Q4 2019 Earnings Call
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[laughter]. Please remain on the line called anything business units.
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Hello, and welcome to the fourth quarter and full year 20 <unk> coal.
Dan and I will be coordinator for today.
This conference is being recorded.
The called <unk>.
However will be an opportunity to ask questions at the end [laughter] time since that star zero wondering telephone keypad conducted as an operator.
I'll now hand, you over to your hosts Lisa you cannot speak in todays conference.
Thank you, Dan and welcome everyone drilling fourth quarter and full year earnings.
So.
Before I turn the call over to burn you Gotta Catch reminder, every month.
We make during this call, but our expectation.
Or predictions of future.
Windows concerning our future financial and operating performance, our earnings expectations or beliefs.
Regarding harmful to that.
Good.
No look, including our views a future contract day rates and our business strategies and plans for future operations are all forward looking statements that are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 95. These statements are not guarantees of future performance.
Actual results could differ materially from any forward looking statements made during this call do a variety of factors, including those described in the rich.
Or leaching form.
Okay.
Let securities.
Commissions, which you can find on our website you should also note that we use certain non-GAAP financial measures terms call you'll find a required supplemental disclosure for these measures, including the most directly comparable GAAP measure and associated reconciliation in our earnings from failed on our website.
I'll turn the call over to burning <unk>, Chief Executive Officer Pacific drilling.
Thanks, Lisa and good morning, everyone, well see a fourq for pretty much in first of all costs and certainly appreciate just flush.
28 in addition to loose Jewel Hirsch, our Chief Financial Officer, and Michael I got senior Vice President of commercial.
So the office this morning, Jim will be covering them often been portion was Michael available for Q1.
These are extraordinary silence.
Well the virus outbreak those calls should benefit.
Most of this Watson somebody like.
Some people.
Touching international economies.
But natural and almost as.
After the opportunity even small installation stockpiles already being the health and wellbeing, Oh, fortys, both offshore and onshore.
We are addressing this through a number of mitigations I'd refer actions, while continuing to focus on blooming assumption, sorry, with us talk slots.
Oh, no long enough doesn't know business.
First sort of Sampson return to work, starting a new contract with us nor in the U.S. Gulf of Mexico.
The current rates have performed incredibly well and demonstrated this engine return of Sparks <unk> cost of service.
Okay. That's more of just go a hot.
Our safety performance that's been supply was good route efficiency.
Yes. Thanks, all work are critically important to our clients.
Our reputation for operational excellence and customer service supported us almost <unk> of a new relationship with Murphy all.
Securing work for the <unk> Pacific Sharav, and Mexico, both the new client new country of operations for Pacific.
On the topic of mid tons that offer actions or work for you in a Oman, what's more are progressing well further building the bars reputation for delivering solid performance across a broad swath of the globe.
As announced in January we were surprised and disappointed with the arbitration probably also systems related to bump into those just XOMA.
As previously disclosed who's sort of paulson those into this.
I refer to lessen the softer than others.
<unk> session permission to go little just what's the Hoxworth hardcore in London.
Separately, we are pleased to have secure the recently announced 50 million dollar revolving credit facility, allowing us the financial flexibility.
You are opportunities as we bolster our balance sheet.
<unk> for a fleet of system seventh generation Drillships, although our discussions with current and prospective clients remain constructive and the number of opportunity.
Those are supposed to that.
We were.
Good where global equity in all markets are impacted by ongoing disruption related both.
The the novel Corona bars, and the associated displacement and all demand and pricing as well as market changes related to OPEC production of supply.
To provide context regarding open demand in the fourth quarter, we received 11, new tenders or bid opportunities as compared to the same period in the previous year. When we received seven new tenders.
More importantly, since the start of year, we have received eight new tenders and another eight request for information several of which are longer term, representing a very strong start of the year.
Recognizing that our clients may moderate their plans and lot of emerging events. This tender inflow is nonetheless, a relative positive.
