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Edited Transcript of ORIG earnings conference call or presentation 9-Aug-18 12:00pm GMT

Q2 2018 Ocean RIG UDW Inc Earnings Call

GRAND CAYMAN Aug 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Ocean RIG UDW Inc earnings conference call or presentation Thursday, August 9, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Iraklis Sbarounis

Ocean Rig UDW Inc. - CFO, Secretary & Director

* Pankaj Khanna

Ocean Rig UDW Inc. - President & CEO

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Conference Call Participants

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* Eirik Røhmesmo

Clarksons Platou Securities, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you, ladies -- thank you for standing by ladies and gentlemen. And welcome to the Ocean Rig Conference Call on the Second Quarter 2018 Financial Results. We have with us today, Mr. Pankaj Khanna, President and CEO; Mr. Iraklis Sbarounis, CFO. (Operator Instructions) I must advise you that this conference is being recorded today. Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Please take a moment to read the Safe Harbor statement on Page 2 of the slide presentation. Risks and uncertainties are further described in the report filed by Ocean Rig with the U.S. Securities and Exchange Commission.

And I pass the floor to one of your speakers today, Mr. Pankaj Khanna. Please go ahead, sir.

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Iraklis Sbarounis, Ocean Rig UDW Inc. - CFO, Secretary & Director [2]

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Good morning, everyone. This is a Iraklis. Thank you for participating in Ocean Rig second quarter earnings conference call. I'm starting with Slide 3, our income statement. Our adjustment of the income statement is $6.4 million associated with the statutory periodic surveys of the Ocean Rig Mykonos and Ocean Rig Skyros and Leiv Eiriksson. For everyone's benefit, we wish to remind our investors that Ocean Rig's accounting policies to expense SPS cost as they occur as opposed to capitalizing and deferring them. Following that adjustment, during the quarter, we had $97.3 million in total revenues and $64.2 million in total rig expenses, which included the demobilization of the 2 rigs from Brazil, The Ocean Rig Corcovado and Ocean Rig Mykonos as well as $400 million for the (inaudible) refurbishment and other one-off projects. Our depreciation, amortization was $26.2 million and our G&A expenses were $15.4 million. In addition, our net interest expense for the quarter was $3.1 million, and we paid $5.9 million in taxes, which is about 6% on revenues. So against our $1.3 million operating income, we have $14 million in expenses, resulting in a net loss of $12.7 million or $0.14 per share.

Turning to Slide 4. We have the best-in-class balance sheet with $719 million of cash against debt of $350 million.

In May 2018, we prepaid the remaining debt balance under the Ocean Rig Apolo bank facility at no additional cost. During the first quarter, we repaid $100 million of Term Loan at par, saving the company total interest cost of $52 million over the remaining term of the loan. Following which, we have no debt repayments until 2024. This offers us unique financial flexibility at this point in the cycle. On top of that, let's not forget our $743 million of firm backlog.

Turning over to Slide 5, whichever metric you want to use, we're the best place in the industry with net debt of negative $370 million. Our backlog of over $700 million is more than twice our gross debt of $350 million.

On that note, I turn over the presentation to Pankaj to talk about our most recent backlog updates.

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Pankaj Khanna, Ocean Rig UDW Inc. - President & CEO [3]

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Thank you, Iraklis. Good day, everyone. Moving on to Slide #6. Our total contract backlog stands at about $743 million. The Ocean Rig Poseidon is currently hot stacked at Walvis Bay, where drilling operation is expected to commence on September 1, for Tullow. Following the Tullow well, the Poseidon will drill for Chariot. We have also secured an LOI for further work that, assuming the contractor signed, will keep the rig employed into Q1 2019. There are further prospects that are on the table for the Poseidon to keep the rig working into 2019.

The Ocean Rig Mykonos remains in the ready-to-drill state at Las Palmas and is being fitted with a full Managed Pressure Drilling package that should be commissioned shortly.

The Ocean Rig Corcovado completed its contract with Petrobras on May 25, and is now in Las Palmas in the ready-to-drill state. We have also decided to install a full MPD kit on her, which will cost in the region of $14 million to install.

Bear in mind, the tender activity from Petrobras and our long track record in Brazil having worked for Petrobras 6 years with the Mykonos and the Corcovado. We are well positioned for those tenders, but regardless, all 3 rigs are being marketed actively on various tenders globally.

The Leiv Eiriksson resumed its contract with Lundin on April 3, 2018 and suffered 27 days of MPD due to subsea-related downtime that has now been fully resolved. The rig is carrying out an extended well test on the (inaudible) field. Lundin has declared their seventh option and the rig will move to the (inaudible) prospect upon completion of the extended well test. The rig will escalate to around $160,000 per day for this work. We believe Lundin has adequate work for the Leiv Eiriksson to be employed well into 2019, and we also have the ConocoPhillips, MSA thereafter. We have now concluded the discussions with Total on the Skyros and the new rate has been fixed at $573,000 per day, a good result for the company. We have bid the Eirik Raude for several prospects in the north sea and elsewhere. We are hopeful of the prospects for this rig, which has a long successful track record. There are several tenders in the pipeline where we believe some of our rigs will be frontrunners. We hope to be able to make further announcements in the coming months.

