SHLLF - Shelf Drilling Ltd. (SHLLF) Q2 2023 Earnings Call Transcript
2023-08-13 09:36:03 ET
Shelf Drilling, Ltd. (SHLLF)
Q2 2023 Earnings Conference Call
August 9, 2023 10:00 AM ET
Company Participants
David Mullen - Director and Chief Executive Officer
Greg O’Brien - Executive Vice President and Chief Financial Officer
Conference Call Participants
Michael Boam - Sona Asset Management
Fredrik Stene - Clarksons Securities
Jay Spencer - Stifel
Robert Ellenbogen - MUFG Securities
Patrick Fitzgerald - Baird
Presentation
Operator
Good day and thank you for standing by. Welcome to the Shelf Drilling Q2 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to Mr. David Mullen. Please go ahead, sir.
David Mullen
Thank you, operator and welcome everyone to Shelf Drilling Quarter 2 2023 earnings call. Joining me on the call today is Greg O’Brien, Shelf Drilling’s CFO. Earlier today, we published the Q2 2023 financial statements for Shelf Drilling Limited and Shelf Drilling North Sea Limited, as well as our latest fleet status report on the Investor Relations page of our company website.
In addition to our press release and our financial statements, we also published the presentation with highlights from the quarter. A recording of this call will be made available on our website within the next few days.
Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for the full year and 2023 and beyond. Activities, events or developments that we expect, estimate, project, believe or anticipate, may or will occur in the future are forward-looking statements.
Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. Also note, that we may use non-GAAP financial measures in the call. If we do, you will find a supplemental disclosure for these measures and an associated reconciliation on our financial report.
I will provide an overview of the company’s performance for Q2 2023 before sharing my latest views on the jack-up market. I will then hand over to Greg to walk you through our first quarter results before opening up the floor for Q&A.
As always, I would like to start my commentary on our earnings call with our safety performance. The year-to-date Total Recordable Incident Rate as of the 30th of June was 0.14, trending better than the average we achieved in prior years. We continue to stress the importance of rigorous planning with our recruits as we strive to deliver perfect execution across all our operations in an environment where nobody gets hurt.
In Quarter 2 ‘23, we achieved a fleet-wide uptime of 98.7%, marginally below our recent quarterly averages above 99%. The influx of rigs returning to operation is the underlying cause of the step down in operating performance. I feel confident that the trend would revert back to the recent averages.
In the second quarter, five of our jack-up rigs commenced new contracts after completing an extensive out of service projects. Two rigs in Saudi Arabia, two rigs in India and one rig in Nigeria. In Quarter 3, we have also completed the shipyard project for the Shelf Drilling Resourceful and the Trident VIII.
The Shelf Drilling Resourceful commenced a three-year contract with ENI in Italy in early August. The Trident VIII has completed its out of service project and has commenced a one-year contract with Chevron in Nigeria. The Key Singapore is expected to commence its three-year contract with ONGC late October.
In Quarter 2 and Quarter 3, we have eight rigs completing out of service projects in a combination of contract preparation work and recertification of drilling and well-controlled equipment. This represents by far the busiest period in our history of contract preparation and shipyard activity.
We have successfully delivered these rigs to our customers substantially on time and within budget in spite of the backdrop of supply chain challenges and people shortages. This was an outstanding achievement and demonstrates the value of our unique operating platform. The company is now very well positioned to deliver a step up in financial performance in the second half of the year and beyond.
A short recap of the financials for the quarter. Adjusted revenue for Quarter 2 ‘23 was $211 million, a 17% sequential increase and in line with our guidance. Adjusted EBITDA for the quarter was $73 million, representing a margin of 34%. We expect these results to further improve in the second half of 2023, with an increase in the number of rigs in operation and at higher day rates. Greg will provide more details on our Quarter 2 2023 financial results and the outlook for the rest of the year.
A few comments on the macro environment and marketing backdrop. Brent crude oil prices, the key driver for demand for shallow water activity averaged $80 per barrel year-to-date 2023. While concerns around the health of the global financial system kept prices in the 70s for much of Quarter 2, Brent rallied into the mid-80s in recent weeks.
