Northern Offshore's (NFSHF) CEO Gary Casswell on Q2 2014 Results - Earnings Call Transcript

Aug.14.14 | About: Northern Offshore (NFSHF)

Start Time: 10:00

End Time: 10:27

Northern Offshore Ltd. (OTCPK:NFSHF)

Q2 2014 Earnings Conference Call

August 14, 2014, 10:00 AM ET

Executives

Gary W. Casswell - President and CEO

H. Gary Sullivan - VP and Chief Accounting Officer

Paul Ravesies III - SVP of Marketing and Business Development

Brian Hefty - Director of IR

Analysts

Andres Bergland - RS Platou Markets

Andreas Stubsrud - Pareto Securities

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2014 Northern Offshore Ltd. Earnings Conference Call. My name is Mark and I’m your conference coordinator for today’s call. At this time, all participants are in a listen-only mode and we will conduct a question-and-answer session; that’s a part of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

Now I’d like to turn the call over to Brian Hefty, Director of Investor Relations. Please proceed.

Brian Hefty

Thank you, Mark. Welcome everyone to Northern Offshore’s second quarter 2014 earnings conference call. With me today from the company are Gary Casswell, President and CEO; Paul Ravesies, Senior Vice President of Marketing and Business Development; Gary Bauer, Senior Vice President of Operations; Gary Sullivan, Vice President and Chief Accounting Officer; and Campbell Austin, Director of Global Human Resources.

Please note that this call will include forward-looking statements within the meanings of all applicable securities laws. All forward-looking statements included in this call are based on information available to the company on the date of this call, the company’s current expectations and various assumptions. The company believes that there is a reasonable basis for its expectations and beliefs, but they are inherently uncertain. The company may not realize its expectations and its beliefs may not prove correct.

For a list of important factors that could cause the company’s actual results to differ materially from the forward-looking statements in this call, please refer to the company’s public filings with the Oslo Stock Exchange, including the risk factors section of the company’s Prospectus filed with the OSE. You are encouraged to read that section and all of the company’s other filings with the OSE.

The company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributed to the company or persons acting on the company’s behalf are expressly qualified in their entirety by the cautionary statements contained throughout this call and the company’s public filings with the OSE.

I’ll now turn the call over to Mr. Gary Casswell.

Gary W. Casswell

Thank you, Brian. Hello, and thank you for participating in our second quarter 2014 conference call. I’m very pleased to say that we had another good quarter with more than $20 million of EBITDA and maintained our dividend. Most importantly, our net profit as a percentage of total revenue is just under 20% for the six months, which far exceeds many of our peers. Obviously, we are very pleased that all of our units are under contract and we expect to see even greater financial results through the remainder of the year.

In a moment, Gary Sullivan will further report on our financials. As noted in our press release, the Energy Searcher is now in operation. We are pleased to have our drillship with CAMAC in West Africa and very excited with the results CAMAC recently announced. Their success of the planned production wells could help with an early exercise of their second year option.

Our recent big announcement was the new 2.5-year contract for the Energy Endeavour. This contract not only adds about $150 million to our backlog but secures work through 2017. Paul will provide additional details on this and other contracts in business developments.

Now regarding the Northern Producer, last quarter we announced and discussed the possible spin-off of the unit, which is still under consideration. As we gain more information on the potential future production in the areas that could tie into the Northern Producer, we realized we needed more time to properly evaluate the new field development plans.

This could substantially increase the near-term production to the Northern Producer. Finalizing our review of this information will help determine the best path forward, which could also include a sale of the asset as we have had recent interest in such a transaction. We expect to complete our evaluation sometime during the third quarter.

Let me conclude on a very high note for our operation teams. I’m very pleased to report that for the second year straight, we received the IEDC award for the safest jackup contractor with under 1 million man hours in the North Sea. In all our operations, we maintain our focus on safety, operations performance, good cost control and lower overheads.

Thank you. I’ll now turn it over to Gary Sullivan.

H. Gary Sullivan

Thank you, Gary. As reported, the company’s second quarter net income was 9 million or $0.06 per share on revenues of 55 million generating 20 million of EBITDA. The results for the current quarter and for the first half of the year are significant improvements over the prior year with earnings per share increasing 600%.

If you compare the second quarter results to the prior quarter, net income, earnings per share and EBITDA were comparable with higher revenues of 6 million due to the commencement of the Energy Searcher contract offset by an approximately equal increase in operating expenses.

The increase in fleet operating expenses was primarily due to higher operating expenses for the Energy Searcher due to contract commencement and higher maintenance and inspection costs associated with the Northern Producer’s mooring system. Compared to guidance, fleet operating expenses came in lower primarily due to the delay in the start of the Energy Searcher’s contract and deferral of certain maintenance projects to the second half of the year.

