Dolphin Drilling ASA (FOEAF)
Q4 2022 Earnings Conference Call
February 28, 2023, 04:00 AM ET
Company Participants
Bjørnar Iversen - Chief Executive Officer
Stephen Cox - Chief Financial Officer
Conference Call Participants
Presentation
Bjørnar Iversen
Hello. First of all, welcome to Dolphin Drilling's Fourth Quarter Presentation 2022. This is our first presentation since we went public on the Euronext Growth on the 28th of October 2022. With me today, I have Stephen Cox, the Chief Financial Officer of Dolphin Drilling and myself, Bjørnar Iversen, the CEO.
Today, you have the opportunity to put questions to us in the chat that you see on the right corner in your screen, and you can do that through the whole presentation. We will, at the end, after the presentation, pick up those questions and answer them as good as we can. Then as always, we refer to the disclaimer. And for those with special interest, please read that.
Today's presenter, I have already introduced myself and Stephen. So then a little bit about today's agenda. First, we will go through the highlights of the quarter, then including the key metrics, we will go through, and I will present the operational update. Stephen will take the key metrics and financial figures. Then I will come to a little bit in that presentation of the market outlook. And at the end, I will do a quick summary. For the picture here, we see Blackford Dolphin.
Okay. Q4 and the subsequent highlights. Mobilization, we have - had during this quarter, mobilized the Blackford Dolphin from Mexico to Las Palmas. At Las Palmas we've had and she arrived Las Palmas in November 2022. During that phase, we also received the second mobilization payment from Global Hydrocarbons Limited, and we went straight into our 5-year recertification or classwork, a 5-year class for Blackford at the yard in Las Palmas.
That scope was finished early February, and it came in, in line with the budget, which was $15 million. We came in a little bit shy of the $15 million budget. Today, Blackford Dolphin is on route to Nigeria, and she is estimated to arrive Nigerian Waters 2nd of March, and then she will go through a quick test, and then she will be on contract, we estimate mid-March.
We have also, during the quarter, signed a letter of award for further work for Blackford Dolphin, at a day rate of $325,000 a day. That's the all-in day rate based on the minimum term. During the quarter, we had some initial challenges when we exited Mexico to get the right approvals to take the rig out and export - the rig or take out a rig out of Mexico, and that has increased vessel cost and a little bit the time cost during the quarter. Of course, this also basically kicks into a longer transit time. On the picture at the right, we see the Blackford Dolphin, the parting Las Palmas on the 9th of February earlier this month.
Then I think we go quickly into the key metrics and the results of Q2, and I give the word to you, Stephen.
Stephen Cox
Thanks, Bjørnar. So very quickly, we'll touch on the numbers here. As everybody is aware, Q3 and Q4, we had very minimal revenues. All our fleet was either mobilizing or stacked in Norway. The key aspects of this were that we did manage to close the account with Pemex. We did receive all payments that were due to Dolphin to that process, including a demobilization. And we also have been touched on previously received the second half of the mobilization payment due from GHL, which was $6 million.
So the income flow in, the cash came into the company during Q4. We did, as expected, to spend roughly $16 million, $17 million. That's consistent with Q3. That's our general OpEx as we've gone through the quarter. And then as you can see on the page there, pretty much all the CapEx that we incurred in the quarter was connected to the Blackford SPS.
Again, as everybody is aware, Dolphin is completely debt-free. We finished the year-end with $36 million - just below $36 million in cash. Some of that was restricted as you'll see in the accounts, and that's linked to the mobilization that will be released upon arrival in Mexico. So all in, roughly zero revenue quarter and as expected on OpEx targets. I think that's everything in there.
Bjørnar Iversen
That's in on that page. Okay.
Stephen Cox
Yes. So the big numbers, I think the key number to look at for the company. Backlog-wise, looking at the 12 months we have with GHL, that's equivalent of $85 million. That's after receipt of the mobilization. So $85 million in booked backlog. Market cap today around about USD150 million and then zero debt, and that's a position that we're in right now.
