Diamond Offshore Drilling, Inc. (NYSE:DO) Q4 2023 Earnings Call Transcript
Diamond Offshore Drilling, Inc. (NYSE:DO) Q4 2023 Earnings Call Transcript February 28, 2024
Diamond Offshore Drilling, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Fourth 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 session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to, Kevin Bordosky, Senior Director of Investor Relations. Please go ahead.
Kevin Bordosky: 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 Savarino, 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. 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.
Bernie Wolford: Thanks, Kevin. Good day to everyone. Thank you for your interest in Diamond Offshore as we present our results for the fourth quarter of 2023. 2023 was a transformational year for Diamond Offshore. We marked our one-year anniversary of relisting on the New York Stock Exchange, a measurable improvement in our capital structure, secured $485 million of new contract reports, and safely delivered five shipyard projects, all while delivering industry-leading operational excellence for our customers. The positive momentum continues in 2024 with the addition of another $362 million in new contracts, taking our total current backlog to approximately $1.6 billion. Before addressing fourth quarter results and sharing some perspective on our markets, I would like to provide a high-level update on the previously reported GreatWhite incident.
On February 1st, while waiting on weather with the well secured and lower marine riser package, or LMRP disconnected from the BOP, the LMRP and riser unintentionally separated from the rig at the slip-joint tensioner ring and dropped to the seabed. No one was hurt, no pollution occurred, and there was no damage to subsea infrastructure. Work to recover the LMRP is progressing methodically to ensure a safe recovery while working within the weather constraints west of Shetland. The LMRP is situated on the seabed, exposed above the mudline in an upright orientation. We have successfully unvoted the riser stream from the LMRP and are prepared to lift the LMRP to the rig in the next winter window. We currently estimate the total repair period to be 90 to 100 days from the date of the incident.
Dominic will provide additional information related to the estimated repair timing, cost, and insurance coverage in his remarks. In the interim, I'd like to recognize the extraordinary work of our team in response to this step and the quality of the ongoing collaboration with our clients and local authorities. Turning to the fourth quarter. I'm pleased to report that our rig crews and operations support team delivered exceptional safety results and revenue efficiency of 95% across our fleet during the quarter. This achievement was particularly noteworthy as we commenced four contracts in the quarter, one in each of the regions in which we operate. That's off to our teams for their steadfast commitment to planning and execution while never compromising on safety.
Our fourth quarter financial performance reflects the impact of having four of our marketed fleet of 10 rigs on higher market dayrate contracts at quarter end. Total revenue and adjusted EBITDA for the quarter were $298 million and $72 million, respectively. These results were above our guidance for the quarter, primarily due to the Patriot working longer than previously anticipated, the deferral of certain contract preparation costs, and earning a performance bonus for efficient and injury-free operations in Senegal. This beat in part reflects the impact of rigs moving to higher dayrate contracts and sets the stage for improving financial performance in 2024, owing to fewer planned shipyard days. The BlackHawk impurged [ph] having a full year of higher dayrates and the BlackLion and BlackRhino moving to higher dayrates in the third quarter.
Now, let's turn to our view on the markets and opportunities for Diamond in 2024 and beyond. The upcycle in offshore drilling continues to be supported by strong commodity prices, robust upstream capital spending, and anticipated year-over-year growth in exploration drilling. Taken as a group, these indicators support our view of a longer duration upcycle in deepwater drilling. Let's look at some of the numbers in support of the longer duration upcycle. Exploration drilling can be considered a leading indicator and a precursor to future development programs, and analysts now forecast year-on-year growth in floater exploration wells of 34%. Subsea trees orders are another leading indicator and 2024 forecasts predict the third year in a row with over 300 new trees ordered.
This level of order activity is the highest it's been since 2013 at a time when we had 115 more rigs in the market than we do today to execute the related drilling activity. Putting to subsea tree into perspective relative to the global marketed floater fleet, back in 2012 and 2013, the number of orders per marketed floater peaked at 1.5 and 1.8 trees ordered for marketed floater respectively. In comparison, in 2022 and 2023, those numbers were 2.1 and 1.8, and the 2024 forecast stands at approximately 1.9. This would indicate three continuous years with numbers matching or exceeding measures dating back 12 years. These trends sink well with [Indiscernible] forecast for floater demand on a rig years basis. The forecast compound annual growth rate of rig years and demand from 2023 to 2026 by region or 7% for North America, 11% for South America, 10% from the North Sea, 7% for West Africa, and 25% for Southeast Asia and Ocean EMEA.