Depreciation and G&A for the period was similar to the prior quarter and in line with guidance. Capital additions for the second quarter were approximately 2 million of which about 0.5 million relates to the newbuild jackups. Accrued capital expenditures at the end of the period amount to around 1 million. The company’s cash position at the end of the quarter was 43 million including funds held in escrow. Of this amount, approximately 26 million is unrestricted.

At the end of the quarter, the company’s loan balance stood at 47 million. In July, the company made a 10 million payment against the loan reducing the balance to 37 million. Currently, the company’s cash balance is 42 million with the unrestricted portion amounting to 24 million giving the company a net cash position of 5 million.

Consistent with previous calls, we will not provide specific earnings guidance. However, we will assist with some of the key data inputs and provide updates to our contract status report, which is posted on the company’s website.

With third quarter, with the fleet fully utilized for the period and increase in the day rate for the Energy Enhancer, we should see an improvement in revenues and earnings over the previous quarter. We expect fleet operating expenses to be in the mid-$40 million range.

The increase in operating expenses is attributable to the Energy Searcher operating the entire period including amortization and mobilization in contract preparation costs of about 5.5 million and completion of certain major feet maintenance projects. It should be noted with the exception of the Energy Searcher, the fleet’s expected routine operating spend will be within normal levels.

Appreciation should be in the mid-$8 million range with G&A coming in the low $2 million range. The annualized effective tax rate for the year is estimated at 15%. Capital investment per quarter should be about 6 million with the full year capital investment of around 33 million, of which 21 million relate to the newbuild jackups.

I will now turn the call over to Paul Ravesies for the marketing update.

Paul Ravesies III

Thanks, Gary, and good day to everyone. I’m going to do something a little differently with my prepared remarks this morning. Since we are fortunate to have recently commenced relatively long-term contracts or extensions with our jackup Energy Enhancer in Denmark and drillship Energy Searcher in Nigeria and with several months remaining on our contract with the Energy Driller in India, I will forgo my usual comments on our short to mid-term market outlook in these regions as the fundamentals have not really changed since my remarks last quarter. Instead, I will focus specifically on the contract status of the jackup Energy Endeavour and talk a little bit about the marketing of our two high-spec jackups currently under construction at a Far East yard.

As I mentioned last quarter, our client Wintershall has exercised a six-month option extending the contract backlog for the Energy Endeavour until November of this year. We have reason to believe Wintershall will shortly confirm a further extension, which would keep the unit occupied for them until March 2015. Our commercial terms and conditions will remain unchanged during this extension.

As Gary Casswell mentioned earlier, we recently announced a 2.5-year contract for this unit with Rosneft as part of a six-rig deal with North Atlantic Drilling or NADL to drill in the arctic. While there are a number of hurdles including the possibility of additional sanctions, which could negatively affect this deal, our legal advisors believe the contract will be grandfathered from the imposition of European union sanctions since it was signed prior to the 1st of August of this year.

Nevertheless, there remains specific jurisdiction of legal hurdles, potential restrictions on people and third party contractors, which could inhibit performance, all of which are being thoroughly investigated as we speak. While we are cautiously optimistic these hurdles will be overcome, we are extremely excited to be part of project that will be executed in a challenging environment and one of the world’s least developed frontiers.

It is relevant to note that we previously operated our jackup Energy Exerter in the same area a few years ago and we will be bringing that experience to bear on this project. The Rosneft contract has very favorable commercial terms which among other things removes any of the investment risks for capital expenses related to winterization or other client requested upgrades.

Additionally, while the main objective for Rosneft is to ensure that Endeavour is available to them for three consecutive summer drilling seasons, the contract provides for payment of a reduced standby rate during the off season thus ensuring fully paid utilization of this unit for the entire 2.5-year contract term.

In addition, the transition from Wintershall to Rosneft should be rather seamless as we will most likely go straight from Wintershall to a shipyard to prepare the unit for the first summer drilling campaign in June 2015.

As for our new two under construction jackups with deliveries in Q1 and 3 of 2016, we’ve commenced marketing these units to potential clients in various geographical areas and I’m pleased to report that we are receiving good feedback and acceptance of the rig design and planned equipping of these units. We expect to be actively tendering these rigs in the coming months.

Now if I missed to address any specific concerns from many of those listening to the call, I’d be more than happy to address them during the Q&A session which follows. That now completes my prepared remarks and I’ll turn it back over to Brian.

