Q3 2022 Diamond Offshore Drilling Inc Earnings Call

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Okay.

Good day and thank you for standing by welcome to the Q3 2022 diamond offshore drilling earnings conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a.

Question during the session you will need to press star one on your telephone and you will then hear an automated message advising your hand, just raised please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today, Kevin Port Dusky senior director of Investor Relations. Please go ahead.

Thank you Michele good morning, everyone and thank you for joining US with me on the call today are Bernie Wolford, President and Chief Executive Officer, and Dominic SAB Arena, Senior Vice President and Chief Financial Officer.

Before we begin our remarks I remind you that certain information reported on this call speaks only as of today and therefore time sensitive information may no longer be accurate at the time of any replay of this call.

In addition, certain statements made during this call may be forward looking in nature.

These statements are based on our current expectations and include known and unknown risks and uncertainties many of which we are unable to predict or control.

These risks and uncertainties may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements.

These risks and uncertainties include the risk factors disclosed in our 10-K and 10-Q filings with the SEC.

Further we expressly disclaim any obligation to update or revise any forward looking statements.

Refer to the disclosure regarding forward looking statements incorporated in our press release issued yesterday evening and please note that the contents of our call today are covered by that disclosure.

In addition, please note that we will be referencing non-GAAP figures on our call today.

You can find a reconciliation to GAAP financials in our press release issued yesterday and now I will turn the call over to Bernie.

Thanks, Kevin.

Good morning, or afternoon to everyone and thank you for your interest in Diamond offshore as we present our results for the third quarter of 2022.

I would like to start the call by thanking the entire diamond team for achieving a strong quarter through their unrelenting focus on delivering safe and efficient operations.

Our commitment to the customer and industry, leading operational excellence, what we call. The diamond difference are the Differentiators that drive return business and our strong contract backlog.

Today, I will cover our financial highlights for the quarter, our view of the macro environment and outlook for the remainder of the year I will then turn it over to Dominic to cover our financial results as well as provide some additional information regarding our 2023 guidance.

Our results for the quarter reflect growth in both revenue and EBITDA.

Total revenue and EBITDA for the quarter were $226 1 million and $18 $4 million, respectively. These improvements were driven primarily by higher utilization in the third quarter.

Turning to our operating highlights I am pleased to report that Diamond had third quarter revenue efficiency of 97, 3% across our fleet.

Particularly impressive given the above average number of rig moves and <unk> during the quarter.

Our safety performance continues to improve as compared to both the previous quarter and year I couldnt be prouder of our crews for delivering this exceptional performance.

In July the Ocean Blackhawk commenced its contract for Woodside offshore Senegal hats off to the men and women who are laser focused on delivering a safe on time and successful startup for our customer.

Notably, while earning a performance bonus on their very first well.

In October the managed drillship Villa successfully commenced its one well contract in the Gulf of Mexico with Woodside.

Which will be followed by a five well contract plus options with a subsidiary of Beacon offshore.

We have experienced recent achievements in other areas as well for example, diamond continues to progress, making our rigs more fuel efficient and reducing our carbon footprint.

We recently analyzed historical fuel usage data for our black ships, comparing closed bus and opened bus electrical plant operations.

Closed bus operations facilitated savings of up to 20% in fuel usage over comparable activities and an open bus configuration.

Please note all of Diamond's large DP rigs are equipped to support close bus operations and we continue to work closely with our clients to maximize time in close bus configurations to reduce fuel usage and greenhouse gas emissions.

The remainder of 'twenty two promises to be an active period for the company.

The Ocean Great flat recently arrived in Scotland to continue its preparation for the previously announced contract with BP.

We are on track for contract commencement in the first quarter of 2023.

The Ocean endeavor recently arrived in Norway to replace eight diagonal prices and conduct a five year special haul survey.

Sure Hi rig availability for the future.

Turning now to the market outlook, the macro environment continues to drive the developing growth cycle in our business.

With supply concerns driving investment.

Despite governmental actions targeting inflation.

Oil and gas supply fundamentals are historically, Todd on the hills of years of Underinvestment and upstream capital projects.

We anticipate relative strength in oil process to continue for the foreseeable future with long dated Brent futures now trending upward.

Energy security priorities are driving a further lag of investment aimed at securing energy suppliers close to home in a responsible manner.

We believe securing sufficient supply will be a multi year undertaking.

Commodity prices have remained elevated this year with the U S energy information administration projecting Q4, Bret averaging $93 per barrel and full year 2003, Brett averaging $95 per barrel.

