Shelf Drilling, Ltd. (SHLF), a leading provider of shallow water drilling services, discussed its fourth-quarter performance and future outlook in a recent earnings call led by CEO David Mullen (NASDAQ:MULN). The company reported adjusted revenues of $239 million and adjusted EBITDA of $88 million for Q4 2023.
Mullen highlighted the company's strong safety record, fleet uptime, and the completion of 14 major shipyard projects. The CEO also provided insights into market conditions, contract updates, and the company's sustainability efforts.
Notably, Shelf Drilling anticipates a funding shortfall of around $50 million in the first half of 2024, with plans to address this through increased credit facilities and potential capital injections from existing investors.
The company's contracted backlog stood at $2.3 billion, with a weighted average day rate of $83,000 per day and a marketed utilization of 97%. The CEO transition plan is in place, with Greg O'Brien set to take the helm in August 2024.
Key Takeaways
- Shelf Drilling reported Q4 adjusted revenue of $239 million and adjusted EBITDA of $88 million.
- The company highlighted its safety record, fleet uptime, and completion of shipyard projects.
- CEO David Mullen discussed the oil price impact on operations and market conditions in various regions.
- Shelf Drilling is expecting a funding shortfall of around $50 million in H1 2024.
- Contracted backlog stands at $2.3 billion, with a marketed utilization of 97%.
- The company is preparing for new sustainability reporting requirements and seeing increased customer engagement on the topic.
- Greg O'Brien is set to become the new CEO in August 2024.
Company Outlook
- Positive momentum in day rates expected due to tightening capacity in 2024.
- Market opportunities are anticipated to remain short-term.
- Confidence in securing follow-on work for Shelf Drilling fortress in H2.
- Advanced discussions to extend the Shelf Drilling Barsk contract in Norway until end of 2025.
Bearish Highlights
- Anticipated funding shortfall of $50 million in H1 2024 until all five rigs are operational.
- Shelf Drilling North Sea expected to address the shortfall with short-term debt.
Bullish Highlights
- Higher earnings and cash flow expected in 2025 and beyond.
- Backlog for Shelf Drilling North Sea is just over $250 million at the end of 2023.
- Improved earnings capacity expected in the second half of 2024.
Misses
- The company is facing a funding shortfall in the near term.
- The jack-up market is expected to remain tight, which could pose challenges.
Q&A Highlights
- David Mullen discussed the company's improved capital structure and execution capabilities.
- Greg O'Brien expressed confidence in the company's ability to sustain more debt based on expected EBITDA growth.
- The company is considering short-term debt options to address the funding shortfall for Shelf Drilling North Sea.
In conclusion, Shelf Drilling's Q4 2023 earnings call reflected a company navigating a complex market with strategic foresight. Despite the anticipated funding shortfall, the company's robust backlog and market positioning suggest resilience in the face of industry challenges. The leadership transition and increased focus on sustainability indicate a forward-looking approach as the company prepares for the next phase of its corporate journey.
Full transcript - Shelf Drilling Ltd (SHLF) Q4 2023:
Operator: Good day and thank you for standing by. Welcome to the Shelf Drilling Q4 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Shelf Drilling CEO, David Mullen. Please go ahead.
