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Edited Transcript of ODL.OL earnings conference call or presentation 29-Aug-19 1:00pm GMT

Q2 2019 Odfjell Drilling Ltd Earnings Call

Hamilton Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Odfjell Drilling Ltd earnings conference call or presentation Thursday, August 29, 2019 at 1:00:00pm 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

* 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 Second Quarter 2019 Investor Call. At this time, I'd like to turn the conference over to Mr. 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, and welcome everybody to this call. Together with me, I have Atle Sæbø, CFO; also Eirik Knudsen, Investor Relations. I'll take the first part of the presentation, Atle will take over on the financials.

Today, we will go through some highlights of the last quarter. We will touch upon the segment reporting, and of course, going into financial information and as usual we open for Q&A when we are through the presentation.

First of all, I will just express that we are very pleased that we were able to complete the refinancing of our Deepsea Atlantic and Stavanger plus the service facility. Today, we can see in retrospect that the timing was good that the bank market is extremely challenging, and we were very happy that we can conclude the structure before the summer. We did the same -- almost the same back in '15, and we expect this time to be easier because we have a strong backlog, which we show and everything was kind of expected to be more smooth, but I think Atle can confirm to me later that we see extremely complex and challenging bank market. So I think the whole segment is affected by that. But anyway, we will go into more details about that later.

Regarding highlights, regarding operation, we have commenced Deepsea Nordkapp working for Aker BP on a 2-year contract. We have an option and expected call to come later this year in November for the first option to recall 18 months ahead of the operation period. I think that the commencement has gone very smooth. We have been operating on close to 100% uptime from day 1, of course, that helps and what is really, I'll say what we can kind of look back and look at the rig, it's a new rig for us, it's a new concept for us even though we have spent a year to prepare and modify some elements to make it as efficient as possible. The operation has so far shown, knock wood, that we are in the very high end of efficiency.

This is confirmed by Aker BP, and of course, it's very pleasant to tick off that we are in a good shape and the rig is performing very, very good. We also have concluded continuous work with Total in South Africa. The rig was actually made available by Aker BP because of very high efficiency. And there was an opportunity for Aker BP to release the rig for that kind of operation. Of course, for Total, this was a gift because we did an operation just around Christmas for the first well. We did a significant find and now we are back there, and we're going to start in January next year to prepare for that mobilization and do more appraisal wells in the same area.

And as we say, I mean I have said, if the results from those appraisals are positive, which we certainly have a reason to believe, it is -- it will open for us a tremendous opportunity for further field development operations. It's a good contract. It's really from the framework or the alliance with Aker BP. We expect Aker BP to call back the rig when we are ready. It's going to be in operation for, let's say, 10 to 15, 16 months, in that range. We talk about depending how long we'll stay there. A contract value of $145 million to $190 million. And with I'll say terms and conditions reflecting what we learned last time we were there, so we have kind of been able to secure all the risks element in that contract.

I think one of the things we have not been -- I'm not going to quantify, but of course, we did significant -- we had a good incentive scheme last time, and we did -- well, we did very, very efficient and safe. This time, we have even a better scheme and if we are able to deliver according to what we expect, it's going to be very okay.

Of course, now we're going to drill through a year plus, and we were there in the summer last time. Now we're going to be there for all the seasons, including winter. And it's kind of, of course, exciting to see how this will go, but we have very, very good experience from last time, and we have adjusted our risk profile and have been able to compensate some of the risks we obviously saw last time so we are -- today are quite okay, secured for the second round down there.

The whole MODU area has over the last quarter delivered extremely well. We have an average uptime of close to 99%, and I think that Nordkapp, it has 99% actually, which is new rig showing that we have good experience of taking new assets into operation. I think also our old Deepsea Bergen, our old lady from '83 has been operating all the time through the crisis on a -- last quarter, on uptime of 99.5%, which is showing that, that rig is a really good machine even though it's old and still we are, of course, looking for the next rate or contract for that rig too but I'll come back to that a little later.

If you go through each one of them and just give a short comment about what we look forward or look here, we actually have Page 7 for your information, if you follow the presentation. Deepsea Bergen. We have coverage of this year somewhat into next year, I believe. What's coming? We are working with several, several opportunities, of course, next fall, October, November next fall, we have the SPS coming up. So our target is now to really to put the rig in back-to-back operations until then and see if we are able to take the rig through the SPS. That will be a question of contracts, day rates, length of contracts and what kind of opportunities we foresee.

If we look back, we have been able to run the rigs through '15, '16, '17, '18 on more or less back-to-back basis. And this shouldn't be any reason for not doing that in the continuation.