Turning to liquidity at the end of the fourth quarter, our unrestricted cash balance was $279 million.
This plus our $50 million revolving credit facility allow us to continue to pursue additional rig contract opportunities, while we exercise an appropriate level a discipline.
Turning to the recent Matt meltdown in market cap across the offshore driller Spice, it's clear that confidence in the sector has eroded for our park. We remained focus on delivering exceptional service to our clients, while providing a safe workplace for our crews and creating value for sure.
Our holders.
We are actively pursuing a number of important contract opportunities, what's the potential to meaningfully build backlog.
We have implemented Toronto virus related risks mitigations and prepared for a number of scenarios, which might require temporary office closures are rigs side case management.
We have actively workmen scenarios internally with each of our clients.
President all our active rigs are progressing their respective well programs and each have adopted measures to preserve our ability to continue to do so.
All in we progress on a number of important fronts and 29 team.
Most notably putting four rigs to work for class across the globe, while acting to strengthen our balance sheet.
I want to remind our listeners that continued diligence dedication and performance of our excellent rig crews and their unwavering commitment to safety.
Are the key to our current operational performance and directly responsible for opening doors to new clients and future contracts I. Thank each and every one of you for delivering on our mission to exceed customer expectations by delivering the safest most efficient and reliable deepwater drilling services in the industry.
I'll now turn the call over to Jim for a review of our for fourth quarter results.
Thank you Barney and good morning, everyone.
I will provide more details on our fourth quarter results give guidance on our outlook for 2020.
And provide context on actions, we are taking to further strengthen our balance sheet to bridge to positive free cash flow.
The khamsin commenced work Frac, one or in the Gulf of Mexico in December and the Santa Ana started back working for Petronas and Martini <unk> also in December.
Yes, Rob continued its long record of service for Chevron in the Gulf of Mexico, achieving consistently high revenue efficiency levels.
We're also mobilized in the fourth quarter two Oman, just start working for you and I am in February.
We achieved fourth quarter revenue up $33.1 million at the low end of our guidance and down $21.2 million from the third quarter.
The decrease in revenue resulted primarily from the Sharav coming off its higher legacy day rate at the end of August and continuing to work for Chevron that lower current market rate.
The Santa Ana was also off hire for two months returning to Las Palmas temporarily for a full thruster exchange and other maintenance projects.
These decreases in revenue were partially offset by the camps ends commencement of contract operations.
Our operating expenses in the fourth quarter of $63.3 million were in line with our expectations and up to $2.9 million from the third quarter.
A sequential increase in expenses was attributable to the maintenance cost on the Santa Ana while transitioning from work completed in the third quarter with hotel to the start of operations with Petrobras in the fourth quarter.
We deferred 15, and a half million dollars in cash operating cost incurred in preparation for contract fulfillment on the Bora.
And khamsin as required and then.
Recognition accounting standards.
These costs will.
And.
Over the Socit contractors.
Our suburban office isn't operation support costs were $6.8 million.
Quarter slightly higher than a third quarter.
Total general and administrative costs came in lower than are asking was $8.2 million and were lower by $700000.
Our adjusted EBITDA for the fourth quarter was negative $36.8 million, which is about $1 billion.
[laughter] estimates represents a declined $23 million from the third quarter as anticipated from the changes outlined in revenue and operating expense.
Capital expenditures for the fourth quarter were $4 million, including $2.2 million for sustaining items and $1.8 million for big enhancements.
To close the fourth quarter $278.6 million, an unrestricted cash as compared to our September 32019 balance of 355.9 million.
The use of cash in the quarter of $77.3 million, primarily funded you adjusted negative EBITDA.
My annual October cash interest payments deferred contract separation expenses and capital expenditures, all offset by a reduction in net working capital.
While the tribunals decision related to design. The arbitration was negatives we have always planned our base case cash flow expectations exclusive of any is on the outcome.
The zonda loss recognized in the fourth quarter of $217.6 million isn't noncash charge.
