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Edited Transcript of AWDR.OL earnings conference call or presentation 13-May-20 10:00am GMT

Q1 2020 Awilco Drilling PLC Earnings Presentation

London May 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Awilco Drilling PLC earnings conference call or presentation Wednesday, May 13, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cathrine Haavind

Awilco Drilling PLC - IR Manager

* Ian Wilson

Awilco Drilling PLC - CFO

* Jens Berge

Awilco Drilling PLC - CEO

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Presentation

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Jens Berge, Awilco Drilling PLC - CEO [1]

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Okay. Hello, everyone, and welcome to Awilco Drilling's Q1 presentation. It's -- we've all gotten more customized with all of these tools over the last few months, but this is Awilco Drilling's first live event. So it's -- that's a first for us, but we think that we'll run very smoothly. And just a practical message to everyone is that you may post your questions in the chat throughout the presentation, and also, of course, when we get into the Q&A session, and then we will go through them when we get there.

With me, I have Ian Wilson, CFO, and we will take you through the following agenda. We will go through the Q1 financials. We will look at the U.K. status or status of our U.K. business. We will have a look at the newbuilds. And then we will go to the part which has to do with the financing of the newbuilds towards the end before we go to Q&A.

So to start with the Q1 financials, maybe you would like to take that, Ian.

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Ian Wilson, Awilco Drilling PLC - CFO [2]

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Okay. Thanks, Jens. Yes, we'll run through the comprehensive income statements for Q1 2020. And unfortunately, I have to bypass the revenue portion. But on to the rig operating expenses, $4.9 million, just short of that, and that represents a daily OpEx number for the WilPhoenix of $52,200. And the WilHunter, in cold stacked mode in Invergordon, continues at a daily cost of $1,600 per day. There were some savings made as a result of reduced labor costs during the quarter. But yes, $52,200 per day for the WilPhoenix Opex.

The G&A expense, $2.6 million that's after a credit of $0.5 million in respect to the revaluation of the LTIP. So the underlying G&A expense there is $2.1 million. And that is represented by the Aberdeen shore-based office, about $1.1 million, and the ramping up of Stavanger and building the organization in Stavanger, the shore-based cost there is in the region of $2 million. The depreciation figure, $2.5 million, in line with previous quarters, no exceptional items there.

So operating loss of $9.9 million. So there we've got interest income from cash in the bank at $371,000 and the other financial items, $258,000, principally foreign exchange and translation. So loss before tax, $9.3 million. Small tax expense relating to the movement in the deferred tax asset, a net loss of $9.4 million, equivalent to $0.17 per share.

On to the next slide, the balance sheet. So rigs, machinery and equipment, $212.3 million. Little movement in terms of the WilPhoenix for the quarter, about $400,000 in respect to well control equipment. And then the biggest increase there is the first installment -- sorry, the second installment, the 25% portion of the payments to the shipyard, that was $10.6 million, plus some ongoing projecting costs there. So all in all, $12.5 million in increase in cost in the newbuild project. Trade and other receivables, $259,000. The bulk of that has been received. Still a small portion outstanding, but nothing in disputes, and we'll get that received shortly. Prepayments and accrued revenue, $1.1 million, principally just prepayments, nothing exceptional there. Inventory, no real movement. And cash at the end of the quarter of $27.7 million.

Should note there that the current tax provision there is 0. I think as many of you are aware, we do have an ongoing dispute with HMRC in respect to the treatment of tax, dating back to 2015. That dispute continues, and it will be some time before we actually get resolution to that. But we believe that we have a strong case, and we've submitted an appeal. And that basically is completion of stage -- or step 2 of a 15-step program before this will reach conclusion.

So I'd just highlight that we have that exposure, a potential liability does carry and was disclosed as a material uncertainty, but we believe we have a strong position. Hence, we have not made any provision for that in the balance sheet.

So total assets -- sorry, $247.5 million. Trade and other creditors, is general payables there, $2.4 million. And accruals and provisions, largely the LTIP, $3.4 million, so total equity and liabilities $247.5 million.

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Jens Berge, Awilco Drilling PLC - CEO [3]

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Thank you, Ian. And then we will go to the next point of the agenda, which is U.K. business from a more operational point of view. So we all know what the last few months have brought us, a headache, in the world society and economy and also very much so in the oil and gas business, but we actually do have some quite positive news to bring into our Q1 presentation and also some recent news from yesterday.

We signed a contract with Petrofac for 3 or 4 well P&A program, estimated at 100 days. Rig went on standby on 1st of May, and we expect to start that on the 25th of May. And our OpEx has been covered in that period and is being covered as we speak.

