Q1 2020 Earnings Call
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Good day, everyone and welcome to Valores plc use first quarter Twentytwenty financial results Conference call.
All participants will be in listen only mode for today's call. If you require operator assistance. Please press Star then zero I would now like to turn the conference all over to Mr., Nick Georgia, as Vice President of Investor Relations and corporate Communications, who will moderate the call. Today. Please go ahead Sir.
Welcome everyone to the Belarus first quarter 2020 conference call with me today are president and CEO, Tom Burke, and executive Vice President and CFO, John boxed, we issued our press release, which is available on our website at Dolores dotcom.
For today's call as will be discussed in more detail. We will not had a question and answer session at the end of our prepared remarks.
Any comments, we make today about expectations are forward looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectation.
Please refer to our press release and SEC filings on our website. It defined forward looking statements and list risk factors and other events that could impact future results.
Also please note that the company undertakes no duty to update forward looking statements.
During this call will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliation.
We issued our most recent fleet status report, which provides details on contracts across our rig fleet on April 22nd and filed our 10-Q earlier this morning.
Now, let me turn the call over to President and CEO, Tom Burke for his remarks.
Thanks, Nick and good morning, everyone welcome to the cool and thank you for your interest in Valores.
During today's call I will briefly discuss the macro and industry environment that has developed over the last two months I will then provide an update on how these events impacting the demand offshore drilling services and the loss is operations.
Finally, I will speak to the cost reduction initiatives that we have underway.
Following my comments I will hand, the call over to John for his remarks on the first quarter financial results. The Corona, Brian pandemic has affected businesses and people around the world, creating a global economic crisis of which we are all acutely aware in response world leaders and policymakers have deploy.
OID fiscal stimulus programs aimed at limiting the impact of this downtime.
While it is uncertain how effective these programs will prove engine starting the global economy.
It is clear that travel restrictions currency orders and the altered consumer behaviors have had a dramatic impact on the demand for hydrocarbons.
We expect commercial and consumer restrictions to be lifted certain countries around the world still we anticipate pellet will take time for consumer behaviors to return to normal.
Therefore, there is a highly uncertain picture of hydrocarbon demand, particularly in the near term.
Unfortunately in the face of these demand challenges the energy industry has been simultaneously facing supply surpluses with competition for market share among producers over the last several weeks. This competitive intensity appears poised to subside following agreements by several oil producers.
The nations to ridges production, although it remains to be seen if this plan supply contraction will be sufficient collectively these supply and demand pressures have created an excess of hydrocarbons to the point that they're all storage capacity concern and operators are choosing to show.
Yes in production.
In turn from mom, Brent crude prices declined from nearly $60 per barrel in late February to less than $20 per barrel earlier this month.
In light of this challenging backdrop customer demand for offshore drilling services has fallen swiftly over the last two months.
We were receiving about 20, new inquiries per month in late 2019 and early Twentytwenty.
We expect to the majority of these request to lead to work the rigs in the global fleet.
Over the past month, we've received a total of nine such inquiries and we anticipate that feel with an half of these inquiries will lead to work for four valores or its competitors.
Not surprisingly with several rigs in the global fleet, having come off contract over the past several weeks without follow on jobs and a shortage of new opportunities, we've already seen global rig utilization drop.
This challenging environment is also impacting existing contracts for offshore drillers as operators move to cancel and delay well programs, along with asking for pricing concessions and other modifications to contract terms.
Most of our customers hospice, some kind of change the current contract arrangements. We have had four contracts terminated and agreed to modify several others.
One of the contract terminations, we received was for the Valores DS eight which had been operate.
Teekay offshore West Africa, when the rigs blowout preventer became disconnected following a non drilling incident.
At the time this contract had approximately 150 million of revenue backlog remaining.
As previously disclosed we have an insurance policy that we would expect will largely offset the loss of backlog associated with this contract.
In addition, we recovered the VIP from the seabed over the past weekend I will now mobilize the rig to the Canary Islands for repairs. However, with the exception of DS eight challenging market conditions and logistical challenges with our customers drilling and completion programs have.
Led to these contract modifications and we expect that this trend will continue.
Travel restrictions and quarantine requirements have also created significant challenges to deploy our global work force to our offshore rigs and supply these rigs with necessary materials offer in remote locations.
That said I'm pleased to report that despite these challenges we've been able to keep our rigs crude and operating.
