North Atlantic Drilling Ltd (NYSE:NADL)
Q1 2016 Earnings Conference Call
May 26, 2016 11:00 AM ET
Alf Ragnar Lovdal - CEO
Scott McReaken - CFO
Lukas Daul - ABG
Anders Bergland - Platou
Good day and welcome to the First Quarter 2016 North Atlantic Drilling Ltd. Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Scott McReaken. Please go ahead, sir.
Thank you Sanjay. Good morning and good evening everyone. Welcome to North Atlantic Drilling’s first earnings call of 2016. Today on the call we have the company’s CEO Alf Ragnar Lovdal and myself Scott McReaken, the CFO.
Before we begin please note that some of the presentation discussion today consist of forward looking statements and are not only historical fact. Therefore discussions here today are subject to uncertainty. I would like to refer you to Page 2 of our presentation today for further details or you can visit our website at nadlcorp.com to find our link to our SEC filings. Now I would like to hand over the call to Alf Ragnar.
Alf Ragnar Lovdal
Thank you, Scott. Good morning and good afternoon to everyone and welcome to our first quarter 2016 conference call. We appreciate your attendance today. We will start by going through our some highlights, the fleet update and our current market view. Then Scott will take us through our financial results for the quarter. Lastly, we will open up for some questions.
Our utilization for the operating fleet this quarter was at 97%, we have maintained a consistently high utilization for the last four quarters and this time it’s notable as we made it through another challenging winter in the North Sea. We’re very pleased with our operations in this downturn and our ability to keep our people safe. We maintained focus on effective maintenance programs that do not reduce safety and I ensure all our rigs remain at the highest quality.
We are meeting and exceeding our clients drilling program timelines by continuing to find ways to efficiently run our business in this market environment. As a result we generated $87 million of EBITDA with a 59% margin which was driven from efficient operations on our rigs. We had West Phoenix return to drilling activities in March and realized synergies in stacking the West Venture and West Navigator at the same location in Skiplawik [ph], Norway.
We have net operating income of $33 million after our normal depreciation charges in the quarter. Additionally, in April we reached an agreement with our bank group to expand the maturity of our $2 billion facility and amend certain financial covenants until June 2017. These amendments are part of a broader package to refinance and recapitalize our business. I’ll let Scott go over this in more detail shortly.
Now moving to our fleet update. North Atlantic’s contracted revenue backlog is at $540 million today and the average remaining contract length is approximately 11 months excluding client’s options for expansions. The rigs are all being actively marketed and they are located in the Norwegian Continental Shelf and with one semi-submersible in the United Kingdom. In Norway our current clients are Exxon, ConocoPhillips and Statoil and in the UK it’s Total.
In addition to our consistently high utilization the other two main highlights in operation this quarter, first on March 6 the West Phoenix returned its operation West of Shetland after an idle period beginning last October. We earned a reduced rate during the idle period and are now back at the full operational rate. The Phoenix will continue its contract until the autumn season with Total.
Secondly, as we had brought the West Venture alongside the West Navigator in the new locations we are able to realize additional efficiencies impacting and having the unit appear to be reactivated when needed. We have preserved the West Venture where there is limited costs during the idle period and we are able to keep the rig between a warm and cold stacked condition. With market utilization at a default percent and 93% for the float and jack ups in the North Sea are nearly half of these contract ending over the next 12 months the market continues to be fiercely competitive.
If extensions or new contracts cannot be secured, rig owners will need to decide how to stack idle units, warm or cold and ultimately if they should scrap their older or less capable units.
Although contract awards and extensions have slowed in the recent months we are seeing many new independent oil companies looking to expand or enter the North Sea as the cost basis is being reset to operator offshore. Recent tendering activity is for shorter terms that include multiple options and the commencement dates for most of the tenders are in the mid-2017 or 2018 and beyond.
We have seen a new interest for services beyond traditional drilling, exploration and development work as oil companies are rationalizing their investments in assets they are looking forward to assist in plug and abandonment work of their older or less efficient fields. Additionally, there has been interest in combining drilling work with production activities in order for them to contract one unit and to potentially reduce their float cost.
