Transocean Ltd. (NYSE:RIG) Q4 2023 Earnings Call Transcript
Transocean Ltd. (NYSE:RIG) Q4 2023 Earnings Call Transcript February 20, 2024
Transocean Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone and welcome to the Q4 2023 Transocean Earnings Call. [Operator Instructions] It is now my pleasure to turn the conference over to Alison Johnson, Director of Investor Relations. Please go ahead.
Alison Johnson: Thank you, Todd. Good morning and welcome to Transocean’s fourth quarter 2023 earnings conference call. A copy of our press release covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater.com. Joining me on this morning’s call are Jeremy Thigpen, Chief Executive Officer; Keelan Adamson, President and Chief Operating Officer; Mark Mey, Executive Vice President and Chief Financial Officer; and Roddie Mackenzie, Executive Vice President and Chief Commercial Officer. During the course of this call, Transocean management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts.
Such statements are based upon current expectations and certain assumptions and therefore are subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact future results. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Following Jeremy, Keelan and Mark’s prepared comments, we will conduct a question-and-answer session with our team. During this time to give more participants an opportunity to speak, please limit yourself to one initial question and one follow-up. Thank you very much. I will now turn the call over to Jeremy.
Jeremy Thigpen: Thank you, Alison and welcome to our employees, customers, investors and analysts participating on today’s call. As reported in yesterday’s earnings release, for the fourth quarter, Transocean delivered adjusted EBITDA of $122 million on $748 million of adjusted contract drilling revenues, resulting in an adjusted EBITDA margin of approximately 16%. For the full year 2023, we delivered adjusted EBITDA of $738 million on approximately $2.9 billion of adjusted contract drilling revenues, resulting in an adjusted EBITDA margin of approximately 26%. As always, Mark will provide a more detailed review of our financial performance during his prepared remarks and provide revised guidance for the year 2024. 2023 was a very productive year for the company.
We hit the ground running in January with a number of significant contract announcements that added approximately $880 million in backlog. These included harsh environment and ultra deepwater fixtures in various jurisdictions around the world. We also opportunistically refinanced 4 senior secured notes totaling approximately $1.2 billion and we raised $525 million from debt investors secured in part by the Deepwater Titan’s 5-year contract. By timely and opportunistically addressing certain debt maturities, we provided additional comfort to investors about our liquidity position. These transactions were positively received by our investors and resulted in the beginning phase of our share price more appropriately reflecting the reality of the improving offshore drilling market.
2023 also marked the beginning of the widespread transition of our rigs higher revenue generating contract. Throughout the year, the average daily revenue for our ultra deepwater fleet increased from $360,000 per day in the first quarter to $432,000 per day in the fourth quarter. Key contributors to this improvement include the Deepwater Titan, which commenced operations with Chevron in May, joining the Deepwater Atlas as the second of the only two 8th generation drillships in the world, both operating in 20,000 PSI fields in the U.S. Gulf of Mexico. In addition to the Titan, we continue to add contracts with leading edge day rates throughout the year ending 2023 with an incremental $3.2 billion of backlog. Included in this total are two new fixtures added in the fourth quarter.
First, we secured contract for the Transocean Barents with OMV Petrom SA in the Romanian Black Sea at a rate of $465,000 per day for a minimum of 540-day duration. The contract includes a rate increase to $480,000 per day for each day the rig operates beyond the initial term, including two option periods plus a fully paid mobilization into the Black Sea. Second, the Deepwater Invictus was awarded a 40-day well in the U.S. Gulf of Mexico with an independent operator at a rate that is undisclosed at the request of the customer. In January this year, we signed a 3-well extension in Angola for the Deepwater Skyros with TotalEnergies at a rate of $400,000 per day. The estimated 142-day contract extends the rig current firm term through May of 2025 at a rate that is meaningfully higher than the prior day rate.
Despite the strong year of contracting, we recognize that some investors have been concerned by the pace of contract awards over the past few months. In an effort to ease that concern, it’s important to note that our customers are increasingly focused on extended duration opportunity with longer lead times to contract commencement. While this tends to result in prolonged contract negotiations, it also demonstrates our customers’ confidence in the longevity of this up-cycle and their commitment to the offshore market. In short, we remain extremely encouraged about the current and future demand for transactions, assets and services. With that, I’ll ask Keelan to discuss what we are seeing in the offshore drilling markets around the world.
Keelan?