The OPEC+ decision to further extend voluntary cuts, coupled with an improving economic outlook contributes to the rising oil prices. I expect oil demand to continue growing for the rest of 2023 as the probability of a recession in the US declines, and China stimulates consumption. All the while, OPEC+ producers hold supply steady.
We maintain that current oil price and the macro backdrop are highly constructive for further upstream investments, and particularly for the jack-up sector in the medium-to-long-term. Contracting activity in the Middle East has slowed from the record growth experienced through 2022 through into 2023.
Saudi Aramco will now focus on putting its many incremental rigs to work and ADNOC have substantially completed its purchase program of jack-ups estimated to be around 16 rigs. Tendering activity in Southeast Asia is accelerating across multiple countries which should drive the rig count activity in the region in 2024.
In West Africa, we now have three rigs on long-term contracts with Chevron. We have a solid pipeline of opportunities for three rigs currently deployed on shorter-term contracts. In India, we see significant incremental demand in the near-term. ONGC has launched the five rig tender in July and is expected to launch additional tenders in the coming months. Several indigenous operators are also in the market for jack-ups for programs in 2024. And available rig supply for this market is very limited.
After a slow period of activity in 2023, the North Sea market is expected to tighten in 2024, following the departure of several jack-up rigs to other regions in recent months and the anticipated increase in demand in the UK sector of the North Sea in Quarter 2 2024. Additionally, the UK Government recently sanctioned a number of new concessions for exploration and development activity in the North Sea, which should drive incremental activity in the medium-to-longer-term.
The Norwegian CJ70 market fundamentals remained strong, while there has been a temporary slowdown in activity this year owing to timing of projects, I expect to see a very strong market in Norway in ‘25 and beyond. The global number of contracted jack-up rigs increased from 390 in January ‘23 to 398 in August ‘23.
Market utilization is approaching 95%, the highest levels since 2014. The excess jack-up supply in the various shipyards across the world has been substantially absorbed into the market. I expect demand to outstrip the available supply and the positive day rate momentum will continue to build through the remainder of ‘23 and into ‘24.
Last week, we announced the Shelf Drilling Fortress was awarded a contract with CNOOC in the UK. We were very pleased to learn that CNOOC’s positive past performance was the deciding factor in the award of this rig. This contract includes two firm wells expected to last nearly five months, plus four optional wells in direct continuation that could add more than a year of additional backlog.
Also in the UK, the Shelf Drilling Perseverance was terminated by IOG in July, owing to lack of funding. The rig is now available and be marketed for multiple opportunities, both inside and outside the UK.
The Baltic secured one well extension in Nigeria for approximately 100 days, and the Shelf Drilling Mentor managed a one well contract in early July. We are in advanced discussions and opportunities for both the Shelf Drilling Mentor and the Adriatic I, following the completion of their programs expected in August and September. In summary, the macroeconomic indicators have improved in recent months, contributing to a recovery in the oil price following a period of uncertainty in the economic outlook.
The jack-up market is further tightened and we expect this trend to continue. As of the 30th of June ‘23, our contracted backlog was $2.6 billion with a weighted average day rate above $80,000 a day. 35 of our 36 rig fleet are contracted, representing a marketing utilization of 97%. There are attractive opportunities for – the few rigs with near-term availability.
Having substantially completed an intense period of contract preparation, we are now very well positioned for a step up in financial performance in the coming quarters and years ahead. As always, we remain focused on delivering safe and efficient operations for our customers. I believe that Shelf Drilling is in a very strong position to reap the benefits of an improving jack-up market.
I will now hand it over to Greg to walk you through the financials.
Greg O’Brien
Thanks, David. As a reminder, our earnings released this morning included standalone financial reports for Shelf Drilling North Sea. We’d also encourage you all to review the results presentation on our website, as this includes additional detail and schedules for both Shelf Drilling and SDNS.
