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Edited Transcript of ODL.OL earnings conference call or presentation 28-Nov-19 2:00pm GMT

Q3 2019 Odfjell Drilling Ltd Earnings Call

Hamilton Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Odfjell Drilling Ltd earnings conference call or presentation Thursday, November 28, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Atle Sæbø

Odfjell Drilling Ltd. - CFO & Executive VP

* Simen Lieungh

Odfjell Drilling Ltd. - CEO & President

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Conference Call Participants

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* Jamie McFarlane

Bybrook Capital LLP - Partner & Senior Analyst

* Lillian Starke

Morgan Stanley, Research Division - Research Associate

* Lukas Daul

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Odfjell Drilling Q3 2019 Investor Call. At this time, I would like to turn the conference over to Simen Lieungh, CEO. Please go ahead, sir.

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [2]

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Thank you so much and welcome to all of you on our investor conference call for the Q3. Together with me here, I have the CFO, Atle Sæbø; and our Investor Relations Officer, Eirik Knudsen. We will visit -- as we normally do, I will take you through a -- take a short introduction to where we are, some highlights, going to the segment reporting, talk a little about the market and the outlook as we see it. Atle will guide you through the financial information before we end up with the Q&A session. So feel free to ask questions, if you have.

So I'm going through the presentation, but I'm not necessarily using all the slides there. But if you -- in the slides number -- on the Page 3 there, just to give you a status. We had a revenue in the quarter of USD 215 million, gave us an EBITDA of $94 million. Our backlog is about $2.1 billion, and that gives us equity ratio, about 40%. The structure in the company are the same. We do have the MODU fleet and service side, which really consist of well services, platform drilling and technology. And I will, a little later, take you through the highlights in each of those segments.

So into the #4, just to repeat what we have said recently about our priorities and strategic focus. We have, so far after a difficult time behind us, refocused the company somewhat. We have cultivated, and focusing on the harsh environment, we want to -- has some ambitions to be the preferred within that segment.

We have certainly taken up the green shift and are working more and more with solutions to reduce emissions for -- during our operations in all segments and have several activities with different clients running in that aspect. And of course, that's in the future more and more important both for attracting investors and financial support as well as being preferred in the -- operator in the market.

Our -- what we have been able to do to is to be -- to continue strong operations. And we are service provider, and we also do more and more integration of those services into the direct operations.

Our focus has always been, and still are, to build a healthy backlog, profitable backlog. And in parallel with that, we are concentrating these days where we see an upturn coming, that we have strong capital discipline to keep the cost level healthy and not been dragged into a negative spiral of diluting income and profits because of cost increases.

The priority is to be -- to grow healthy, profitable. We also have said that we are focusing now to be a stable dividend provider. We might come more into the details there, but we haven't paid dividend for some years. And when we look down the road now, we are in a position to provide a dividend. And when that happens, we will make sure that, that's going to be on more like a stately basis, not one-offs and up and down, here and there. So that's really our strategic focus and priorities.

I'm going to Page #6 and just to share with you some highlights. We have -- as we have previously announced, we have been able to continue with Total in South Africa. We will bring the rig up to -- into shore and prepare for the travel to South Africa in January. And we expect the rig to operate down there for mostly of the 2020 year. A little uncertain about there could do some extensions, but we estimate that 2020 will be a year where we operate in Africa.

We have also been able to bring Deepsea Yantai, our recent rig. It's not Odfjell rig, but we do the management. We were able to bring it commenced in 31st of October, according to the business target. And it's difficult to say what kind of result we can expect regarding efficiency because it's quite new to us. But it seemed to be an interesting piece of equipment and we believe it's going to be a good contributions down the road. And we have to see what we're finally going to do with the rig somewhere down the road. I cannot be more specific than that.

Going into the segments, it's good to see actually that our fleet are operating on a high financial uptime. 98%, 98.5%, 99% on average, and that is quite okay. And I think together with the uptime and the focus to operate, we also have an extremely strong focus to be sure that we are doing a safe operations. We all need to have that in mind. And there's no success without having a safe and solid operation, so we take care of the people and equipment and our environment.

