Q4 2022 Diamond Offshore Drilling Inc Earnings Call

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

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Good day, and thank you for standing by welcome to the queue for 2022, gentlemen, 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 this session you will need to press star one one on your telephone you were getting here an automated message advising your hand is raised to withdraw your question. Please.

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Be advised that today's conference is being recorded.

I would now like to hand, the confidence over to your speaker today Kevin.

<unk> senior director of Investor Relations. Please go ahead.

Thank you Michelle.

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's that Arena, Senior Vice President and Chief Financial Officer.

Four we begin our remarks I remind you that 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.

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.

And now I will turn the call over to Bernie.

Thanks, Kevin good.

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

I'd like to start by thanking our cruise around the world for delivering on our finished strong safety campaign in the fourth quarter.

Billing us to achieve our best safety performance are the last four years.

2022 was a pivotal year for Diamond offshore we re listed on the New York Stock Exchange secured $1.3 billion in New contract Awards successfully started up to manage drillships.

Secured work to reactivate the ocean, great what all while continuing to deliver industry, leading operational X left for our customers.

Today, I will recover financial and operational highlights for the fourth quarter or operational outlook for 2000 to 2003.

In our view of the markets on the macro environment I will then turn it over to the dominant to provide a detailed look at our fourth quarter financials as well as guidance for 2023.

We continued our high level of commercial success during the quarter, securing $482 million, a backlog with associated commitments totaling more than $4 for ray gears.

Adjusted EBITDA for the fourth quarter was $12.5 million on total revenue of $223.2 million dominant will provide further details on these results in his remarks.

Turning to our operating highlights I'm pleased to report that a rig crews and operational support teams delivered revenue efficiency of 96% across our fleet during the quarter.

This efficiency number is impressive, especially considering the integration startup of the seventh generation drillship Villa, which perform at a high level on this first well under our management.

The fourth quarter was a busy one for domino ashore the ocean Greatwhite arrived in Scotland to continue its preparation for the previously announced contract with BP.

We found a new four year contract for those encouraged with Petrobras in Brazil, and the Ocean Blackhawk, an ocean Black Rhino combined efforts to earn a well based performance bonus for the second consecutive quarter.

The first quarter of twenty-three has been productive for the company. The ocean great. What recently moved from cash are important to a nearby sheltered waters offshore the west coast of Scotland at sea trials and customer acceptance testing.

We expect contract commencement occur within the next month.

The Ocean endeavor is expected to complete that shipyard scope next week when it will transit to us Maxwell location for our customer.

Looking forward in Australia, the ocean apex scheduled to mobilize to Singapore late in March to undergo a five year special whole survey and certain regulatory and customer required upgrades.

We currently estimate the out of service time for this project, including round trip transit to be approximately 110 days.

Turning now to the market outlook the offshore drilling sector continues to be supported by improving market fundamentals.

Demand for oil and gas is expected outpaced supply through at least 2026. In addition oil and gas companies have materially increase their capital budgets for 2023, and we expect a continuation of this trend over the next three years.

These combined with the effect of longterm stacking and years of rig retirements have prompted a sustainable cycle in the deepwater sector of offshore drilling.

The likes of which we have not seen for the past 10 years.

For assets in February of 2023 outstanding tenders for deepwater rigs as reported by S&P Global represented 49 rig years of demand.

A 63% increase as compared to 30 rig years of demand a year ago.

Next up I would like to offer comments regarding the markets, where we compete starting with the North sea.

The UK governments energy profits Levy are EPL has had an unsettling effect on brownfield prospects I'll show of the UK.

In addition, Norwegian to ban remained soft in 2023.

This has prompted a number of hospice location rigs to leave the region for attractive opportunities in other areas.

A trend we expect will continue through 2023.

However, there are a number of shorter term program. Starting later this year and early next plus two significant new programs offshore UK, starting in 2024 or 20 to 25.

These latter programs benefit from investment credits to offset the energy profits Levy.

Overall for the UK, we expect one additional semisubmersible to be contracted in the region in 2023, an additional unit late in 2024.

We recently announced our clients in touch into early terminate the ocean Patriot contract and reallocate capital related to that program to other areas due to the energy profit slightly tax changes in the UK.

We expect the rig will remain on contract into early July of this year before being terminated.