Keelan Adamson: Thanks, Jeremy and good morning, everyone. To expand on Jeremy’s last point and as a reminder to those listening, in our corporate presentation available on our website, we provide an 18-month look ahead of floater opportunity commencements. The slide also includes a historical perspective. Over the past nine quarters, we have observed the number of tendered rig years increased nearly 90% to 91 rig years. Overlaying this with the number of programs over the same time period, our customers’ programs have increased and continue to increase in duration. Now, looking closer at each region. Last year in Brazil, Petrobras alone awarded 7 rig lines and we continue to see strong demand from the region with Petrobras and Equinor tendering for long-term programs.
Over the next 18 months, we expect the award of 7 more rig lines based on open opportunities, including 5 between Petrobras’ Sépia and Roncador tenders, which are expected to be awarded in the second quarter of this year. We anticipate that at least 1 of the 7 rigs will come from outside the region. If this materializes as expected, including rigs currently preparing 4 and mobilizing 2 contracts for previously awarded work, the rig count in Brazil will increase from 31 there today to 36 rigs by the end of 2025. The U.S. Gulf of Mexico continues to be a source of steady demand, with several tenders and negotiations ongoing. We expect that most demand requirements over the next 18 months will be met by rigs already in the region and don’t currently anticipate adding significant capacity to the area since the introduction of the Atlas, Titan and Stena Evolution contracts.
The U.S. Gulf is shifting from a market characterized by short lead time, short duration opportunities to a longer lead time, longer duration market. Beyond this 18-month horizon, additional demand for long-term work has materialized from several of the major E&P companies as they seek to secure the right high specification assets for their ongoing developments. We continue to be encouraged by demand in West Africa and currently expect that up to 13 programs will commence in the next 18 months. Notably, half of these programs are at least 2 years in duration. Namibia continues to exhibit significant potential with recently announced discoveries by TotalEnergies, Shell and Galp Energia and we expect most of the 4 rigs currently on contracting country to be extended.
In Nigeria, Shell has issued its multiyear tender and we expect Chevron and Exxon will issue their multiyear rig tenders in the first half of this year. And lastly, in Angola, there are 7 rigs presently on contract with operators that include TotalEnergies, ExxonMobil and the Eni BP joint venture, Azule Energy. We expect that these rigs will remain in country and will be extended primarily through existing contract options. Moving now to the harsh environment market, local supply of high specification, harsh environment, semi-submersibles in Norway is currently fully utilized until the end of 2024 and the majority are largely contracted through 2025. Day rates therefore continue to increase and recent fixtures have been in the high 400s, a constructive trend.
We expect there to be a need for incremental supply beginning in the second half of 2025. The outlook in Australia remained strong with a number of additional programs set to start in 2026. Our rigs, the Transocean Endurance and Transocean Equinox, are contracted with options through early 2026 and 2028 respectively and are strategically well positioned for some of these future opportunities. In addition to the capability of our high specification fleet, our strong safety and operational performance is highly valued by our customers and positions Transocean well to secure contract opportunities. Flawlessly executing large scale drilling and completion programs that consist of a wide range of highly complex operations requires a commensurate level of operational discipline.
For several years now, we have been acutely focused on improving our processes, tools and competence as we strive to become a highly reliable organization. In 2023, we completed the implementation of what we call our global critical operations assurance centers. Located in both our Houston and Stavanger offices, these real time monitoring centers are staffed 24 hours a day, 7 days a week by teams of subject matter experts from our offshore workforce. Equipped with live footage from our fleet and the ability to communicate directly with our offshore crews in real-time, these teams provide an additional level of assurance and verification during the performance of key steps in these critical operations. Since the introduction of this capability, we have seen a significant improvement in our operational reliability, resulting in a company record uptime performance of 97.6% for 2023.
In addition to normal day-to-day operations, we took delivery of the Deepwater Aquila, brought our second eighth generation drillship, the Deepwater Titan in service and installed the 20K BOP on the Titan sistership, the Deepwater Atlas. We also completed contract preparation projects and subsequently mobilized 6 rigs. The development driller 3, Duravit Deepwater KG2, the Deepwater Orion, Transocean Barents, Transocean Endurance and the Transocean Equinox to new programs in different regions with different customers around the world. Additionally, Transocean has onboarded approximately 1,000 new offshore employees in 2023. Despite these operational changes, in 2023, we delivered one of our strongest process and occupational safety performances, beating our annual target for recordable injury rates.
