Diamond Offshore Drilling Inc (DO) 2022 Q3 法說會逐字稿

Good day and thank you for standing by. Welcome to the Q3 2022 Diamond Offshore Drilling earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today, Kevin Bordosky, Senior Director of Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone, and thank you for joining us. With me on the call today are Bernie Wolford, President and Chief Executive Officer; and Dominic Savarino, Senior Vice President and Chief Financial Officer.

Before we begin our remarks, I remind you that certain 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.

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-K and 10-Q filings with the SEC.

Further, we expressly disclaim any obligation to update or revise any forward-looking statements. 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.

Thanks, Kevin. Good morning or afternoon to everyone and thank you for your interest in Diamond Offshore as we present our results for the third quarter of 2022. I would like to start the call by thanking the entire Diamond team for achieving a strong quarter through their unrelenting focus on delivering safe and efficient operations. Our commitment to the customer and industry leading operational excellence, what we call the Diamond difference, are the differentiators that drive return business and our strong contract backlog.

Today, I will cover our financial highlights for the quarter, our view of the macro environment, and outlook for the remainder of the year. I will then turn it over to Dominic to cover our financial results as well as provide some additional information regarding our 2023 guidance.

Our results for the quarter reflect growth in both revenue and EBITDA. Total revenue and EBITDA for the quarter were $226.1 million and $18.4 million, respectively. These improvements were driven primarily by higher utilization in the third quarter.

Turning to our operating highlights, I'm pleased to report that Diamond had third-quarter revenue efficiency of 97.3% across our fleet, particularly impressive given the above-average number of rig moves and BOP runs during the quarter. Our safety performance continues to improve as compared to both the previous quarter and year. I couldn't be prouder of our crews for delivering this exceptional performance.

In July, the Ocean BlackHawk commenced its contract for Woodside offshore Senegal. Hats off to the men and women who were laser focused on delivering a safe, on time, and successful startup for our customer, notably while earning a performance bonus on their very first well.

In October, the managed drillship Vela successfully commenced its one-well contract in the Gulf of Mexico with Woodside, which will be followed by a five-well contract plus options with a subsidiary of Beacon Offshore.

We have experienced recent achievements in other areas as well. For example, Diamond continues to progress, making our rigs more fuel efficient and reducing our carbon footprint. We recently analyzed historical fuel usage data for our Black ships, comparing closed bus and open bus electrical plant operations. Closed bus operations facilitated savings of up to 20% in fuel usage over comparable activities in an open bus configuration.

Please note, all of Diamond's large DP rigs are equipped to support closed bus operations. And we continue to work closely with our clients to maximize time in closed bus configurations, to reduce fuel usage and greenhouse gas emissions.

The remainder of '22 promises to be an active period for the company. The Ocean GreatWhite recently arrived in Scotland to continue its preparation for the previously announced contract with BP. We are on track for contract commencement in the first quarter of 2023. The Ocean Endeavor recently arrived in Norway to replace eight-diagonal braces and conduct a five-year special hull survey to assure high rig availability for the future.

Turning now to the market outlook. The macro environment continues to drive the developing growth cycle in our business, with supply concerns driving investment despite governmental actions targeting inflation. Oil and gas supply fundamentals are historically tight on the heels of years of underinvestment in upstream capital projects. We anticipate relative strength in oil prices to continue for the foreseeable future with long-dated Brent futures now trending upward.

Energy security priorities are driving a further leg of investment, aimed at securing energy supplies close to home in a responsible manner. We believe securing sufficient supply will be a multiyear undertaking.

Commodity prices have remained elevated this year with the US Energy Information Administration projecting Q4 Brent averaging $93 per barrel and full year '23 Brent averaging $95 per barrel. This has led to significant cash flow generation by our existing and potential customers, which supports their ability to fund dividends while making meaningful increases to upstream capital investments.

Rystad predicts that total offshore greenfield project commitments will be approximately $138 billion in 2023 compared to $72 billion in '22, representing a 92% increase year-over-year. We believe this surge in spending will, in turn, lead to increased demand for our services spanning multiple years.

