Odfjell Drilling Ltd

OSE:ODL

Q3-2025 Earnings Call

[James Crothers, executive]

Good afternoon, everybody, and welcome to the Odfjell Drilling Q3 2025 Results Presentation. My name is James Crothers, and I am the Investor Relations Officer of the company. I'm joined today by our Chief Executive Officer, Kjetil Gjersdal; and our Chief Financial Officer, Orjan Lunde.

Before we begin, your attention is has brought to an important information slide of our presentation, which we'd encourage participants to read in full. Note that this presentation is only a summary of the quarter and a more comprehensive quarterly report should be read separately. Both that report and today's presentation are available on our website, www.odfjelldrilling.com.

Our call today will begin with Kjetil taking us through the key highlights from the quarter before moving on to discuss our operational performance. Kjetil will then hand over to Orjan, who will go through our financial review before Kjetil summarizes the presentation and closes the call. We will then hold a Q&A session and invite all participants to submit either the telephone or electronic the webcast tools. We, as ever, we'll try and get through as many of those questions as possible. However, if we don't get a chance to answer your question live, I'll have a record of the question, and I'll follow up with you directly after the call.

Q3 has been an excellent quarter for our business. So I'm delighted to now hand you over to our Chief Executive Officer, Kjetel.

[Kjetil Gjersdal, executive]

Thank you, James, and good afternoon, everybody. I am very pleased to report another period of record financial and operational results. Because of an excellent performance across our business, we have delivered a revenue of $234 million and EBITDA of $119 million, resulting in net profit of $55 million. Financial utilization was at an outstanding 99%, adding to the company's long history of excellent financial utilization, which now stands at an impressive average of 97% over the last -- over the past 10 years. As a result, we have once again declared an increase in dividend to $0.20 per share, up from $0.18, resulting in total dividend of $48 million being issued to shareholders. Whilst increasing our dividend, we have continued to reduce our leverage, ending the quarter at 1.2x net-debt to EBITDA and an equity ratio of 66%.

And finally, our fleet remains sold out until the end of '26, and we remain positive about the market appetite to secure our fantastic Tier 1 units. Our total order backlog is at $1.5 billion at the moment, and we are in advanced discussions with several clients with a view to adding backlog in near future.

And then we move on to our operation. As for previous quarters, the company's own fleet has been active on the Norwegian continental shelf, working for Aker BP and Equinor. The Atlantic and the Aberdeen continued to operate for Equinor with the Atlantic engaged in exploration drilling, which included a high-pressure, high-temperature campaign. The unit achieved a financial utilization of 99% and set several drilling performance records during the quarter. The Aberdeen continued to drill at the Breidablikk field development and achieved a financial utilization of 98%. And meanwhile, the Nordkapp worked for Aker BP, drilling the Bøyla and Symra production wells, which will support the Edvard Grieg field. The Nordkapp achieved a financial utilization of 99.7%. And then finally, the Stavanger, while also on contract with Aker BP, completed the Omega Alpha project, which we -- you might have picked up in the media. This was an outstanding achievement, which showed Deepsea Stavanger drilling through 40,000 meters of reservoir, setting a world record for the longest exploration well at a total length of 45,000 meters of drilling. The units have achieved a financial utilization of 99.8% during Q3.

In our external fleet, the Deepsea Yantai and Deepsea Bollsta were working in Norway for ConocoPhillips and Equinor, respectively, during Q3. The Mira began operations for Rhino Resources, supporting the discovery of the Volans-1X condensate discovery before it began work for BW Energy. And finally, Hercules was warm-stacked in yard in Norway for the entire quarter.

In summary, our own fleet performed really, really well this quarter and with an overall financial utilization of 99%. The operations teams at Odfjell Drilling can be really proud of what they have achieved this quarter.

And then before I move on from operations, we wanted to highlight that in line with our ambitions to be at the forefront of efficiency, all units in our own fleet have now achieved DNV's ABATE Power+ class notation. This is a notation awarded to units which implement technologies and systems that improve energy efficiency and reduce greenhouse gas emissions from power generation as well as implement comprehensive energy and emission management systems. I would say achieving this notation for our entire fleet speaks volumes about the capability of our own units and places Odfjell Drilling to our knowledge as the only rig owner whose entire fleet has this notation.

