North Atlantic Drilling Ltd (NYSE:NADL)
Q3 2016 Earnings Conference Call
November 22, 2016 11:00 AM ET
Alf Ragnar Lovdal – Chief Executive Officer
Scott McReaken – Chief Financial Officer
Lukas Daul – ABG
Jacob Ng – Morgan Stanley
Good day and welcome to the Q3 2106 North Atlantic Drilling Limited Earnings Conference Call. Today’s call is being recorded and at this time, I would like to turn the conference over to Mr. Scott McReaken. Please go ahead, sir.
Thanks Hema. Good afternoon everyone and welcome to North Atlantic Drilling Limited’s Third Quarter Earnings Conference Call. With us today we have Alf Ragnar Lovdal, our CEO; and myself the Company's CFO.
Before we get started, I'd like to remind everyone that much of the discussion today will not be based on historical fact but rather consist of forward-looking statements, that are subject to uncertainty. We articulate some of these key items on Page 2 of the presentation and for additional information and to view our SEC filings, please visit our website at nadlcorp.com.
To begin the discussion today, Alf Ragnar will take us through the third quarter highlights, update on operations and our market outlook. I'll then address our financial highlights and then open up for some questions.
With that I'd like to turn the call over to our CEO, Alf Ragnar.
Alf Ragnar Lovdal
Thank you, Scott. Good morning and good afternoon to everyone. This quarter marks the fifth consecutive quarter where North Atlantic has reached the fleet utilization above 95%. Again we are at 98% this quarter for the rigs in operation. Our crews and management remain committed to running our rigs safe and efficiently, despite the uncertainty in the market.
Our revenue came in at $133 million for the quarter and we are able to push our costs down further. Preserving an EBITDA margin above 60% which is fantastic. Net operating income came in at $29 million as two rigs finished up contracts in the quarter and mobilized to their idle location in Skip Lysaker [ph] Norway.
I am please to report good progress has been made on the overall terms and structure for the financing agreement with our banks and excellent co-ordination with Seadrill. We intend to re-profile all of our secured credit facilities to mature in the period from 2020 to 2023.
Reduce our fixed amortization obligations and amend financial covenants to create a runway to recovery in the markets. We have initiated engagement with stakeholders on the other key elements of the plan and expect to conclude the restructuring by the end of the April 2017. We will not be able to comment more on this subject in this call.
Currently, North Atlantic’s contracted revenue backlog is at $360 million. While this has been reducing each quarter we are now beginning to see evidence of some muted activity in the North Sea, which is resulting in new employment opportunities albeit some term in duration, short-term in duration but above break-even level.
We recently signed a short-term contract on the West Phoenix with Total in the UK. We expect similar performance in the re-activation compared to last year. The rig will remain idle in Invergordon, Scotland and then commence under its contract in February with Total. We are positive on being able to achieve follow-on work that secures our market share in the UK North Sea for 2017.
Meanwhile the West Alpha completed it’s four-year drilling campaign with ExxonMobil at the end of August. During this time, we have been pleased with the success for West Alpha in the harsh environment including successfully drilling the only Russian Artic well in the last 20 years. We look forward to maintaining our close relationship with Exxon.
Additionally on the September 27, we announced that West Epsilon received an early termination from Statoil Norway. We completed their program efficiently and ahead of schedule and due to their reduced off-shore program for the remainder of the year the rig was terminated in accordance to their rights in the contracts.
In general, our long-term view of the market for harsh environment drilling rigs remains positive. In the near-term markets area still remains some challenging. Oil prices remained in the 40 to 50 range during the third quarter, a level that is not sufficient to reverse the declines in oil company upstream spending. It is suspected that upstream spending will again decline in 2017. Albeit less than previous reductions in 2016 and 2015.
While the forecasted decline in spending sets the stage for another challenging year, in the offshore drilling business it is important to recognize the resetting of costs across the value chain. This may facilitate increased activity on a year-over-year basis with only a marginal increase in commodity prices if accompanied by pricing stability.
The current downturn in the market now has the distinction of being the worst downturn in the history of offshore drilling in terms of duration and absolute demand. The peak to current demand drop-off 40% is double the average witnessed in prior cycles.
In the United Kingdom and Norway North Sea there are seven floaters and eight jack-ups rolling off contracts in the next six months. Of which seven units are 25 years or older. This brings the total to 31 idle units that are greater than 25 years and are likely to be scrapped when the next SPS is due.
Since the beginning of this downturn only two floaters in the harsh environment have been scrapped and it is reasonable to expect a significant portion of older units becoming idle over the next months will be destined for the scrap yard. The combination of volume returning to the market at the measured pace and accelerated scrapping activity will eventually lead to a balanced market. Based on the expected level of scrapping activity and number of units that are cold stacked, a pick up in spending in 2018 could meaningfully tighten the markets.
Now I will turn it over to Scott to finish up with the financials.
Thank you, Alf Ragnar. Highlights for the quarter include our EBITDA at $84 million, operating profit at $29 million as Alf mentioned we had two floaters conclude contracts by August and we still continue to preserve our margins above 60% as we focused. Bringing the rigs idle and reducing our cost basis to the current activity levels.
