Ocean Rig UDW Inc. (ORIG) CEO Pankaj Khanna on Q2 2018 Results - Earnings Call Transcript

Ocean Rig UDW Inc. (NASDAQ:ORIG) Q2 2018 Earnings Conference Call August 9, 2018 8:00 AM ET

Executives

Pankaj Khanna - President and Chief Executive Officer

Iraklis Sbarounis - Chief Financial Officer

Analysts

Eirik Rohmesmo - Clarksons Platou Securities

Operator

Thank you for standing by, ladies and gentlemen and welcome to the Ocean Rig’s Conference Call on the Second Quarter 2018 Financial Results. We have with us, Mr. Pankaj Khanna, President and CEO; Mr. Iraklis Sbarounis, CFO. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that the conference is being recorded today.

Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflect current views with respect to future events and financial performance and may include the statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Please take a moment to read the Safe Harbor statement on Page 2 of the Slide Presentation. Risks and uncertainties are further described in the reports filed by Ocean Rig with the U.S. Securities and Exchange Commission.

And I pass the floor to one of your speakers today, Mr. Pankaj Khanna. Please go ahead, sir.

Iraklis Sbarounis

Good morning, everyone. This is Iraklis. Thank you for participating in Ocean Rig’s second quarter earnings conference call. I am starting with Slide 3, our income statement.

Our adjustment of the income statement is $6.4 million, associated with the statutory periodic surveys of the Ocean Rig Mykonos, Ocean Rig Skyros and Leiv Eiriksson. For everyone’s benefit, we wish to remind our investors that Ocean Rig’s accounting policy is to expense SPS costs as they occur as opposed to capitalizing and deferring them.

Following that adjustment, during the quarter, we had $97.3 million in total revenues and $64.2 million in total rig expenses which included the mobilization of the two rigs from Brazil, the Ocean Rig Corcovado and Ocean Rig Mykonos as well as $400 million for the treasury refurbishment in neither one of projects.

Our depreciation and amortization was $26.2 million and our G&A expenses were $15.4 million. In addition, our net interest expense for the quarter was $3.1 million and we paid $5.9 million in taxes, which is about 6% on the revenues. So against our $1.3 million operating income, we had $14 million in expenses, resulting in a net loss of $12.7 million or $0.14 per share.

Turning to Slide 4. We have the best-in-class balance sheet with $719 million of cash, against debt of $350 million. In May 2018, we prepaid the remaining debt balance under the Ocean Rig Apollo bank facility at no additional cost.

During the first quarter, we repaid $100 million of the term-loan at par saving the Company total interest cost of $52 million over the remaining term of the loan, following which we have no debt repayments until 2024. This offers us unique financial flexibility at this point in the cycle. On top of that, let’s not forget our $743 million of firm backlog.

Turning over to Slide 5, whichever metric you want to use, we are the best place in the industry with the net debt of negative $370 million. Our backlog of over $700 million is more than twice our gross debt of $350 million.

On that note, I’ll turn over the presentation to Pankaj to talk about our most recent backlog topics.

Pankaj Khanna

Thanks, Iraklis. Good day, everyone. Moving on to Slide 6, our total contract backlog stands at about $743 million. The Ocean Rig Poseidon is currently hot stacked at Walvis Bay, where drilling operations expected to commence on September 1 for Tullow.

Following the Tullow well, the Poseidon will drill for Chariot. We have also secured an LOI for further work that assuming the contract is signed, we will keep the rig employed into Q1 2019. There are further prospects that are on the table for the Poseidon to keep the rig working into 2019.

The Ocean Rig Mykonos remains in a ready-to-drill state at Las Palmas and it’s being fitted with a full managed pressure drilling package that should be commissioned shortly. The Ocean Rig Corcovado completed its contract with Petrobras on May 25 and it is now in Las Palmas in a ready-to-drill state.

We have also decided to install a full MPD kit on her, which will cost in the region of $14 million to install. Bear in mind, the tender activity from Petrobras and our long track record in Brazil having worked for Petrobras for six years with the Mykonos and Corcovado. We are well positioned for those tenders for regardless all three rigs are being marketed actively on various tenders globally.

Leiv Eiriksson resumed its contract with Lundin on April 3, 2018 and suffered 27 days of NPT due to subsea related downtime that has now been fully resolved. The rig is carrying out an extended well test on the [indiscernible] field. Lundin has declared their seventh option and the rig will move to the [Silfari prospect] upon completion of the extended well test. The rig will escalate to around $160,000 per day for this well. We believe Lundin has adequate vertical to Leiv Eiriksson to be employed well into 2019 and we also have the ConocoPhillips MSA thereafter.