And here at Odfjell, we pride ourselves of being at the forefront of technological innovation and drilling capability. And I think achieving this notation is a strong reflection of this. I am very pleased to have this in place.

Then we move on to our backlog. And as noted earlier, our backlog now sits at [ $1.5 Billion ]. Our forward schedule is largely unchanged from previous quarter with our units having nearly 9 years of work secured with the Deepsea Stavanger as you see, booked out until 2030.

As also can be seen, the first contracting opportunity is with the Deepsea Aberdeen and Deepsea Nordkapp. And for both these units, we are in advanced discussions for adding new valuable backlog. We do experience broad interest in both rigs and are confident about securing further valuable backlog, and we expect to conclude on these opportunities in the near future. Transitioning this backlog into yearly revenue, we continue to maintain year-on-year revenue growth based on firmly secured contracts alone. Our average day rate per rig continues to increase quarter-on-quarter, and our average OpEx per rig is anticipated to only marginally increase. And as a reminder, on top of these day rates, comes a historic average of around $25,000 to $30,000 per day per rig in bonuses and add-on sales.

And just a reminder, going forward, we will not have the CapEx that we have experienced in '24 and '25 associated with the SPS projects.

And finally, before I hand over to Orjan, let's talk a bit about the market. We do maintain our view that the market that we operate in remains well balanced. As mentioned, our fleet is largely booked until '27 and we see good opportunities to secure more work for our rigs. We are in constant dialogue with existing and new clients for our rigs and are involved in ongoing tenders in the basin. Ultimately, we see the Norwegian market is likely to continue to need more supply of Tier 1 harsh environment units, particularly as our clients try to maintain Norwegian production levels from smaller, more complicated exploration targets and infield developments. And also, as you might have noticed, our clients are united in their messaging around this, and we expect that this focus on maintaining production will require a lot of drilling, more wells for ultimately less barrels of production, which is likely favorable to our business. And to meet our client messaging, there must be a high volume of drilling activity on the Norwegian continental shelf in the coming years, and we do have the tools that they need to meet that demand.

Day rates for work in '27 have remained in line with previous contracts with the recent award on Deepsea Bollsta emphasizing this. Internationally, we have seen a more cautiously but optimistic view. Contracting remains by short-term exploration -- is dominated by short-term exploration, but recent success in Namibia has been positive for that basin. And Namibia remains a very exciting opportunity for our sector, particularly as it will enter into a development phase. And we also maintain our view that additional demand can come from areas such as Canada, South Africa, Australia and the U.K.

Our view of supply remains unchanged. We expect supply likely to reduce with some retirements of vessel. And as you all know, no new build is likely at all. There are a few stranded or incomplete vessels in our sector also, which we do not believe is likely to create meaningful competition in the near to medium term. And for additional capacity to enter our sector, it will require both significant time and significant capital. That could, of course, happen, but we view this as not likely in the near to medium term. Ultimately, we see very good interest from clients seeking to secure Tier 1 assets in this period, and we reiterate that we are confident of securing additional backlog for our units for work in '27 and onwards.

And with that, I will now pass on to Orjan to go through our financial review.

[Orjan Lunde, executive]

Thank you, Kjetil. I'm pleased to begin with a summary of the income statement, which continues to go from strength to strength.

Operating revenue in Q3 was $234 million compared to $186 million in Q3 last year. Operating revenue from our own fleet was $189 million, while the external fleet generated a revenue of $44 million. The positive development of higher day rates continues to impact us with Q3 EBITDA for the owned fleet segment of $119 million, which is a margin of 59%. The EBITDA for the external fleet segment was $9 million, which is a margin of 20%. Less corporate overhead and other adjustments, the group EBITDA was $119 million. The company delivered a net profit of $55 million in Q3, another significant improvement compared to previous quarters. This takes our last 12 months EBITDA to $420 million.