Our contract calls for a 12.5 million dollar payment upon early termination we.

We are pursuing a number of attractive alternative work programs for lotion Patriot and are optimistic that the rig will find work commencing in the third or fourth quarter of 2023.

In Australia, we see two remaining somehow submersible opportunities yet to be awarded for commencement late in 2000 2003.

Totalling three rig years to work.

Looking forward into 2024, a consortium of work also the east coast and possible exploration opportunities on the northwest northwest shelf could add a further three combined regulars a demand.

We are hearing our customers express some near term concern related to the process of securing environmental permits and the related permit approval backlog, but envisage this to be resolved as we progress through 2023 and not impact demand in 2024.

Southeast Asia remains relatively flat with incremental demand for one additional semisubmersible life this year and potentially one incremental drillship in 2024.

We expect India to grow slowly, adding one semi submersible and one Doyle ship in 2024.

West Africa, MSM Russell the demand is being driven primarily by opportunities in Namibia, Equatorial <unk> in Nigeria.

We expect demand to grow by up to two units in 2024.

Drillship demand in the region is expected to grow by two to four rigs in 2024.

Primarily by activity Angola, the Ivory Coast Namibia Ghana.

Sal and Mauritania.

East Africa, East Africa, particularly Mozambique has potential for upside drillship demand as well.

We see modest increases in feminist submersible demand and no matter of training and Black sea with potentially one incremental unit through 2024.

Drillship demand in the region is expected to be relatively flat.

In Latin America, we expect somehow submersible demand to exceed regional supply by two units in 2024.

Drillship demand could grow by six or more rigs over the same period.

Brazil is driving the bulk of the new demand in the region with Guyana Surinam in Columbia contributing.

Mexico, and the rest of Latin America region to remain relatively flat through 2024.

Finally in North America, we see drillship demand remaining relatively flat with one incremental rig in 2023 and possibly another in 2024.

It is worth noting that the rates in the region are under pressure to the upside due to the potential exodus of certain sixth and seventh generation units for opportunities in Brazil in West Africa.

Canadian harsh environment somehow some russell demand remains a wildcard, but with upside potential subject to subject to commercial success in the region.

Translating all of this to a global perspective, and factoring in conservatism to allow for slippage in star dates options not exercise and potential negative final investment decisions, we foresee incremental demand for <unk> gone by 4% to seven units through 2024 and incremental demand for <unk>.

She'll ships going by <unk> through the same period.

Increased rig demand is already being reflected in the number of currently open tenders and continued upward pressure on contract day rates.

The strengthening global market stands to materially benefit diamond offshore.

The Ocean Black Hornet was the first of our four black shifts to transition to a leading edge right in February .

Next up for reprocessing will be the Ocean Blackhawk currently working offshore Senegal with anticipated availability in the fourth quarter of this year.

Thereafter, the Ocean Black Rhino also working offshore Senegal will have access to reprice market rates when it rolls off contract in the second quarter of 2024.

We are currently pursuing multiple opportunities for the ocean Blackhawk in the Golden triangle with commitments with commencement from the third quarter of 2023 onward.

As previously mentioned, we are pursuing a number of opportunities for the Ocean Patriots were also pursuing multiple opportunities for the ocean Omics in southeast Asia, and Australia can.

Commencement for these projects.

<unk> of which are in the supply constrained Australia and market are anticipated to take place late in 2023 or early 2024.

This is later than previously anticipated in part due to recent delays and regulatory approvals related to environmental permits.

I will close by highlighting the conditions are in place for a continuation of this upcycle.

Particularly for key indicators are struggling a continuation of this upcycle first relatively strong oil prices and long dated futures.

Second growth in the number of open rate tenders.

Third year on year growth and our clients capital budgets and lastly continued growth in average rig contract durations taken together these bode well for a sustained cycle of increasing demand.

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

Thanks, burning and good morning or afternoon to everyone.

And my prepared remarks. This morning, I'll provide a recap of our results for the fourth quarter and some insight into our projected results for the first quarter and full year 2023.

For the fourth quarter, we reported a net loss of $52.4 million or 52 cents per diluted share.

The reported lost consists of a net loss before tax of $26 $8 million and a non-cash tax expense of $25.7 million.

The tax expense is attributable to our mix of earnings and the lack of benefit on losses in certain jurisdictions as well as the increase in certain tax reserves for potential tax exposures.