Deepsea Atlantic has -- is working for Equinor under Master Frame Agreement. We have the contract for this operation until summer next year. We are working with Equinor to -- are looking and in negotiations for extension. And we expect that those extensions will come maybe in the Q4 or late Q3 this year in that range. It's not -- we don't -- we haven't any specific date, but I can say that we have a strong reason to believe that the rig will continue for Equinor.

Deepsea Stavanger, as I said, we will go to South Africa. It will come back, and we expect Aker BP to call the rig quite soon after release, and we expect them to do that, then go back to the alliance. That's what -- at least the indications we are given.

Deepsea Aberdeen has the same contract until late spring '22. Nordkapp, as I said, has 2 years fixed. We have the first option. It will potentially be then recalled late this year for the first year of the 2-year option in that contract. The call period is 18 months ahead of the commencement of the option.

Deepsea Yantai, which is the last one, which is not the rig we own, but we have management. It's on its way -- on the way up to Las Palmas. We expect her to come to Las Palmas 2nd or 3rd of September and then mobilize and go to Norway and then mobilize for commencement late this year. And well, nothing more to say. We have the same management contract as we have talked about. We have reason to believe the rig will be okay and operational. We have a strong expectation by Neptune, and we look forward to get the rig back and see if that's the asset that will be hopefully operating according to what -- how we expect it to operate.

I think that picture we have in front of us gives us the predictability or the future for the fleet. We can talk a little about the day rates that we expect. We expect them to come up somewhat. And these are into market links and brokers are working today as we speak to estimate what kind of expected day rates do we get in the future for, let's say, 12 months ahead of us and future.

So I think that, at least, is an indication of where the level will be, but after this will be discussions with the client. So we will announce it when we are ready to go in a market.

Moving over to service side with platform drilling and technology. I have to say I'm quite pleased that we have been able to turn around that segment from loss-making a couple of years ago to today, a double-digit margins and strong backlog and loyalty to clients and the better market. It's a high tender activity in the area. We are currently working with several tenders. We have also been able to restructure all the, I'll call, the bad contracts we used to have or had some years ago. We have laid off what we wouldn't have. We are now able to bring better -- much better performance into the portfolio. And we are also within platform generally looking at other business areas like mobile modular drilling units, which we also have a exclusive agreement with the company called Xrig here in Norway, and we are looking for type of operations also to expand the delivery of services as we have done before.

The technology area with engineering and rig inspection shows increased activity level. We -- after the significant downsizing we did some years ago, we're now building back, and we are employing more and more people and I can say that we are facing margins in that area, looking at the double-digit level, which is good and services is now providing quite good numbers into both the bottom line and the backlog.

Well Services have for long time been a challenge. We have faced a market that has dropped significant over the last year since the crisis approached. We have since then worked very hard to restructure the area and I can now say today that we are finally looking at an increased activity level and better performance. We believe that will continue in the future. We have also all the services we have delivered with casing running with rentals, with well intervention activities. We're also in the process of expanding our services to, I will say, more advanced services like working with wired drill pipe from where -- which is more actual to work on the drilling rigs together with NOV linked to the technology and the digital solutions they are providing, which we are also installing on the fleet we have with Aker BP and Equinor.

We are working with casing while drilling with Huisman in Holland, and we have reasons to believe that we will finally be successful by doing directional drilling while setting casing. So it's -- this is more for land operations, but it expands the service area and the margins and the internal rate of return is quite much better than what we actually foresee some time ago. We will come back to that when that is realized, but it shows that the market is better, the volume is getting back. But we are not kind of being too bullish about how it will happen and when it will happen. We're looking for the trends and the trends are very, very good. And in the future, we expect those numbers to be much, much better.

If we flip over to the Page 11 talking a little about the market outlook. I'll say, in general, we are -- the total rig market is very, very different today. You have jack-ups, you have deepwater floaters, harsh environment, onshore rigs and so forth. And I can say that well, some segments are still, I will say, suffering for a very, very long activity like ultra-deepwater area. That will probably take some more time. How long, it is difficult to say, but a couple of years more I think we need that at least. Jack-ups seem to be picking up somewhat, not significantly step up, but it's a huge volume in the market. There's a huge supply, but the best rigs will get to work first there also. And within the harsh environment market, which mainly covers the North Sea area, Barents area, U.K. area, Atlantic Canada, South Africa maybe and -- which is not a super big market, but it is interesting has stabilized on a high level, and we expect that to be also to continue to grow the day rates down the road.