50 performance is a testament tower employees to the fantastic efforts of our operations supply chain and human resources teams as well as our travel partners.
I'm, especially proud of our offshore cruise many of whom have had to workover for extended periods.
They've done so due to flee despite being away from their families during such an uncertain time.
In response to this challenging backdrop for the offshore drilling sector, we're taking action to rationalize our fleet.
Right size, our support costs and structurally lower our operating expenses.
As I've mentioned before I want from our it's to be the industry cost leader I believe that the offshore driller the office safe and reliable operations at the lowest cost is best positioned for success.
To minimize our costs, we intend to preservation stack several of our competitive rigs, including three drillships, a semi submersible and five jackups.
By putting these rigs into a lower state of readiness, we expect to realize more than 50 million of annualized cost savings beginning in the latter half of this year.
In addition, we were retired three six generation modern drillships the dsthree the DS five and the DSX and 4.9 waters semi submersibles. The 5000 for the 500, the 85, a one and the 85, though too.
We believe that given the age and capability profile of the global floater fleet.
Only the most capable modern rigs will be competitive going forward.
Given the combination of these rigs technical capabilities and amount of time, they've been out of service, we do not believe that the necessary economics to reactivate these rigs and make them competitive will ever occur. So we plan to retire these assets.
We will also retire for Jackups collectively the decision to scrap these 11 rigs will save the company more than 30 million in stacking costs annually once sold.
We will discuss the impairments we've taken on these assets in a moment.
We're also rightsizing, our shore based support to better reflect expected fleet utilization levels, which aligns well with the final phase of the merger synergy process, but I mentioned on our last conference call.
At the end of the first quarter, we achieved a run rate of more than 175 million of combinational synergies exceeding a 165 million premerger target nine months early.
Today, our run rate of shore based support is approximately 65% of the two legacy organizations shore based support costs immediately before the merger closed.
Inclusive of Gionee expense as well as operational and local support that is within contract drilling expense.
We expect to further reduce shore based support cost in the future lowering them to less than half of what they were in early 2019.
While savings through fleet management and shore base reductions are significant the most meaningful opportunity to sustainably improve our cash generation potential is by lowering rig operating costs.
To address this we have several initiatives underway, including optimizing manning levels, and improving operational and supply chain processes to safely lower repair and maintenance spend.
We anticipate that these efforts will help a structurally reduce our daily operating costs.
While the savings from these initiatives will depend on rig utilization, we expect to benefit regardless of activity levels.
Lastly, we are reducing our capital expenditures for full year 2020 to 120 million a 25% decrease from our prior estimate and we continue to scrutinize. This.
Spanned carefully.
With market conditions expected to remain challenging we're focused on what we can control, providing safe and reliable operations to customers and actively managing our cost base.
By delivering efficient services at high levels of uptime reflects position the company to win the limited opportunities for new work that arise and keep our rigs utilize provided they are economically viable contracts total ours.
And through the Rightsizing of our marketed fleet and overall rig footprint, along with our operating and support costs, we preserve cash as we navigate the industry challenges.
And with that I'll turn it over to John.
Thanks, John and good morning, everyone.
We issued a press release yesterday that provides detailed explanation of our first quarter 2020 results on a sequential quarter basis. Therefore, my commentary today will focus on more significant items included within our results along with our cost reduction efforts and capital structure.
And with our first quarter results, we reported an adjusted EBITDA of negative $40 million from an operational perspective, our first quarter financial results were negatively impacted by the following.
First as Tom mentioned, we had a non drilling incident on Belarus, DSA, where the rigs DLP became disconnected.
And as a result, the rig did not earn a day rate for most of the month of March.
In addition, we incurred some extra costs associated with Remediating. The situation in total this incident negatively impacted first quarter results by approximately $15 million, mostly in revenues. In addition, first quarter contract drilling expense included $14 million of high repair and maintenance costs.
Inclusive of contract preparation and startup cost for Jackups in the North Sea.
Lastly contract drilling expense also included a noncash charge of $5 million to write off receivable from a customer impacted by the drop in oil prices.
Moving to other income.
We repurchased $13 million of discounted 2021 maturities in early March prior to the significant decline in oil prices, which generated a $3 million gain in the first quarter.
We reported a 152 million dollar tax benefit for the quarter, primarily due to a $164 million benefit from discrete tax items.