Bjørnar Iversen
Thank you, Stephen. Let's then take a quick operational update. As we see on this slide, we see our rigs, and we have the Borgland and the Bideford smart stack, in a smart stack mode outside Flekkefjord in Norway. Both of them has - have a mobilization time around 80 to 120 days with an estimated mobilization cost in the range of 20 to 25 each. They are both heavily marketed, both in the North Sea and internationally. And we have had multiple customers already visiting the rigs lately.
I will come back to the market situation, more about the market situation or other rigs in the market section. But as we see here, we moved the rig from the Blackford rig from Mexico into Las Palmas. And now she is now, as we said, this week entering Nigerian Waters and have the expected start-up in May – in March.
We have a firm contract with General Hydrocarbons, and we have this new lateral award signed 420 to 485 days based on 325,000 a day, including monitoring [ph] for the shorter period of that contract. So this shows the rigs. It shows the status of the company today. And of course, as we said previously, we are very happy to see that the organization did the SPS on time and cost, though a little bit delayed in the transit time, bringing her out of Mexico and into Las Palmas.
And as we said a little bit more in depth here for the Blackford. Blackford arrived safely 24th of November. Capital cost, repeating myself here, $15 million. We have done the full 5-year recertification. They left the port in Las Palmas 9th of February and expected to arrive Nigerian Waters early 2nd of March and will be on the contract shortly thereafter. Expected on contract will be mid-March 2, probably around second week of March and then starting that GHL contract we mentioned. The LOA is also mentioned. And as previous - mentioned in some of our presentations with the contract - being on contract with GHL, the company will have a positive operating cash flow.
A little bit on the mark look [ph] We decided this presentation to focus on the market. And let me first take you a little bit back in history to show you how the market was in 2010 versus today. In 2010, there were 105 rigs from the standard mode - segment on the contract. Today, we have 23. That's approximately a 75% reduction. We can also note that most of the activities were in the North Sea, it was in the Gulf of Mexico, West Africa, but also Brazil and the Far East, including Australia and New Zealand.
Jumping today, we have seen strong interest for more rigs in all the same areas. We have received approximately or, in fact, a little bit more than 20 rig inquiries over the last 90 days. And here, we have put them on the map, and we see the pattern. It pops back in the same areas as we saw back in 2010 and in the last up cycle.
As we say - as I said, approximately 20 tenders in process or pre-screenings or direct inquiries, and we have put them on the map here. We also see the location on the Dolphin Drilling rigs there. Two in Flekkefjord, one soon in Nigeria.
Okay. That was the demand side. Let's have a look at the supply side [Technical Difficulty] sorry for that, there were some technical issues trying to ruin my main point in the presentation, but I'm going to do - to repeat myself, strong interest for the mod rigs in all offshore basins, as I said, approximately 20 inquiries received over the last 20 days. We have met them on the map here.
Okay. Then looking back again, that has to be viewed in the light of history, 105 rigs from 2010 down to 23 and then, of course, looking at the supply side. The supply side of rigs has really, really changed from approximately 140 in the last up cycle, down to 36 rigs in the market. That's close to 75% reduction. And if we look at this, of course, this has a major impact. So it's not only that the demand is coming back. It's also that the supply has really, really been reduced.
And let's have a deep dive into the 36 rigs in the market. If we look at the gray down there, we see the Caspian Sea and the China, of course, in the Caspian Sea, you cannot take out those rigs, and we have long-term contracts on most of the China rigs. That means 15 rigs are taken out of the market based on that.
Then we have the red part, which is the high reactivation cost rigs. We have four of those. And today, we have 12 rigs on contract. That means we have five free and available rigs, more rigs available in the market, and please have a reflect - reflect on that in relation to the 20 opportunities we've seen in there that has currently come up over the 19 days and look at it in the light of that it was 105 rigs on contract in 2010.
So there might be an overlap of some other rig segments, but take into consideration that sixth-generation rigs are currently operating or marketed around the 400 - 450,000 mark internationally. And there might be some of this that is sliding. But as we see it, we think there's a high probability to bring the rest of the fleet out and to have a very, very strong rig market going forward. So we are very optimistic on that.