Our financial items were $22 million as we recognized our normal interest and received some benefit from our hedges. Loss per share came in at $0.67 as we had some non-cash tax expense recorded in operating cash generated in the quarter was $54 million.
Looking at the details here, total operating revenues, was $137 million down $28 million for the quarter, the operating fleet continues its trend of high utilizations even though our active rig count was reduced. We had the West Phoenix end its contract in mid-August and West Alpha finish up with Exxon with some additional revenue in demobilization.
Costs continue to trend lower as expected with the activity levels decreasing, vessel and rig operating expenses were at $44 million as we laid out two rigs and our general and administrative costs were at $5 million as we reduced on-shore and benefited from the Seadrill cost reductions due our management charges.
With our normal depreciation, total operating costs were $108 million resulting in net operating income of $29 million. Net from financial items amounted to $22 million which is less compared to last quarter. Our normal interest expense was at $27 million and received a net gain of $13 million, which is mainly driven from the cross currency swaps mark-to-markets as the Norwegian kroner strengthened this period against the dollar. This was offset by a net financial loss of $8 million as unrealized losses were recognized from the revaluation of $1.5 billion kroner bonds.
Lastly our tax expense increased this quarter compared to last as we reported some non-adjustments to our differed tax liability. With all this our $29 million of operating income is reduced to a net loss of $13 million which is an equivalent loss of $0.67 per share for the quarter.
And the balance sheet non-current assets decreased from the normal quarterly depreciation, some working capital changes and our cash came in at $86 million as we generated $56 million cash from operations.
Not too much activity on the liabilities, to mention either, we met our regularly quarterly installments on the credit facilities being $42 million out of $2 billion kroner facility, $2 billion facility and the $12 million on the Ship Finance credit facility. After these re-payments and revalue of kroner bonds our total debt balance is $2.4 billion included related party debt.
This wraps our financial highlights and our prepared remarks and I’d like to turn it back over to you queue up some questions for us.
[Operator Instructions] We will now take our first question from Lukas Daul from ABG. Please go ahead, your line is open.
Hi, guys. Good afternoon. It is Lukas Daul from ABG. Can you hear me?
Alf Ragnar Lovdal
Yeah, hi. Thanks a lot for calling. Yep.
Scott can you just say the de-mob revenue that you received on Alpha in the third quarter, can you quantify it?
Yeah, it was de-mob revenue associated to the winterization kit on Alpha it was around $17 million
And that was booked as revenue?
Okay, thanks. And then on West Phoenix, you seem sort of a bit confident that it might pick up more short-term jobs in 2017. Can you sort of give us your thoughts around the rest of the fleet and the outlook for 2017?
Alf Ragnar Lovdal
I think its – what we have seen now – this autumn is a shift in the number of tenders. And obviously we are involved, active on 23 different tenders, and then it's split between some 50% UK Norway, and the majority is start up in 2017 already in March and throughout the year. With – I actually feel reasonably comfortable with the situation for Phoenix to get follow-up work, and we are working closely there with a couple of different clients. And for the rest of the fleet, I am optimistic now. So we are involved in a lot of activity, as I mentioned. So for next year, startup is in the nine floaters, and it's for – and it's eight jack-ups – jack-up works. In a way, I feel we have bottomed out activity level.
Okay. And the termination fee on Epsilon, is it going to be booked as a one-off in Q4 or?
No, we’ll amortize it over the remaining term of the contract.
And Epsilon is heading for stacking together with the rest of the rigs, or?
Epsilon is already stacked, [indiscernible] and Norway, yes, and we are preparing for new opportunities next year.
Okay. Thanks, guys.
Alf Ragnar Lovdal
[Operator Instructions]. We will now take our next question from Jacob Ng from Morgan Stanley. Please go ahead your line is open.
Thank you and congrats and a great quarter.
Alf Ragnar Lovdal
Thank you. Thank a lot.
I was just wondering how much you see OpEx being lowered on West Phoenix during its idle time between contracts?
Alf Ragnar Lovdal
For the next couple of months, we will stay at about $50,000 a day, so prepare for the startup, yes.
Okay. Great. And just you guys just brought down SG&A and maintenance CapEx quite a bit, and I was just wondering if these are steady run rate levels we can assume going forward.
Alf Ragnar Lovdal
Yeah, two thirds of it, is sustainable going forward, and the last third is deferral.
I would say if you also take consideration about three months time, two to three months to get the costs down to the stacking level, so we should see that normalize out as the rigs, the ones that are working continue to operate.
Okay. Great. Thank you.
Alf Ragnar Lovdal
Thanks, thanks for calling.
[Operator Instructions] There are no more questions in the queue. I will turn the call back to your hosts.
Thank you. Again, appreciate everyone's time today on North Atlantic's third-quarter earnings call. Have a good week. Have a good thanks giving.
Thank you ladies and gentlemen that will conclude today call. And you may all disconnect.
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