And much more importantly, none of our employees incurred a life-changing injury. We are very proud of our operational performance and the positive impact it has on our financial results, which ultimately creates value for our shareholders. This operational performance is not by chance. It is the direct result of our relentless drive to improve our willingness to constantly challenge the status quo and our holistic approach to optimizing how we deliver superior results for our customers. Innovation is a foundational principle at Transocean, and we continuously invest in technologies to improve the safety, reliability and efficiency of our operations. As an example, in 2023, we deployed the third robotic riser bolting system in our fleet on the Deepwater Titan.
This system automates certain activities during Weiser operations, significantly reducing the exposure of our rig personnel to moving equipment on the drill floor. We have also continued to advance the automation of drilling control, where repetitive tasks are replaced with machine control sequences. This further improves the consistency and predictability of our operation while affording our drillers more time to focus on the well itself. We also recently agreed to conduct a trial of an automation solution in the West Gulf of Mexico and look forward to expanding this to additional rigs. From an asset perspective, we continue to proactively manage the composition of our fleet with a strategic focus on owning and operating high-specification, ultra-deepwater and harsh environment floaters.
In the second quarter last year, we entered into an agreement to sell the Paul Be Lloyd Junior and the Transocean Leader, effectively exiting the moored fourth-generation semi-submersible asset class. The transaction closed last week. In the third quarter, we acquired the outstanding interest in the joint venture company that owns the deepwater Aquila, which was selected for a 3-year contract to work with Petrobras, making it the eighth 1,400 ton rig in our fleet and further strengthening our position in the high hook load ultra-deepwater drillship market. The Aquila is currently undergoing preparations for its contract in Brazil, which is expected to commence midyear. As a result of the substantial contract preparation work we have performed and the newbuild delivery experience we have accumulated over the years, we are confident that when the time comes and we start to reactivate our cold stacked assets, we will do so safely and efficiently and then transition into operations at the highest level of performance.
The number of opportunities that could justify the reactivation of cold-stacked assets continues to grow. As always, we will remain disciplined in these decisions and will only do so to contracts that recover the investment required to reactivate plus generate an appropriate return for our shareholders. I’ll now hand the call back to Jeremy.
Jeremy Thigpen: Thanks, Keelan. 2023 will be remembered as a significant year for Transocean. We take great pride in being the sole company among our peer group of publicly traded international offshore drilling contractor to successfully navigate the financial challenges of the downturn, ensuring the preservation of value for our shareholders. Our fleet is largely contracted through 2024, and we will continue to actively seek work to fill any gaps in utilization. Having said that, our $9 billion backlog and superior assets provide us with the confidence and flexibility we need to be selective in the opportunities we pursue as we constantly endeavor to strike the right balance between utilization and day rate optimization. As previously mentioned, we’re encouraged by the longer-term programs we see materialize with start dates well into the future.
As we move into 2024 and further into what appears to be a sustained up cycle, our priorities remain: first, converting our industry-leading backlog to cash. We’ll do this by maintaining acute focus on safety and the uptime performance across our fleet, which directly impacts our overall revenue efficiency. Second, deleveraging the balance sheet. Assuming the market materializes as we expect, we will generate significant free cash flow over the next few years. And while we recognize that operating a growing fleet is a competing priority with deleveraging, we will be sure to balance the two in a manner that best serves our shareholders. Third and finally, manage the business with the ultimate goal of returning more value to our shareholders, either through share repurchases or dividends.
Before I hand the call over to Mark, I would like to thank each member of the Transocean team for their dedication to delivering safe, reliable and efficient operations for our customers and contributing to our strong and constantly improving operational and financial performance. You all did a great job in 2023, and I look forward to continuous improvement in 2024. With that, Mark will now discuss our financial results and future outlook. Mark?
Mark Mey: Thank you, Jeremy, and good day to all. As Jeremy mentioned in his remarks, we’ve had a very active year in the tech capital markets in 2023. In addition to the January 2023 refinancing and secured debt issuance we discussed in October 2023, we issued $325 million of 8% senior secured notes due 2028. The notes are secured by a deepwater killer to support the purchase and upgrade of the rig. We also executed several liability management transactions during the year. These include the retirement of $243 million outstanding principal of the 5.375% senior secured notes due in May 2023, releasing the collateral rigs, Transocean Equinox and Transocean Endurance. The completion of exchanges with approximately $339 million of previously issued exchangeable bonds with maturities in 2025, 2027 and 2029, mainly for equity and the repayment of the remaining $49 million of the 0.5 exchangeable bonds at maturity in January 2023.