If we continue with the MODU on Page #8. We can take the rig-by-rig as we see it here. MODU is important to the company, it's about 80%, 85% of the balance sheet, so of course we spent a little more time on that part.

And if we start with Deepsea Bergen. Deepsea Bergen has been able to -- we have been able to run the rig through the last years on a more close to 100% continuous basis. Currently, we have work for MOL in Norway. And we expect that we will continue with this contract into December and maybe somewhat into January. We don't really -- can say we have anything firm in 2020.

I just remind everybody that we have a SPS coming up in October 2020. We have said that we have to evaluate if we're going to the SPS on alternative base on the market and hope that we are able to secure activity for the rig. It's a rig from '83. It's a very good rig. It's only the third-generation rig that has work been won through the last 3 or 4 years through the crisis. It delivers good results, liked by the clients, but we have to face the fact that it might be a different -- difficult and different situation for the rig down the road. SPS is relatively costly. And if the market is not improving and we don't see a longer-term contract that can give us some visibility into the future, I think it will be difficult to say we're going to continue to run the rig.

So that -- after that -- if that happens, there are several options. We could sell the rig. We could cold-stack it or stack it forward. Or we could scrap it. So that's the options. Our preferred option is to work hard, and we do that to find more work for the rig because we like it, but we're not -- no way married to it. But we are -- but we think it has a merit going forward and the track record, it should be attractive. So we are following several leads for the next year and we worked hard to secure activity. And I believe that we might get something, that's my belief, but I can believe whatever I want. The fact is that -- what we can present, but we believe we will be able to win more work.

Deepsea Atlantic is now working with an MFA, a Master Frame Agreement, for Equinor. And I've been asked recently, what happens? And I can say the rig is going to continue to work for Equinor. We haven't -- we're not yet ready to launch any specifics regarding the next call-off, but that I can tell you that we are close to reveal some news on that rig.

It's a very efficient rig. It has worked, over the last period, extremely on a high uptime, high efficiency, good performance of safety. And we believe this rig has a long future with Equinor.

Deepsea Stavanger, I just mentioned, currently working for Aker BP. It's going to have a break from next year, doing the South African job, coming back late '20. And next big round will be continuous work with Alliance for Aker BP. We believe that's going to happen. Currently, it will be released from the Alliance for practical reasons into another type of contract. But when it comes back, Aker BP has the right to get it back into the Alliance.

Deepsea Aberdeen worked with BP, West of Shetland, has a relatively nice day rate compared to the market today. There is no changes in the situation there. And the rig has -- the current contract will end in April 2022.

Nordkapp has -- is working for Aker BP. The next could have -- year will be a somewhat higher day rate, and we are discussing with the Aker BP for the extension for the first option. So we have no news coming up there yet, but we expect that we will have something to talk about somewhat later this year or early next year.

Deepsea Yantai is -- as I said, it's a managed unit in the same we used to manage the [innovators], so it's the same type of thinking. We are running the rig for CIMC in China, Neptune is the client. And I'm really pleased to say that the team in Odfjell has done an exceptionally good job to take the rig from China, bring it to Norway, get through the AoC and out to the location and commenced 31st of October.

This is a very strong performance from the team, and we did the same with Nordkapp, we have done now with Yantai. Two rigs they hadn't built themselves. So -- and that's different. When you build yourself, you know all the details. But in this case, we had taken over, we had to know the asset. And we are pleased that we were able to provide Neptune the service they had deserved. And we look forward to find -- figure out how that asset could be managed and handled in the future.

We have the first right to take over with the rig, but we have no plans to do it in the traditional way. But we are discussing with CIMC and the owners, down the road, how we will hopefully do something to have the rig on a more continuous basis. It will be depending on the market, it will be depending on the client needs, but certainly, we -- so far, it looks promising, I can say.

On Slide #9, just to reflect a little. I don't want to bring you too much details. But we do have an ambition to what we call 0-emission drilling. Sounds futuristic, but absolutely realistic. Not today, but maybe in the not-too-far future. Clearly, we have experienced a lot in these segments over the last 1.5 years in that time period, that this is getting more and more important. Our responsibility to be -- also to take the climate change seriously will be to -- together with our clients and core suppliers, to reduce the emissions from these operations. And that's clearly an ambition from the whole industry. Not only within the hydrocarbons, but with the whole industry and -- of the services areas, too. And our responsibility on this is clearly the same. To attract the financial interest and support from market, we need to do more.