We have recently seen a meaningful increase in the number of fixtures for floating rigs. According to IHS Markit, the number of new fixtures increased 44% quarter-over-quarter to 35 fixtures in the third quarter. These fixtures represent 37 rig years of demand compared to 16 rig years in the second quarter, with 60% of awarded work going to drillships for campaigns approaching two years in duration. The majority of these are for work in the Golden Triangle, that is the US, South America, and West Africa -- all areas where we have an established operating presence.

With rig supply tightening in most markets, we saw direct negotiation opportunities double in the third quarter as compared to the second quarter. In the US Gulf of Mexico, where drillship capacity is nearly sold out, we are seeing opportunities emerge for direct negotiations on term work commencing in 2024.

The tightening supply/demand balance supported a high level of commercial success in the third quarter. We secured $778 million of additional backlog during the quarter. This attributed to the previously announced contracts on the Ocean BlackHornet, Ocean Apex, Ocean GreatWhite, and the managed rigs -- the Auriga and Vela. These commitments added six rig years of backlog and will materially increase revenue as we progress through 2023.

We also look forward to repricing opportunities for our seventh-generation drillship, the Ocean BlackHawk, which is anticipated to finish its current contract in Senegal early in the second half of '23.

After the end of the quarter, we received notification of award of a new drilling program with Petrobras in Brazil for the Ocean Courage. The Ocean Courage was awarded a four-year project with an unpriced option for an additional four years. The total value of the firm term of the award is approximately $429 million, including a mobilization fee and the provision of certain additional services.

The contract for this work is expected to be signed imminently and commenced late in the fourth quarter of '23 after the rig concludes its current contract and completes new contract preparations. Upon contract execution, this will grow our current backlog from $1.6 billion to just over $2 billion. This award is a testament to the exceptional performance of our crews and allows Diamond to continue serving the world's largest operator of deepwater drilling rigs.

These backlog additions and growing demand are game changers. We set the stage for meaningful improvements in EBITDA and cash flow in 2023 and beyond.

It takes an entire organization focusing on the right things to deliver successful outcomes. I'm very proud to be surrounded by the high caliber men and women of Diamond Offshore that our customers count on to deliver energy responsibly.

I will now turn the call over to Dominic before returning with some concluding remarks.

Thanks, Bernie, and good morning or afternoon to everyone. In my prepared remarks this morning, I'll be providing an overview of our results from this past quarter, briefly touch on our liquidity and the key activities influencing it going forward, provide some insight into our projected results for the fourth quarter and full year 2022, and also provide a preliminary look at our projections for 2023.

For the third quarter, we reported net income of $5.5 million or $0.05 per diluted share. This compares favorably to our reported net loss in the second quarter of $22 million or $0.22 per diluted share.

The results for the third quarter included a reported adjusted EBITDA of just over $18 million, which is a slight improvement from the prior quarter. The increase in EBITDA was driven by increased activity in the quarter associated with the Ocean BlackHawk beginning work in Senegal as well as the Ocean Apex having a full quarter of operations in Australia. These increases were partially offset by higher contract drilling expense associated with these operations, as well as the Ocean Onyx completing its contract in Australia during the quarter and being stacked.

The improvement in our net income and earnings per share was largely driven by a non-recurring non-cash tax benefit of $23 million associated with the recognition of deferred tax assets, the release of a valuation allowance, and the reversal of tax reserves due to the expiration of the statute of limitations in certain jurisdictions.

Interest expense for the quarter was $10.3 million, and capital expenditures for the quarter came in at $9.8 million. We also had a working capital build in the quarter as a result to the Ocean BlackHawk, Ocean BlackLion, and Ocean Patriot transitioning to higher day rates during the quarter and a temporary delay in accounts receivable collection that we expect to collect in the fourth quarter.

Our liquidity at the end of the third quarter stood at $296 million, including $23 million of unrestricted cash and $273 million of undrawn capacity on the revolving credit facility and delayed draw of First Lien Notes.

As a result of the Ocean Endeavor shipyard work in the fourth quarter and the ongoing reactivation of the Ocean GreatWhite, as well as the Ocean Apex going into the shipyard between contracts for a little over a quarter in the first half of '23 for its special hull survey and other maintenance programs, we expect our liquidity to continue to dip over the next few quarters.

