the Q1 included a reported adjusted EBITDA of $21,700,000 as compared to adjusted EBITDA of $12,500,000 reported in the Q4 of 2022. Excluding reimbursable revenue, revenue for the Q1 was $214,000,000 up from $208,000,000 in the prior quarter, primarily as a result of the Ocean Black Hornet rolling over to a new contract at higher day rates. Both our revenue and EBITDA came in above our prior guidance for the quarter, largely as a result of timing effects, Including the Apex having more revenue earning days than anticipated before the start of its shipyard project, partially offset by later than anticipated deliveries of the Ocean Endeavor and Ocean GreatWhite.

Speaker 3

It should be noted, however, that despite being later than originally anticipated, The Ocean GreatWhite reactivation was the shortest duration and lowest cost reactivation of any high specification floater that we're aware of. Contract drilling expense decreased to $173,000,000 for the quarter compared to $178,000,000 for the prior quarter, Primarily as a result of the Ocean Onyx being cold stacked for the full quarter and the annual pressure control by the hour bonus expense being included and the prior quarter results. We used approximately $12,000,000 in operating cash for the quarter, driven by a change in working capital with negative free cash flow of $41,000,000 after considering CapEx expenditures of $29,000,000 in the quarter. In contrast, our Q4 2022 free cash flow generation of $15,000,000 was largely a result of working capital swings in the other direction and lower CapEx expenditures. Looking ahead to the Q2, we expect contract drilling revenue excluding reimbursables of 240 to $250,000,000 and adjusted EBITDA of $20,000,000 to $25,000,000 While the Ocean GreatWhite and Ocean Endeavor have returned to work and should contribute with a full quarter of activity, that growth in EBITDA is offset by the Ocean Apex spending the 2nd quarter in the shipyard for its special hull survey and certain upgrades, returning to work in early Q3.

Speaker 3

And consistent with my comments from last quarter, adjusted EBITDA for Q2 is still anticipated to be quite similar to Q1 adjusted EBITDA before rising substantially in the second half of the year as a result of having more operating days at higher day rates. I would also like to reiterate our full year 2023 guidance for contract drilling revenue excluding reimbursables of 950 to $990,000,000 and adjusted EBITDA of $160,000,000 to $180,000,000 as found on Page 7 of our earnings presentation. Our CapEx guidance for 2023 has increased to $120,000,000 to $135,000,000 as a result of the contract award we announced yesterday for the Ocean Blackhawk and the requirement to install a managed pressure drilling system. And as a reminder, our CapEx expenditure guidance for 2023 does not include any CapEx for the reactivation of the Ocean Onyx should it win a contract later this year. Our new contract awards of $212,000,000 plus our backlog as of April 1, totals $1,800,000,000 As a result of these new contracts, the average day rate in our 2024 backlog has increased to approximately $320,000 per day as compared to $283,000 per day for the 2023 backlog.

Speaker 3

With the average day rate for our owned and managed drillships 2024 currently sitting at $366,000 per day. These new contracts award also increased our contract coverage in 2023 to 89% and 59% in 2024 as represented on Slide 5 in our earnings presentation. This level of contract coverage gives us greater visibility and certainty into our results for this year and next, yet still provides Ample opportunity for contract awards at higher day rates to fill out the calendar for 2024 and beyond. Moving to some comments on our balance sheet. Our net debt excluding our finance lease liability and restricted cash stands at $327,000,000 with a weighted average coupon rate of approximately 9.5 percent and our total liquidity is $280,000,000 as we exited the quarter.

Speaker 3

On the back of the continued improvement in the market and our own results, including the award of the new contracts we announced yesterday, We are evaluating opportunities to enhance our capital structure and establish regular way financing that provides more flexibility than our current post emergence debt instruments. To be clear, we are not under any pressure to refinance our outstanding debt given that maturities are still 3 and 4 years away in 2026 and 2027, not to mention the increasing liquidity profile we anticipate as we exit 2023 and move through 2024. However, should we be able to simplify our debt stack, increase our liquidity, reduce our cost of capital, Increase our weighted average time to maturity and maintain our revolving credit facility, we would opportunistically entertain a refinancing transaction or series of transactions. Of course, the sizing, pricing and terms of such transactions would have to be attractive And we would need modification to certain covenants and restrictions in our revolver to help facilitate this. Overall, it was a great quarter for the company and we remain on track to deliver our forecasted results.

Speaker 3

That concludes my prepared remarks. I will now hand it back to Bernie for some closing comments before we go into Q and A.

Speaker 2

Thank you, Dominic. At Diamond, we have maintained we have remained productive since the beginning of the year, executing an important shipyard project, Delivering a relatively low cost rig reactivation for a key client and securing significant new backlog with higher margins, All while continuing to deliver industry leading operational excellence for our customers and never compromising on safety. We appreciate your interest in Diamond Offshore and we'll now open the call for questions.

Operator

Please standby while we compile the Q and A roster. The first question comes from Eddie Kim with Barclays. Your line is open.

Speaker 4

Hi, good morning and congratulations on the contract for the Ocean Blackhawk, which is one we've been keeping an eye on for a while. And that $162,000,000 of firm backlog you mentioned in the prepared remarks would imply something around kind of $440,000,000 to $455,000,000 a day, Which is right in line with where leading edge data rates are today. So you mentioned that the BlackRhino is the next Bill shift to come off contract in the Q2 of 2024. So just based on where day rates are Trending, would you expect that rig to be signed at a higher level than what you just secured for the Black Hawk? And when should we expect A contract announcement for that, Rich.

Speaker 2

Thanks for the question, Eddie. So Looking at the BlackRhino, I mean, as of today, we have it bid across the Golden Triangle. So certainly, The rates will be impacted by the location that the rig ultimately finds work in. As you know, rates for Petrobras in Brazil Generally include a service provision that can cost anywhere from $30,000 to $60,000 a day for additional services. And so those rates are naturally somewhat inflated compared to similar rates Earning the exact same margins in other regions.