David Mullen: Thank you, operator, and welcome, everyone, to Shelf Drilling quarter four 2023 earnings call. Joining me on the call today is Greg O’Brien, Shelf Drilling’s CFO. Earlier today, we published the quarter four 2023 financial statements for Shelf Drilling Limited and Shelf Drilling North Sea Limited (NYSE:SE) as well as our latest fleet status report on the Investor Relations page of our company website. In addition to our press release and the financial statements, we also published the presentation with the highlights from the quarter. A recording of this call will be made available on our website within the next few days. Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for the full year 2024 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future are forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. Also note that we may use non-GAAP financial measures in the call today. If we do, you will find supplemental disclosures for those – for these measures and an associated reconciliation in our financial reports. I will provide an overview of the company’s performance for quarter four 2023 before sharing my views on the jack-up market. I will then hand over to Greg for his remarks and to walk you through the fourth quarter results before opening up the floor to Q&A. As always, I’d like to start my commentary on our earnings call with our safety and operating performance. There were no safety recordable incidents for quarter four across the fleet of 36 rigs. And the total recordable incident rate for the full year of 2023 was 0.12, which represents the best safety performance since company inception. The fleet-wide uptime for the year 2023 was 98.8%, a marginal step down from the 99% or higher in recent years. This is due to the many rigs commencing new contracts. The safety and uptime achievement is remarkable considering the backdrop of increasing activity, the amount of out-of-service project work in the first half of the year and many of our rigs returning to work in the second half of the year and, of course, the industry-wide pressure on human resources and supply chain as a result of the global expansion and activity. I give full credit to our rig crews and operations team in implementing our Make It Safer Today program and the One Team One Goal philosophy to achieve these outstanding results. Both of these initiatives are now cornerstone of our offshore operations and have proven particularly effective in protecting our employees and business partners from harm, which further drives operational excellence and our vision for an incident-free environment where nobody gets hurt. 2023 was by far the highest concentration of shipyard projects in the company’s history, whereby we completed 14 major projects. These out-of-service projects were completed in aggregate on an improved timeline compared to similar projects in the past, and consistent on a cost basis. Since our last earnings call, we completed the Main Pass IV and High Island II well control projects. The High Island II project in particular, which was a three yearly recertification of well control equipment as per the Saudi Aramco (TADAWUL:2222) requirements, was completed well ahead of the scheduled time. We worked with our customer to successfully carry out the scope of work at the drilling location, eliminating the need to take the rig to a shipyard. And by using innovative 3D scanning technology, well controlled pipe work was largely prefabricated, leading to a significant reduction in the out-of-service time from 75 days to 17 days that is projected versus actual. In addition, the Trident II shipyard project has been completed and the rig is expected to commence the new three-year ONGC contract in the coming days. Every rig project has been planned meticulously, well ahead of time. And although few faced delays, our teams managed to significantly reduce or entirely eliminate the out-of-service time for three rigs through a combination of utilizing batch processes in the well construction and rigorous execution of innovative practice in close collaboration with our customers. These examples are a further illustration of our commitment to driving technology innovation act as in a template that can be applied to more rigs in our fleet. And this demonstrates the effectiveness of our operating platform and the fit-for-purpose strategy. Adjusted revenue for the quarter four 2023 was $239 million. Adjusted EBITDA for the quarter was $88 million, resulting in a margin of 37%. These metrics show a marginal step down from the prior quarter, largely due to idle time between contracts in West Africa and the completion of the Shelf Drilling Barsk contract during quarter four. We are pleased to announce an improvement in our liquidity in March, with an additional $25 million on our revolving credit facility on substantially the same terms, increasing the capacity to 150 million. Greg will provide more details on our quarter four results and financial outlook for the full year 2024. In 2023, we witnessed sustained growth in the demand for oil despite the myriad of economic challenges posed by an elevated interest rate environment, heightened regional instability in the Middle East and the ongoing war in Ukraine. Brent oil price averaged $82 in 2023 versus nearly $100 in 2022, a decline of 17%. The year-over-year change in oil price was due to higher production volumes from onshore U.S., offshore