And we have -- we are working with several projects now, where we get funding from different fronts to support our technical solutions. We work with what we call flywheel or hybrid solutions with NOV, closely with them. And we believe that maybe the first rig that's going to be equipped with this kind of equipment will maybe Deepsea Atlantic. And we have quite optimistic view on the -- how we can reduce emissions from drilling operations going forward.

So this is going to be a very, I will say, red thread in our presentations in the future that will always address what are we doing, how are we -- in what way are we able to reduce emissions and reduce fuel consumption and so forth. Very interesting, very exciting area. And we are quite -- very, very motivated to show that we can be a frontrunner on that area.

Moving over to Platform Drilling and Technology. There's not too much to say about that. It's a very stable business. It's very, very, I will say, good to see now that Platform Drilling and Technology are delivering good results. Double-digit numbers on margins and EBITDA, and -- which is not necessarily given because if you look some years back, we were struggling with low performance -- or high performance but low results due to some sort of a difficulty and there is the very tough contract conditions. But the turnaround in that segment is impressive, and today, they contribute significantly on the bottom line and are a very important provider services for other actions and other activities we have in the company, like rail services, engineering, technology upgrades and so forth. A very important area for us, and hopefully, going to be stronger and stronger in the future.

With Well Services, I can also say now after many years of struggle, the team within Well Services has done a fantastic job to turn around and now finally getting better and better results. The trend going forward are very, very positive. We operate still in more than 20 countries. We see much more activity here in the continental shelf in Norway and the U.K. We see more activity now in Central Europe, Continental Europe also. We have better and better, obviously, look-aheads for Middle East. We see more activity in Asia Pacifics. And we are also looking at newer areas of services and products which hopefully will be -- will gain us down the road.

We look at what we call something with the wired pipe, which is a more intelligent pipe, to work with digital solutions to control the well during drilling. It's a totally step-change regarding visibility and predictability of the wells.

And we also look at some interesting prospect of what we call casing while drilling. Also the directional drilling with casing have not been successful so far, but we believe that also has the potential. And we look forward to the next trial which might happen in the first quarter next year.

The backlog, as I mentioned, it's healthy. We believe in the close future, we will build more backlog. $2.1 billion now. We have a little drop since the last quarter. But what I'm saying here is that when we launch the next round of call-offs, it's going to get back again.

The market outlook from my side is still differentiated. We are operating in the harsh environment. We believe that the trend in the market will improve somewhat. We don't believe in type of a step-change, a step up, if people are talking about day rates. I think what's going to happen now in the future will be that compensation will be face value of the, well, base day rate, but also more and more contributions from incentive schemes. And I think the reason really that we are somewhat over consensus on this quarter is that we are now seeing results from the performance schemes and incentive schemes, bonus schemes we have with certain clients.

And with the fleet we have with rigs that have the capability to outperform and -- both on the efficiency side and the HSE side, we are honored and we are compensated by certain KPIs, which gives us, in some areas, quite significant contributions. I have indicated earlier that what is the contribution from incentives from a day rate, I said 5% to 10% of the day rate. I don't think that is too far away from the fact. Some, it's higher; some rigs, it's slower. But in average, it's in that range and I can't be more specific than that.

But I think that clients clearly prefer assets, rigs that has the specification that can provide, I would say, a platform for that kind of efficiency and performance. So that's the reason why the sixth-gen high-specced assets are more or less sold out in -- at least here in Norway, and why there is less appetite for the older assets. What's going to happen down the road is difficult to say, but we clearly see that the interest for these kind of assets are quite heavy.

That's the harsh environment. But in fact, we are not operating anymore on the deepwater side, but we do have interests on those -- in certain areas, to look at the deepwater side. And we used to run 2 drill ships. We also are engaged in certain projects where we can access drill ships and hopefully get some activity on that aspect because we don't want to just flush out the experience we have there. We operated the 2, we had -- quite okay, especially in the Deepsea Metro I. But we unfortunately see that the deepwater market will still have a tough way -- long way to go. Long way meaning maybe a couple of more years at least before you can see day rates are lifting to a healthy level where you can justify the investments on those areas and also maintenance and SPSs and those -- required to run those type of assets.