Once we begin to enjoy the full benefit of our recent contract awards at higher day rates as referenced in our fleet status report published yesterday, we expect our earnings potential, operating cash flow, and liquidity profile to improve significantly in the second half of '23 and throughout 2024.

Turning to our Q4 and full year 2022 guidance, we expect Q4 2022 contract drilling revenue, excluding reimbursables, to be between $205 million to $215 million. And largely due to the Ocean Endeavor being in the shipyard and Ocean GreatWhite reactivation activities taking place in Q4, EBITDA is expected to be slightly above breakeven, and our capital expenditures are expected to be between $30 million to $35 million.

Should we achieve these results for Q4, our full year 2022 results will be in line with the guidance we have previously provided.

I would now like to provide an overview of our expectations for 2023. Our backlog as of October 1, 2022 is $1.6 billion. In addition, as Bernie alluded to, we are anticipating, finalizing a contract award with Petrobras in the near future worth $429 million. Our backlog position gives us great visibility into our revenue opportunity for 2023 and beyond.

In 2023, we are contracted for 75% of our available days, excluding planned shipyard days. In addition, our average day rate for 2023 across our fleet is approximately $285,000 per day as compared to $235,000 per day for Q3.

As a result, our preliminary revenue for 2023 is expected to be between $950 million and $990 million. Our preliminary EBITDA for 2023 is expected to be between $160 million and $200 million. This expected EBITDA margin of 17% to 20% is a five-fold improvement over our expected EBITDA margin for 2022.

During our Q4 conference call, we'll provide a more fulsome outlook for 2023 after our 2023 budget process is complete and approved by the Board. That concludes my prepared remarks, and I will now hand it back over to Bernie for some closing comments.

Thank you, Dominic. At Diamond, our focus has always been to deliver best-in-class performance while never compromising on safety performance, no matter what stage of the cycle we may be in.

The Diamond difference is well established and continues to deliver value for our customers and shareholders. We expect to continue leveraging our position and capabilities in this nascent upcycle to deliver improved results in 2023 and beyond.

We appreciate your interest in Diamond Offshore, and we'll now open the call for questions.

(Operator Instructions) David Smith, Pickering Energy.

Good morning. Congratulations on the strong operating results in Q3, and thanks for taking my question.

Thanks, David.

I wanted to circle back to your earliest availability for your owned and contracted fleet, the BlackHawk coming available third quarter next year. I wanted to ask how you see the potential for options to extend that rig's current contract. But also, if you could share your outlook for the BlackHawk after this contract. And it sounds like you might already be having conversations with customers about its next job.

Sure, David, and thanks for your interest today. As you know, the BlackHawk is with Woodside in Senegal. As we understand it today, the expectation is that that rig would finish its contract, including any exercised options sometime around August of next year. And then likely demob to Las Palmas, where we'll make the -- conduct a special hull survey, which we're bringing forward from '24 into late '23 before moving on to its next project.

In terms of its next project, we're currently in a number of active discussions around the potential commitments for the BlackHawk. Given the tight supply in the Gulf of Mexico, I would sort of consider that our primary target at this stage and look forward to continue to explore direct negotiation opportunities in that vein.

Appreciate it, and a follow-up question. Other than the Apex and the Blackhawk, are you planning any other special surveys for next year? And if I could sneak a related -- how should we think about the SPS for a modern drillship hitting the 10-year mark in terms of downtime and costs?

Right. So for the first question, David, no, we have the -- the BlackHornet and BlackRhino are Q4 '24 for their next special and the BlackLion is in early '25. We're in somewhat of a unique position with regard to the Black ships.

Thanks to our relationship with HMH and our contracts for the maintenance of those BOPs, we were able to have condition-based monitoring that allow us essentially to maintain continuous COCs and not necessarily have to take the BOPs out of service for an extended period. So those particular, special hull surveys would be theoretically less costly and less lengthy than what you might expect otherwise.

Very much appreciated.

(Operator Instructions) Fredrik Stene, Clarkson.

Congratulations on a nice quarter, I would say, and also on the Brazil award. So I wanted to circle back to -- partially you could call it contracting strategy going forward. I think you guys and many of your peers painting an upbeat picture of the world going forward. You're talking about negotiations, term work from 2024 and onwards.