Ghana and offshore Brazil, more than offsetting the demand growth of 2.3 million barrels per day, combined with self-imposed cuts to the OPEC production quotas. Oil price is one of the key drivers for our activity and despite this year-over-year decline, Brent crude oil prices remains within a constructive range for our business. As a result, we experienced an improving market conditions across most of our operating regions, extending the recovery that began in 2022. Regional gas prices, in contrast has been approaching 10 year lows in Northern Europe due to milder winter and when combined with energy levy tax imposed by the UK government on oil and gas producers, this had an impact on the demand for jack-up drilling services during 2023. LNG prices also fell in Asia, but remain well above domestic lifting costs in most Asian countries and continue to drive incremental activity. The global number of contracted jack-up rigs increased from 394 in January 2023 to 407 in February 2024. And market utilization edged higher from 93% to 94% over the same period. Contracting activity in 2023 was notably slower than in 2022, as was expected while the Middle East customers focus on shifting the deployment of the 50-plus incremental rigs they had chartered or purchased over the past two years. Day rates on new jack-up fixtures continue to increase across all regions and asset classes on the back of heightened rig supply. And we expect this trend to persist under the current circumstances. A recent directive by Saudi Arabia’s Minister of Energy ordered Aramco to maintain its maximum sustainable capacity at 12 million barrels per day instead of increasing it to 13 million barrels as had previously been planned. Three million barrels a day of existing sulfur capacity is deemed more than sufficient for Saudi Arabia to continue to play an active role in balancing the market. The unexpected announcement has fueled a wave of uncertainty in the market, with the implication that CapEx projections for 2024 and beyond will be revised downwards. Aramco is expected to provide an update on the CapEx guidance in March and will likely reset activity plans later in the year. It is too early to assess what this might mean for 2025. However, onshore liquid production will continue to decline and offshore remains the source of incremental barrels within the kingdom. We therefore believe that offshore activity will continue to increase over time even if Saudi Aramco maintains a flat production profile. But for now, there is some quantum of excess capacity in Aramco’s 91 offshore rig fleet, we imagine whatever that rig capacity is released can be easily deployed in other regions around the world. As a result of this announcement, the Middle East market will face near-term uncertainty as Aramco assesses the implication of the directive. We expect to learn what the scale of the reduction in activity will be before the end of quarter two. There has been a significant pickup in market inquiries from Southeast Asia towards year-end and into 2024. We see additional incremental demand, primarily in Thailand, Vietnam and Malaysia that is expected to outpace available rig supply in the region in 2024. Shelf Drilling perseverance, which had been war stacked in the UK has secured a 16-month contract with PetroVietnam in Vietnam. The rig is currently en route ahead of the contract commencement expected in quarter three. The West African market has threatened over the course of 2023 and should continue to do so into 2024. The current available capacity in the region is under contract or sold out. And we expect that there will be incremental demand in 2024, especially in Nigeria, as the international and indigenous operators look to shore up the country’s declining production. The Baltic rig has very recently secured short-term work in Nigeria with an indigenous operator and we are in advanced discussions with multiple indigenous and international companies regarding follow-on work for this rig. In India, ONGC continues to add rig capacity as they look to increase production on the Mumbai – Bombay high complex. This is a four-rig tender underway and we expect tender opening before end of quarter one, an award to follow shortly thereafter. Cairn Energy (OTC:CRNCY) and Oil India are also looking for rig capacity with commencements targeted for late 2024 or early 2025. The total jack-up rig in India is expected to be 40 rigs versus pre-COVID levels in the low-30s. The escalation of conflict in Gaza has added further pressure to the already fragile Egypt economy [indiscernible] access to U.S. dollars. This has naturally had a knock on impact to the oil and gas activities in the Gulf of Suez. However, in recent weeks we’ve seen a more positive trend with fresh inflows of foreign capital from UAE and other sources. And today, we issued a press release for a two – for a new two-year contract on Rig 141 in direct continuation with the current contract. The Trident 16 contract in Egypt concluded in late February. However, given the improving situation, we expect to have a contract for the rig before the end of quarter two. The North Sea market has lagged other major jack-up markets throughout 2023, resulting in number of rigs leaving the region. In late 2023 and early 2024, the market inquiries have picked up significantly and we feel confident about follow-on work for the Shelf Drilling fortress in the second half of the year. The