It's -- I think it's important to say that in this area where we have very advanced clients, which operate like Equinor and Aker BP to take a couple of examples, for Wintershall and Lundin are close there too, but they are looking for efficiency and the step-up in efficiency is quite significant.

I think it surprised many, many, including ourselves, how this high specification modern 6th-gen assets really are operating when you are doing things the way we have learned and in cooperation with the client and the service -- provide the main service provider. I think one of the reasons we have luckily get the contracting back with Total was that actually we are -- the rig was working so efficient, so that we might look at sublet opportunities from Aker BP and finally we got the rig back to Total, which is what they wanted, and that's the reason because the rig has delivered wells so efficient that has actually worked herself out of the scope of work.

What I was saying this is because I think that we are very happy actually to have a modern fleet that we can provide the clients with the service what they want and perform according to the last benchmarks and on questions that how is this compared to 2 years ago. I think we talked about more than 50% more efficient wells than used to be only 2 to 3 years ago and that's significant. And that is not only one thing, it's some of the parts. But it shows that we are in a position that we are attractive in the market, that clients want this kind of rigs in the market, and we worked hard to bring Bergen up to speed not on this level because will never get there, but I'm quite happy that we don't have 5 other Bergens to be quite frank. We worked more with Bergen to get her in operation than we do with the 4 others.

I think also I want to share with you a little about what's the focus in our fleet when we talk about this efficiency. We talk about -- we have never compromised safety, and we are working since '15 to try to bring the rigs up to low carbon footprint status. And of course, there's been a lot of activity recently by rig for the future stuff, but there's a long road that has to be completed or run until we have -- and kind of the green -- really green shift on these assets.

One day, we will present what we are doing there and we have quite high ambitions to do automation, to do digital solutions and to reduce the carbon footprint. And I think that we just say that quick one, if we take out well, how much we deliver I would say emissions on a well. If you take the new technology we are using and the speed we are working with, the CO2 emission per well is reduced with close to 50%. That includes, of course, the time line here, which is -- has been more than close to 50% shorter time to do complete the well. So of course, this is attracted by the clients. This is attracted by governments, this is attractive to many that has -- that will work in this segment and down the road there are much more to get. We are looking forward to find opportunities to present what we are doing in this aspect and to show that this is really -- really, is not only words, it's facts.

I think finally before Atle goes in here, I'd like to say we have $2.3 billion backlog, but this is not including any engineering or call it from OWS. So the backlog is good. We expect to maintain and improve the backlog down the road and well, this is at least what we prioritize is to work efficient, build backlog and secure predictability in the operations.

So before questions, Atle could you take us through the financials?

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

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Thank you. I'm pleased to take you through the second quarter figures.

If we start with the group operating revenue, it was $186 million compared to $201 million in the first quarter this year. Operating revenue increased mainly due to commencement of the Deepsea Nordkapp as per 10th of May this year. The group EBITDA was $72 million compared to $73 million in the first quarter this year. And again, this is due to Nordkapp. We managed to maintain the EBITDA from the first quarter when we received the substantial bonus from the Total South Africa work. We can also see increased performance from platform drilling activities and technology. The EBITDA margin was 39% compared to 36% in the first quarter this year. These figures are the blended figures of the capital-intensive MODU business and the labor-intensive Platform Drilling and Technology.

We will now look into each of the business segments. Then on Page 14, we start with the MODU financials. The operating revenue for the MODU -- in MODU segment was $132 million compared to $152 million in first quarter this year. The decrease in revenue is mainly explained by the incentive earned in the first quarter for Deepsea Stavanger during the South Africa operations.

EBITDA was $63 million compared to $67 million in the first quarter this year. And again, Deepsea Nordkapp almost compensated for the shortfall of incentive earned under the South Africa contract in first quarter. The EBITDA market for the MODU was 48% in the first quarter -- second quarter compared to 44% in the first quarter this year.

Then we move over to the Drilling & Technology financials on Page 15. The operating revenue was $37 million compared to $34 million in the first quarter. EBITDA was $4 million compared to $2 million in the first quarter this year. And the increase in the EBITDA is mainly due to increased activity due to operational performance and more profitable projects. We are very pleased to determine that we have reached an EBITDA margin of 10% in the period, which has been our target within this business area.

Then we move over to the Well Services on Page 16. The operating revenue was $27 million compared to $25 million in the first quarter and the EBITDA was $7 million compared to $5 million in the first quarter. As you can see from the figures, it's still too early to recognize an improvement in cash flow from the Well Services. However, there are signs of increase in activity, which in the long run will lead to a price increase. Also the nature of long-term frame agreements makes the bottom line improvements somewhat slower. The EBITDA in the second quarter was 25% compared to 19% in the first quarter.