Then you will also recall that we announced that LOI with Serica a while back, that materialized into a contract, which we announced yesterday. And that is for a one well workover estimated at 70 days commencing 15th of December this year. So that actually gives us a firm backlog this year, which basically already started on the 1st of May and then until beginning of December. So that we are very pleased with, and we look forward to take the rig and the team and go out there and do a good job for these customers.

Looking into next year, visibility is quite limited due to the oil price collapse, but also COVID-19. And it wasn't a booming market before these things happened, and it's not -- it hasn't -- at least not turned to the better with these recent events, but we do actually see some attractive opportunities. And yes, that's what we said last year as well about this year, and we were right, those attractive opportunities turned into contracts. So hopefully, coming towards the end of the year, we can be right again about winning some of the few opportunities that are there.

Then we have the newbuilds. And well, here's a picture where you see this massive CS60 hull arriving in Singapore earlier this year. It's -- you will know this hull from several of the other biggest Norwegian rigs or the biggest rigs that are in the Norwegian market. So CS60 is a well-known, very resilient, big hull. And our hull also has a very clean design. So not only on variable deck load, but also on movements and hydrodynamic capabilities, it's the best hull that has ever come out.

Looking at the progress of these newbuilds that we have. You will also have seen that we have the new names on it. In the background here, you can actually see the hull of the deck box of the rig with the name painted on it. That's from Singapore. The hull was actually -- lower hull was actually shipped from China to Singapore in the middle of that first COVID wave in China, but they managed -- in spite of that, they actually managed to send the hull to Singapore, which was quite, yes, a positive achievement and an important milestone.

And then when the hull reached Singapore, the first wave of COVID in Singapore was more or less over, so we also got some quite good progress after the hull arrived. But then lately, we've seen that the COVID-19 restrictions have sort of slowed down over the last month. So Singapore is pretty much down. But yes, we will have to wait and see what that ends up with in the end. But right now, it's quite slow. But so far, we've maneuvered quite well around the COVID issues. So we look forward to getting up to full speed again.

The Nordic Spring, rig #2, is in China, and that also continues as per -- well, as per schedule, the lower hull construction.

Looking at the market, how has that changed? If we look at the Norwegian market, how has that changed with COVID and the fall in oil price? And there are many views on that. But the one we have here on the screen now shows that there is, obviously, a demand in the coming years, too, although it has decreased quite a bit with these recent events of COVID-19 and the oil price, the fall in oil price. E&P companies are cutting 20% to 30% of their 2020 investments, then we wouldn't be there anyway for this year. Continued preference for Tier 1 as expected. Like we've said before, even before COVID and oil price decline, we saw that top-tier rigs were 100% utilized whereas older and less advanced rigs had lower utilization. And that would just continue to be the case in the future.

While the demand falls slightly, we also see that supply is being reduced. So at some point, within the next few years, we expect this -- the market to recover again where top-tier rigs will again have a much higher utilization factor than other rig types.

Contract opportunities. We know now that the customers have -- they've received presentations from us and also looked so much into the rig capabilities and the rig specifications that they do know of our rig capabilities and our operating concepts. So that message has come through, and everyone will see that our rigs offer significant savings for the customer on total well cost, not only on efficiency and capacity in the harsh environment in the winter season and with rig movements and everything that we can add there, but also on the operating concept, more digitization, reduced headcount, reduced fuel and also -- and a much lower environmental footprint that will also enable the customers to pay less taxes on emissions, for instance.

We have the most efficient technical configuration to date of equipment, and that should also be the case when you buy equipment that is so many years newer than what's in the market today.

Our ESG profile is groundbreaking, and we'll get back to that later in the presentation. We are undoubtedly well positioned for future long-term drilling programs. That is also something we know for sure, that there is a place for these rigs in the sort of strategic developments that will come in a few years. And also on the short to medium-term, we are still looking at some opportunities that will enable us to take the rig on contracts straight from delivery. And that's something we are sort of very excited to sort of explore and see.

That's what it would take for us, for everything to go exactly according to plan, getting that long-term contract, straight asset delivery. That's the ideal scenario from us -- for us.

We're only considering long-term opportunities. We have that takeout financing and financing of the rigs from the yard to keep in mind. And we can only take the rigs out if we have contracts that can justify and enable us to get that financing.

That being said, it could be one program that will -- again, talking about the ideal scenario, one program with that term would be ideal for us. But we could also be looking at a combination of several programs that give us that term that we need.

So we've been quite clear about the advantages of these rigs before. They are of this CS60 class, very resilient and good in the harshest environments, give you very high winter uptime. We've also talked about the environmental side of things, the digitization and also our operating concepts and everything that will be presented in a completely new way in the market when these rigs come into operation.