Let's move on to the balance sheet on Page 14. Net debt has marginally increased from previous quarters, partly due to higher accrued unpaid interest compared to Q2. Despite this, our leverage ratio continues to reduce, now standing at 1.2x net-debt to EBITDA. Equity ratio is 65% out of a total asset base of approximately $2.2 billion. The available liquidity is $209 million, including undrawn RCF of $112 million.

Details of the cash flow for Q3 follows on the next slide. In Q3, we generated $95 million in cash from operations, which was somewhat influenced by changes in working capital due to timing and increase in day rates. Net interest paid was $5 million, while tax paid was under $1 million. CapEx for the quarter was $37 million, which mainly relates to purchases of fixed assets, whereof $10 million were client-specific upgrades covered by lump sum payments from customers in this or adjacent quarters.

Net cash flow from financing activities was $37 million, of which $17 million was repaid on the RCF and $12 million were for installments on other facilities and leases.

Dividends paid in Q3 were $43 million and related to Q2 results. We are continuing our upward dividend trajectory by declaring a dividend for Q3 of $0.20 per share, which translates into a total dividend payment of $48 million. This corresponds to an annualized yield of approximately 10% based on yesterday's close. The shares will trade ex dividends 12th of November and payments will be made on 26th of November.

With that, I'll pass back to Kjetil, who will summarize our presentation.

[Kjetil Gjersdal, executive]

All right. So then Q3 summary. And I suspect for many of you, our Q3 numbers are not a massive surprise. We have done what we said we would do, and that has resulted in yet more record results for our business. Despite this, I would like to emphasize that this quarter has seen our units operating in a really strong level, 99% financial utilization is very hard to beat. But I think it says a lot about the intelligence and capability of our team who enable these great financial results.

So to summarize it all, we have achieved record financial results. We have increased our dividend while reducing our leverage ratio. And I just want to make this clear. Our financial strength gives us great capacity and allows for further increased distributions to our shareholders going forward.

Our fleet remains fully sold out until the end of '26, and we are in advanced discussions with several clients to add backlog in the near future. And I'm -- to say, I'm delighted with the performance of our business during Q3. And I would like to thank you all for tuning in and listening into our presentation. I will leave it to you, James, to take over now from here.

[James Crothers, executive]

Thank you very much, Kjetil and Orjan. So as a reminder, if you like to ask a question, you can do so by the telephone line controls or via the webcast tool. Our operator is Laura. Laura, can you open the Q&A session on the telephone lines?

[Operator]

[Operator Instructions] We'll now take our first question from Fredrik Stene of Clarksons Securities.

[Fredrik Stene, analyst]

I have 2 questions for you today. And the first one relates to the Aberdeen and Nordkapp, which I think is key events going forward now that your SPSs are behind you. You seem to be quite confident that these rigs will get contracts. But I think maybe it was the second quarter call, you said that typically the options that you have with Equinor, Aker BP would be kind of negotiated around 15 months ahead of the end of the firm contract and now we're past that date in a way. So I was wondering, should we read anything particular into that specifically? There is a good chunk of rigs on the NCS that rolls off in '26, beyond your 2 owned units. Is this like a [ dance ] to press day rates down? Or do you think kind of in line with the commentary that you'll get both utilization and rate on these 2? Any color you could give would be very helpful.

[Kjetil Gjersdal, executive]

Yes. No, I can just fill out a bit more. I could probably start with the easiest one, with Nordkapp, which is, as you all know, in the semi alliance with Aker BP. And the way that we've operated that cooperation is by adding a year-on-year basis. And the way that this is, they have until the end of the year to declare this option and the most likely scenario is that Nordkapp is extended into the Aker BP semi alliance. But they do have formally until the end of the year to do this. I'm not saying it could not happen sooner, but formally, they have that. So that is the case with Nordkapp. With the Aberdeen, yes, we are in the middle of the negotiations as you talk. But I think I will sort of out of respect of the processes ongoing, just say that we are very confident about securing new backlog for Aberdeen. This is probably the best harsh environment rig out there, and we experienced great interest from -- on the rig, both from the existing client and also other clients. So we are confident that we will add new backlog to the Aberdeen as well.

