Noble Corporation (NYSE:NE) Q3 2023 Earnings Call Transcript

Noble Corporation (NYSE:NE) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Thank you for standing by. My name is Bailey and I will be the conference operator today. At this time, I would like to welcome everyone to the Noble Corporation Q3 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Ian Macpherson, Vice President of Investor Relations.

Ian Macpherson: Thank you operator and welcome everyone to Noble Corporation's third quarter 2023 earnings conference call. You can find a copy of our earnings report along with the supporting statements and schedules on our website at noblecorp.com. This conference call will be accompanied by a slide presentation that you can also find located at the Investor Relations section of our website. Today's call will feature prepared remarks from our President and CEO, Robert Eifler as well as our CFO, Richard Barker. Also joining on the call are Blake Denton, Senior Vice President of Marketing and Contracts; and Joey Kawaja, Senior Vice President of Operations. During the course of this call, we may make certain forward-looking statements regarding various matters related to our business and companies that are not historical facts.

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Such statements are based upon current expectations and assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially from these forward-looking statements and Noble does not assume any obligation to update these statements. Also note, we are referencing non-GAAP financial measures on the call today. You can find the required supplemental disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation in our earnings report issued yesterday and filed with the SEC. With that, I'll turn the call over to Robert Eifler, President and CEO of Noble.

Robert Eifler: Good morning. Welcome everyone and thank you for joining us on the call today. I'll begin with some opening remarks on our quarterly results and then provide some comments on the market outlook and commercial activity before turning the call over to Richard to cover the financials. Following Richard's financial overview, I'll wrap-up with some additional highlights on technology innovation underway here at Noble and the strong progress we've made with our merger integration. And after that we'll look forward to taking your questions. First, we've reported a solid third quarter with total revenue of $679 million and adjusted EBITDA of $283 million. On these metrics, this was our strongest quarter since the Noble-Maersk Drilling combination closed a year ago.

And these results reflect an exceptional collective effort by our employees around the world who have leaned into this merger and executed simultaneously on both the integration and the day-to-day business. So, well done and thank you all. Next, we're pleased to announce an increase of our quarterly dividend to $0.40 per share this quarter, which represents a 33% increase and demonstrates our continued commitment to maximizing value for shareholders via return of capital. Following the dividend initiation last quarter, we have signed additional contracts to bring our 2024 scheduled backlog to $1.8 billion currently with near-term visibility to additional bookings that could increase 2024 backlog to over $2 billion. So, we have taken the decision to make this upward revision just one quarter after the dividend initiation.

While you should not expect us to continue to adjust the dividend each quarter, we will remain focused on maximizing free cash flow generation and as previously stated returning the significant majority of free cash via dividends and buybacks. Turning now to the market outlook. Offshore drilling fundamentals remain robust with the marketed utilization rate for ultra-deepwater rigs in the 90% and leading edge day rates for working high-spec drillships in the mid- to high $400,000. Leading-edge fixtures for harsh jack-ups outside of Norway have been in the $130,000 to $150,000 per day range. During the third quarter, the drillship Noble Valiant was awarded a six-month contract with LLOG in the US Gulf of Mexico at a day rate of $470,000, excluding potential additional revenue for MPD services.

This program is scheduled to commence in early January and direct continuation of the Valiant's current contract. Also in the Gulf of Mexico, both of the Globetrotter drillships have recently been awarded additional contract scopes from Shell that are expected to keep both of these units working into March of next year, at extension rates just below $400,000 per day. On the jackup side, looking forward to the redeployment of the Noble Regina Allen with a three-well program for TotalEnergies in Argentina that's scheduled to commence in mid-2024 at a day rate of $150,000 excluding mobilization. The Phoenix field provides a significant source of domestic natural gas for Argentina and this program aligns very well with the JU-3000 rigs' technical capabilities and well-established operational track record in this unique harsh environment location.