Digitization, it's interesting from a technical point of view, but it also opens up to so many possibilities. Combining tasks, offshore being more efficient, transferring data to shore, so you can deal with them there, even carrying out operational tasks from shore. So the equipment we have here from a digitization standpoint is very unique, and we look forward to bring that into operation.

Then we can go to ESG. And of course, we're talking a lot about the E part of ESG, the environmental side. And we have also, a few months ago, we were confident enough to go out and say that we will actually achieve the 2040 -- the 2030 ambition of greenhouse gas emissions in Norway. We will achieve that when the rig comes out in 2021.

But you will also see a number to the right here that is 340 over 1020. And first of all, the greenhouse gases, that's simply based on our much reduced fuel consumption and in our tier level, we will be so much lower than what rigs are today. And that's money, and that's green, and that's a win-win for us and the customers and the environment.

The one to the right is more about the S, and you might have seen from Aker's -- and Aker have used some numbers lately to look at how many workplaces the building of a new rig with their rig packets actually subsidizes of Norwegian jobs. And that's a very high number. I mean, building a rig like the Awilco Drilling rig, which is the only one being built at the moment, is securing 340 jobs, direct jobs for the project. And on top of that, 1,020 indirect jobs from Norwegian suppliers because of our high Norwegian content. So from a -- so looking at the S of ESG in these tough times in the whole world, but also in Norway and then in the industrial sector, continuing to build a rig like ours is the same as protecting 1,360 jobs from Norwegian suppliers, and that's a remarkable number.

Back to the E again. On the emissions, we've said it before and it's sort of just an illustration of this reduction and achieving the '30 goal in 2021. Average Tier 1 competitor rigs today versus what we will bring to the market, and our calculation shows that average, we are 45% lower. But even looking at the best rigs today, we are in -- have a 40% reduction.

We've presented headlines on this before on the technology. And some of you might wonder, where does this come from? Why is it so easy for Awilco to do what's not possible today? Well, here is a list of environmentally friendly solutions available today. You would see the closed bus design, when you integrate that with hybrid energy battery package and so on down the list.

Some competitor units, very few have any of these -- I mean, there are only a very few of these features that exist today, and they exist on very few rigs. Some have them on -- from part of the original design, some have retrofit solutions. And it's good because any environmental-friendly effort and adjustment from the industry to sort of meet and be ambitious about cutting down emissions, that's great news.

Comparing what's in the market today of solutions on a few rigs, either they were from design or it comes from retrofit solutions, cannot compare all with what we are bringing out with our newbuild. Because we have every single one of these features on the newbuild, and they are there from design. They are built together. They are put together in a sophisticated overall energy management system. So I think it's quite obvious even for a nontechnical person to see that this must be a huge step in the right direction for more environmentally friendly drilling.

So again, the biggest rig class out there, you will have seen some of the same CS60 rigs in Norway today, very popular, big powerful rigs, very efficient with digitization and the newest technology from MH Wirth that some of our customers are also buying because they believe in it. And then on top of that, on top of higher efficiency and higher uptime and total well cost improvement, we also have substantially lower carbon doing the same job.

Then to financing. And you will know that we have 75% of the second installment due on 9th of June. And then we obviously have the takeout financing for Nordic Winter when we take delivery. Now for the second installment and approximately $32 million due 9th of June, it -- of course, it doesn't make sense to raise any equity to cover that installment. That's not really a good option, the way things are now. So we're still aiming for good news before that date that could lift the share price and still make equity a viable alternative. If not, then we need to look at further deferral or a debt arrangement of some kind. But yes, we have various scenarios that we're looking at. And again, we are not making any firm decision on that before we get even closer to that date.

Capital only needs to be raised when required. So that's the funding we need now. And then we have some project funding that we need this autumn, next winter. And then it's only on delivery that we need the 80% of the rig payment of $340 million. And that's far out in the future. So right now, the focus on the next installment and then the takeout financing is something that we are considering options for already. And the better that is, the better offering we can also come within competitive market.

The financing structure will depend on the term and value of the rig contract, long contracts, better terms and, yes, as high but guaranteed revenue as possible. That's what you can go to the banks with. That's when you -- no risk.

And then we just continue to say that flexibility remains a keyword in our case. We have that payment due in June. Apart from that, if we don't get a contract soon, we can call the sleeping beauty. We can leave the rig down in Singapore for an additional year, wait for the market to recover. And there are great opportunities out there come '23, '24. But also in the meantime, there are opportunities that we're looking at now. So if we need time, we have the time. If we don't need time, we'll be ready to go on contract.