[Fredrik Stene, analyst]

And just a side question, just remind us the price option on the Atlantic, when is that due to the potential exercise? What's the late stage that Equinor can take that one?

[Kjetil Gjersdal, executive]

The price options on Atlantic, right?

[Fredrik Stene, analyst]

[indiscernible] Price option on Atlantic.

[Kjetil Gjersdal, executive]

I don't have those details. I don't remember it. But we will -- I'll get James to revert back with those details to you. I don't have that. Was that okay, Fredrik?

[Fredrik Stene, analyst]

Yes. No, super helpful. And then the second question, and I did speak briefly spoke to James about this earlier today. But in your second quarter report, you said that you were well placed to continue to increase shareholder distributions with the fleet moving to continually higher day rates. And you are no longer saying that in the third quarter report. So in my model, there's definitely room to increase dividends by maybe 25% more or something. But just wanted to kind of hear your comments around that. Does this mean that we're approaching, call it a ceiling or that we should expect maybe a slower pace of increase when you go forward?

[Kjetil Gjersdal, executive]

No, no. Just -- it might not be in the report, but I think I was very clear when I commented the presentation about this. We absolutely see great capacity and to continue with dividends. But I think one key here is that we want to see -- to add valuable backlog. That's what it's all about, market outlook and add valuable backlog. And as long as we continue to do that, which I think I've been very clear that we have great faith in, we definitely intend to continue with our plan to increase the dividends going forward.

[Operator]

We now take our next question from Mathias Carlson of DNB.

[Mathias Carlson, analyst]

Just a quick question following up on the question just asked on the Aberdeen. You're clearly sending a strong message that you're confident in getting new work for the rig. At the same time, it's more available rigs on the Norwegian continental shelf also looking for probably some of the same jobs. Could you help us how we should think about the different scenarios for the rig and whether or not it's most likely to get back to back work or whether or not there is risk for gaps, both small, shorter and longer between the current contract and any new contract?

[Kjetil Gjersdal, executive]

Yes. No, you're right. And you -- it's well known that Equinor is out there with a tender, which is still not be concluded. But what I can say about gaps is that all the scenarios that we are working on does not include any white space or gaps at all. That is very important for us to secure back-to-back operations and all the scenarios that we are discussing with all our potential clients is in a back-to-back scenario. Was that [indiscernible].

[Mathias Carlson, analyst]

That was clear. Another question on pricing and day rates. I think it's becoming more obvious that there is a relatively large spread in the technical capabilities and performance of the rigs in Norway and also for some of the rigs outside Norway looking to get in. Could you say something about how clients value performance and how you think about, call it, bifurcation in day rates in Norway ahead on high-performing units like your own and some of the lower spec units?

[Kjetil Gjersdal, executive]

Yes. No, I think in negotiations, all parties use the best cards they have on their hand. I think clients are asked us to look internationally and see how day rates are playing out on the 7G market -- deepwater market and so on. However, it is a totally different situation in the harsh environment market where, where it's pretty much a balanced market. We do see that clients are willing to pay a premium day rate for highly efficient units. We do see that. And we have a fantastic track record. These are well factories as we like to call them, and they -- when they sign a contract with a rig like Deepsea Aberdeen, they know they're going to get great value for money. So we still see that there's a strong willingness to pay extra for a highly efficient unit. And I think you probably see some spread around various units depending on capabilities and so on. I think that is as specific as I can get at this stage, Mathias.

[Mathias Carlson, analyst]

And then last question, expanding on the dividend question just asked by Fredrik. A natural follow-up would be in terms of doing a refinancing and reduce the debt amortization burden that you're currently having. Could you talk a little bit to timing of potential refinancing and what type of sources of capital you have looked into?