So we're very excited to be participating in the revival of Argentina's offshore upstream activity with the Regina Allen next year which will mark Noble's drilling campaign in the country with a JU-3000 jackups. In the North Sea, the Noble Resilient has been awarded a 120-day contract with Petrogas at $133,000 per day that's scheduled to commence next summer. Of note, the resilient sustained damages while import two weeks ago, when a floating production vessel experienced a mooring failure and aligned with our rig, which was stationary in position near Keysight. There were no reported injuries and investigation and damage assessment is underway and we expect damages to be covered by the liable party or our own insurance, subject to applicable terms and limits.

The time line for required repairs could impact the extent of the resilience availability for additional work before the Petrogas contract next summer. However, we do not expect the timing of the Petrogas contract to be impacted. Moving on, also in the North Sea. The jackup Noble Reacher has been extended by 15 months with TotalEnergies via exercise of priced options extending the rig to mid-2025 with one-year of priced options remaining. These are legacy priced options, so the day rates for the reach will remain materially below the more recent leading-edge fixtures. These recent jackup contract awards have significantly firmed up 2024 visibility for our non-Norway fleet which has been a positive development. Within Norway, the timing of demand recovery continues to be hard to predict.

At this point, we remain generally cautious on the outlook for this market through 2024. Thus, our idle CJ70 jackup Noble Interceptor is still confronted with a limited opportunity set. You can find a summarized schedule of our backlog on Page 5 of today's earnings slide presentation. As shown, our backlog stands at $4.7 billion currently, down slightly from $5 billion as of last quarter. However, excluding our long-term commitments from ExxonMobil and Guyana and Aker BP in Norway, our backlog was essentially flat quarter-over-quarter. Accordingly, we're much more focused on the quality of backlog additions rather than an absolute dollar total, as we progress through time and we remain overall quite constructive on the re-contracting opportunities confronting our available rigs.

Two of the defining features of our floater backlog are that it is both more in step with current market pricing than most of our competitors and also more exposed to near-term rollovers than average. Putting numbers to it, our average day rate in floater backlog is $408,000 and 62% of 2024 available days across our marketed floater fleet are currently exposed to market re-pricing. Approximately one-third of this 2024 re-pricing exposure relates to the CEA rigs in Guyana and two-thirds relates to un-contracted rig days across the balance of the UDW fleet. We think this is clearly an advantageous exposure to hold in a strong and improving day rate environment. And it also provides a measure of flexibility in how we approach shorter and longer-term contract opportunities as they arise.

There is a partially offsetting negative effect's from the utilization inefficiency that results from the churn of shorter-term contracts. Within this context, as previously discussed, we continue to see more white space impacting our sixth generation floaters over the near to medium-term, specifically the two Globetrotters and the Developer and Discoverer. That said, we still see a good pipeline of follow-on opportunities next year and we do hope to announce some additional fixtures here in the fourth quarter, which would resolve some of the near-term rollovers in our fleet. So stay tuned. Overall, the supply-demand situation and outlook for both deepwater and harsh jackups remains very similar to what we described last quarter. The contracted UDW rig count has hovered in the low 90s since early this year with utilization of the marketed fleet of 99 rigs stable in the low 90%s.

During the third quarter 22 rig years of UDW floater contracts were awarded [Technical Difficulty] leading edge fixtures have priced in the mid- to high 400,000 per day for working Tier 1 rigs, a step lower in the low $400,000 for contracts awarded to rigs that are being reactivated and mid-300,000 to mid 400,000 for sixth generation rigs. Although contracting activity and utilization rates have remained firm throughout this year, we recognize there has been some concern in the market recently over the lack of apparent demand growth over the past few quarters as indicated by the contracted UDW rig count. We see nothing to indicate any type of underlying problem with demand growth, although it has been slightly slower to materialize in the short-term.

Over the past few years we've seen a similar pattern of seasonality in which volume of total UDW contracts in a given year has been slightly weighted towards the first half of the year and this appears to be playing out similarly this year. Additionally, eight of the 14 long-term contracts that have already been awarded this year have gone to non-active rigs that are being reactivated at discounted pricing. We had originally anticipated some of these programs to go to working rigs, which combined with normal blips here and there with certain programs slipping to the right has resulted in a slightly more moderate slope of appreciation in the UDW market in 2023 compared to 2022. So we're approaching the $500,000 day rate threshold, a bit more slowly than we had previously expected.