Speaker 2

With regard to what rates we expect, we do expect rates marginally higher Then what was awarded to the Black Hawk. The current rate structure today, we feel like is sort of in the 4.20 $460,000,000 range on a clean basis. We've seen rates as low as $380,000,000 but that's a somewhat special case and special relationship. And we've seen the highest clean rate closer to $460,000 to date. We understand there may be a fixture announced later this year At or around $500,000 per day, but understand it will be inclusive of services.

Speaker 2

So Long answer to your short question, we would see rates marginally higher than those of the Black Hawk as the most likely. In terms of when we would expect To secure a commitment for that rig, I would say it'd be approximately 6 months from now just as a general guide, Eddie.

Speaker 4

Got it. Got it. Okay. Great. That's great to hear.

Speaker 4

But my follow-up is just on the pace of drill ship Reactivations industry wide, but there are a couple of reactivations going on currently. Some of your peers have recently alluded to the potential So for additional reactivations later in the year, you of course don't have any cold stacked drill shifts, but Just is the pace of reactivations across the industry something that concerns you in terms of potentially keeping a lid on day rate progression over the next 6 to 12 months, based on your response just now, it doesn't seem like it. Or is the demand strength right now, especially in places like Brazil and West Africa kind of more than enough to absorb the impact of these reactivation.

Speaker 2

Yes, Eddie, I would say a couple of things on that. First of all, quite frankly, if it wasn't For the reactivations and anticipated reactivations, we would already be solidly into the 500s today. I mean, in my mind, there's no doubt about that. There is sufficient demand to absorb the reactivations. And I continue to believe that on average, From contract commitment to reactivation completion, delivery and 1st day of day rate It's going to range somewhere between 12 to 15 months.

Speaker 2

So the pace, although it's quite obvious in some of the public tenders that we see Currently in Brazil, it's not at an alarming rate, but it is preventing us from moving to the 500s Sooner rather than later. So I think it does to a certain extent keep rates in the high 400s longer on average Than we would have otherwise anticipated, but it doesn't drive any significant gaps in utilization.

Speaker 4

Got it. Understood. Great. Thank you for the response. And I'll turn it back.

Operator

Please standby for the next question. The next question comes from Frederic Steen with Clarksons Securities. Your line is open.

Speaker 5

Hi, Bernie and team. Hope you are well. I wanted to touch a bit on the new contracts or two things. First, just on I think this question and your answer there, you gave some good color. But as you Kind of move forward to tie up more and more capacity, and I think you mentioned close to 70% for 2024 if we assume that fixed price Options are taken.

Speaker 5

How is your approach to fixing the remainder there? Has that changed over time? Are you willing to take more risk? Or do you think that fixing turns similarly to what you did Now yesterday, with 1 year and potentially fixed price options thereafter, is the way to go? Also, if you're potentially looking to optimizemplify the balance sheet just for the visibility part of it?

Speaker 2

Thanks, Frederick. Yes, I would say that generally speaking our approach will be fairly similar. I mean In the case of the Black Hawk, I believe we were pursuing 8 or 9 opportunities for that rig. We always look at what the bottom line margin is going to be for a project, after consideration for all expenses associated with start up, And any associated services and we're looking to maximize that margin and positive cash flow to the company. In terms of what kind of durations we're looking for, I would say right now 1 to 2 years is sort of the sweet spot For us in terms of what we're looking for, although we definitely bid the rig on longer term projects as well, like you've seen in the Petrobras public tenders.

Speaker 2

But not much change in our approach, generally speaking. I mean, utilization is important, but Full utilization is not absolutely critical. Instead, we're really focused on what's going to give us the highest margin and the best EBITDA For the forward looking

Speaker 5

periods. Perfect. Thank you. And the 2nd question, you asked to do your CapEx guidance since you're doing the NPD on the Black Hawk. Just On a general basis, I'm tying this to the comments from the written report as well about EBITDA and cash flow development Are you able to give any comments on the pace of that, the slope?

Speaker 5

And or

Speaker 4

if you think it's going

Speaker 5

to be, call it, a bumpy ride, but still with the underlying improvements on average at least quarter over quarter Going forward.

Speaker 2

Yes. Frederick, this is Dominic. Yes, looking out into the

Speaker 3

future, I mean, as I alluded to, we're going to have obviously significant EBITDA uptick in Q3 and Q4 to achieve our results for the year, Given where we've been for in terms of Q1 and what we're forecasting for Q2. But I would say that Q3 is

Speaker 2

going to be incrementally more than Q2 and then Q4 should be probably again incrementally more than that. So The EBITDA profile certainly grows quarter to quarter as we reap the benefit of being on higher day rates for full contracts. So As the Apex comes back, as we get the courage on contract later in Q4 as well as the Blackhawk, You'll see an increase in EBITDA quarter over quarter starting in Q3. And Frederick, I would add to that from a capital expenditure point of view. By the end of this year, We will have the Endeavor, Apex, Courage and Blackhawk SPSs behind us.

Speaker 2

So going into 2024, We have the Ocean Black Hornet and the BlackRhino scheduled for their SBSs. And then in 25, the Ocean Black Line. So, this is probably one of our higher cost years when it comes to SBSs with next Sure, being similar, but somewhat less.

Speaker 5

Perfect. Thank you so much, Both of you. That's all for me. Thanks, Frederick.

Operator

I show no further questions at this time. I would now like to turn the call back to Bernie Wolford for closing remarks.

Speaker 2

Thanks to all for joining the call today and we look forward to speaking to you again next quarter. Have a good day all. Bye bye.

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