market opportunity to remain relatively short in tenor but 2024 capacity is tightening, resulting in some positive momentum on day rates. We feel having one rig in the UK and one rig in Denmark is the right balance to maintain high utilization through year-end 2024 and into 2025 and beyond. In Norway, we are in advanced discussions on extending the term of the Shelf Drilling Barsk and we are confident that the rig will have continuous work until the end of 2025. As of the December 31, 2023, our contracted backlog was $2.3 billion across 35 rigs with a weighted average day rate of $83,000 per day and a marketed utilization of 97%. We believe we have a good blend of contracted days and open capacity from 2024 through to 2026, which positions us very well to capitalize on the improving market. Moving to some comments on sustainability. Amidst the implementation of Corporate Sustainability Reporting Directive in the EU in 2023 and anticipated adoption by Norway in 2024, we have proactively geared up for the new reporting requirements. In the fourth quarter of last year, we completed a comprehensive double materiality assessment, laying the groundwork for compliance with the regulatory changes. Currently, we are completing a thorough gap analysis to align the updated reporting standards, leverage the expertise of both our external auditors and sustainability specialists. This collaborative effort will ensure that our processes and systems are equipped to meet the stringent demands of these regulations for reporting year 2024. We are also seeing increasing levels of engagement by our customers across a number of sustainable topics. The work we have done over the last years has allowed us to respond promptly to their requests. Our annual report will be published later this month, which includes our latest sustainability report that provides a detailed description of our sustainability program performance and plans. In closing, we are very pleased with our safety and operational performance in 2023 and the financial results were within the guidance range provided at the beginning of the year. The jack-up market is expected to remain tight through 2024 as the markets outside the Middle East are looking to add rig capacity and will likely absorb any excess capacity released by Saudi Aramco. In February, we announced that our Board had approved the CEO transition plan, formerly appointing Greg as the new CEO of Shelf Drilling effective August 2024, at which time I’ll be stepping down as CEO and assume the position of Executive Chairman. Our plan is in place to make this transition seamless and we will continue to engage with all our stakeholders through the process. I’m extremely proud of what we’ve built together and have every confidence in Greg to lead Shelf Drilling to continued success in the future. I’m also very proud that we have an internal candidate of Greg’s caliper, who I know will not only uphold, but also build upon the foundation of what we have established. My congratulations to Greg and I will now hand it over to him for his remarks.
Greg O’Brien: Thanks, David. As a reminder, we published our Q4 and full year 2023 results this morning, as well as standalone financial reports for Shelf Drilling North Sea. We’d encourage you all to review the results presentation on our website as this includes additional metrics and schedules for both Shelf Drilling and SDNS, including our financial guidance for 2024. Reported revenue for Q4 of $242 million included $3 million for amortization of intangible liability. We’ll continue to focus on and refer to adjusted revenue, which excludes the impact of this non-cash item. Adjusted revenue for Q4 2023 of $239 million included $220 million of day rate revenue, $12 million of mobilization revenue and $7 million of recharges and other revenue. Adjusted revenue for Q4 decreased by $25 million, or 10% relative to Q3 2023. Revenue declined sequentially, primarily due to two rigs in West Africa, the Adriatic I, which started a new contract during Q4 2023, and the Baltic, which was idle for the full quarter after completing its prior contract in late September. Revenue at Shelf Drilling North Sea of $27 million represented a sequential decline of $5 million, mainly resulting from the contract completion for the Shelf Drilling Barsk in Norway. As a reminder, other revenue included the contribution associated with the Shelf Drilling Barsk, which was the net margin generated by this rig under its bareboat charter agreement that finished during Q4. The rig came off day rate with its customer in mid-November after having continuous service for the first three quarters of 2023. With this change in activity, other revenue declined by approximately $10 million at SDNS on a sequential basis. The Shelf Drilling Barsk is now preparing for its new contract, which is expected to commence in Norway in May. This Q4 impact was partially offset by the full quarter of operations on the Shelf Drilling Fortress in the UK following its contract startup in Q3 2023. As a result of the idle time in West Africa and planned shipyard activity for rigs contracted in Saudi and India, effective utilization decreased to 85% in Q4 from 90% in Q3. Average day rate was $80,000 per day in Q4, down marginally from $81,000 in Q3, mainly driven by lower revenues in West Africa. Operating and maintenance expenses of $135 million in Q4 increased from $129 million in Q3, partially