So it will come. I guess offshore drilling, offshore production, will come more and more. Maybe the shale will, in the future, flatten more out, at least we believe so. There's not the same pace of -- or just to produce more and more, there are costs involved, there are cash flow restrictions and all that. So we believe offshore production will increase. We see maybe, as I said, a couple of years ahead of us, that's going to be a different market.

Jack-ups, also the same. We see also that, that segment is coming up. And the good things as we see it is that, in general, there are more positive outlook of offshore activity than it used to be just a year ago. Might take some little more time, but we have a strong belief it will be better and better. And when things get balanced, companies coming back to more investments, we see clients are investing at least more and more into these areas. And when companies are getting balanced, they will also be able to do more dividend activity, and that will attract more investments and shareholders. So all in all, it has a positive outlook.

Well Services, the same. We see that after a time with very tough pricing activity and very tough competition, we see more and more activity, we see more utilization of equipment. We will do more investments there. We have, as I mentioned, well -- wired pipe, which will require some investments, but we also do that because we believe it's a very strong business case. We see in general that the markets are lifting, activities are improving, both onshore, shallow water, deepwater, midwater. So in general, it's a better outlook.

Within Platform Drilling and Technology, it has been stable. It hasn't changed much over the last years, but -- and it doesn't really contribute regarding market too much on the picture I just explained to you.

So with that comments, I think I'll leave the word to you, Atle, so you can handle the financials.

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Atle Sæbø, Odfjell Drilling Ltd. - CFO & Executive VP [3]

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Thank you, Simen. I'm pleased to take you through the 2019 third quarter financial information. On Page 15, you can see that the group operating revenue was $215 million compared to $180 million in Q3 '18. The group EBITDA was $94 million compared to $69 million in the same quarter 2018. The increase in both revenue and EBITDA is mainly due to higher activity in the MODU segment. The EBITDA margin was 44% this year compared to 38% in the same quarter last year. These are the blended figures of the capital-intensive mobile drilling units and the labor-intensive platform drilling.

We will now present each of the business segments. We start with the MODU segment on Page 16. Operating revenue for the MODU segment was $155 million compared to $119 million in the third quarter '18. EBITDA was $81 million compared to $59 million in the third quarter '18. Another strong quarter from all of our rigs. High financial uptime combined with average OpEx of approximately $130,000 a day per unit provides a solid EBITDA contribution this quarter. The increase in both revenue and EBITDA is mainly related to Nordkapp's operation in third quarter '19. In addition, we have earned some performance bonus, which is helping the bottom line. The EBITDA margin was 52% compared to 49% in the same quarter last year.

Then we continue with the Drilling & Technology segment on Page 17. The operating revenue was $38 million compared to $40 million in the same quarter last year. EBITDA was $6 million compared to $7 million in third quarter '18. The Drilling & Technology segment continues its positive development and delivers over 15% EBITDA margin this quarter and accumulated 11% EBITDA margin year-to-date. The figures are partly due to one-off items, and we note that long-term objective of this segment should be somewhat lower than what we achieved this quarter.

Then we move on to Page 18, the Well Service segment. The operating revenue was $29 million compared to $27 million in Q3 '18. EBITDA was $8 million compared to $7 million in the same quarter last year. Well Services has developed positively in this quarter compared to comparable quarter in '19 (sic) ['18] and also last quarter. As mentioned earlier, there are signs of increase in activity, which in the longer run, will lead to a price increase. Of course, the nature of long-term frame agreements makes the bottom line improvement somewhat slower, but we see a clear trend in the market that this is a positive development. The EBITDA margin was 29% compared to 27% in the third quarter of '18.

Then we move on to Page 19, the eliminations and reconciliation. On this slide, the group eliminations and reconciliations have been included for your information, but please note that corporate overhead has been maintained at the same level as the previous periods.