This has led to significant cash flow generation by our existing and potential customers, which supports their ability to fund dividends, while making meaningful increases to upstream capital investments.

<unk> predicts that total offshore Greenfield project commitments will be approximately $138 billion in 2023 compared to <unk> $72 billion, and 22, representing a 92% increase year over year.

We believe the surge in spending will in turn lead to increased demand for our services spanning multiple years.

We have recently seen a meaningful increase in the number of fixtures for floating rigs.

According to IHS market, the number of new fixtures to increased 44% quarter over quarter to 35 fixtures in the third quarter.

These fixtures represent 37 rig years of demand compared to 16 rig years in the second quarter.

With 60% of awarded or go into Drillships for campaigns approaching two years in duration.

The majority of these are for work in the Golden triangle that as the U S South America, and West Africa, all areas, where we have an established operating presence.

With rig supply tightening in most markets, we saw a direct negotiation opportunities double in the third quarter as compared to the second quarter.

In the U S Gulf of Mexico, where drillship capacity is nearly sold out we're seeing opportunities emerge for direct negotiations on term work commencing in 2024.

The tightening supply demand balance supported our high level of commercial success in the third quarter.

We secured $778 million of additional backlog during the quarter.

This attributed to the previously announced contracts on the Ocean Black Hornet Ocean apex Ocean, great, what and the managed rigs via our rigor and Villa.

These commitments added six rig years of backlog and will materially increase revenue as we progress through 2023.

We also look forward to repricing opportunities for our seventh generation drillship, the Ocean Blackhawk, which is anticipated to finish its current contract in Senegal early in the second half of 'twenty three.

After the end of the quarter, we received notification of award of a new drilling program with Petrobras in Brazil for the Ocean courage.

The Ocean <unk>.

<unk> was awarded a four year project with an unpriced option for an additional four years.

The total value of the firm term of the award is approximately $429 million, including a mobilization fee and the provision of certain additional services.

The contract for this work is expected to be signed imminently and commenced late in the fourth quarter of 'twenty three.

After the rig concludes its current contract and completes new contract preparations.

Upon contract execution. This will grow our current backlog from one 6 billion to.

To just over $2 billion.

This award is a testament to the exceptional performance of our crews and allows diamond to continue serving the world's largest operator of deepwater drilling rigs.

These backlog additions and growing demand are game changers, which set the stage for meaningful improvements in EBITDA and cash flow in 2023 and beyond.

It takes an entire organization focusing on the right things to deliver successful outcomes.

I am very proud to be surrounded by the high caliber of men and women of diamond offshore that our customers count on to deliver energy responsibly.

I will now turn the call over to Dominic before returning with some concluding remarks.

Thanks, Bernie and good morning or afternoon to everyone.

In my prepared remarks, this morning, I'll be providing an overview of our results from this past quarter brief.

Briefly touch on our liquidity and the key activities influencing yet going forward.

Provides some insight into our projected results for the fourth quarter and full year 2022, and also provide a preliminary look at our projections for 2023.

For the third quarter.

We reported net income of $5 $5 million or <unk> <unk> per diluted share.

This compares favorably to a reported net loss in the second quarter of $22 million or 22 per diluted share.

The results for the third quarter included a reported adjusted EBITDA of just over $18 million, which is a slight improvement from the prior quarter.

The increase in EBITDA was driven by increased activity in the quarter associated with the Ocean Blackhawk beginning work in Senegal, as well as the ocean apex, having a full quarter of operations in Australia.

These increases were partially offset by higher contract drilling expense associated with these operations as well as the ocean Onyx completing its contract in Australia during the quarter and being stacked.

The improvement in our net income and earnings per share was largely driven by a nonrecurring noncash tax benefit of $23 million associated.

Added with the recognition of deferred tax assets the release of evaluation allowance and the reversal of tax reserves due to the expiration of the statute of limitations in certain jurisdictions.

Interest expense for the quarter was $10 3 million and capital expenditures for the quarter came in at $9 8 million.

We also had a working capital build in the quarter as a result of the Ocean Blackhawk Ocean Black Lion and Ocean Patriot transitioning to higher day rates during the quarter and a temporary delay in accounts receivable collection that we expect to collect in the fourth quarter.

Our liquidity at the end of the third quarter stood at $296 million.

Including $23 million of unrestricted cash and $273 million of Undrawn capacity on our revolving credit facility and delayed draw first lien notes.