The two subsidiaries that were party to the arbitration are not included in our consolidated financial results as both companies.
Main and bankruptcy.
As a result, the four and a half million dollars of cash held by the subsidiaries has not been included in the consolidated balances that we have been reporting.
While we while we have filed for the right to appeal our liquidity planning is unaffected by the tribunals decision.
In February 2020, we closed on a 50 million dollar first lien super priority revolving credit agreement.
This three year facility will provide us with added financial flexibility over its term as we continue to invest and to put our rigs to work.
As we look ahead to deal with the increased market uncertainty caused by current of Iris concerns. We are exploring avenues permitted under our bond indentures that might further increase our liquidity, including a possible capital leases facility of up to $50 million.
In the first quarter of 2020, the Sharav will operate with Chevron for the full quarter.
Laura went on contract with the and I for one well in Oman in February as should lasted the ended the quarter.
Khamsin commenced work and the Gulf of Mexico in December and is completing its first well with Ecuador before moving to work the next well for hotel.
And the Santana is working now with Fernando and Maher attain yet which is anticipated to last into the fourth quarter.
This quarter is the first time in over three years that the company has had four rigs operating at the same time.
With these fleet status changes, we expect first quarter 2020 revenue to recover to between 83 and $90 million.
First quarter operating expenses should be between 90 and $95 million up from the fourth quarter levels with increased operating days under contract and lower amounts of cost deferred.
Operating expenses for the year should be within the range 325 million to $345 million.
Operating loss includes amortization of deferred revenue per.
The net amortization expense is expected to be around $6 million in the first quarter.
$12 million for that full year 20 twond.
We expect first quarter general and administrative expense to be approximately $9 million and cash income taxes around $2 million.
Depreciation and interest expense should be in line with fourth quarter results.
For the year cash income taxes are estimated to be approximately $11 million.
Just any capex for 20 flying shipments approximately $21 million and the final installment on the M.T. system installed on the camps and then 2019 total capex for the or should be at about $6 million.
For the first quarter same sustaining capex 10 minute on a $4 million.
Contract base favorably for opera vessels It may 20.
Excluding third party services, but including ours.
So this is approximately $190000 a day.
As we roll off legacy Ginnie Mae contracts negotiated a bottom of the cycle, we expect our base pay rates and 2021 to average closer to the mid $200000 range.
If we are successful putting our senior vessel the meltem door.
And with five working in 2021.
Acquired day eight to achieve enterprise level breakeven free cash flows is approximately $255000.
We anticipate reaching leased approaching levels, and then [laughter] assets totaling some one.
The mouth left anchor a lot parliaments on first and is currently move into the Gulf of Mexico.
We have commenced a soft ramp up of the vessel.
Right.
Items and started work on reactivation.
Once we have a contract for the meltdown.
Total cost to put the vessel ends what we're ready to drill stage fully trained for who will be approximately $50 million.
And the absence of a suitable contracts, we fast anchor the vessel in the Gulf of Mexico.
Where the staffing possibilities class, that's leaving the ship an anchor homeless and expect that will likely more from the golf given the time.
All vessels.
[laughter]. This includes operating expenses for fuel Cashel major mispriced assets.
Necessary supplies on board.
We also anticipate the working capital build for many years of approximately $15 million due to the higher activity levels.
Got it posted are wanting to earnings guidance.
Minimum adult [laughter] Investor Relations tab on our website.
In closing in the fourth quarter.
Positioning our fleet for success in 2020 and beyond.
Investment.
Estimates, we have made in our vessels and operations are expected to yield improvement results through the year, enabling the company to inflect.
Positive free cash flows by mid 21.
I will now move onto marketing section.
The last few days there was a significant amount of uncertainty with respect to the impact resulting oil price for off will have on the market and how long before the effect.
We will have to wait and see over the next several months, but prior to this significant event. The market was continuing to strengthen in the high specification drillship space on its road to recovery.