And that takes us to the Q&A session. And maybe you, Cathrine, can help us do that by bringing the questions to our attention.

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Questions and Answers

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [1]

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Yes, I will do that. We have 2 questions. And the first one is, will there be a Nordic Summer? What is your thinking about pulling another option?

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Jens Berge, Awilco Drilling PLC - CEO [2]

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Well, there will definitely be a Nordic Summer in a few months from now. The rig, Nordic Summer rig, if we guess, there are higher priorities right now than ordering the third rig. If we get a good contract for #1, continue the building on #2, at some point looking at longer strategic opportunities, I hope so. But it takes more security, at least for #1 needs to go on good contract, and also, we need to see that there is a good outlook for #2. That could also be simply by looking at whoever clients picks #1 and what strategic opportunities they have. And if there is room for taking in more rigs, in a few years for long-term contracts, then we will definitely look forward to be looking at both Summer and Autumn when that makes sense. Yes.

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [3]

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Good. Another question is if the option of scrapping WilHunter has been considered to raise capital. And I guess, linked to that, when would we make a decision on scrapping WilHunter?

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Jens Berge, Awilco Drilling PLC - CEO [4]

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We haven't made a decision yet, but the rig doesn't get newer while it's lying there. It's still -- we see a lot of scrapping in the market. So there are actually some sectors, not in the North Sea, but more benign and overseas sectors, where we have received requests on WilHunter recently because there are fewer left of these vintage rigs. And this one is in a good state. That's why we've kept it for so long.

That being said, if you bring the question of WilHunter scrapping into the capital discussion, it doesn't really have a big effect. Obviously, reducing OpEx helps on sort of your cash balance and cash burn rate. But in a scrapping case, it's -- you're not left with a whole lot of profit from scrapping a rig. So it's not really relevant for that discussion. But the time might come when we consider scrapping Hunter too just like our competitors do with other rigs in that -- of that age. Yes.

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [5]

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So the next question is if you could say something more about the contract options for Nordic Winter.

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Jens Berge, Awilco Drilling PLC - CEO [6]

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I would rather say -- I would rather repeat what I said earlier. Sorry, if that's not a good enough question because I assume whoever asked that question will have heard what I said also. But we -- there are quite a lot of good opportunities in the future, in 2, 3 years from now. And then there are few but very good opportunities that is almost ideal for our rig delivery schedule, and which also has the duration that we require and where there is also demand for the capabilities that we can offer. But I do not want to give more detail than that.

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [7]

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The next question is from Lukas in ABG. If you call the sleeping beauty on Nordic Winter, rig #1, is the June milestone payment also going to move forward?

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Jens Berge, Awilco Drilling PLC - CEO [8]

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They are unrelated, but we need to pay that installment. And I mean, that's part of the contract we have with Keppel. So we need to pay the installment and then to maintain our commitments. And then we can call sleeping beauty after that. And the way these things are put up now, the due date for the installment comes before we have a deadline for calling sleeping beauty. So if we use that time until that deadline for calling sleeping beauty, then we need to deal with the installment first. Or as I said previously, have it deferred if possible or at least be compliant with the contract and maintain our obligations. Yes.

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [9]

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Yes. Then we have a question on if you can estimate the value of scrapping WilHunter.

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Jens Berge, Awilco Drilling PLC - CEO [10]

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Estimated value. I -- well, the value of steel is one thing, and then the cost of doing is another thing. And some drillers see that this is -- or most see that it's pretty much a zero-sum game. I think some choose an expensive approach and get little value from the rate. Others might get a good deal on the steel, and they manage the costs better. So it's not a big -- it's not a big profit anyway. It's a zero-sum game, hopefully with a few million plus.

But we will optimize that. And the reason why we believe we could get -- potentially get more than that is because there's also quite a lot of well-kept equipment on board and that could be a premium for us, but that wouldn't be scrapped. So that's what -- the equipment we would take off, that could give us additional funds.

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [11]

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We have no further questions at the moment, so if anyone has any further questions, please post them in the Live Events Q&A.

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Jens Berge, Awilco Drilling PLC - CEO [12]

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Okay.

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [13]

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We have no further questions, so I suggest that I'll hand it back to you, Jens.

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Jens Berge, Awilco Drilling PLC - CEO [14]

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Okay. Thank you, Cathrine. So thanks, everyone, for your attention today, and have a good day. Thanks a lot. Bye-bye.

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Cathrine Haavind, Awilco Drilling PLC - IR Manager [15]

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Thank you. Goodbye.