Reported revenue for Q2 2023 of $214 million, included $3 million for amortization of intangible liability. We’ll continue to focus on and refer to adjusted revenue, which excludes the impact of this non-cash item. Adjusted revenue for Q2 of $211 million included $193 million of day rate revenue, $4 million of mobilization and bonus revenue, and $14 million of recharges and other revenue. Adjusted revenue for Q2 increased by $31 million or 17% relative to Q1 2023, which is in line with the guidance we provided on our last call in May.
At the parent company, revenue of $181 million increased sequentially by $34 million due to the commencement of new contracts or contract extensions for seven rigs during the quarter. The Shelf Drilling Victory and Harvey Ward in the Middle East, the Shelf Drilling Scepter, and Adriatic I in West Africa, as well as the Key Singapore, Combat Driller and C.E.Thornton in India. This was partially offset by lower revenue for the Trident VIII in West Africa, which was preparing for a new contract commencing in August.
Revenue at Shelf Drilling North Sea of $30 million, represented a sequential decline of $3 million following the contract completion for the Shelf Drilling Fortress in Q1 and lower contribution from the Shelf Drilling Barsk in Q2, primarily due to the rig moved to the final platform under the current contract that was completed in June.
As a reminder, other revenue included the contribution associated with the Shelf Drilling Barsk, which is the net margin generated by this rig under its current bareboat charter agreement, that is scheduled for completion in Q4 2023.
With several rigs returning to operations during the quarter, effective utilization increased to 82% in Q2 from 75% in q1. Average day rate was $75,000 per day in Q2, up from $70,000 in Q1. This increase reflects higher day rates for five rigs in Saudi Arabia and four rigs in Nigeria, following new contracts and extensions.
Operating and maintenance expenses of $120 million in Q2 decreased from $129 million in Q1, primarily due to lower expenses for three rigs preparing for new long-term contracts that commenced in Q2, the Compact Driller in India, the Harvey Ward in the Middle East, and the Shelf Drilling Scepter in West Africa.
Partially offsetting this were higher operating costs for the Shelf Drilling Victory in the Middle East, and the Shelf Drilling Resourceful in the Mediterranean, which started their new contracts in April and August, respectively. At the SDNS level, operating expenses decreased sequentially to $21 million as the Shelf Drilling Fortress was idled during Q2.
G&A expenses of $15 million in Q2 were largely unchanged from Q1. Adjusted EBITDA more than doubled to $73 million in Q2 for a margin of 34% compared to $36 million and a margin of 20% in the previous quarter. Adjusted EBITDA for SDNS was $5 million in Q2 versus $7 million in Q1. The EBITDA contribution from the rest of the business was $68 million in Q2, up from $29 million in the first quarter due to the substantial increase in revenue, as well as a slight decline in operating expenses.
Income tax expense was $8 million in Q2, down from $9 million in Q1 or 4% of revenues. Net interest expense of $34 million for the quarter was in line with Q1. Other net expense of $4 million was due to foreign currency exchange loss in Q2 from certain fluctuations against the US dollar. Non-cash depreciation and amortization expenses totaled $34 million in Q2, up from $31 million in Q1. Net income attributable to controlling interest was $2 million in Q2, which represented a material improvement from Q1.
Capital expenditures and deferred costs totaled $61 million in Q2, down from $83 million in Q1. The sequential decrease primarily related to the Shelf Drilling Victory and Harvey Ward in Saudi Arabia, the Compact Driller in India and the Shelf Drilling Scepter in Nigeria, all of which started their new contracts during Q2. This was partially offset by higher contract preparation for the Shelf Drilling Resourceful in Italy, the Key Singapore in India and the Trident VIII in West Africa, all expected to commence new contracts in Q3 or Q4 of this year.
In total, spending on these seven rigs was approximately $40 million in Q2, with the completion of these major projects, we expect quarterly capital spending to decline in the second half of the year. CapEx at Shelf Drilling North Sea was $2 million in Q2, primarily for transition related spending and investment in fleet spares.
Our consolidated cash balance as of June 30th, was $142 million, largely unchanged from the balance of $144 million at the end of March. Cash at Shelf Drilling North Sea declined from $63 million in March 2023 to $53 million at the end of June, primarily due to the first interest payment made in April.