But if you scratch a little deeper, what you find is that the UDW market is still in fact tightening, due to the steady absorption of the sideline capacity. Looking ahead throughout 2024, we continue to expect a double-digit increase in UDW rig demand globally driven primarily by incremental requirements throughout the Americas and West Africa. Brazil continues to be a major fulcrum of demand growth. And despite customary delays with their award process, Petrobras' total floater fleet is poised to expand from 24 contracted rigs currently to approximately 30 rigs over the next year based on recent and pending awards. Additionally, major projects in Namibia and Suriname are poised to drive incremental rigs requirements and established UDW basins such as Angola and Nigeria continued to trend higher.

The methodical absorption of sideline capacity has had a bifurcating effect on day rates over the short-term. However, we believe the structural trend with day rates will continue to correlate positively with demand growth over time, which in fact is one of the key reasons why we are beginning to see the emergence of more long-term tenders in the market as the inventory of sideline capacity continues to dwindle and the economics for new rig construction are at such a dramatically higher plane as we discussed in detail during last quarter's call. And just to reiterate that point we believe that the economic threshold to support new drillship construction would be something along the lines of a 10-year contract at or above $650,000 per day with a three to 4-year delivery time preceding contract commencement.

Given these fairly straightforward supply and demand parameters and with mounting evidence that our customers are reengaging in their long-life offshore resource portfolios in a more deliberate way than we've seen in over a decade, we believe the outlook for our business is very encouraging. Now let me turn the call over to Richard to discuss the financials.

Richard Barker: Thank you, Robert and good morning or good afternoon, all. In my remarks today I will briefly review the highlights of our third quarter results as well as our outlook for the remainder of the year. Contract Drilling Services revenue for the third quarter totaled $671 million up from $606 million in the second quarter. Adjusted EBITDA was $283 million in Q3 up from $188 million in Q2. Diluted earnings per share was $1.09 and adjusted diluted EPS was $0.87. Cash flow from operations was $139 million. Capital expenditures were $99 million and pre-cash flow was $40 million. As anticipated, revenue and adjusted EBITDA improved from second quarter levels with higher day rates being the primary driver. Our 16 marketed floaters were 92% utilized in the third quarter up from 90% in the second quarter with average day rates increasing to $404,000 per day in Q3 up from $363000 per day in Q2.

Our 13 marketed jackups were 61% utilized with an average day rate of $141,000 in the third quarter compared to 59% and $129,000 per day in the second quarter. As summarized on page 5 of the earnings presentation slide, our total backlog as of October 31 stands at $4.7 billion versus $5 billion as of July 31. It's important to recognize that our unique long-term commitments with ExxonMobil in Guyana and with Aker BP in Norway have an outsized impact on our total backlog profile. As such, the sequential decrease in backlog this quarter is really attributable to the fixed rigs operating under the ExxonMobil CEA and the Aker BP programs which did not take on additional backlog bookings over the past three months. Current backlog includes approximately $1.8 billion that is scheduled for revenue conversion in 2024.

It is important to note that, our backlog excludes reimbursable revenue as well as revenue from ancillary services. Last month, we celebrated the one-year anniversary of our business combination with Maersk Drilling, and integration activities continue to progress extremely well. Our synergy realization is ahead of plan. Within one year of closing we have realized run rate synergies of approximately $100 million which represents 80% of the $125 million target. This is well ahead of what we communicated upon the transaction announcement and is a testament to how the two legacy companies have come together to create value for both our shareholders and customers. Referring to page 9 of the earnings slide we are adjusting our full year 2023 guidance for revenue adjusted EBITDA.

For total revenue, we now expect a range of $2.5 billion to $2.6 billion versus the prior range of $2.35 billion to $2.55 billion. And for adjusted EBITDA our expected range is $775 million to $825 million, which is the top half of the prior range and about a 3% increase at the midpoint. These improvements in guidance ranges are driven by our strong results year-to-date with revenue also benefiting from higher-than-expected reimbursable revenue. Full year guidance for capital expenditures remains unchanged at a range between $325 million and $365 million, excluding customer reimbursable CapEx. For reference reimbursable CapEx has totaled $13 million through the first nine months. Notwithstanding the enhanced full year expectation for adjusted EBITDA, the upwardly revised range still implies a sequentially lower fourth quarter, compared to the third quarter.