Brian Hefty

Thank you, Paul. That concludes our comments and we’ll now turn the call back over to Mark and take any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions). A question comes from the line of Andres Bergland of Platou Markets. Go ahead, your line is open.

Andres Bergland - RS Platou Markets

Thank you. Good morning, gentlemen and congratulations for the good quarter. I have a couple of questions, one concerning the Endeavour. What kind of operating expense should we expect working up in the balance sheet on that one? And secondly, on the Northern Producer, the wells or the tie-ins that you described, how much do you expect this could increase the product rates of the Northern Producer? And thirdly, what’s the big value on Northern Producer? Thank you.

Gary W. Casswell

Okay. Thanks, Andres, and thanks for participating in the call. We appreciate it a lot. We expect the operating costs for the Energy Endeavour to be probably in the neighborhood of around $5,000 a day a little more than where we are at right now to be close into the 80 range.

Andres Bergland - RS Platou Markets

Okay.

Gary W. Casswell

In any event, we expect to maintain the same cash margin that we have where we’re currently operating.

Andres Bergland - RS Platou Markets

Okay. Just a follow up. Will you have a split kind of day rate? So you have a higher day rate during the operating period and then a lower day rate during the [30] (ph) idle time or in the winter season?

Gary W. Casswell

Yes, that’s correct but it’s not much lower.

Andres Bergland - RS Platou Markets

Okay. And on the Northern Producer?

Gary W. Casswell

On the Northern Producer, depending upon how good the wells come in, the actual new production based on the new field development plans, which is what we’re analyzing right now could be substantial. I mean it could substantially impact the – and we’re not just talking about one well. We’re talking about multiple wells in the new area and then going on from there with additional growth. So we’re analyzing all that and as we always do, we go off of what the operator kind of their mid case and when you look at the low, the mid and the high, it can be substantial. So it’s just too soon for us to put a real figure on it.

Andres Bergland - RS Platou Markets

Okay. In terms of – can you put some timeline of when you expect to land on some kind of – and so are you going to keep it, lift it or sell it?

Gary W. Casswell

Yes, we’re probably going to make that decision sometime during the third quarter when we finalize this evaluation.

Andres Bergland - RS Platou Markets

Okay, (indiscernible)

Gary W. Casswell

No. I guess that at the end of the day it’s all very, very positive for us so we’re excited about it.

Andres Bergland - RS Platou Markets

Okay. If I may just another question on the Energy Driller. Given the softness in the total market in general, what do you believe is the outlet for potential extension on the ONGC or the Energy Driller?

Gary W. Casswell

Paul can answer that for you.

Paul Ravesies III

Hi, Andres. I think based on the feedback we’re getting from the client and looking at their needs going forward, we fully expect that there will be a retender of the requirement for the unit and several others in that category toward the end of this year or early part of next year. So, our strategy is to retain the work and with ONGC with the new contracts. So we’ll be aggressively bidding it when that tender comes out.

Andres Bergland - RS Platou Markets

Okay. I think that’s all from me. Thank you and congratulations, a great quarter. Looking forward to the outcome of the Northern Producer and looking forward to continue to listen to the calls. Thank you.

Gary W. Casswell

Thanks, Andres. We appreciate it.

Operator

(Operator Instructions). The next question comes from the line of Andreas Stubsrud of Pareto Securities. Please proceed.

Andreas Stubsrud - Pareto Securities

Hello and good morning to you and I think I’m just going to follow up where we left on the rig actually if that’s okay. Energy Enhancer, you are receiving a little bit high day rate now and you talked about the margin going up to the Russian waters. What do you expect for Energy Enhancer if it secures a new contract? Are we in the 160 which you had on the Endeavour or are we more in the 130, 140 on the Enhancer and how you see the market today for this type of rig in the North Sea?

Gary W. Casswell

Hi, Andreas. Thank you very much for calling in and being part of this. We appreciate it. As always we really appreciate everyone’s interest in the company. Paul’s got a good handle on what’s going on with that rig and I’ll let him answer that.

Paul Ravesies III

Hi, Andreas. In terms of the contract status of that unit, it’s on a multiple annual option renewal contract with Maersk and they just renewed for an additional year from July of this year in the low 140s and that will run until July of '15. They’ve got another option beyond that and it’s a market – it’s fixed with a market adjustment and based on the work – I guess in the bigger picture, you asked what is kind of the future of the unit? The way that unit is being operated by Maersk at the moment is working mostly workover and they’ve got a huge workover program in Denmark going forward and it’s an ideal unit in their view for that type of work. And so from a future point of view, we fully expect the next option will be exercised. And if so, we expect that rate will be in the mid-160s from July of '15 forward for a year. And then I don’t think we would be surprised at all if we would be talking to Maersk in the coming year or so about an additional – a new contract for that unit. So from our internal planning point of view and the way we view the market in that rig, we think it’s going to be there for years to come.