Cash at the parent company increased from $81 million in Q1 to $89 million at the end of Q2, despite the continued high level of capital spending during the quarter. The inflow of approximately $80 million of mobilization fees received during Q2 offset the high level of CapEx and an increase in net working capital during the quarter.
In our release this morning, we also maintained our financial guidance for full year 2023. Fully consolidated adjusted EBITDA is estimated between $310 million and $345 million. The Commencement of new long-term contracts in the Middle East, India, the Mediterranean and West Africa in recent months, will contribute to increases in both effective utilization and average day rates in Q3.
With the full run rate benefit of these contracts, we expect our quarterly average adjusted EBITDA to exceed $100 million in the second half of 2023. Our total capital spending guidance for full year 2023 is also maintained between $220 million and $245 million, which includes $20 million to 25 million at the SDNS level.
As discussed earlier, the higher than normal level of spending across the rest of the business was heavily – concentrated in the first half of 2023 on four rigs, the Shelf Drilling Victory, Harvey Ward, The Shelf Drilling Scepter and Shelf Drilling Resourceful. Mobilization fees of approximately $100 million included in these contracts are serving as the material offset to the spending requirements for these four rigs.
Our improving results in Q2 are in line with expectations and consistent with the guidance we provided for 2023. This period with a high concentration of major projects to mobilize and prepare rigs from new contracts is substantially complete. And we believe we are now at an inflection point.
We expect our earnings to significantly increase again in Q3 and cash to build through the end of the year. Our backlog visibility and accelerating financial performance combined with constructive industry fundamentals position us extremely well as we consider refinancing options ahead of our debt maturities in late 2024 and early 2025.
With that, we’d like to open the call for questions.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] We are now going to proceed with our first question. And the questions come from Michael Boam from Sona Asset Management. Please ask your question.
Michael Boam
[Technical difficulty]
David Mullen
Hey, Michael it’s pretty hard –
Greg O’Brien
Hey, Michael, it’s hard to hear you.
Michael Boam
I’m sorry, isn’t that better?
Greg O’Brien
Yeah, lot better.
Michael Boam
Okay. You will be in a surplus cash position as you said through the back half of the year. And you’ve talked about when you do come to market, bringing less debt than you maybe have today. Where do you use cash to buy back bonds in the open market through the third and fourth quarters to reduce your interest cost? And obviously pick up some discounts to par as a use of cash?
Greg O’Brien
Michael, not necessarily. No, I mean, the bonds are trading pretty close to par. Today, I think we’re mostly focused on positioning ourselves for the right refinancing. You are right. We have talked about potentially trying to get absolute debt lower as part of refinancing, that is a goal and that becomes a bit easier as time passes.
And as we build cash in the company, we did a little bit of that in Q2, we’ll do more towards the end of the year. That is a partial source of funds that we’ll consider using in a refinancing. But yeah, no other comment on open market repurchases. I think it’s somewhat unlikely in the short-term.
Michael Boam
Okay. And obviously you will be meeting investors in London on I think is September 5th at Goldman Sachs Conference. I believe you did a non-deal roadshow in the US earlier in the quarter. Are you – I mean, the market is absolutely conducive to you coming? What is the delay?
Greg O’Brien
Look, I don’t think there’s a delay. I think we’ve been very consistent and how we’ve messaged our expected timing. We’ve said we thought it was late 2023 or early 2024, we do have a number of objectives we’re trying to achieve. I think trying to get absolute debt lower is a goal. That’s something we’re focused on as I mentioned, that is easier to do as time passes. We’re obviously following market condition that has been a pretty receptive period in the high-yield markets for our space.
And that’s for good reason, because the fundamentals have significantly improved. We think that’ll continue. So we’re spending a lot of time debating timing and structure, we think we have very good options available to us. We do a lot of regular way investor engagement I think we’ll continue to do that in the weeks and months ahead. So it’s clearly top of mind, we want to get the right outcome done. Nothing else really to add unless David –
David Mullen
Yeah, the real – we are laser-focused on getting the best possible refinancing that we can and, you know, we’re very mindful of the market. The market is good. Yes. And, you know, when the moment is right, and we see everything aligned, we will go to the market, but we got to be ready. It could be earlier, it could be later, we’ll be ready. That’s the goal.