[Orjan Lunde, executive]

Well, I guess that question is for me, Martin. Thank you. We're conscious that our bond is now callable, first call by end of November this year. And to your question, we are continuously evaluating ways to reduce costs, flattening the amortization and potentially increasing cash flow available for our equity holders. If we decide to refinance and when we decide to refinance, it will be as a consequence of trying to achieve an overall benefit of all of these objectives, even taking into account specific cost elements, which comes from calling bonds at an early stage.

[Operator]

We have no further questions in queue. I will now hand it over to James for webcast questions.

[James Crothers, executive]

Thank you very much, Laura. Again, thank you, everyone, who has submitted questions. We will try and get through these as fast as possible. As always, I'll answer the questions in separate e-mails if we don't have enough time to get through them all.

So first question, how do you approach contracting on your open rigs? Are you looking to push the fleet day rate north of 470,000? Or would you be willing to set up for these levels in exchange for terms that keep your rigs working like Stavanger?

So I suppose it's a question how we consider length of contract versus day rate?

[Kjetil Gjersdal, executive]

Well, I don't want to sort of be public about the negotiation strategy. But as a general rule, I can say that longer-term work normally comes with a discount. and shorter-term work requires a higher day rate. That goes for -- that is the way we think.

[James Crothers, executive]

Brilliant. When do you expect to mobilize Deepsea Atlantic to the U.K.? And are you able to reduce daily OpEx whilst operating in the U.K.?

[Kjetil Gjersdal, executive]

So as for now, the Atlantic is likely to start up in U.K. in the first half -- first quarter in '26, as for now. That may change, but that is what we're working towards now. As for OpEx, we -- as the duration of the work in -- is not that long, we have decided to bring our Norwegian crews with us and have arranged with certain arrangements around that, if I can say that. So we expect a pretty same OpEx in the U.K. as we have here in Norway for the Atlantic. It's very important for us that we -- when we go to Rosebank that we perform at the same high performing level that our client is used to and to start sort of with a fresh crew and so on is not an option for us.

[James Crothers, executive]

With the recent upgrade by Moody's to a B1 rating and your leverage decreased, does Odfjell Drilling now view M&A as a viable strategic lever for growth? And if so, what type of targets would you consider if you consider any at all? Would you look at fleet acquisitions, geographic expansion or complementary services?

[Kjetil Gjersdal, executive]

Well, I think I've commented on M&A on all our Q&As that I participated in. For us, it's all about fleet rig quality, it's about backlog and of course, it's about price. We have -- we are extremely pleased with the situation that Odfjell Drilling is in now. We -- if we are to do something, it sort of needs to fit into that story. It needs to be accretive, as I've mentioned many times before. So we still keep our same view there. No news. And yes, it might come as a surprise, but we're not going to announce any M&A during the Q&A for a quarterly presentation. So I'm going to be a bit boring here.

[James Crothers, executive]

A question more generally here. Can you elaborate on the tendering situation in Norway and your expectation around the requirements for additional rigs? I suppose this question is more framed in the context of some commentary of how much more rigs we anticipate for Norway in '27 and onwards, how we see that developing perhaps?

[Kjetil Gjersdal, executive]

Yes. So I think -- well, as I mentioned, it's well known that Equinor is in the market for the -- from [indiscernible] development program. That has not been concluded yet. But we also experienced quite a lot of direct negotiations, both for shorter-term work and for longer term. And also, there are some tender activities around shorter-term work with smaller clients as well. So it is very much a mix. of public tendering, direct negotiations that's going on. And for additional rigs, so when we sort of look into the crystal ball and align that with what our clients say and what we see about the market, we see that it's likely that we are looking at an increase of maybe 1 to 2 rigs from '27 and onwards.

[James Crothers, executive]

Great. Thank you very much. We don't have any more questions actually today on the webcast, which -- so I guess at that point, we'll close the call.

Thank you very much for listening into the conference call. We are -- I think our next quarterly results will be in the new year. So if you'd like any more color on today's results or have any further questions, in the meantime, please do just get in contact with me directly. My e-mail address is on the back of the presentation and on the website as well. Thank you to all the operators and to BRR Media for sitting on the call. I think we can close the call now. Thank you.