We continue to see several positive trends develop as day rate fixtures are solidly in the two hundreds for the first half of each one thing.
Certain markets posted in banks from 220200 $40000 per day.
The tendering pace. The second half of 2019 result in a total of 27 drillship tender fish food and remain strong going into 2020, averaging five new opportunities for.
We continue to see more programs with durations of one year or more come to the market with 2021 start dates.
Currently there are several longer term programs outstanding, including Murphy U.S. Gulf of Mexico, Ecuador, Brazil.
Sure prospered settle.
Nigeria.
Exxon Mobil, Nigeria with a few other scheduled to come to market later this year.
Turning to the supply for the sixth generation Drillships segment.
We see effective utilization of the markedly improving from 86%.
One cents since our last fall.
But 70 high spec girls contract as of February February 20 plenty.
[laughter] number consists of 47th Jones and 36th gens.
Well, the three and four markets and that's available digitally.
As we look forward through 2020 that remain this 4.1 rig years available to the market it slipped for the year.
With that predict an increase in demand is based on current outstanding opportunities.
Back to high spec drillship marketed utilization dibrom.
Over 90% from the seeable future.
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And this past quarter, we received 11, new tenders, representing an 8.4 rig years. Furthermore, and 6.8 years of associated options as compared to the third quarter. When we received 14, new cancers, representing 7.1 hundred years affirm or 9.9 years associated options.
In addition in Q4 receipt and.
It's a request for information for constantly drilling programs compared with 19 modifies in Q3.
We currently have 28 high spec drillship opportunities in the active Sherman stage compared to 26 quarter.
And well 14 set for 2020 starts and 14 plan for 2021.
Okay individual specification markets around the world Southeast Asia remains of smoking today.
Yeah that is having availability in 2020.
But find suitable opportunities in the market.
We're starting in the second half of 2020 and one in 21.
Anticipates region remains strong with the likelihood.
Additional rig work to mobilizing to the area to satisfy projected demand.
And the Mediterranean an African region, we see there are four market at high spec units plus a couple of potential farmout rigs currently competing for new work.
So there is a current oversupply, we see this market continuing to slowly improves with eight fiscal opportunities for starts and 22.
Forecasting the timing based programs is always a challenge, particularly for West Africa demand in this region is expected to increase 21 yen Juan.
Current programs federal to kick off in Nigeria Angola.
Yeah and Guyana.
In South America.
Oh.
Suriname Columbia region remains strong with a predicted demand for five to six rigs on a continuous basis later this year and into 2021.
Additionally, Brazil is slowly moving forward with this recovery in activity.
Petrobras is currently out with two opportunities for up to two high spec drillships, each which is inline with the expectation of an incremental four to six rigs over the next 12 months.
For the most recent hi tactical shift tender.
Boss is prepared to contact and mixed for up to three years, each of which is positive to see at the longer term mess and just go to market.
This weekend.
Yeah.
With the projects Jade from National oil companies, such as Exxon and Mobil.
Our principles for long.
The view for future deepwater activity Brazil.
We see the design target and balance now with all of them contractors.
Yes.
Do you expect all new opportunities to be fulfilled by international Contactors localized rigs enter Brazil, which should help balance the global supply demand and improved rates to the Brazilian market.
Finally, turning to the U.S. Gulf of Mexico.
The region remains the tightest deepwater basing globally only a few break months available for the remainder of 2020.
With the developing demand, we see going to U.S. and Mexico for 2021.
Oil prices can return to more stable levels at 55 to $65 per barrel.
We believe demand remained strong in the region and day rates can maintain their current level at 220200 $40000 per day.
Turning to our fleet update we're excited to announce the Pacific Sharav contract with Murphy, Mexico for two from Wells Fargo adoption, while starting in November of this year, that's less than $30000 per day.
Our first contract Murphy oil company as well as our first opportunity to drill into developing a promising Mexican deepwater markets.
We're very excited about this opportunity future sets for Pacific drilling.