Another key metric we track is the trading four quarters tender activity on a rig years basis. It has been a bumpy road from a peak in 2012 of approximately 106 rig years of tender implied trailing demand to a cycle bottom of 28 in 2016 and a COVID bottom of 35% in 2020. The industry closed 2023 with 106 rig years of tender implied trailing demand matching the number from 12 years ago. Closer to home, we are currently tracking 51 opportunities representing 52 rig years of demand with commencement dates through 2025, of which roughly 61% are for DP rigs and 39% for more rigs. The start date profile for these opportunities arises from a low in Q2 2024 to a peak of 12 and 11 in Q4 2020 and Q1 2025, respectively. This data lends credence to the view that the second half of this year looks to be positive in terms of the number of expected fixtures and contract starts.
For Diamond specifically, the U.K. sector of the North Sea continues to develop as a bright spot with increasing demand in the region with shrinking harsh environment rig supply. Recent long-term commitments by operators in the region support our view that demand for plug and abandonment or P&A work is becoming more certain and exist in larger quantities than previously anticipated. Additionally, green shoots of future drilling demand have missed on the heels of the recent oil and gas licensing round, where 27 licenses were awarded for areas that have the potential to be brought into production quickly. Timing options are exercised on the Black Hawk, we have one drillship, the BlackRhino, with availability late this year. We are currently pursuing eight opportunities for the BlackRhino, all for work commencing following the conclusion of its contract for SPS and MPD upgrade.
In the context of these improving markets, we have been able to firm up additional contract term for 2024 and build significant backlog commitments for 2025 and 2026. Year-to-date, we have secured $362 million in new contract awards, one for our seventh generation drillship BlackLion at leading-edge rate and 1 for a more harsh environment semi in the Patriot. The BlackLion contract will start in direct continuation of its current work without any gap between contracts and provide firm work through the third quarter of 2026. Under this new contract, the BlackLion will be positioned to generate approximately $115 million in annualized rig level EBITDA and contribute significantly to our cash flow in the coming years. The Patriot contract is for a 60-day 2-well P&A campaign and is set to commence this week, filling in some of the gap in its schedule before beginning its three-year contract in early 2025.
On the back of our recent contract announcements, excluding cold-stacked rigs, we have 87% of our 2024 capacity contracted, 91% if you include priced options. Looking further out, excluding cold-stacked rigs, we now have 36% of our 2025 capacity and 30% of 2026 capacity contracted. If we include price options, the 2025 number goes from 36% to 59% with notable contracting opportunities on the BlackRhino, BlackHornet, Endeavor and Apex to further secure backlog. For the last 20 months, we completed the special periodical surveys or SPSs on six of our 10 actively marketed rigs with a further two rigs due in 2024 and one in 2025. Through the combination of reduced planned shipyard days, our recent backlog additions, our positive exposure to improving market conditions, we are providing materially improved EBITDA and cash flow visibility through 2026.
I will now turn the call over to Dominic before returning with some concluding remarks.
Dominic Savarino: Thanks Bernie and good morning or afternoon to everyone. In my prepared remarks this morning, I'll provide a recap of our results for the fourth quarter, including some operational highlights and additional details on our recent contract awards. The estimated financial impact of the recent GreatWhite event and guidance for the first quarter and full year 2024. For the fourth quarter, we reported a net loss of approximately $146 million or $1.42 per diluted share. The reported loss consisted of net income before tax of $29 million and non-cash tax expense of $174 million. As discussed in prior quarters, the large tax expense in the quarter was the result of the reversal of the tax benefit recorded in prior quarters and the further normalization of our overall tax expense for the year.
The results for the fourth quarter included a reported adjusted EBITDA of $72 million, well in excess of our guidance for the quarter of $50 million to $60 million, with the U.S. GAAP required deferral of approximately $8 million of precontract commencement cost for the Courage and BlackHawk contributing to the favorable results. Our reported adjusted EBITDA for the quarter represents a significant increase compared to our adjusted EBITDA of $28 million reported in the third quarter. And this quarter-over-quarter increase was primarily a result of higher revenue reported in the fourth quarter. Excluding reimbursable revenue, revenue for the fourth quarter was $280 million, slightly higher than our guidance for the quarter and up from $225 million in the prior quarter.