Then we move over to Page 17, Elimination and Reconciliation. On this slide, the group eliminations and reconciliation has been included for your information, but please note that the corporate overhead has been maintained at same level as previous periods.

Then we move over to Page 18, which is the summary statement of financial position. The group's gross interest-bearing debt was $1,435 billion at the end of June this year. We have a cash position of $179 million loss. And in addition, we have $60 million in undrawn credit facility, which will be drawn in 2 tranches later this year and early next year. The equity ratio as end of second quarter was 38%.

As announced before the summer break, we successfully secured a refinancing package for the service facility and for Deepsea Atlantic and Deepsea Stavanger with an additional tranche of $100 million, which secures the working capital for the next couple of years. The next loan renewal is now end of 2021.

If you take a look at the summary statement of cash flow on Page 19, we could note that the net cash from operations was $60 million compared to USD 36 million in the first quarter. We can further note that in the first half of 2019, invested USD 369 million, which is mainly related to the acquisition of Deepsea Nordkapp. In addition to cash position of $179 million at end of second quarter, we have, as mentioned, an undrawn bank facilities of $60 million at the same time.

If we then move over to Page 20, the summary of the second quarter, I would like to focus within the MODU area that we have an attractive harsh environment assets, strong backlog and healthy outlook. For the Drilling and Technology, we have shown improved financial performance and a loyal client portfolio. Well Services has, after a long downturn, slightly better outlook for the service market. If you at the end take a look at the key financials, we have earnings visibility through $2.3 billion order backlog. We had -- have a solid cash position in combination with undrawn bank facilities, and we have no short-term refinancing requirements coming up.

This concludes our presentation. We will now open up for Q&A session. So please shoot.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question here from Jamie McFarlane with Bybrook Capital.

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Jamie McFarlane;Bybrook Capital LLP;Partner;Senior Analyst, [2]

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Congratulations on the good results. I just wanted to ask, I think that this quarter was the first quarter that you were expecting to start seeing some of the bonus rates come through across some of the framework agreements and the contracts you've got there. And if I was to calculate what I expected revenue to be and EBITDA to be based on your day rate figures, there seems to be quite a meaningful amount of potential bonuses that are included in operating revenues. I just wanted to check that this was the case and how we should think about the percentage of the day rate that you have been receiving as bonuses in this quarter and what we should be expecting to model going forward?

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

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Yes. I think it's a -- I would say it's a little early to conclude on that part because it's both with Aker BP and Equinor. This calculation of bonuses is not just straightforward. It has to do with a mechanism. And as you rightly say, some of the results are -- we have taken some of the bonus into the results. But we are not kind of ready to give you an exact more like an indicate or -- well, difficult to say. But kind of what is the number or what's the range of bonuses we can expect, we have result from several wells now. They have been -- for example with Stavanger -- take Deepsea Stavanger, which has delivered some 6, 7 wells on more than half the time of the planned duration. Of course, that is surprising to many and including the clients, little to ourselves too, and we are talking about what kind of mechanism or what kind -- how should we calculate the performance bonus when you talk about the most likely cost in this area.

As you say, the most likely cost element with Aker BP, it has the formula behind it, but it means that -- most likely cost for the well. Together, all the costs including the well, I think we need little more time to conclude with the client that we understand both -- all 3 of us understand how this mechanism should work. So there's a potential that we might pick up some more and then I can't give you this number now. But as I said, as a rule of thumb with these bonus schemes, some wells goes good, some goes bad. We are planning for the future. So I said, we may be on the right side not to be too bullish about the -- say 5% to 10% of the day rate. You are -- sometimes you get more, sometimes you get less.

I think this is what we can give you as an indication. But it has to do with -- we have an operation where we drilled 15 wells in the same field. We will probably have a learning curve. But if we move the rig around in several fields, it's very difficult to kind of predict what kind of bonuses do you meet because you might meet some surprises down in the mother earth. So it's very difficult with these bonus schemes and, as you know, the banks won't even look at them. So they look at the basic cash flow, but we hope that we can provide some numbers down the road that can show you that we are in that ballpark or more. That's how specific I can be.

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Jamie McFarlane;Bybrook Capital LLP;Partner;Senior Analyst, [4]

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Yes. And when I calculated it, it was about 14% uplift across all of your contracts, but given some are on businesses, including BP, which don't have the bonus scheme, it would suggest that it's maybe -- it could be more than 20% uplift on the day rate. Is that the right type of ballpark you could be performing?