We are in ongoing conversations for these types of work, however it has become extremely competitive as rig owners are focusing on utilization over returns. In the current environment rigs with contracts expiring will likely face challenges securing follow-on work. Our first order of priority is working to get our rigs extended and contracted. We have been in dialogues with our customers and in some case we may offer reducing the current day rate, however this often is not enough to secure an extension due to customer budgetary constraints.
When we are faced with potential idle periods we consider what other opportunities are in the market. Potential work that maybe expected in the foreseeable future, the duration and timing of these projects and the day rate. In this highly competitive environment there are many rigs chasing each opportunity leading to day rates at or often below cash flow breakeven level. If rates are too low to justify operation we have to consider the alternative stacking decision.
Generally speaking, if a floater is not expected to find a suitable contract for a year or more economics suggest that cold stacking may be the preferred option. Conversely. If we feel there maybe economic work within this time period, we will consider warm stacking the unit for a period.
For the [indiscernible] there's not a material difference between warm and cold stacking therefore we will immediately go to minimum clearing levels to preserve cash while idle. However, we also must consider this strategic impact of these decisions rather than strictly applying the economic view. A floater that is cold stacked will find itself at the back of the queue in a recovery, due to the cost of reactivation and require a higher day rate and a rig that had been warm stacked.
Our current strategy is to be able to have rigs ready for work relative to near term opportunities and strategically positioned to pursue work in an efficient manner. The condition of our units, churned classing [ph] spaces and our preferred preparation prior to stacking allow us to minimize expected reactivation cost and remain competitive while preserving cash in the idle period.
Now I'll turn it over to Scott to finish up with the finances.
Thank you, Alf Ragnar. Before we get into the quarter's financials I'll walk through the recent amendments to our debt facilities and way forward. In late April we reached agreement with our banking group to extend the maturity of our $2 billion credit facility to June 2017 and we amended financial covenants that are measured at the Seadrill consolidated level. These amendments are part of a broader package that measures our majority shareholder as undertaking a refinance and recapitalize the business at the Seadrill group. The covenant amendment also extend to June 27, 2017 and include resetting the leverage covenant, revising the definition of the equity ratio to exclude the impact of any change to the market by our rig and suspension of the provision that allows lenders to receive prepayment if rig values decline below a minimum value relative to the loan balance outstanding.
As part of this agreement we agreed to a set of milestones which provide a timetable for advancing discussions around a longer term solution. By deferring the credit facility, resetting the covenant removing the risk of facility prepayments related to declining rig values. We've established a more stable platform to pursue and conclude negotiations with our stakeholders. We are pleased with the support shown by our banking group and by Seadrill and we continue to make good progress on negotiating a broader package of measures intended to significantly improve liquidity and register a recovery in the sector. We expect to communicate a broader package of measures over the next quarter and be able to execute by the end of the year.
Now turning to Slide 8. The financial highlights for the quarter include EBITDA 87 million, operating profit at 33 million with financial expense coming in at 35 million bringing our loss per share at $0.41. Compared to last quarter EBITDA improved as we realized more cost savings offshore and in the overhead, while holding our revenues constant. The same increases in operating profit, if we exclude the non-cash impairment on the West Rigel from the fourth quarter.
Financial expense increased mainly from foreign exchange moved in our swaps and revalue of the Norwegian krone debt. Cash from operations in the quarter decreased from changes in our working capital. Revenues for the quarter were 152 million, up slightly from last quarter. The West Phoenix entered in its idle phase in October and returned to service in early March. While the other rigs performed consistently add or above 97% utilization. Vessel and rig operating expenses and general administrative costs for both lower this quarter as we adjust our activities to the current operating fleet and realize some savings and consolidating the stacking of the West Venture and West Navigator.
Net loss from the financial items in the fourth quarter amounted to 35 million, compared to 18 million last quarter. We had our normal interest expense coming at 26 million and loss on interest rate swaps were offset by gains in the cost currency swaps. And we had our foreign exchange losses on the revaluation 1.5 billion krone bonds as the Norwegian krone weakened slightly against the dollar in the quarter. Lastly, tax expense came in at 4 million bring our net loss per share, the $0.41 for the quarter.