Slide 7, turning to the market. The slide shows the considerable decline in offshore discoveries over the last 5 years as exploration has been mostly suspended since the collapse in oil prices in 2014. However, we are seeing the beginning of the revival as oil companies draw up budgets for 2019 with independents leading the charge. Oil prices north of $70 per barrel are providing the impetus to drill and so is the slowdown in growth in the shale phenomenon, which is due to logistical constraints and the investors' desire to take some profits. So while we can't say shale isn't a factor anymore, offshore is again becoming an interesting option for oil companies.

Slide 8. The graph clearly show what we have been saying for the last few months. The number of contracts awarded in Q2 reached levels last seen in 2013 prior to the collapse in oil prices.

However, in 2013, the term of the contracts been awarded with -- per quarter was significantly higher with 30 to 60 rig years awarded per quarter rather than what we see today with a mere 17 rig years in Q2, but we are headed in the right direction.

Slide 9. As we have been pointing out for the last 4 to 5 months, tendering activity has picked up significantly for both exploration and development drilling. We counted a total of 77 active tenders at the moment, but the total rig years per (inaudible) tenders is just 53 years. In a way this is good as you wouldn't want to fix these low rates for longer contracts. We're now seeing some customers wanting to take advantage of the current low rates for working starting in 2019 and some even for 2021. Mostly for defined development work. Activity in the Asia-Pacific area, especially, have picked up this year as operators take advantage of the really low rates to drill. Interestingly, 23 of the 34 tenders are [customized inner space,]which will put further upward pressure on rates (inaudible). A number of tender are close to conclusion, and we expect that several contracts will be awarded in the next couple of months.

Slide 10. We are seeing utilization improvements across the flow (inaudible) for both Semis and Drillships. The Semis are recovering quicker due to the demand from harsh environment areas and also some other areas in the Asia-Pacific where Semi are preferred . We expect that utilization will continue to improve despite further roll off as the numerous tenders currently in the market are considerable.

Slide 11. Finally moving on to Slide 11, in summary, Ocean Rig is a pure play in the ultra deep water space with premium type quality asset, and a established track record in the harsh and benign markets. We are further upgrading our fleet with the addition of MPD (inaudible) of 2 rigs. We're also preparing for the eventual reactivation for the stacked rig, refurbishing (inaudible) and certain (inaudible) to allow us to shorten the reactivation process. Our new building contract and associated financing from the builder offers substantial optionality and leverage to the extending markets. We have the best-in-class balance sheet with negative net debt, more than ample cash liquidity, and a significant backlog. We have no debt maturity until 2024. The company is in a prime position to benefit from the recovery in the offshore drilling market and that inflection point seems to be nearer every quarter. We remain focused on creating shareholder value whichever route that may take. We have now reached the end of our presentation.

And I open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the participant.

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Eirik Røhmesmo, Clarksons Platou Securities, Inc., Research Division - Research Analyst [2]

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This is Eirik Røhmesmo with Clarksons calling. Just one question regarding to Eirik Raude and a potential reactivation. Just thinking what kind of contract would you require in terms of EBITDA covering the reactivation costs?

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Pankaj Khanna, Ocean Rig UDW Inc. - President & CEO [3]

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It is no real threshold as such. I mean, if -- we believe in the prospects in the North Sea market and we see a lot of inquiry there, reactivation of that rig would basically give us the opportunity to take advantage of that market for contract starting Q3, Q4 '19. So from our standpoint, if we saw even 6-month contract, we would react (inaudible) to it.

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Eirik Røhmesmo, Clarksons Platou Securities, Inc., Research Division - Research Analyst [4]

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Okay, so it's more about term rather than actual day rates?

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Pankaj Khanna, Ocean Rig UDW Inc. - President & CEO [5]

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Yes.

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Eirik Røhmesmo, Clarksons Platou Securities, Inc., Research Division - Research Analyst [6]

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Okay. And also just more of a housekeeping item, could you provide some guidance around expected downtime for your operating rigs in the second half of 2018. Especially Ocean Rig Skyros.

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Pankaj Khanna, Ocean Rig UDW Inc. - President & CEO [7]

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At this point, we don't have any planned downtime for the Skyros or any other.

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Operator [8]

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There are no further questions. Please continue.

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Pankaj Khanna, Ocean Rig UDW Inc. - President & CEO [9]

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Okay. There are no further questions guys. Thanks very much. Have a good summer, and we'll talk to you for -- after the Q3 results.

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Operator [10]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.