Then I would like to take you quickly into the U.K. market. It has nearing sold out. The rig market has gone from three rigs contracted in December 2021 to 11 rigs as we see there in 2023, and one to 11 there. And then you have three rigs or four rigs available. That is the Borgland Dolphin and Bideford Dolphin. In addition to that, you have the Transocean Leader and the Ocean Valiant that both needs, as we said from the previous slide, slightly higher investments to bring them back into the market. So a tight market in the U.K.
But in the U.K., we have seen the windfall tax. It has reduced a little bit the investment appetite, but still, we think that there will be a relatively high investment and increased spending. It will not change the direction of the investment.
As we see here, investments in the U.K. has been around the $6 billion mark. The predictions is an 87% increase. It might be reduced somewhat due to the last windfall taxes. But as I said, we don't believe in a change in the direction of that travel. We think that U.K. will be rational and will do their energy investments to bring back energy security and a decent cost level.
That brings us back to the summary, and I will start with summarizing the strategy of the company. Based on what we just said, we believe in an improved market and improved market conditions for the existing fleet. We think that the day rates will come up and that we will be able to announce and take out the rigs within a recent period of time.
We still have the marketing rights for the Keppel newbuilds, which we're still marketing in the market or marketing out in the market, particularly in Norway. We are still chasing management opportunities on some assets, and we are still focusing on growing the company, doing some opportunistic moves.
So to sum up the quarter, Blackford is through on contract start-up in Nigeria that will move the company of Dolphin Drilling into a positive operating cash flow. We see some near-term opportunities that will add the backlog to Blackford at increased day rates. We see a significant increased tender activity for standard mod rigs in the global market. And as we saw, the supply is very limited.
And we think that both Borgland and Bideford are two of the few remaining units in the market, and we are working to realize our growth opportunities. And again, to the right, we see the Blackford, left Las Palmas, the 9th of February, and we expect to be in Nigerian Waters on the 2nd of March beyond contract mid-March.
On that, I think we open up for the Q&A session. And Stephen, have we received any - any questions?
Question-and-Answer Session
A - Stephen Cox
Yes. So a few questions here. So let me just start off with the first one. So in Nigeria, you got a day rate of $325,000. Do you consider that a good rate in today's market?
Bjørnar Iversen
I think the - yes, I would say it's a good rate in today's market. But we see that the ultra-deepwater, the tide is lifting all the boats, and it starts with the ultra-deepwater market. And we've seen the ultra- deep market - water market go around 400, 450. And some is now saying that they're bidding above the 500 mark. So there's an upward pull on the premium segment. And that lifts the rest of the market.
And my answer to that is, yes, it's a good rate, but we have seen day rates on - in this market significantly higher than we've seen today. And personally, I think the market will go up, continue to increase in all segments due to the lack of supply in combination with increase in demand.
Stephen Cox
Okay. Next question here. Could you add some flavor to the start-up and duration of the approximate 20 mentioned inquiries on Slide 14?
Bjørnar Iversen
Yes. What we see there, most of it will be start-ups, the earliest one of those start-ups will be, I would say, third, fourth quarter this year, the earliest one of those inquiries, but most of them kicking in from early '24 and from early mid-'24. It seems that the lead time on tenders on the standard segment is somewhat between, I would say, 6 and 12 months, probably leaning towards 9 months. So I think that's the answer to that, Stephen.
Stephen Cox
So there's a connected question here, but I'm just going to take the second half of what was the key challenges with the reactivation. I presume that's of the Borgland and Bideford?
Bjørnar Iversen
I don't see that as a big challenge. We have secured - we have something called smart stack. That means we have secured the key personnel for the rigs. So we have the key personnel of the drilling section and the technical section and the marine section. That means we have the key guys to take out the rig.
So when we mobilize a rig, of course, we need local crew in the country or the market we go to. So there's a hiring or an HR mobilization challenge, which we will overcome. And then, of course, in a tighter market, you need access to the critical vendors for doing the actual job. And that is, of course, also becoming a little bit tighter. So I would say that those are the two things that we need to manage.
Stephen Cox
Okay. There was a specific question on Blackford here. How do you see the market for Blackford going forward? Are you able to market Blackford is a deepwater rig now that the high-spec deepwater is sold out, can we expect to see day rates of $400,000?