Then we move over to Page 20, the summary statement of financial position. And the group's gross interest-bearing debt was $1.410 billion at the end of September 2019. We have a cash and cash equivalents of $131 million at end of September '19. Please note that we do have an undrawn bank facility of $60 million at the same time, but in reality, we had approximately $190 million in cash and cash equivalent available. Further, we also have prepaid payment of $20 million on the service facility which was originally due later this year.

The equity ratio as end of September is approximately 40%. For your information, I would also add that the leverage ratio, adjusted for newbuild financing, at the end of September was approximately 3.5. That is measured, the EBITDA compared to net debt to equity at the end of the third quarter.

Then we move over to the next page, the Page 21. You can read that the net cash from operations was $27 million compared to $32 million in the third quarter '18. The important explanation here is that we have a change in the working capital of $47 million, and that is due to the increased revenue of turnover in the period which has increased the accounts receivable by approximately $20 million in addition to some other operating, like employee tax and deductible [receipt], taking this amount up to $47 million in total. We can further note that we, in the year to date of '19, has invested $406 million, which is mainly due to -- related to the Deepsea Nordkapp. In addition to cash position of $131 million at the end of September, we have, as mentioned previously, an undrawn bank facility of $60 million.

If we then move over to Page 22, it's the summary for the third quarter. If we look into the mobile drilling business, we could see that we have an attractive harsh environment assets, strong backlog and a healthy outlook for that business segment. The Drilling & Technology has improved the financial performance, supported by a strong backlog in the business area. In Well Service, the turning point has passed, and increased tender activity will lead to higher utilization and prices in the quarters to come.

Then we take a look at the key financials. We have an earnings visibility through a $2.1 billion order backlog. We have a sound cash position in combination with undrawn bank facility and we have no short-term refinancing requirements at the time being.

And as this concludes our presentation, we will now open for our Q&A session. So please, if you have any questions, we are available.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Lillian Starke from Morgan Stanley.

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Lillian Starke, Morgan Stanley, Research Division - Research Associate [2]

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I am just curious on the innovations that you mentioned on your equipment in order to qualify the rigs to be 0 emission. More or less, is there an additional investment you're looking? Or is this something you would be incorporating as part of the maintenance CapEx?

And then as a follow-up to that would be, these upgrades, are you seeing clients being more interested on the rigs or becoming a requirement for tenders or maybe allowing for better pricing?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [3]

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Well, it's -- we are use -- we are working with technologies with some key suppliers. I mentioned actually NOV. So there will be some investments, not the big investments, but there are technologies that are -- some of them are already available and some of them are quite new. And we get support from -- there are different fronts that actually support activities in this area. And we have already get -- got several tens of millions, NOKs, it is the Norwegian-based funds that support activities around this area. So we do have programs on Nordkapp, we have programs on Atlantic, and we have progress on Stavanger ongoing.

So yes, we are doing this because we believe this is the clear future. We have high ambitions to reduce fuel consumption during, for example, drilling operations when we do actually drilling. When you move a rig, it's difficult to see how we can kind of avoid to spend fuel, but when you are steady over a field, you can actually anchor up the rig, and also in combination, by DP. But there are also possibilities in Norway at least which has hydropower electricity from shore to connect the rigs to platforms which is already fueled by electricity from shore-based or hydropower, which will also be used on semisubmersibles. So combination with the hybrids; combination with the type of flywheel, we call it, technology that can kind of bring the requirement for power and electricity down; combination with potential now in the future connected to onshore power, and in the future, windmills offshore, we'll be able to -- kind of to make the rig more and more down to 0 emission during drilling.

So the reason we do this is many-folded. Yes, clients themselves have an ambition to do what we can do to step up on that area, which we have not done so far, I think, all over the place. We want to be ahead of that -- in that development. And secondly, by that, we will demonstrate, not green-wash anything, but demonstrate that we are able to reduce the energy consumption via hydrocarbons. And secondly, we also believe that clients will prefer contractors, and -- within this area that actually step up and do significant developments in that direction. You will be, by that, preferred to win more work and be in stable operation. So that's the reasons.