Andreas Stubsrud - Pareto Securities

Okay, great. And actually jumping back to Northern Producer, I followed your company for many years and I’ve been impressed by the low costs on Northern Producer. And in today’s quarterly statement you actually discussed a little bit the higher OpEx this quarter due to inspection costs for the Northern Producer. Can you comment on that a little bit? Is that something we should expect more going forward as the unit gets older or was it more a one-time happening?

Gary W. Casswell

No. This was more of a one-time happening. To give you an update, we just recently completed our five-year periodic survey. We have no outstanding. But one of the things that we do on an annual basis is we take a look closely at the mooring system. You may recall that the year before last we spent over $6 million replacing the entire mooring system, upgrading it for the new requirements for the location where it’s at. And part of that is, is that we maintain an annual inspection and there’s certain components to it that annually we will change out. However, the expense that we incurred this last quarter we don’t expect to have that significant going forward. So generally it should flatten out in the future.

Andreas Stubsrud - Pareto Securities

Okay, great. And in terms of Energy Searcher, you discussed it a little bit in your prepared remarks but at the same time I’m impressed how you entered Nigeria and actually got up and running and it doesn’t look like you’re working capital or accounts receivable is going up too much. But how is this looking forward? I mean if you’re not going to work more than one year for CAMAC, what’s your idea then? Is it more to stay and go for contracts in West Africa or do you have any other strategies?

Paul Ravesies III

Well, I’ll answer that. Andreas, this is Paul. In terms of the future, obviously we can’t definitely say at this point in time whether CAMAC is going to exercise their one-year option. But as Gary said earlier, we’re optimistic that the conditions precedent for that are improving as far as they’re work outlook is concerned. If we don’t get that, we’re finding that we’ve got a number of companies that have been coming to us with short-term programs they would like to farm in or obviously if we don’t a CAMAC contract at the time we’ll look at stringing some of that work together. We’re not opposed to relocating the unit outside of that particular region if we have a contract opportunity of a sufficient term to justify that relocation. So we’re just going to have to see what happens at the time.

Gary W. Casswell

Andreas, let me comment on the accounts receivable. We’ve had absolutely no problem. I know that many were worried in the beginning with us going in there and a start-up and everything. But there’s been no problem with that whatsoever. So they’re right on top of it and it’s a really good relationship.

Andreas Stubsrud - Pareto Securities

Okay. My last question is going back to Endeavour, I understand the political risks obviously. In terms of the CapEx you’re saying you have basically no more seasonal CapEx risk other than the slightly higher OpEx and of course it’s stationed up in Russia. Is that correct?

Gary W. Casswell

Yes, that’s correct, but Paul can give you more detail.

Paul Ravesies III

What I try to do in my prepared remarks is kind of highlight the main contract points but for us we couldn’t be happier with the terms in the contract. We really don’t have any capital or major expense that would be necessary occurred for this contract and we’ve got our ongoing maintenance and so on that will continue to be our responsibility. But if we have to put money in the rig to go up to the arctic by way of winterizing or the like, then that’s going to be fully paid. We’re paid a rate in the shipyard where all of that is taking place. So, as Gary said, we expect – the day rate that we have is higher and the day rate we current have for that unit in the Netherlands. But when you adjust for the higher operating costs, the margin should be about the same. And the contract provides for cost escalation during that period. So we think our margins will be protected and that’s a very fair contract from a T&C point of view.

Andreas Stubsrud - Pareto Securities

Okay, great. And just a follow up on that. You mentioned North Atlantic Drilling, just one final question, there is no management fees or marketing fees or anything to North Atlantic Drilling based on the six-rig deal they have with Rosneft and that you are included in that deal?

Paul Ravesies III

There is a management fee that they get. How that’s going to be applied we haven’t exactly worked through those details just yet. But yes, they will – as part of what they bring and have brought us into this, so yes, they get a management fee.

Andreas Stubsrud - Pareto Securities

Okay, great. Thanks a lot.

Gary W. Casswell

Thank you.

Operator

We have no further questions, so I’d like to turn the call back to Brian Hefty for closing remarks.

Brian Hefty

Thank you, Mark, and thanks again everyone for your participation in today’s call. As always, if you have any additional questions, please give me a call. Otherwise, we look forward to speaking with you again next quarter.

Operator

Thank you for your participation in today’s conference. Ladies and gentlemen, this concludes the presentation. You may now disconnect. Enjoy the rest of your day.

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