Operationally the strongest recently began drilling on the third well.
Well contract extension with Chevron in the U.S. calls expected to last until at least early may.
Currently there is a project five month gap for the break before starting the Murphy, Mexico work and we're pursuing opportunities with a couple of contractors to secure at least one well.
Let me say.
So we are sad to see the strongest long and successful secure run with Chevron and we're very excited for the rate to start a new chapter working for a strong deepwater player like Murphy.
Moving to the Pacific Khamsin.
It continues to successfully drilling the initial well of the three from wells, plus one well option contracts with excellent or in the U.S. Gulf of Mexico.
We expect to complete this well sometime later this month and move over to spot tow towels, south flat exploration target.
Based on the current schedule, we expect the rig to be occupied until at least October 2021 additional option remaining on the contract.
The Pacific Santa Ana continues its stellar work on phase two of the Petronas permanent abandonment program and the Chin Getty field.
As stated before this program.
This program should occupy the rigs through most of the year with options for two additional wells with hotel on the schedule.
The Pacific Bora is currently drilling the first deepwater well in Oman free and I, which is expected to last until the end of this month.
As you may recall that he and I am on contract includes a $5 million paid demobilization plus fuel cost that allows us to return the rig to a location of our choice.
With respect to the smart stacked rigs, we recently made the strategic decision to mobilize the Pacific Meltem to the U.S. Gulf of Mexico as it is currently underway to the region.
Being our highest specification units and one of the latest generation Drillships in the world. We believe that will be very competitive and the strategic market going forward.
With our proven ability to reactivate our smartstax drillships as seen with the khamsin, we believed that the meltem will be a very attractive alternative for customers, who need the highest technical capabilities that only come with a top tier drillship.
Our priority remains to secure work for the Sharav after which the Meltem is our next available rig.
Regarding this rocco.
Currently in Las Palmas, we see several longer term opportunities in West Africa for which it should be a great fit and we'll bid accordingly, where it makes sense, both strategically and economically.
Mr. All is also smartstax and Las Palmas, where we are continuously evaluating strategic opportunities. Currently there are no market opportunities to justify reactivating. The rig. So we continue to focus on minimizing cost while preserving optionality.
In summary prior to the last few days, we were excited by the developments in the deepwater market.
The improving outlook for 2020 in 2021.
However, we like most in the markets, we'll be watching keenly the future price of oil and how our customers react to both the recent drop in price as well as the expected decrease in demands from the Corona virus pandemic.
These are clearly unique times and we remain vigilant on our analysis of and adapted this to the changing market conditions.
That I will now turn the call back over to Bernie.
Thanks, Jim.
In closing, we remain focused opportunistic and discipline in our execution and strategy as we navigate the challenges before us.
Through a person we are committed to delivering the value that Pacific drilling uniquely represents.
With that I'll now hand, the call back to the off rider to build the Q and open the call for an issue and I.
Thank you, Sir ladies and gentlemen, if you'd like to call. It a question today. Please press star one your telephone keypad now and please ensure your phone is on music.
That's fair name adviser to ask your question.
And that star one if youd like to ask the question though.
And we do have our first question to the first call. It is Devon Xu from Wells Fargo and then when you were ready. Please go ahead.
Hi, guys. Thanks for taking my question Congrats on the new relationship with the Murphy.
Just a they also mentioned that they were cutting capex in the region I guess could you comment on.
You know given that news what the opportunity is for potential further.
Contracts after that.
Yeah, Devon, Hey, this is Michael here.
I would say that you know obviously, it's very early in the news was just out this morning I'm, we have the contract for Mexico with them that we announced today you know we're in discussions on a potentially other potential contracts or work that they have in the future we'll have to analyzed.
The where they are there but.
My guess is it would probably push work to the right a bit if that's the case, but we again have to have those discussions.
Got it and then with the flora and and I what are the.
I guess what are the chances that it continues work.
Given the high uncertainty right now.
Well, so we when we finish this well as we said in our comments I.