This improvement was primarily a result of the BlackHawk commencing its contract in the Gulf of Mexico in early November after its SPS and NPP upgrade in the third quarter. Patriot is being on contract for the entirety of the fourth quarter after being between contracts in the prior quarter. And the BlackRhino, earning its largest performance bonus to-date during the fourth quarter. Contract drilling expense increased to $189 million for the quarter compared to $182 million for the prior quarter, primarily as a result of higher charter costs from one of our management and the accrual of the annual bonus expense related to the drillship's BOP service agreements, partially offset by the absence of costs associated with the Apex and shipyard period in the prior quarter.
Operating cash flow for the fourth quarter was $9 million with negative free cash flow of $22 million as compared to negative free cash flow of $48 million in the third quarter. The improvement in free cash flow was primarily a result of increased EBITDA and lower CapEx in the fourth quarter, offset by greater working capital used during the quarter as a result of commencing higher dayrate contracts and the resulting higher accounts receivable at year-end. For the full year 2023, we reported revenue, excluding reimbursable revenue of $984 million and adjusted EBITDA of $158 million. OpEx for the full year was $132 million. After the successful execution of our capital structure refinancing in the third quarter, we exited 2023 with unrestricted cash and cash equivalents of $124 million and total liquidity of $422 million, including the undrawn balance of our revolving credit facility.
Expanding a bit more on the fourth quarter operational highlights, we had notable successes in each region in which we operate. In the Gulf of Mexico, the BlackHawk commenced its new contract in November at the start of the commencement window after undergoing its SPS and MPD upgrade. In West Africa, the BlackRhino earned performance bonuses in the quarter totaling $3.2 million, the ninth bonus achieved during the Senegal campaign. In the North Sea, the Patriot executed a P&A campaign for a customer over the course of the fourth quarter and into January of this year, being on contract almost twice as long as originally anticipated. In Australia, after coming out of the shipyard in the third quarter, the Apex successfully commenced a contract for a new customer during the fourth quarter at a higher dayrate.
In Brazil, after completing its prior three-year contract with Petrobras in the third quarter, Courage safely and timely completed its SPS and contract preparation activities and commenced its new four-year contract with Petrobras in mid-December. Turning now to the GreatWhite and our estimate of the financial implications of the unintentional release of the LMRP and riser. As Bernie noted, the GreatWhite is currently in the process of recovering the LMRP to the surface and is estimated to be back earning dayrate by the end of April or early May. As a result, we currently estimate that we could be off rates for approximately 90 to 100 days, which could result in approximately a $24 million to $27 million reduction in revenue over the course of the first and second quarters.
Our current estimate of incremental recovery costs and repairs and maintenance is approximately $20 million to $25 million, and our current estimate of replacement capital expenditures is approximately $12 million to $15 million. We anticipate that the incident will be covered by our hull and machinery insurance policy and that all incremental costs, less our $10 million deductible should be reimbursable under the policy. In addition, we maintained loss of higher insurance on the GreatWhite. After a 60-day waiting period, the loss of higher insurance provides $150,000 per day or up to 180 days for each day of lost revenue as a result of a covered property loss claim. Based on our current expectations of being out of service for approximately 90 to 100 days, the loss of higher insurance may provide proceeds of approximately $4.5 million to $6 million.
Because the accounting treatment of insurance proceeds creates complexities in the reporting of financial results and because the actual financial impact of the -- GreatWhite incident is not yet known. We are presenting our initial guidance for 2024 results by excluding the estimated financial impact from the GreatWhite event. We believe that this normalized approach will provide more accurate and meaningful visibility into our expectations of our ongoing recurring operations without regard to this extraordinary isolated incident. In addition to having a strong financial performance in the fourth quarter, we also had significant success in the quarter and early this year in booking new contracts, as Bernie mentioned. In the Gulf of Mexico, we enjoyed significant contract wins in the past month with the BlackLion, executing a contract extension with its current customer with a duration of two years and a contract value of approximately $350 million.
With this new contract, the BlackLion is now contracted through the third quarter of 2026. In addition, in the fourth quarter, the BlackRhino was awarded a contract and direct continuation of its Senegal campaign at a day rate in excess of $500,000 per day, the highest clean day rate awarded during this upcycle. These recent contract awards pushed the average day rate in our drillship backlog, up to $408,000 per day. Also during the quarter, the Patriot was awarded a contract valued at $240 million for a 35-well P&A campaign representing approximately three years of firm work expected to commence in early 2025, and up to 17 additional P&A wells subject to priced options that would add a fourth year of duration. Subsequent to year-end, the Patriot was also awarded a two-well P&A campaign commencing later this week, filling in some of the gap before commencing its three-year contract in 2025.