I extend a sincere thank you to the entire Transocean team for your continued efforts as we work to optimize our capital structure. I will now briefly recap our fourth quarter results then provide guidance for the first quarter as well as give an update on expectations for the full year 2024. Lastly, I’ll provide an update on our liquidity forecast through the end of 2024. As reported in our press release, which includes additional details on our results, for the fourth quarter of 2023, we reported net loss attributable to controlling interest of $104 million or $0.13 per diluted share. After certain adjustments sustained in Say’s press release, we reported adjusted net loss of $74 million. During the quarter, we generated adjusted EBITDA of $122 million, which translated into cash flow from operations of approximately $98 million.
Our negative free cash flow of $122 million reflected the CapEx associated with the Deepwater killer, including the final shipyard milestone payment upon taking delivery of the rig from the shipyard. Looking closely at our results during the fourth quarter, we delivered adjusted contract-driven revenues of approximately $748 million and an average value revenue of $408,000 per day. Our reported revenue is below our guidance, primarily due to the late start of Deepwater Mykono s, which is now on contract with Petrobras and lower-than-anticipated revenue for MoneyPass drilling services, mainly for the Deepwater Conqueror, partially offset by higher fleet-wide revenue efficiency. Operating and maintenance expense in the fourth quarter was $569 million.
This is slightly higher than our guidance, mainly due to certain customs duties, indirect taxes and litigation costs incurred mostly in South America. General and administrative expense for the fourth quarter was $50 million. This is below our guidance, primarily due to lower than anticipated professional fees and legal expenses. Turning to the cash flow and balance sheet. We ended the fourth quarter with total liquidity of approximately $1.6 billion unrestricted cash and cash equivalents of approximately $762 million, which comprises approximately $198 million of restricted cash for debt service and approximately $600 million from our revolving credit facility. I will now provide financial guidance for our first quarter 2024 and update on our expectations for the full year 2024.
Our revenue guidance is primarily based on firm contracts as listed in our fleet center support and an average fleet-wide revenue efficiency of 96.5%. For the first quarter of 2024, we expect adjusted contract drilling revenue of approximately $780 million. This quarter-over-quarter increase is largely due to increased activity on the following rigs, including the Deepwater Mykonos, People Orion, KG2 in Brazil and Transocean Endurance in Australia and the deepwater in vectors in the Gulf of Mexico. This is partially offset by lower activity on the Transocean Barents, which concluded its contract in the Eastern Mediterranean in February, and the KG1, a pareto its next contract in India. In addition, the sale of the Paul B Loyd Jr., which closed last Thursday, results in lower revenue of approximately $11 million.
We expect first quarter O&M expense to be approximately $545 million. This is less than we reported for the fourth quarter of 2023 relating mainly to reduced activity for Transocean Barents, lower maintenance costs for the operating fleet generally, the sale of the Paul B. Lloyd Jr and the aforementioned South American costs incurred in the preceding quarter. This will be partially offset by higher operating costs resulting from more operating days for the Deepwater mechanize, the Deepwater Orion and the KG2 in Brazil and the Transocean ingurance in Australia, which commenced their new contracts. We expect G&A expense for the first quarter of $47 million. For the full year 2024, we estimate that our adjusted contract drilling revenues will be between $3.6 billion and $3.75 billion, also based on 96.5% revenue efficiency.
Our expectations are lower than the prelim guidance we provided on the third quarter 2023 earnings call, mainly due to changes in fleet activity. These changes are reflected on our February 14 free status reports and include the following: contract commencement for the Deepwater Orion Transocean Equinox and Transocean Endurance were delayed due to prolonged mobilization and contract preparation activities. Lower anticipated revenue for the Deepwater Atlas as a portion of the customers’ contract requiring the 15,000 PSI capabilities is running longer than originally anticipated. As a result, the rigor has not yet transitioned to the higher day rate segment of its contract. Changes in activity on the Transocean variance versus our expectations included in the prior customers decision to forgo its option wells under the rig’s prior contract, partially for security reasons in the Middle East.
In line with our prelim guidance, we’re anticipating a full year 2024 O&M expense to be approximately $2.2 billion and full year G&A expense of approximately $196 million. Excluding any noncash changes associated with the fair value adjustment of the basic exchange feature embedded in our exchangeable bonds issued in the third quarter of 2022. Net interest expense for the first quarter is forecasted to be approximately $131 million. This includes capitalized interest of approximately $7 million. For the full year, we’re anticipating net interest expense of approximately $513 million, including capitalized interest of approximately $16 million. Capital expenditures, including capitalized interest for the first quarter are forecasted to be approximately $120 million, including approximately $81 million to the preparation of the Deepwater Aquila for its 3-year contract with Petrobras in Brazil.