The results for the fourth quarter included a reported adjusted EBITDA of $12.5 million as compared to adjusted EBITDA of $18 $4 million reported in the third quarter.

The decrease in EBITDA was primarily a result of the reactivation expenses associated with the ocean great White.

Excluding reimbursed of all revenue revenue for the fourth quarter was $208 million in line with our guidance for the quarter ended up from $190 million in the prior quarter.

As a result of a full quarter of operations in Senegal for the Ocean Black Hawk.

The Ocean Black Lion operating for a full quarter at its higher day rate.

And one of our managed rigs the villa commencing it's maiden contract under Diamond management during the quarter.

The increase in revenue was partially offset by reduced revenue from the Ocean Onyx, which completed his contract in the third quarter and was subsequently cold staff during the quarter and the Ocean endeavor, which was in the shipyard for two months in the quarter for repairs regulatory surveys and steal renewals.

Contract drilling expense increased to $178 million for the quarter compared to $156 million for the prior quarter as a result of the villa going on contract and expenses related to the reactivation of the ocean, great White and the Ocean endeavor shipyard projects.

Operating cash flow for the fourth quarter was $36 million with feet free cash flow of $15 million.

As compared to negative free cash flow of $30 million in the third quarter.

The improvement in free cash flow was primarily a result of working capital released during the quarter.

For the full year 2022, we reported revenue excluding reimbursed of all revenue of $725 million and adjusted EBITDA of $35 million. Both at the upper end of our most recent guidance for the year.

Capex for the full year of $60 million came in well under our prior guidance of 75% to $80 million.

In large part due to the ocean endeavor and ocean, great White projects straddling year and with some items pushing into 2023.

We exited 2022 with a strong balance sheet, including total liquidity of $306 million.

Turning now to our full year 2023 guidance.

Or $1.8 billion in backlog as of January 1st 2023 positions us extremely well in terms of contract coverage for 2023, yet with some key opportunities for operational leverage in 2023, and 2024 as legacy contracts Roelof and re contracting opportunities arise.

As preliminarily guided last quarter 2023 revenue, excluding reimbursed of all revenue is expected to be between 950 and $990 million, which represents a more than 30% increase over 2022 revenue as a result of higher average day rates.

And the ocean, great white being on contract after reactivation.

Also consistent with our preliminary guidance last quarter.

<unk> for 2023 is expected to be between 160 and $180 million or more than fourfold increase over 2022 EBITDA.

Embedded in these results for 2023 contract drilling expense is expected to be between 730 and $740 million and G&A expense is expected to be between 65 and $75 million.

Interest expense is expected to be approximately 45% to $50 million in cash taxes, approximately $15 million to $20 million.

Capex for 2023 is expected to be between 95 and $110 million, excluding any capex associated with the potential reactivation of the ocean Onyx or NPD kit from one of the black ships should it be required.

Are estimated capex span for 2023 does take into consideration the completion of the ocean endeavor repairs and ocean, great White reactivation as well as the maintenance upgrades and special Health survey for the ocean apex occurring over much of the second quarter. When it is off contract for approximately 110 days.

And the special whole survey in customer required upgrades for the ocean courage occurring in the fourth quarter in advance of its new four year Petrobras contract.

Breaking down 2023, a bit further beginning with guidance for the first quarter, we expect revenue excluding reimburse symbols to be between 202 hundred 10 million and EBITDA debate between 15 and $20 million.

More broadly the year can be categorized as a tale of two halves.

The first half of 2023 characterized by the run off of some lower day right contracts shipyard stays and a reactivation <unk>.

Resulting in modest EBITDA improvements from our currently from our current quarterly run right.

But still negative free cash flow.

In contrast, the second half of 2023 benefits from full quarters operating on higher day rates for the ocean Black horned in ocean apex.

And the ocean, great white being on contracts for the full period <unk>.

More than doubling our EBITDA potential compared to the first half of 2023, including returning to free cash flow breakeven or slightly positive for the second half.

That said, we do expect the combination of the two halves to leave us free cash flow negative for the full year.

Despite this the upward trajectory of our free cash flow beginning in the third quarter should accelerate quarter over quarter as the calendar turns to 2024.