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Lillian Starke, Morgan Stanley, Research Division - Research Associate [4]

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Okay. Perfect. And if I may ask another question. Just with regards to the incentives that you mentioned. To what extent do you think the delivery of -- or achieving these incentives or this performance could eventually lead to a reduction in clients being willing to pay an additional percentage of a day rate for them as maybe that performance become the norm as more rates are upgraded? Or do you think it's more likely that we'll see these incentives or the performance being maintained over time?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [5]

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I think if we look at the -- if we take away the technology we talk about here for the green upgrades, I call it green upgrades for lack of better words. But if you see that these rigs we talk about, the sixth-gen high-spec efficiency, we have reduced the time in the well by more than 50% of the last 1.5 years. More than 50% reduction, time in the well itself. That means less days when you burn fuel, less days when you need supply from shore, less days when you need all the spreads around to support the operation. So every day we can save on a well will be saved hydrocarbon emission or CO2 emission.

On top of this, what we foresee is going to be more and more important is not only that you save days, but you also can say that you are reducing fuel consumption by using these kind of technologies. So the incentive schemes will be based on technologies and solutions to reduce emissions and to be high efficiency. So the combination of these things is going to be both things. We don't have any KPIs today really in incentive schemes to reduce emission. What we do have is with some clients, that we have, in the old days, we were paid every gallon used of diesel offshore. Today we are, with some clients, giving an estimate of what we are use -- going to use in these operations and take responsibility for the volume. The client pays the gallon -- the dollar per gallon, but we estimate what kind of fuel consumption do we think we're going to use in this kind of operation. So by that, we have already been incentivized to take care of the fuel consumption itself.

But they have not yet put an incentive KPI into the emission -- I would say CO2 emission, for example, itself. And that's going to be developed. By doing the technology, the step-up we are talking about here, we can also demonstrate and we can calculate what we expect really how many tons of CO2 we're going to reduce by using that rig with that technology or with that kind of operation. So yes, it's going to be part of the incentive scheme, definitely.

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Operator [6]

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(Operator Instructions) We will take our next question from Jamie McFarlane from Bybrook Capital.

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Jamie McFarlane, Bybrook Capital LLP - Partner & Senior Analyst [7]

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My question, just wanted to ask, you mentioned that you're close to adding backlog on the Atlantic. What's the timing there? And could you give a little bit more color around how long that might end up being with Equinor for?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [8]

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Yes. We -- I think the reason we have taken some more time than we actually hoped for, this is not excuse, but it's that the client -- the program we expect that Atlantic will work with is a well-based program going forward. It's not one field, it's several different wells with different licenses. And to make a path of activity, Equinor needs to confirm that path with the different licenses. That actually takes some time. I'm not concerned that, that will be nothing. It's going to be we know the rig is very attractive with Equinor, and they're going to call the rig. I don't think they will -- I don't think we will need to wait for too much longer, it's going to happen in the relatively close future. That I can say.

How long that will be will depend on what they get approval for. Now we have operations now with -- until, say, May next year. We have agreed on more or less all the commercials. Just about to say, when you release the activity path, how long will that be? And after that, it's going to be add-ons after that again. So I think that we are in the continuous optionality with Equinor, and we believe the rig is going to stay there for quite some more time. So the date, I can't give you, sir, but I don't think we need to wait for too long.

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Jamie McFarlane, Bybrook Capital LLP - Partner & Senior Analyst [9]

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Understood. And just is there any update on the Johan Sverdrup 2 tender, which I think you'd mentioned before as well?

And then the other question was -- that I had was in relation to the Stavanger. When does Aker BP have to give, and when will they give you the view that they're bringing that back to the Alliance after the Total work?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [10]

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Well, depending on the Phase 2, we are -- we have submitted our bid for that. We expect there will be activity from all the bidders. I mean Equinor will probably entertain everybody. We will do as much as we can to make sure we win the work, but I think everybody else will say the same, so that's not a surprise. But clearly, we expect that there will be some more discussions on the side to -- in the future here now. We expect to be called in to explain what we have done and be challenged by that.

Regarding Stavanger, I guess that when Stavanger is coming into shore now in January, I guess that, that will be about the time, I guess, Aker BP will call the Alliance option. I guess around January, February next year, I guess. If they don't, well, the rig will be free, but I guess they will do that. That's my clear, I will say, expectation.