The Patriot is also being considered for additional work later in 2024, evidence of the improving moored floater market in the North Sea. Turning now to our normalized full year 2021 guidance. Our $1.4 billion in backlog as of January 1, 2024, combined with our year-to-date 2024 contract awards of $362 million gives us visibility to over $1.6 billion of firm work to be performed over the coming years and positions us extremely well in terms of contract coverage for 2024, with 91% of our available days, excluding cold stacked rigs committed with firm contracts or priced options. Our 2024 revenue, excluding reimbursable revenue and excluding any estimated impact of the GreatWhite event, is currently expected to be between $940 million and $960 million.
This expected level of revenue represents a slight decrease from the revenue we earned in 2023. We -- this expected decrease is primarily due to the managed rigs transitioning back to their owner over the course of 2024, and our plans for the BlackRhino in time in the shipyard, conducting its SPS and NPD upgrade later this year, partially offset by higher day rates for the BlackHawk, Courage, Apex and BlackLion during the year. Our EBITDA guidance for 2024, again, excluding any impact of the GreatWhite head today, is currently expected to be between $230 million and $250 million, a more than 50% increase over 2023 EBITDA, largely driven by higher day rate contracts and increased EBITDA margins due to the return of the lower-margin managed rigs back to their owner.
It is worth noting that our EBITDA guidance for 2024 includes approximately $20 million of non-cash net amortization expense as required by U.S. GAAP accounting rules associated with the Courage and BlackHawk pre-commencement contract activities that occurred in 2023. D&A expense for 2024 is expected to be between $72 million and $77 million. Net interest expense for the year is currently expected to be approximately $40 million to $45 million, and cash taxes are expected to be approximately $5 million to $10 million. CapEx for 2024 is currently expected to be between $125 million and $135 million, excluding any CapEx resulting from the GreatWhite event or the potential reactivation of the Onyx should it be successful in securing a long-term contract.
Our estimated CapEx spend for 2024 includes the installation of MPD equipment and the SPS for the BlackRhino, the SPS for the BlackHornet as well as the BOP recertification for the endeavor. Taking a look at our guidance for the first quarter, again, excluding any impact of the GreatWhite incident, we currently expect revenue, excluding reimbursables, to be between $260 million and $270 million, EBITDA to be between $45 million and $55 million and CapEx to be between $38 million and $43 million. Our expectations for the first quarter of 2024 are lower than the fourth quarter of 2023 as a result of the Patriot being off contract for a portion of the quarter and the amortization of pre-contract commencement costs for the Courage and BlackHawk.
Despite this dip in Q1, our projected EBITDA results for the year are essentially equally weighted between the first half and second half of the year, and we expect our free cash flow in 2024 should be meaningfully greater than 2023. Beyond 2024, our visibility to estimated future earnings and cash flow is increasing as a result of our growing backlog at higher average day rates. In addition to our 91% contract coverage in 2024 for firm contracts and priced options, excluding cold stacked rigs, we have 59% and 30% of available days committed for 2025 and 2026, respectively. This level of contract coverage positions us extremely well for the next three years, yet still provides plenty of room for positive operational leverage as re-contracting opportunities arise.
And with the continued favorable fundamentals of the deepwater offshore industry, we are confident that we will be able to continue to secure meaningful day rate increases for our rigs as contracts roll over. And finally, at the end of 2024, we expect our net leverage ratio and other requirements under our credit facility and bond indenture to be met we would allow our Board to begin to consider the appropriate timing for a shareholder return program. That concludes my prepared remarks. I will now hand it back to Bernie for some closing comments.
Bernie Wolford: Thank you, Dominic. In the near term, our organization remains focused on the safe and timely restart of the great wine. Looking further ahead, as the BlackLion rolls to its higher day rate in Q3, I'll look closely by adoption of the BlackHawk. We will have 5 out of our 9 active rigs on contracts at market rates. We are ideally positioned to capture further upside in the strengthening drillship market with the BlackRhino in late 2024 and the BlackHornet in early 2025. Similarly, the supply-demand picture for harsh environment semis bodes well for upside on the Endeavor, Apex and GreatWhite as we progress through 2025. In the interim, we are targeting several near-term opportunities for the Patriot that allow us to fill a portion of the gap in 2024 prior to its long-term campaign in 2025.
These factors, combined with the notable decrease in planned shipyard days, position us to deliver growth in both EBITDA and cash flow while making significant progress in de-leveraging our balance sheet. We appreciate your interest in Diamond Offshore. I will now open the call for questions.
See also 18 of the Easiest Languages for English Speakers to Learn and 20 Countries That Read the Most in the World.
To continue reading the Q&A session, please click here.