Michael Boam
Okay, [inaudible] congratulations on a great quarter. And thank you very much.
David Mullen
Thanks, Michael.
Greg O’Brien
Thanks, Michael.
Operator
We are going to proceed with our next question. And the questions come from the line of Fredrik Stene from Clarksons Securities. Please go ahead with your question.
Fredrik Stene
Hi, David and Greg. And hope you’re well and thanks for taking my question. I wanted to touch a bit on the dynamics for what’s going on in India and West Africa. And maybe we can start with India. David, you gave some color in the prepared remarks. There’s a tender going on now. And it seems to be another ONGC tender coming relatively shortly.
But I think at least what we’ve heard, it seems like they’ve not really been able to fulfill this ongoing tender, they haven’t received enough bids. So my question to you is, if that’s correct, what do you think will happen here? Do you think that what will happen to rates? And are we going to see new rigs actually coming into the contrary? And how does this kind of fit with the upcoming requirements and requirements from other local E&P companies?
David Mullen
Yeah, look, I think ONGC has – have a big appetite, they want to increase the rig count by a significant margin, and they’ve got a tender in France, and there’ll be more to follow. And you’re also going to see like, [Karen] [ph] is looking for a couple of rigs, there’s another few other indigenous companies that are looking for rigs. So there’s clearly a demand that outstrips what is the available supply.
And I think you’re going to see a good healthy step up in day rates. And, it’s – there’s a certain barrier to entry into India, because there’s quite a significant investment to make on rigs that are not currently operating in India to go into India. So there’s – it’s going to be very good for the rigs that are already in India. But it’s also going to mean that there’s going to be probably a higher price tag coming with the rigs that are coming from outside into India.
Now, I think, look, it’s a positive market. And we’ve always said in the recent past that India is a really good and important market for us. So it’s playing out exactly like that. And I think actually, it’s playing out more on the high end of my expectation. But I always felt that this was going to be a really good market. And I think it’s even better than what I thought.
Fredrik Stene
All right. Then do you think that means – that means six digit day rates at some point?
David Mullen
Yeah, I mean, I won’t get specific on it. But yeah, why not? It should be.
Fredrik Stene
Great, done. And then turning to West Africa. As you said you have or I believe you said that you had a few follow-up opportunities for some of the rigs there with availability in the short-term. I guess that’s the Adriatic, the Baltic and the Mentor at least and are you able to classify the opportunities that you’re chasing there? Or is there more short-term opportunities? Or are you also looking long-term?
David Mullen
No, I think, we’ve got three rigs on long-term contracts all with Chevron. And we’re pretty happy with that. And we’re quite happy to remain relatively short on the rest, because we do see there is way more demand and there is supply. So again, it’s a similar dynamic, it’s a different geography. It’s – but maybe not. The demand is not so outstripping the supply, but we see more demand and there is supply.
So we’re quite happy that we keep rigs a couple of – some of the rigs on a relatively short-term trigger, because you’ll see progressively higher day rates. I think some of the day rate fixtures you can probably back solve for it, because we announced the contract value. And that part of the world has been very healthy. And it’s continuing to improve. So, we – yeah, it’s a good market for us.
Fredrik Stene
Thanks. And just a quick follow-up on the refi before I hand it over. I think you’ve said before that you’re exploring different types of opportunities, and I guess, conventional bond markets. That’s one thing, but there is also maybe potentially to do something locally in Saudi with Aramco fleet. Are there any – and I understand that the kind of it’s a sensitive matter, but are there anything you’re able to share in terms of progress or other types of financing that you’ve been looking at that you haven’t talked about before?