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Jamie McFarlane, Bybrook Capital LLP - Partner & Senior Analyst [11]

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Understood. And just a final thing. On the Nordkapp, you mentioned the -- that next year, it will be at a higher day rate. Can you disclose what that rate would be?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [12]

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Yes. It's close to 330k, isn't it? Plus the [MLC] that are most likely for incentives Of course, so I think it's 327.5 if I remember right. And the first option we are discussing with Aker BP, that 2 first years, I think the first option is due around now. So we will discuss with Aker BP when they will finally call the first option on the year #3 on the rig. Remember, there's an 18-month call period before the option is real. So kind of a long period before that, but we are talking about that in these days. So I guess there's going to be some news there not too far into the future.

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Operator [13]

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(Operator Instructions) We will take our next question from Lukas Daul from ABG.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [14]

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I was wondering on the frame agreement, the jobs that you are potentially looking at in Norway. In general, are those programs put out as a tender? Or is there sort of a direct negotiation between you, the oil company and potentially others that they might have a similar frame agreement with?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [15]

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In general, the work -- the frame agreement are more like direct negotiations. Remember, with Equinor, which has frame agreement with 3 actors, it's Seadrill as well as [Rowan]. Equinor has the privilege to plan the path forward for each of the rigs to having the frame agreement. And according to those plans, they start to negotiate with the contractors. So that is their privilege, to go direct negotiations, and we're doing that. The path for the wells we are kind of marked for are direct negotiations.

While they can also derive from that principle like they did with Sverdrup Phase 2, that was a tender. So they can also do both, really, but they have the privilege to do both. They can decide to go tender or they can decide to go direct negotiations. But basically, the reason for the frame agreements is to have an access to players that they can play around with the assets as they want and be able to kind of make their own optimal path for their rig activity going forward. But it's up to them to decide if they want to go tender or not. [It's what we talked], but that is direct negotiations.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [16]

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Okay, good. And then on Deepsea Bergen. Obviously, you will need to take the decision whether to SPS it or not. But given its age, et cetera, what's your sort of a preliminary cost estimate related to that SPS survey?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [17]

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As I said, a full SPS of a rig like that is typical, I guess, around $30 million, $35 million. That's the SPS cost for a 5-year SPS. However, there might be -- if we get some visibility of the rig for the period beyond the October next year, we are able -- or it's possible to do a 1-year extension to go SPS-light to be able to get into '21 with a limited investment. That level need to be -- I need to come back to that, but we are evaluating, if we see some activity that can justify us to go forward, the financials to play in the right direction. We might do an SPS-light first, and then after that, you have to call the -- obviously evaluate if we're going to do the full SPS after that. So that's the flexibility we have. All right?

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [18]

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Okay. And then finally on the Deepsea Nordkapp, I mean, I read in the footnote on Page 8 that you should have a minimum average rate of $325,000 per day. But if you're getting $300,000 in the first year and $327,000 in the second year, then you are not getting $325,000 on average.

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [19]

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So then, we will be -- if the average over the period -- we are committed or bound by the contract. If the average is less than $325,000, that will be compensated. And remember that on top -- what you said that on top of those rates you have just mentioned, we have the so-called most likely cost incentive, which is again 5% to 10% on top of the rate. So currently, it looks okay. But if for any reasons, the market drops down and we get -- the average of the period we have worked for Aker BP, is less than $325,000, we will be compensated to $325,000. And if we get above $325,000, we will get that money, we will not pay back anything.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [20]

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Okay, good. So you are going to get what is promised. That's good.

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [21]

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Yes. It's actually -- so that was the -- Lukas, that was the basis for the contract. Remember, we couldn't go into a contract and get it financed by the banks without having a secured floor. So that floor is $325,000. That was the difficulty, that's why it took some time to get the contract because it was a little hard to get that floor.

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Operator [22]

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(Operator Instructions) It appears there are no further questions at this time. I'd like to turn the call back over to you for any additional or closing remarks.

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Atle Sæbø, Odfjell Drilling Ltd. - CFO & Executive VP [23]

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Okay. Let me use the opportunity to thank all of you for the attention regarding the third quarter report. Thank you.

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [24]

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Thank you. Bye-bye.

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Operator [25]

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This concludes today's call. Thank you for your participation. You may now disconnect.