As a result of the Ocean endeavor shipyard work in the fourth quarter and the ongoing reactivation of the ocean, great White as well as the ocean apex going into the shipyard between contracts for a little over a quarter in the first half of 'twenty three for our specialist Hull survey and other maintenance programs.

We expect our liquidity to continue to depth over the next few quarters.

Once we began to enjoy the full benefit of our recent contract awards at higher day rates as referenced in our fleet status report published yesterday, we expect our earnings potential operating cash flow and liquidity profile to improve significantly in the second half of 'twenty three and throughout 2024.

Turning to our Q4 and full year 2022 guidance.

We expect Q4 2022 contract drilling revenue, excluding reimbursable to be between $205 million to $215 million.

And largely due to the ocean endeavor being in the shipyard and ocean, great White reactivation activities, taking place in Q4 <unk>.

EBITDA is expected to be slightly above breakeven and.

And our capital expenditures are expected to be between 30% to $35 million.

Should we achieve these results for Q4, our full year 2022 results will be in line with the guidance. We've previously provided.

I would now like to provide an overview of our expectations for 2023.

Our backlog as of October one 2022 is $1 6 billion.

In addition, as Bernie alluded to we are anticipating finalizing a contract award with Petrobras in the near future worth $429 million.

Our backlog position gives us great visibility into our revenue opportunity for 2023 and beyond.

In 2023 were contracted for 75% of our available days, excluding planned shipyard days.

In addition, our average day rate for 2023 years across our fleet is approximately $285000 per day as compared to $235000 per day for Q3.

As a result, our preliminary revenue for 2023 is expected to be between 950 and $990 million.

Our preliminary EBITDA for 2023 is expected to be between 160 and $200 million.

This expected EBITDA margin of 17% to 20% is a fivefold improvement over our expected EBITDA margin for 2022.

During our Q4 conference call, we will provide a more fulsome outlook for 2023 after our 2023 budget processes complete and approved by the board.

That concludes my prepared remarks, and I'll now hand, it back over to Bernie for some closing comments.

Thank you Dominic.

At Diamond our focus has always been to deliver best in class performance, while never compromising on safety performance.

No matter what stage of the cycle, we may be in.

The Diamond difference is well established and continues to deliver value for our customers and shareholders.

We expect to continue leveraging our position and capabilities in this nascent up cycle to deliver improved results in 2023 and beyond we appreciate your interest in Diamond offshore and will now open the call for questions.

As a reminder to ask a question. Please press star one on your telephone please standby, while we compile the Q&A roster.

Okay. Our first question comes from David Smith, with particularly energy. Your line is now open.

Hey, good morning, congratulation demonstrating operating results in Q3.

Thanks, Mike Good question.

Wanted to circle back to your your earliest availability for your owned and contracted fleet.

Blackhawk coming available third quarter next year.

I wanted to ask how you see the potential for offsets to extend that rigs current contracts, but also if you could share your outlook for the Blackhawk.

After this contract it sounds like you might already be having conversations with customers that next job.

Sure David and thanks for your interest today.

The Blackhawk is with Woodside in Senegal.

As we understand it today the expectation is that that rig would finish its contract, including any exercised options sometime around August of next year and then.

Likely.

The demob to Las Palmas, where we'll make.

The conduct a special whole survey, which we are bringing forward from 24 into late 'twenty three before.

Moving on to its next project in terms of its next project.

We are currently in a number of active discussions around the potential commitments for the black Hawk given the tight supply in the Gulf of Mexico, I would sort of consider that our primary target at this stage and look forward to continue to explore direct negotiation opportunities in that vein.

Appreciate it and a follow up question.

Other than the apex and the Blackhawk.

Any other specials that rates for next year.

And if I could sneak related how should we think about the Sps for modern drillship hitting the mark in terms of downtime and costs.

Right so.

For the first question David.

No. They would have the the black Hornet and Black Rhino, our Q4 'twenty four for their next special and the Black line is in early 'twenty five.

We're in somewhat of a unique position with regard to the black ships, thanks to our relationship with HMH and our contracts for the maintenance of those video piece, where we're able to have condition based monitoring that allow us essentially to maintain continuous coc's and not necessarily have to take that.

<unk> out of service for an extended period.

So those particular sport.

Special Hull surveys would be theoretically less costly and less lengthy than what you might expect otherwise.

Very much appreciated.

As a reminder.

Mind or to ask a question. Please press star one one on your telephone please.

Please standby for our next question.

Our next question comes from Fredrik Stene with Clarksons. Your line is now oil sands.

Hey, guys hopefully you can give me.

<unk>.

And congratulations on a nice quarter I would say and also on the Brazil Award.