Greg O’Brien
Not much to be honest, Fredrik. We continue to think that that is a pool of capital that’s available to us. I think it’s frankly a little bit easier now that we have all the rigs to work with the two contracts that commenced in Q2, but we also think the bond markets are very good option. It’s been receptive this year, and we think we have a pretty good following, given our track record in the capital markets. So we’ll continue to debate and explore both. Not much more to add then really.
Fredrik Stene
All right. Thank you so much. I’ll hand it over. Thanks.
Operator
We’re now going to proceed with our next question. And the questions come from the line of Jay Spencer from Stifel. Please ask your question.
Jay Spencer
Great, thanks. And congrats on a good quarter. I’m just trying to get a sense of the contribution from SDNS. I think in the prepared remarks, you said that you’d expect EBITDA for the company to be over – for the total company to be over $100 million in the third quarter and fourth quarter as well. SDNS contributed $5 million of EBITDA this past quarter. Just trying to get a sense of what’s our contribution might be over the next couple of quarters? Can you provide any color on that?
Greg O’Brien
Yeah, yeah, sure. I mean, it’s fair to assume that the parent company is going to contribute this substantial majority of our earnings in the second half of the year. We did $12 million in H1 that SDNS, I wouldn’t necessarily assume the second half is better than that, given that we do have some potential rig in Q4, particularly on the rig in Norway.
So hope that’s an unhelpful context. I mean, the growth in Q3 and Q4 is really at the parent company off the back of the five long-term contracts that David talked about that started in Q2. And then we had two more that just started in the first half of August, in West Africa and in the Mediterranean. So, a large percentage is the key take away.
Jay Spencer
Okay, thank you. And just one more for me, in terms of working capital. Do you expect working capital to be a use of funds through the remainder of the year? And if so, approximately how much?
Greg O’Brien
Yeah, it’s a good question. I mean, you always have a bit of a build as earnings are ramping up. And also, if you’re coming out of a period with high capital spending, I mean, the simplest way to think about is our payables balance was somewhat elevated at the end of Q2, just you would normally expect that when you’re coming out of a period, with higher CapEx. That number is probably in the $25 million range.
Just working back to a more normalized level, which we would expect to hit in the second half of the year. And most of that’s probably in Q3. So we said, we think we build cash pretty meaningfully before the end of the year, most of that’s really going to be in Q4. And that’s off the back of what should be a pretty clean kind of new run rate for the business. We hit that in Q3 and Q4 from an earnings standpoint. In terms of cash flow, it’s more Q4 into early 2024.
Jay Spencer
Okay, thanks a lot. That’s it for me.
Operator
We are now going to proceed with the next question. And the questions come from the line of Robert Ellenbogen from MUFG. Please ask your question.
Robert Ellenbogen
Hey, guys. Congrats on the quarter. My questions have mostly been answered. But just on Shelf North Sea. We all get it that, I think it’s a little less likely to be folded in now. But, any updates that you can provide on that more medium-term on that market? Any latest thoughts there?
David Mullen
Yeah, look, I think the focus is to get the refinancing done. And then, we would put all our attention around how we want to look at SDNS. But the logical thing would be to roll it into SDL and we have to figure out the best way to do that. But I would say, all the focus – absolute focus today is all about getting this refinancing done and getting the best possible refinancing we can.
Greg O’Brien
I mean the other point I would make, because that I mean, it’s obviously a very good collection of assets. We think the earnings capacity there is substantial, medium-to-long-term. I mean the run rate contribution is going to be a little bit choppier between now and call it, early-to-mid-2024 and once the rig in Norway restarts, I think we’ll have a much better view of call it, next 12 months earnings capacity, the business unit and we think we’ll have more clarity on the rig that’s in the UK as well. So like we think there’s a lot to do with SDNS going forward, but to David’s point, it’s a bit more of a secondary priority in the very, very near-term.
Robert Ellenbogen
Thanks guys. Congrats again.
Greg O’Brien
Thanks, Patrick [sic - Robert].
Operator
We are now going to take our next question. And the questions come from the line of Patrick Fitzgerald from Baird. Please ask your question.
Patrick Fitzgerald
Hey, thanks a lot for taking the questions. Assuming you hit the middle of your guidance for the year with the working capital movements that you highlighted and the adjusted EBITDA, et cetera. Where would you think the cash balances go to?