We have now concluded the discussion with Total and the Skyros and the new rate has been fixed at $573,000 per day, a good result for the Company. We have bid the Eirik Raude for several prospects in the North Sea and elsewhere, we are hopeful of the prospects for this rig, which has a long successful track record. There are several tenders in the pipeline, but we believe some of our rigs will be front runners. We hope to be able to make further announcements in the coming months.

Slide 7, turning to the market. The slide shows the considerable decline in Offshore Discoveries over the last five years as exploration has been mostly suspended since the collapse in oil prices in 2014. However, we are seeing the beginning of the revival as oil companies drop budgets for 2019 with independence leading the charge.

Oil price is north of $70 per barrel are providing the impetus to drill and so is the slowdown in growth in the shale phenomenon, which is due to logistical constraints and the investors desire to take some profits. So while we get on the [indiscernible] isn’t a factor anymore, also the gain becoming an interesting option for oil companies.

Slide 8, the graph clearly show what we are been saying for the last few months. The number of contracts awarded in Q2 reached levels last seen in 2013 prior to the collapse in oil prices. However, in 2013 the total of the contracts being awarded in the third quarter was significantly higher with 30 to 60 rig years awarded per quarter rather than what we see today with a mere 17 rig years in Q2, but we are headed in the right direction.

Slide 9, as we have been pointing out for the last four to five months, tendering activity has picked up significantly for both exploration and development drilling. We count a total of 77 active tenders at the moment, but the total rig years got by this tenders in just 53 years. In a way, this is good as we wouldn’t want to fix these low rates for longer contracts. We are now seeing some customers wanting to take advantage of the current low rates for work starting in 2019 and some even for 2021, mostly for defined development work.

Activity in the Asia-Pacific area especially has picked up this year as operators take advantage of the prevailing low rates to drill. Interestingly, 23 of the 34 tenders are for semi-submersible, which could put further upward pressure on rates for semis. A number of tenders are close to conclusion and we expect that several contracts will be awarded in the next couple of hours.

Slide 10, we are seeing utilization improvement across the floater fleet for both semis and drillships, with semis recovering quicker due to the demand from harsh environment areas and also from other areas like the Asia-Pacific where semis are preferred. We expect that utilization will continue to improve despite further roll-off as the numerous tenders currently in the market are concluded.

Slide 11. Finally moving on to Slide 11 in summary, Ocean Rig is a pure-play in the ultra-deepwater sector with premium high-quality assets and an established track record in the harsh and benign market. We are further high grading our fleet with the addition of MPD capabilities on two rigs. We are also preparing for the eventual reactivation of the stacked rigs, refurbishing thrusters and certain subsea equipment that will allow us to shorten the reactivation process.

Our newbuilding contracts and associated financing from the builder offers substantial optionality and leverage to ascending market. We have the best-in-class balance sheet with negative net debt, more than ample cash liquidity and a significant backlog.

We have no debt maturity until 2024. The Company is in a prime position to benefit from the recovery in the offshore drilling market and that inflation points seems to be nearer every quarter. We remain focus on creating shareholder value, whichever route that may take.

We have now reached the end of our presentation and I open the floor for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the participant and his line is now open. Please go ahead and ask your question.

Eirik Rohmesmo

Yes, hi. This is Eirik Rohmesmo with Clarksons, calling. Just one question regarding the Eirik Raude on potentially reactivation, what kind of contract would you require in terms of EBITDA covering the reactivation cost?

Pankaj Khanna

There is no real threshold as such. I mean we believe in the prospects in the North Sea market and we see a lot of inquiry there. Reactivation of that rig would basically give us the opportunity to take advantage of that market for contract starting Q3 and Q4 2019. So from our standpoint if we saw even six-month contract, we would react sequentially.

Eirik Rohmesmo

Okay. That’s more about rather than actual day rates?

Pankaj Khanna

Yes.

Eirik Rohmesmo

Okay. Thank you. And also just more of a housekeeping items, can you provide some guidance around expected downtime for your operating rigs in the second half of 2018, especially…

Pankaj Khanna

At this point, we don’t have any planned downtime for Skyros.

Eirik Rohmesmo

Okay. Thank you.

Pankaj Khanna

Thanks.

End of Q&A

Operator

There are no further questions. Please continue.

Pankaj Khanna

Okay. There are no further questions guys. Thanks very much. Have a good summer and we’ll talk to you for the Q3 results.

Operator

That does conclude our conference for today. Thank you for participating. You may all now disconnect.