Turning to the balance sheet, there are only few moments here. Our assets decreased with normal depreciation and current assets decrease in line with the level of our operating activity, which resulted in changes in our working capital. Looking at the liabilities, you’ll see the current liabilities decreasing as well and we had our regularly quarterly installments on the credit facilities where we repaid 42 million of $2 billion facility and net repayment of 11 million on the ship finance credit facility.
After these repayments and revalue on the krone bonds, our total debt balance is 2.4 billion include the related party debt. Now this wraps up our financial highlight section and we’re now ready to start the question-and-answers. I’d like to remind everyone to please follow the one question and one real follow-up.
Operator, can you go ahead with the first question?
Yes. [Operator Instructions]. And we’ll now take our first question from Lukas Daul of ABG Please go ahead.
Question on your floaters, pretty much or all of them will be coming off contract before the end of this year? And I was wondering, if you could sort of rank them in terms of their probability or your view and how they are going to be ready for new work, which one will be the hottest and which one will be the coldest?
Alf Ragnar Lovdal
Yes, it’s Alf. Phoenix of course will be ready to start new work [ph] right away likewise with West Alpha and West Venture will require two to three months reactivation time. And then obviously, Navigator is more long-term. And for Navigator we are still working on an international carrier for that rig.
What we have seen lately, actually a more dynamic North Sea than probably elsewhere in the world. Over the last couple of years, we’re have had nearly no tenders and now we have a number of 13 we are working on. So, but I have to say that, its majority is mid-’17 and ’18. So we are working hard to find the opportunities in direct continuation of current contracts. And if we achieve that, it will be a different day rate.
Yes. And that was basically my next question, because if you get a contract starting end of ’17. Will you still stack the rig or would you sort of try to ship it around for any kind of work, just to keep it working?
Alf Ragnar Lovdal
Yes. We will try to ship around to keep it working. Our units are classed and they are ready to work. So we will look for all kind of opportunities and that’s what we are working on. Yes, that’s correct.
[Operator Instructions]. We will now take our next question from Anders Bergland of Platou. Please go ahead.
Just a couple of questions regarding your OpEx levels for the cold stacked units and also for the ones that are between cold and warm stack. What should we put in as a figure on the OpEx side? Secondly, any color on the West Rigel situation? And thirdly, is the Russian entity or the Russian deal is that completely off by now, any comments about that as well? Thank you.
Alf Ragnar Lovdal
Thanks a lot Anders. For the stacking cost, they’re less than 10,000 a day and that’s for the units we take the advantage of using the same place to stack the units and we have a reduced cost or different schedule for people looking after and it’s relatively low number. With regard to Rigel, we work together with [indiscernible] and of course we’re trying to sell that unit and we’re working closely with them to achieve that and that’s a goal for us to have it sold. And with regard to the Russians and as we have stated previously we have a framework agreement in place and that’s until May 2017 and we continue to monitor the market conditions.
Okay. And this is final follow up, on the West Venture, that also runs out of the contract by the end of this year, it’s an older jack-up and the large majority or the large jack-up in the North Seas are running off contract over the next couple of years, or do you think there is a probability for that to be extended by stacked [ph] order or do you expect to find additional work for once it rolls over its contract -- existing contract?
Alf Ragnar Lovdal
I believe we have to look at the whole North Sea, UK as well, relatively not that old if you look at the North Sea and also the size of that rig is quite suitable for not only Norway, but also for UK. And as you know as of today utilization is 100% for jack-ups, so whenever there is a need we will be there and we are of course in contact with the clients and are having discussions, yes.
Could it be suitable for P&A work, or do you have to do some upgrades on this before putting that?
Alf Ragnar Lovdal
Both yes and no. depends of course we can do P&A work with it, standalone and also to on board a fixed platform, we actually have done that previously and -- but of course you can do upgrades if you want to, but nowadays clients are interested in low cost solutions. So that’s what we are aiming at, no investments if we can avoid it.
[Operator Instructions] We will now take our next question, pardon it looks like they stepped away.
[Operator Instructions] Thank you ladies and gentlemen that will conclude today’s Q&A session and now I would like to turn the call back to Mr. Scott McReaken for any additional or closing remarks.
Yeah I appreciate it Sanjay. Thank you everybody for joining our call today and we will talk to you in other -- in the next one. Thanks bye.
Thank you. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.
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