Greg O’Brien
Patrick it’s a pretty specific question, it shouldn’t be hard to back into it based on your assumptions. Look, I think Q3 is probably more of a sort of neutral-ish quarter as we’ll have working capital impact, we think will start to build from there. I don’t think I want to be too much more specific.
But we think we should hit a more normalized level of capital spending, we do have one more bigger projects that we’re doing in Q3, that’s the Key Singapore which David talked about, which will start a new three-year contract in India, late October, and then from there, we don’t have a ton planned.
So, we’ve always talked about this kind of $100 million, $110 million annual spending level, that’s probably the right level to think about short-to-medium-term. After that, we’ve talked about tax burden. So, I think we should hit a steadier level of cash flow starting in Q4, in the early part of next year. But a specific number at year end, we’re not going to give too much guidance on that.
Patrick Fitzgerald
Okay, thanks. So do you – about the refinancing? Do you have like an absolute level of cash interests that you would be comfortable now, EBITDA is much higher than it was previously? But rates are higher than they were previously as well? So do you have any thoughts on what type of cash interest you could sustain going forward as you think about this refi?
David Mullen
We’re not going to disclose that sort of thing. I mean, we’re just going to try to do the best deal we can. And to throw out a number of our cash interest is something that no, we’re not going to do that.
Greg O’Brien
Yeah, look, I mean, it’s fair to assume that our cost of debt will go up a little bit relative to the coupons we have today. We don’t think it’s much part of the goal we’re trying to print a smaller amount of absolute debt is to manage around long-term cash interest expense.
Is there a specific number? No, I think we’re feeling better and better about earnings capacity, short, medium and long-term, which is pretty helpful in how you think about debt service. But clearly, we’d like to get that as manageable as low as possible to David’s point.
Patrick Fitzgerald
Okay, thanks. You talked in the past about non-traditional financing opportunities or options. I was just wondering, you have a lot of backlog that’s from key customers and that could potentially use to do a secured deal or something like that. But I’m wondering, would a secured deal – would that actually come from your existing lenders? Or are your existing type of lenders, or would that actually come from – the money come from Middle East sources?
Greg O’Brien
I don’t know if I totally understand the question. Like, I think as we think about new financing, it’s fair to assume that most, if not, all the debt would be secured. That’s been more than norm in the capital markets as of late.
If we were to look to split the financing into multiple parts or regional out in the Middle East would be secured either against some or all of the assets. And I think you’d expect the same in the bond market. There’s a very good chance we can look to do the entire refinancing in the bond market. And it just feels like secured placement is more common today than it was five, six years ago. So I don’t know if that helps answer the question. That’s how we’re thinking about it.
Patrick Fitzgerald
No, that’s helpful. Thanks. And then just one quick one on North Sea CapEx. What is that on a kind of annualized basis?
Greg O’Brien
Yeah, I mean, like it’s a smaller fleet. So it’s going to be more inherently lumpy, if you will, it’s going to be tied to as and when you need to do kind of small or medium-sized projects on rigs. This year, we don’t have much of that planned, you know, we guided to $20 million to $25 million for the year, we only had $5 million through June. So we clearly expect to spend some more in the second half of the year than we did in the first half.
But this is mostly around kind of building a pool of skipped spare equipment. This is something we talked about when we announced the acquisition a year ago. So there’s not much plan this year. I think next year and thereafter, it’ll be more around potential contract preparation requirements. And as and when you have equipment recertification need, there’s one rig that may have that need in the next 12 months or so, the others are farther out in time.
Patrick Fitzgerald
All right. Thanks a lot.
Operator
We have no further questions at this time. I will now hand back to Mr. David Mullen for closing remarks.
David Mullen
Thank you, operator and thank you, everybody for joining the call. So that’s it from us and we look forward to talking again at the Quarter 3 earnings. Thank you very much. Bye.
Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect your lines. Thank you.
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Shelf Drilling, Ltd. (SHLLF) Q2 2023 Earnings Call Transcript