So.

I wanted to.

Circle back to <unk>.

Call. It contracting strategy going forward I think you guys from many of your peers paint.

Painting, a picture of the world going forward you are talking about direct negotiations.

Through our work from Q4 numbers.

Was wondering how are you.

How are you.

Expect that he will.

Play your olefin capacity overtime, you signed some of the ink for longer term contracts.

And in a strong market, there's also potentially some value too.

Yes.

Short term commitment and fixed are available just to make sure that you were able to capture.

They always improvements do you have any.

Made any thinking around that.

Yes, I think the best way to describe it as that.

We continue to work to push the envelope in terms of rates and mope fees at this stage.

The demand picture is tight.

We have three additional high spec rigs needed in Brazil, plus another two for BSM 11, BMS 11 that remain unfilled.

<unk> are going to just put further pressure on availability for rigs in late 'twenty three in early 'twenty four.

Given the limited sort of dry powder, we have as represented by the Black Hawk.

Looking to place that rig and our superior contract in terms of.

Total cash generation so.

Not to get much more specific than that but we're just at a point in the market.

Where we feel like we have room to test.

Test the envelope of it.

So.

Do you think it's possible to see a rate coupled with a five handle.

Well, it's a great question.

Recency bias makes me makes it hard for me to say, yes to that I had to be honest with you.

We certainly do see.

The high fours with significant mobilizations as being.

Kind of where the market is today.

Yes, it depends how the market moves we'll be watching the upcoming tender with Petrobras.

With great interest I think that's really the next opportunity these kind of see how the market is developing but certainly demand.

As.

Significant and the cost of reactivation of code or stranded assets, just get slightly higher every single day.

Thank you I'll be watching this closely and just a final one for me here.

Here you have some open capacity.

Valeant the omics the monarch.

And I think et cetera.

Looking forward at least in your press.

Do you have any color on both screening and how whether the potential tracon can see.

And then returned to the working fleet.

Sure. So I'll start with the Valeant energy security in the UK sector has.

Change pretty dramatically in terms of incentives for operators to get out and drill also we are seeing.

Finally, seeing some true demand materialize for PMA and so the Valeant for US is really a play on the PMA market at this stage and a rig.

We would not reactivate on spec under any circumstance.

But if it can be funded through its first program, we would certainly consider it so think of it as a <unk>.

All option on the P&A market.

Monarch is in a tough market in the southeast Asia region, which we are not seeing a lot of development.

In terms of pricing with <unk> being the one bright spot in that area right now.

Monarch, I think as I mentioned on our previous call, we need $40 million to $50 million to return that rig to work and again.

To put it to work unless we could pay for the reactivation and the firm term of a new contract.

Finally, the Onyx is just perfectly.

<unk> situated for the demand is materializing next year in Australia, we see three programs in late 'twenty three in early 'twenty four.

Materializing.

They are all significant programs with significant term and.

And the number of available rigs in the market today is the onyx and so.

We feel very well situated there to capture one of those opportunities.

Alright. Thank you so much guys.

For me thanks, Thanks Fredrik.

As a reminder to ask a question press star one on your telephone please standby for our next question.

Our next question comes from David Smith, with Pickering Energy. Your line is now open.

Hey, Thanks for letting me back in.

Wanted to follow up on that last question and kind of pilot queue.

'twenty three outlook, which I realize is preliminary.

I did want to ask how the ocean Onyx kind of factors into that 160 $200 million.

EBITDA outlook for next year.

I think we've taken a pretty conservative view with regard to the Onyx for next year, but we do have an expectation of utilization in the back half of next year.

Built into that range.

They are there.

We purposely created a range, where our expectations kind of reflect the middle of that range and there's room for some upside or downside.

And the range, but.

Long answer to a short question, we expect it to be working in the second half of next year at a conservative day rate.

Great to hear.

Yes.

Sticking with the preliminary 'twenty three outlook I don't mean to be greedy, but would you happen to have a preliminary free cash flow outlook to go along with the preliminary EBITDA outlook.

Our next quarters call.

Wait until next quarter's call day, we are still working through our finalizing our capex budgets and the like so there are some significant movers there that we're continuing to evaluate so please be patient and we will we will have that for you next time.

Alright, Thanks for all your time today.

At this time I am showing no further.

I would now like to turn the conference back to Bernie Wolford for closing remark.

Thanks, and thanks, all of you for participating in today's call.

We look forward to speaking you speaking with you again in the next quarter and really appreciate your interest in diamond offshore.

Hey.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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