due to higher shipyard costs for the Trident II ahead of its new contract in India and higher demobilization costs for the Baltic and Adriatic I in West Africa after completing their previous contracts. At the SDNS level, OpEx increased sequentially to $26 million in Q4 from $24 million in Q3, mainly due to higher demobilization and maintenance costs for the Shelf Drilling Barsk in Norway. This was partially offset by lower maintenance costs for the Shelf Drilling Fortress following its contract startup in the previous quarter. G&A expenses of $14 million in Q4 decreased from $20 million in Q3 due to a $6 million provision for credit losses recorded in Q3. Adjusted EBITDA was $88 million in Q4, representing a margin of 37% compared to $115 million and a margin of 43% in the previous quarter. Adjusted EBITDA was negative $3 million for SDNS in Q4 2023 and $91 million from the rest of the business. For full year 2023, we generated adjusted EBITDA of $311 million, including $10 million from SDNS and $301 million from the parent company. This compares to a guidance range of $310 million to $345 million set at the beginning of 2023. The variance between our actual result and the upper portion of our guidance range was mostly driven by lower than expected contribution from our two rigs in the UK in 2023. Both the Shelf Drilling Fortress and Perseverance were idle for more than half of the year following the reduction in natural gas prices and implementation of the UK windfall tax that David covered earlier. With that change in market dynamic and impact on revenues, we were very pleased with the performance across the rest of the business to finish the year within the guided range on consolidated EBITDA. Income tax expense of $6 million in Q4 brought our full year tax expense to $30 million, or 3.3% of 2023 revenues. The full year 2023 tax expense included $1 million for SDNS. Net interest expense of $65 million for the quarter was $31 million higher than Q3. This included $28 million of one-time expenses associated with our debt refinancing transaction, which we completed in October 2023. $19 million for the call premium on our old 2025 notes and the balance primarily for the non-cash write-off of unamortized debt issuance costs. Other net expense increased to $2 million in Q4 from $0 million in Q3, resulting from foreign currency exchange losses. Non-cash depreciation and amortization costs totaled $40 million in Q3 – and Q4 and were in line with other Q3. The quarterly net loss attributable to controlling interest was $17 million, primarily impacted by the $28 million of one-time debt extinguishment costs mentioned earlier. Capital expenditures and deferred costs totaled $48 million in Q4, including $4 million at SDNS. The sequential increase versus Q3 primarily related to higher spending for the planned out of service projects for the Main Pass IV and High Island IV in Saudi and the Trident II contract preparation shipyard as well as higher spending for fleet spares. Our full year 2023 capital spending was $226 million, including a $11 million at SDNS. The significantly higher than normal spending in 2023 related to a series of shipyard projects ahead of long-term contracts, including the Shelf Drilling Victory, Harvey Ward, Shelf Drilling Scepter and Shelf Drilling Resourceful, for which we received mobilization fees as a material offset to CapEx for those rigs. Actual spending levels came in at the lower end of the guidance range of $220 million to $245 million that we communicated in early 2023. Our consolidated cash balance as of December 31 was $98 million, which was $47 million lower than the balance at the end of September, primarily due to the completion of our refinancing transaction, which involved total net cash outflows of $70 million. The year-end cash balance included $28 million at Shelf Drilling North Sea and $70 million at the parent company. We also included financial guidance for full year 2024 in our release this morning. Fully consolidated adjusted EBITDA is estimated between $375 million and $420 million. At the SDNS level, we anticipate full year EBITDA between $25 million and $30 million. This includes an expectation for Q1 in the range of negative $15 million, some improvement in Q2 before a significantly better and more normalized level of run rate EBITDA in the second half of the year once all five rigs are in operation. This implies an EBITDA level for the rest of the business of $350 million at the low end, approaching $400 million at the upper end, generally consistent with our run rate level in Q4 of 2023. We expect average day rate and effective utilization to improve in 2024 relative to levels in Q4 of 2023, but this positive impact on revenues will likely be offset by a year-over-year increase in operating expenses. Total capital spending in 2024 is estimated between $145 million and $170 million, which includes $40 million to $45 million at SDNS. The largest single component of the SDNS capital program is the Shelf Drilling Perseverance due to mobilization costs and other maintenance and contract preparation requirements in the first half of 2024. In addition, we expect to spend more than $10 million for fleet spares at SDNS, largely a deferral of spend that was originally planned for 2023. This implies an expected spending level across the rest of the business in the $115 million range for 2024. Based on the guidance for SDNS in 2024 