We'll be mobilizing the rig we're currently in discussions on a couple of opportunities there.
We can't really comment at this time on that but I will say that you know will you probably got at least 30 days of mobilization, regardless of where we take the rig.
So we'll hopefully update you in the near future on on a contracts.
Got it and then in terms of the Meltem.
The larger step ups throughout the year, largely because of the expenses related to that and kind of what.
Daily expense.
Are you expecting for that rig.
So on a meltdown.
We are being ordered long lead items as we as we talked about them or doing some basic reactivation, but we won't enter into a full reactivation and did those costs.
Yeah, and the estimates so it's wonderful estimation is $50 million to total investment.
We all inclusive.
The operating expenses for the crew the training.
Your maintenance projects passes handicap acts and maybe people to do all major maintenance projects that would be that we would otherwise have to do the term of its initial contracts that would be no interruption to the revenue. So there's some acceleration there and also restocking all the supplies.
On the vessel so that it in the ready to draw states.
I guess you know previously they got us and that was maybe $40000 a day and expenses as it moves to the Gulf of Mexico does that go up as it's.
You know getting semi ready for work.
We expect to cost to be roughly 40000, a day during the Gulf of Mexico, They may be slightly lower but hey, my close them.
And if you don't mind I'll have to listen to about one more follow on question as we have others into Q.
Absolutely. The final question is just on the current spot market, what do you guys, saying that they rates look like given the uncertainty.
Is there risk.
The spot market would be significantly weaker.
I don't think we measure that as we speak today because the situation has evolved.
Credibly quickly over the last week.
The only real indication we have as our recent fixture for the Sharav with Murphy in Mexico, and I'm sure. The you know many we'll be watching the space to see what the near term impacts our but.
In a very near term I think we may see other flat quiet period, while our clients consider that forward. So that's what we really see what indication is or the future spot rates.
And our next question on the phone coming so [laughter] no [laughter].
[laughter], maybe you know when you see please go ahead.
Hi, Thank you very much can you hear me while gentlemen.
Yeah.
Okay.
I have two questions and thank you protocol. One can you. Please give us an idea of the flexibility in the Opex. You mentioned I think you said 325 to 345, yeah, we're talking about a very fluid environment for the rest of the year and I know this that range, but it's a rather narrow range. So uh huh.
Much like do you have to or do you have to cut it lower if you need to that's question number one and question number two is that can you give us an idea about the rig supply.
You are seeing for the rest of the year Oh, we don't we're not sure about the demand, obviously, but with respect to weak supply in the second third fourth quarters I do you have some numbers before you as to how many rigs are going to end the or contracts and look for look for work.
Thanks for the question and with regard to flex and the operating expenses first let me point out that those operating expenses include assumptions for further work for certain rigs those currently not contracted and so therefore, they're very much reflective of.
Additional work higher levels of activity et cetera, India event that for whatever reason that work doesn't materialize there would certainly be flex to the lower.
Below the that range. However, we gave you that range on the basis, our expectation for filling gap work for the Bora and filling the gap work for the Sharav.
Got it.
With regard to availability of sixth and seventh generation ships for the balance severe.
We're currently 4.1.
Rig years available in the balance of the year with the bulk of that following in the fourth quarter across a number of available rigs where the contracts will be expiring in October or November or the year. So there is actually very little unbooked work at this time towards our for 20.
The 20.
Having said that there are number of auctions that.
Prior to the recent events, we fully expected to be exercised and our statistics reflect.
Certain assumptions around which of those options will be exercise and which maybe not so our best estimate as it stands today is there you know just over 48 months worth a rig work available on the market in 2020 this year.
Thank you.
And that's all the questions I have in the queue. So I will return the call to your hosts for any closing remarks.
We thank you all for your interest in Pacific drilling and.
I wish you all the best of success as we watch I'll do a world emerges from their recent challenges. Thank you very much and good day.
Thank you all for joining todays conference you may now disconnect your lines.
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