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

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Well, Jamie, let's take that offline. I can't say. I can't say. It's more -- it's easier when we have -- we can show you proven numbers than just guess. So give us a little more time, and we can be more specific.

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Jamie McFarlane;Bybrook Capital LLP;Partner;Senior Analyst, [6]

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Perfect. And then second question for me. You mentioned the call-off on the Atlantic and obviously the Johan Sverdrup Phase 2 tender is out there at the moment. Do you expect the call-off to be linked in with that as well? Or Equinor dealing with the call-off separately to the JS 2 tender?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [7]

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The JS tender is a separate exercise and that's expected to be concluded during maybe within a couple of months really. It doesn't start until early '22 or in that range. So we're currently discussing with Equinor the first call-off, and we are working to line up I'll say a stream of activity until as long as possible, and so we are not really in a rush to conclude tomorrow because we want to kind of let also Equinor mature that strength so it get as long as possible -- hopefully close as possible to the next phase again, but we are competing on a (inaudible) we have a good position, but we have strong competition from Transocean and Seadrill. So we never take anything for granted, but we have been there so we hope for the extension, but -- and Equinor like the rig, we like them. So it should be a basis for continued operations, but the numbers and the terms must be right, and so I can't be specific on that either, but it will be a call-off for the next round, not to find the future. How long that will be is difficult to say, but we work to make it as long as possible.

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Jamie McFarlane;Bybrook Capital LLP;Partner;Senior Analyst, [8]

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And just on that I think you mentioned earlier in the call that you're going to -- the brokers were providing prices now and there's expected an uptick in the rate that one might expect for 12 months ahead call-off. Could you give a little color around what type of pricing uplift you are seeing that might be for about 12 months ahead call-off in pricing?

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [9]

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Well, the mechanism is so that -- it's the marketing that works now. The brokers -- some brokers will set an expected day rate 12 months ahead from now, let's say, from September, October -- about the same rate in September, October '20. They will indicate what they believe looking at the market and efficiency and blah, blah, blah. It remains to be seen where that day rate will be. We don't know that really. We can guess, but I think it's better to -- if you want an answer and they might give you a better answer because they ask -- the brokers ask me what do I expect from there. And so you guys are putting in day rate, so ask yourself. So I think let's come back to that where we have more indications or where we are in that aspect. But we believe the day rate will gradually come up. So that's the -- how we see it, but to what level is difficult to say. So -- but we believe it's going to be from where we are now.

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Operator [10]

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(Operator Instructions) And we have a question here from Lukas Daul with ABG.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [11]

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Just a question on the Well Services division. You sort of mentioned that you have seen a turnaround in the activity and the margin has bounced back a little bit now in second quarter from the first quarter. So margin wise, have you also seen the margin trough than it should sort of stay at this or higher level going forward? Is that how we should think about it?

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

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I think we are -- we can say that the margin will also gradually pick up. We are -- the call-offs we did, all the frame agreements we did some 2 years ago has a long runway. So today we're picking up more activity in all regions also in Norway. Norway used to be much bigger earlier than it is today but the Norwegian sector is picking up quite significantly, and we also see the margins are climbing after. I won't give you a number, but the margins are on the way up. And the activity level is on the way up. So how quick that will turn around is difficult to say. We have said things earlier that we couldn't deliver on, and I won't kind of do that again because it's a more complex situation than we expected some time ago, but we have very good reasons to believe that in general the whole segment will go on the positive trend. And both the revenue and volumes will gradually be picked up. And also we are looking for, as I mentioned here, some new business areas we are looking at and that could be also an interesting adventure.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [13]

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Okay. And so the North Sea or Norway would be sort of the main driver of that pickup? Or will that be sort of a correct assumption or...

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [14]

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Yes, they are, at least, a very important part of it. We see better conditions down in Middle East. We see much better conditions down in Southeast Asia. So -- but the volume is not the same, but trends are much, much better. Middle East has been quite painful, but it's picking up now. And the both Continental Europe, Romania, East Europe and Norway/U. K. has a positive trend. So I think we are considerably on a good track.

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Operator [15]

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(Operator Instructions) And it appears that we do not have any other phone questions at this time.

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [16]

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Okay. Thank you for calling in and...

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Atle Sæbø, Odfjell Drilling Ltd. - CFO & Executive VP [17]

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Thank you. Thank you for the attention.

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Simen Lieungh, Odfjell Drilling Ltd. - CEO & President [18]

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Thank you for now.

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Operator [19]

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