Cash taxes to be paid in the first quarter are expected to be approximately $10 million and approximately $51 million for the full year 2024. Our expected liquidity in December 2024 is projected to be approximately $1.45 billion, reflecting our revenue and cost guidance and including the approximately $600 million capacity of our revolving credit facility and restricted cash of approximately $350 million, which is mainly reserved for our debt service. This liquidity forecast includes 2024 CapEx expectations of $242 million, including $134 million related to the Deepwater Aquila. As briefly mentioned earlier and discussed in detail on our third quarter 2023, we had significant contract preparation activities in 2023. In total, we spent more than 800 days across seven rigs preparing for new contracts.
In 2024, we only expect to have approximately half the amount of contract preparation days we had last year. As these rigs continue to commence their respective programs, our focus is on operational execution to ensure we maximize different version of our backlog to revenue. We continue to proactively manage our debt maturities and combined with our $9 billion of contract backlog, we believe the strength and longevity of this up cycle will support our ability to meet our priorities of deleveraging the balance sheet and returning cash to shareholders. In this regard, we continue to evaluate various liability management opportunities that satisfy our objectives of reducing debt, extending the liquidity runway, simplifying the signet structure of our balance sheet and reducing interest expense.
This concludes my prepared comments. Jeremy?
Jeremy Thigpen: Thanks, Mark. Before we transition to Q&A, I’d like to take a moment to announce our preparation for a transition within our executive team. As part of our executive succession planning, Mark May, who has been a key member of this executive team since he joined Transocean 2015 will soon transition his role of Chief Financial Officer to Thadd Vayda, our Senior Vice President of Corporate Finance and Treasurer. Many, if not all, of our analysts and investors already know that from his many years leading our investor [Technical Difficulty] so this move will likely come as no surprise. Needless to say, that is unbelievably prepared for and deserving of this opportunity, and I could not be more delighted for him as he assumes the leadership of our finance organization.
Over the next few months, I will work with Mark and Thadd Vayda to help finalize the succession plan that has been in development for several years and ensure a smooth transition, which we expect will take place during the second quarter of 2024. As we Transocean and many in the investment community already know, Mark has made an incredibly significant contribution to Transocean’s success throughout his tenure here. His leadership, strategic thinking and financial discipline have been instrumental in helping guide the company through an unbelievably challenging market downturn while also preserving and driving significant shareholder value. From leading multiple timely and opportunistic capital markets and liquidity enhancing transactions to helping to identify and consummate numerous strategic acquisitions, joint ventures and divestitures.
Mark has played an absolutely critical role in fundamentally transforming Transocean into a company that not only survived the downturn that forced all of our primary competitors into bankruptcy, but into a company that is better positioned to take advantage of a multiyear up cycle with a streamlined cost structure and a fleet of the most desirable and technically capable drilling rigs in the offshore industry. So before we move forward with the rest of the call, I wanted to pause and on behalf of the Board of Directors, every employee at Transocean and me personally thank Mark for his dedication, his leadership, his service and his partnership these past 9 years. I honestly can’t think him enough for what he has done. We look forward to continuing to build upon the financial discipline and strong foundation that he helped to create.
Thank you, Mark.
Mark Mey: Thank you, Jeremy. Reflected in my 3 decades in the offshore drilling industry, I can say with certainty that while the last almost 9 years at Transocean, have been some of the most challenging, they’ve also been the most fulfilling and enriching of my career. Each day, I’ve had the privilege of working alongside an extraordinary team whose dedication, talent and motivation have been nothing short of inspiring. To my colleagues at both past and present, I extend my deepest gratitude. Your unwavering support, collaboration and friendship have not only made the work extremely rewarding, but also contributed significantly to our collective success. It has been an honor to learn and grow both personally and professionally within this incredible team.
To our stakeholders and partners, thank you for your trust, support and collaboration over the years. It has been a privilege to work alongside you and contribute to our mutual success. I’m delighted that Thadd Vayda with whom I’ve worked closely since 2015 will be elevated as CFO. I look forward to working with Jeremy, Thadd and the rest of the team to facilitate a smooth transition, which our approach with a profound sense of gratitude for the opportunities afforded me and the relationships formed along the way. I will always carry with me the adverse respect and admiration for each of you. Thank you. Todd, we’re ready for questions.
Operator: [Operator Instructions] Our first question will come from Kurt Hallead with Benchmark. Please go ahead.
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