This is consistent with our prior directional view, and primarily reflects greater anticipated downtime for various rigs in the fourth quarter. The primary drivers include the Noble Faye Kozack, which has recently finished a contract in the Gulf of Mexico and is preparing for its next contract in Brazil that is expected to start in March, the Noble Developer, which finished its work scope in Brazil in late September, and the Noble Voyager which is about to finish its current work scope in Mauritania. Looking beyond 2023 at a high level, we continue to expect a nice step up in adjusted EBITDA and free cash flow in 2024 versus 2023, and also envision a higher weighting of 2024 EBITDA in the second half of next year compared to the first half.

As previously discussed, 2024 will be the peak year of 10-year SPSs and major projects across our fleet. And as such, we continue to expect a moderate increase in CapEx next year compared to this year. Additionally, we continue to see persisting inflationary trends across our cost structure that are very consistent with the type of industry upcycle that we're currently experiencing. Therefore, we do expect something in the range of mid single-digit type percentage inflation rates on average from 2023 into 2024, across our full cost structure. Finally, I would like to provide a comment on cash flow. As our past few quarters have shown, the quarterly variability of working capital can create some short-term swings in free cash flow. During the third quarter, we generated $40 million of free cash flow despite over a $100 million build in working capital.

While some of this is a function of a growing top line, we do expect a portion of this bill to reverse in Q4. As Robert stated, we remain committed to returning the significant majority of free cash flow to shareholders over time via share repurchases and dividends. We continue to believe that maintaining a conservative through-cycle balance sheet in support of a high free cash flow payout, is the appropriate capital allocation formula for our business. And therefore, you can expect Noble to abide by this framework going forward. That concludes my remarks. And now, I'd like to pass the call back to Robert for closing comments.

Robert Eifler: Thanks, Richard. Before we move to Q&A, I'd like to close here with a couple important highlights. First, an exciting new technology that we're developing. And second, a few reflections on the one-year anniversary of our merger. On the technology side, I'm very excited to highlight Horizon56 a software platform that we've developed to promote the digitalization of well planning and execution. The benefits of digitalizing work streams and closing the gap between our customers' well programs and our drilling crews, are far-reaching impacting safety, drilling speed, management of change, elevation of lessons learned and overall risk management. We believe the digitalization enhancements provided by Horizon56 can ultimately drive drilling efficiency gains, which obviously translates into very significant value uplift for customers including, but not limited to well cost and emission factors.

Overall, we feel fortunate to have this very talented Horizon56 team at Noble, a group that came to us by way of the Maersk Drilling combination as one of the many outstanding aspects of Maersk's human capital and technology suite. We talk frequently about the new industry landscape in which we aspire to be as we say first choice offshore. That ambition can only be realized with two major prerequisites, which are inexorably linked; A scale; and B, a culture of tireless innovation and service posture, both of which we have very purposefully promoted as part of the industrial logic behind our strategic actions of the past few years. Accordingly, we remain keen to invest in and focus on areas like Horizon56 where Noble can drive incremental value for our customers.

Finally, a brief reflection on the state of the company as we approach 2024. Noble recently celebrated the one-year anniversary of our business combination with Maersk Drilling and we could not have asked for a better integration effort than we've seen so far. Within the first six months of close, we achieved operational stability and a true culture of One Noble that proved critical to our first-year success, all while exceeding synergy targets and consistently executing for our customers. Year-to-date our operational uptime of 97% has been outstanding especially, for year one of an integration of this scale. And ultimately, I believe the company's third quarter results are a very clear demonstration of the power of this combination. So, I would just like to conclude here, with a special offering of gratitude and congratulations to our fantastic employees around the world, for your tremendous efforts and for the great results that you're producing on behalf of Noble.

We're off to a great start together and the best is yet to come. With that, we'll pause here and open up the call for Q&A.

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