These discrete items occurred due to the release of certain liabilities as we received a favorable outcome on an uncertain tax matter along with the benefit from the recently completed internal reorganization.
However, the largest item in our first quarter results was a 2.8 billion dollar noncash impairment to adjusted book value of several varden rigs as Tom mentioned industry challenges over the past two months have negatively impacted customer demand for offshore drilling services.
This led to an impairment for three Drillships three semi submersibles and seven jackups. The vast majority of this impairment was to adjust book values for six modern floaters to scrap in anticipation of a multiyear downturn. We're also taking decisive action by preservation stacking several competitive rigs, including three drillships.
One semi and five jackups.
In doing so we expect to realize significant annual savings as compared to keeping these rigs warm stack state.
While reactivation costs vary depending on asset type and duration of the stacking period in general we believed that the decision to preservation stack and offshore drilling rig breaks even in a little over two years.
Given our outlook on the market and other rigs in our fleet that are currently or will soon be without contracts. We believe these are prudent decisions.
We will reactivate these rigs when day rate and contract durations can justify it but as evidenced by our actions. We do not expect this will happen for at least two years.
Additionally, as further rigs come off contract given the current environment, we will evaluate quickly moving them to a preservation stack state.
To be clear, we're shifting our marketing approach from what we have done over the past several years, including during the prior sector downturn.
We will not be keeping many rigs.
Typically for floating rigs available to pursue short term work at near breakeven levels that approach has more cash flow variability. There's only successful at the rig level when high utilization of achieved however, nonworking available rig can be a material cash liability without meaningful cash flow being generated from our backlog and with our high cost of care.
Before we can undertake the risk of keeping rigs available to pursue short term work with the hopeful view on a near term recovery.
Therefore, these rigs will remain stack until market conditions become more favorable and contracting terms or turn to levels, where we able to lock in the necessary return on capital to justify a reactivation.
These cost management actions, including efforts to rightsize, our support cost base and optimize rig operating cost the top spoke about earlier will benefit our liquidity position going forward.
As of March 30, Onest, we had 185 million of cash on the balance sheet.
Outstanding balances, our revolving credit facility of three.
$329 million, leaving the Lars with approximately $1.3 billion of available revolver capacity.
In total available liquidity from cash in the remaining revolver capacity was approximately $1.5 billion.
We remain in compliance with our debt covenants under our revolving credit facility, including our debt to capitalization ratio, which stood at 52% at the ended the quarter and we continue to drawn our revolver as a source of funding having drawn approximately $30 million earlier this week to bring our outstanding revolver balance to approximately $410 million.
While we continue to have access to liquidity the associated challenges presented by lower energy demand and an oversupply of hydrocarbons have meaningfully impacted demand for offshore drilling services.
These challenging market conditions have led several customers to defer suspend or cancel offshore projects and in turn we're seeing the majority of the rig contracting opportunities we are pursuing get deferred or canceled as a result, we expect to continue to report losses, a negative cash flows throughout the remainder of the year.
We are taking rapid measures to address the financial impact of the challenging market conditions were also analyzing the cost to support our capital structure with more than $6.5 billion of debt and outstanding balance on our revolving credit facility annual annual interest expense of approximately $400 million is our largest non operating cost by a wide.
Margin.
Therefore, we are evaluating various alternatives to address our capital structure and annual interest costs to facilitate devaluation of these alternatives. We are engaged in discussions with our creditors and their advisors around these alternatives, including without limitation, a comprehensive debt restructuring, which may require substantial conversion of our indebtedness to echo.
Sorry.
Given the sensitivity surrounding these discussions we will not be providing further comment on the matter or holding a question and answer session. At the conclusion of today's call Andrew would refer all inquiries on the company's capital structure to Lazard and their capacity as large as financial advisor.
Before I close todays call I would reiterate Tom's comments around our cost control focus. It is clear that there are challenges ahead and to better faced these challenges we must lower our cost to operate and support our rig fleet, while continuing to provide safe and reliable operations to customers cost efficiency will be a key differentiator for offshore drew.
Theres going forward irrespective of activity levels, and we are determined to make the large the industry costs leader.
I believe that this combined with strong capital discipline will position Lars well for the future.
This concludes our prepared remarks I'd like to thank you for your interest in Belarus, and will now handed back to our operator to close the call.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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