and the ongoing debt service requirements at that level, we estimate a funding shortfall of approximately $50 million in the first half of the year until all five rigs are operational. We have multiple available options to address this temporary liquidity need, including both external and internal options. As David mentioned earlier, we recently signed an agreement to increase the size of our revolving credit facility from $125 million to $150 million. This is a strong demonstration of support from our relationship banks. It gives us more liquidity for general corporate purposes, but also more capacity to provide temporary support to SDNS. As another alternative, we’ve received indications from several of our existing investors with a strong interest in providing capital directly to SDNS, and we’re evaluating those expected terms and pricing. We expect to have this process concluded within the next 60 days and we’ll provide an update to the market at that time. We’re very pleased with our operating and financial performance at Q4, which included a positive year for Shelf Drilling. We incurred higher than normal capital spending and lower levels of utilization during the first half of 2023 to upgrade and reposition our fleet. Our successful refinancing transaction provides greater flexibility for the company and will facilitate further deleveraging of our balance sheet through annual debt repayments. While there may be some activity reduction in Saudi in the quarters ahead, we remain in a very strong market environment and anticipate jack-up demand will increase in other key regions. With high utilization and the acceleration in day rates in recent years we expect to drive further increases in earnings and cash flow in 2025 and beyond. On the CEO transition plan I’d like to thank David and the rest of our board for the confidence and opportunity. I’m really proud of the performance and resilience of our business over many years. Stability and continuity throughout our organization have served us extremely well in dynamic market environments, and we’re very focused on preserving and building on that continuity. I’m looking forward to working with David and the rest of our team in this new role and believe this transition will be a great step forward for Shelf Drilling. With our improved capital structure and our team’s proven execution capabilities, we believe we are uniquely positioned to create value for all our stakeholders in the years ahead. With that we’d like to open the call for questions.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Patrick Fitzgerald from Baird. Please ask your question.
Patrick Fitzgerald: Hi. Thanks for taking the questions. On the Shelf Drilling North Sea funding shortfall, our capital raise, would you expect that to be a debt or equity infusion if you went with that option?
David Mullen: Yes. Most likely debt, we see this as a short-term issue that we don’t necessarily want to address with a permanent or long-term solution. So given the expected outlook for the five rigs in the second half year and beyond, and the fact that we have a maturity of the bond there at the end of 2025, we think a short-term debt option makes more sense. That’s the most likely outcome.
Patrick Fitzgerald: Okay. And I’m sorry if I missed this, but do you have a contract backlog figure for to Shelf Drilling North Sea?
Greg O’Brien: Yes. Just in the results presentation that we published this morning, Page 8 has a bit of a breakdown of the backlog across different asset classes. So, we were just over $2.3 billion for the group at the end of the year. It was just over $250 million for SDNS. And so the parent company was just under $2.1 billion at the end of 2023.
Patrick Fitzgerald: Okay. But you think the, operating results from there can sustain more debt 2025 based on kind of your expectations for EBITDA growth there?
Greg O’Brien: Yes, that’s right. We think there’s going to be a significantly better run rate, earnings and cash flow second half of the year. I mean clearly, 2023 was not a fantastic year at SDNS with $10 million of EBITDA, but that’s a product of gaps and utilization, not really the earnings capacity of those five rigs. As I mentioned, we had two rigs in the UK that were idle for quite a while in 2023, and now we have this break on the Shelf Drilling Barsk. Now that’s going to run another couple of months, and that has a pretty big impact on profitability. Last year Q1 of this year and into Q2, but as we get into the second half of the year, we have all five rigs contracted, and we think we’re going to be able to term out backlog on several of those rigs over the next couple of months. David made a comment about the Barsk and we see pretty good opportunities for both Fortress and the Winner second half of this year and into 2025. So, I think we’ll demonstrate that there’s a much better level of earnings capacity second half of this year and into next year.
Patrick Fitzgerald: Great. Thanks for taking the questions.
Operator: Thank you. [Operator Instructions] There seems to be no further questions at this time. I would like to hand back for closing remarks.
David Mullen: Okay. Thank you, operator and thank you, everybody for joining the call. And I look forward to speaking again when we have our Q1 results. Thank you all very much. Goodbye.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
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