And I was wondering, have you -- how do you expect that you will play your open capacity over time? You've signed some of the rigs for longer-term contracts now. But in a strong market, there's also potentially some value to having shorter commitments if they're available, just to make sure that you're able to capture [there] improvements. Thus, do you have any -- made any thinking around that?

I think the best way to describe it is that we continue to work to push the envelope in terms of rates and mob fees at this stage. The demand picture is tight. We have three additional high-spec rigs needed in Brazil, plus another two for BMS-11 that remain unfilled, which are going to just put further pressure on availability for rigs in late '23 and early '24.

And given the limited sort of dry powder we have as represented first by the BlackHawk, we're looking to place that rig in a superior contract in terms of total cash generation. So not to get much more specific than that, but we're just at a point in the market where we feel like we have room to test the envelope a bit.

So do you think it's possible to see a rig starting with a [five] handle on that one?

Well, it's a great question. Recency bias, it makes me -- makes it hard for me to say yes to that. I have to be honest with you. We certainly do see the high fours with significant mobilizations as being kind of where the market is today.

So yeah, it depends how the market moves. We'll be watching the upcoming tender with Petrobras with great interest. I think that's really the next opportunity, to kind of see how the market is developing. But certainly, demand is significant. And the cost of reactivation of cold or stranded assets just get slightly higher every single day.

Thank you. I'll be watching this closely. And just a final one for me on the fleet here. You have some open capacity in Valiant, the Onyx, and the Monarch. How -- and I think you said that the Onyx is looking for work, I believe, in your press release, do you have any color on those three rigs and how or/and when we potentially can see the return to the working fleet?

Sure. So I'll start with the Valiant. Energy security in the UK sector has changed pretty dramatically in terms of incentives for operators to get out and drill. Also, we are seeing -- finally seeing some true demand materialize for P&A.

And so the Valiant for us is really a play on the P&A market at this stage. And a rig -- we would not reactivate on spec under any circumstance. But if it could be funded through its first program, we would certainly consider it. So think of it as a call option on the P&A market.

The Monarch is in a tough market in the Southeast Asia region, which -- where we are not seeing a lot of development in terms of pricing, with ONGC being the one bright spot in that area right now. The Monarch -- I think, as I mentioned on a previous call, we need $40 million to $50 million to return that rig to work. And again, wouldn't put it to work unless we could pay for the reactivation in the firm term of a new contract.

Finally, the Onyx is just perfectly situated for the demand that's materializing next year in Australia. We see three programs in late '23 and early '24 materializing. They're all significant programs with significant term; and the number of available rigs in the market today is the Onyx. And so we feel very well situated there to capture one of those opportunities.

All right. Thank you so much. That's all for me. Thanks.

Thanks, Fredrik.

(Operator Instructions) David Smith, Pickering Energy.

Thanks for letting me back in. Wanted to follow up on that last question and kind of tie it to the '23 outlook, which I realize is preliminary. I did want to ask how the Ocean Onyx kind of factors into that $160 million to $200 million EBITDA outlook for next year?

I think we've taken a pretty conservative view with regard to the Onyx for next year, but we do have an expectation of utilization in the back half of next year built into that range. There -- we purposely created a range where our expectations kind of reflect the middle of that range, and there's room for some upside or downside in the range. But long answer to a short question, we expect it to be working in the second half of next year at a conservative day rate.

Great to hear. And sticking with the preliminary '23 outlook, I don't mean to be greedy, but would you happen to have a preliminary free cash flow outlook to go along with the preliminary EBITDA outlook? Or should we wait until next quarter's call?

Yeah, wait until next quarter's call, David. We're still working through our -- finalizing our CapEx budgets and the like. So there's some significant movers there that we're continuing to evaluate. So please be patient, and we'll have that for you next time.

All right. Thanks for all your time today.

At this time, I am showing no further questions. I would now like to turn the conference back to Bernie Wolford for closing remarks.

Thanks, and thanks to all of you for participating in today's call. We look forward to speaking to you -- speaking with you again in the next quarter, and really appreciate your interest in Diamond Offshore. Good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.