Bjørnar Iversen
The answer is yes. We see - if you look at the map and the opportunity map, there's a lot of dots around West Africa. The beauty of Blackford, it is a deepwater asset. It can go down to 1,800 meters. And there's not many rigs in the world that can do that. The other ones, as you said, is the ultra deepwater rigs, the big DP rigs.
So we see demand in West Africa on the deepwater side, and we see some other basins like India, where there's also - also an opportunity. And we will look at, of course, adjusting the day rates to the right level. So the rig has been operating well north of 400, and I think we will see it in this up cycle, too.
Stephen Cox
I'll try and take these in some sequence. So would it be different CapEx involved in Bideford and Borland to bring it back to work in a more exotic location than the North Sea, Brazil, Australia or other basins?
Bjørnar Iversen
The answer is yes. Yes and no, there will be a slightly lower cost on personnel. So typically, if we go international, we have our key personnel, which will be, let's say, North Sea-based Norway, U.K. based mainly. And of course, in some markets, you have a slightly lower wage level and some other markets, slightly higher wage level. So it depends. So I think the estimates of 2025 is good for both.
Stephen Cox
Specific to CapEx reactivation...
Bjørnar Iversen
Yes.
Stephen Cox
It's more determined by the location?
Bjørnar Iversen
Exactly.
Stephen Cox
So let me get this - what is your best guess on the cost of bringing one of the high reactivation cost rigs back to the market?
Bjørnar Iversen
I would say north of $50 million, probably somewhat between $50 million and $100 million, 75 is in the middle. So let's say, my guesstimate then will be 60 to 70 will be the expected level to bring back some of the four others that we had on that list.
Stephen Cox
There's a specific question here around possible to give some more guidance around timing of a contract for Borgland?
Bjørnar Iversen
It's always difficult to predict the past, but I can say there's a lot of activity around the Borgland. Our ambition is to have a start-up on Borgland still in 2023, and we still have time for that, and there's significant interest around the rig.
And so I would say, signing or getting a contract has to be this quarter. So it has to be able to mobilize in this year. You have to have a signed contract this quarter. So at the earliest, this quarter, so - and we are now at the end of February. So that means within the next 30 days. So there's a lot of interest around her. And we also, as I said, see incoming, increased incoming activity around the Bideford in this setup, referring again to the 20 processes we have.
So I would say - from a month best case, worst case slipping a little bit into the second quarter, but it's going to be sold out. There's - I'm 100% convinced of that, in fact.
Stephen Cox
In the connected question, do you see increased competition from modern floaters becoming available at Norway?
Bjørnar Iversen
We see some tender activity from particularly Transocean in Australia, and I would not - this trial - that's a possibility that they will pick up something. So - but outside that, I don't see anything. I think Norway from '24 and onwards has an undersupply of rigs by itself. And I think we probably will see over the next quarter, at least before the summer holidays, rig commitments in Norway, particularly from Equinor [ph] but also some of the others that is looking for rigs. So I don't believe in the great out flux of rigs from Norway, maybe one, maybe two maximum.
Stephen Cox
And then there's a question about cost inflation, reactivating an operational and difference in cost between the North Sea and international, which we may be touched on with the wage aspect. It's predominantly driven by the salary aspect and the wages. There's been some slight supply chain pressure.
Bjørnar Iversen
I would say the big thing is Norway has a different location 24[ph] while the rest of the world has equal time. That means you have - you need to have an extra crew in Norway, and that means $30, $35,000 a day in extra cost. Taking that aside, there's a little bit different cost level if we operate in India or Brazil or Mexico or Nigeria. West Africa is still high, relatively high OpEx, lower OpEx, India, Asia. So it varies a little bit, but the big differentiator is that 24 Norway it's the different market, yeah.
Stephen Cox
Okay. That's all.
Bjørnar Iversen
I think that's what we had on the Q&A session. So on that note, we thank you all for calling in and showing interest in the company, and we are looking forward to have you back in the quarter presenting first quarter results and with news and updates from the company in three months' time. So thank you for participating.
Stephen Cox
Thank you.
For further details see:
Dolphin Drilling ASA (FOEAF) Q4 2022 Earnings Call Transcript