Our perspective on the second half of 2023 and the full year 2024 is bolstered by the continued demand we're seeing across all asset classes and regions in which we operate as Bernie alluded to.

We remain confident that we will be able to secure meaningful day rate increases for our rigs as they roll off their current contracts and combined with our current backlog are well positioned to be able to capitalize on this upcycle and deliver meaningful EBITDA and free cash flow and 2024.

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

Thank you Dominic abdominal sure we ever remain productive over the last six months securing significant backlog executing an important shipyard project and delivering a value enhancing rig reactivation, all while providing significant value to our customers through productivity and safe execution.

Work I appreciate the talent focus and enthusiasm the diamond all short team brings to bear in order to achieve these results.

Prospects for the deepwater offshore drilling market are compelling as we enter 2023, and we remained poised to capture further upside in what is shaping up to be a sustainable upcycle we.

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.

One line on your phone and wait for your name to be announced.

Question. Please press star.

Again please.

Sure.

Our first question comes from Eddie Kim Sparkly each of your line.

Hi, good morning.

So just wanted to touch on the contracting strategies for the Black coffee Black Rhinos contract here in the next 12 months.

Anything you just described on the outlook, especially for Drillships, suggesting rates are moving higher from here.

Now would you be willing.

To take.

440, a day over three years.

Would you be more inclined to take maybe a one year contract to secure.

A longer term contract with a five hormone down the line.

Thanks, Eddie good question.

Not necessarily one I'm going to add less answer in some detail, but but I will tell you you know.

Obviously.

Term has value and the fact that you can secure.

100% utilization without gaps between contracts.

And there is certainly a modifier we use when we consider whether to go longer term or shorter term. Your question, though is more directed at what rates would we expect in the out years, let's say a a three year contract and we would we prefer to go go shorter and Clyde.

Frankly.

There are a couple of fairly obvious alternatives out there today and they differ pretty materially in terms of the duration and we're going to just take each one kind of case by case.

We would we would be unlikely to pass on a contract and the mid for hundreds with long term at this stage in the market.

Not wanting to be waiting on a 500 handle that that may not appear on the market until late 24 of 2025.

Got it.

Against you can't be can be too greedy.

Just shifting over to.

Actually just a question on your on your police status.

Okay.

No price options mentioned and <unk> is it fair to assume you don't have any price options for any of your rig which would obviously be a great thing in this current environment.

So let me kind of run through the rigs, where we do actually have priced options today.

I know that the ocean, great Y as eight one well priced options, which are which we reported and I think when we announced that contract.

The Villa one of the rigs that we manage also has priced options with the current.

<unk> I believe that's all we have right now in terms of price options.

Okay understood.

Great. Thanks for all that color.

Thank you Daddy.

Please stand by for our next question.

Our next question comes from David Smith.

Energy your lines.

David Your line is now.

Hey, good morning, and thank you for taking my question.

Sure David.

I'll start by saying congratulations on maintaining preliminary guidance I think there was law some investor concern about that after the past week, but that was good to see.

Wanted to ask you a quick.

Good to hear about your prospects for the Ocean Patriot.

They pick up new work in the second half of this year.

Hoping to get a little more color on her prospects.

The opportunities that you're focused on relate more to TNA work and whether you are seeing much if any competition from higher spec reg that might be looking to fill out their own.

Second half twenty-three availability.

Yeah. Thanks, David.

We've been somewhat pleasantly surprised by the interest in the Patriot since we announced the they expected termination.

The work I'll show the UK that that the rig is most likely to participate in is about 50% P&A opportunity and 50% drilling and appraisal work.

Most of the terms are relatively short anywhere from 40 days out.

Out too.

180 days right now for the work that we're actually looking at and we're in very constructed discussions at this stage with.

Two parties for the potential use of the rig so I don't want to get too crazy optimistic on it but we feel pretty good about the Patriot right now where it says.

It seems like it might actually come out ahead.

Hi.

I also wanted to focus on your cue higher spec.

K.

Some great white and the Hudson endeavor.

I did notice that the endeavor.

The fleet status report looks like it got pushed forward a quarter, but I'm going to ask anyways. If you can tell us anything about what this contract termination provisions might look like.

Sure David both the great wide and the endeavour have contract termination provisions that allow our customers to terminate for convenience, but in the event they would choose to do that.

In effect the payments that they would allow us to recover the full economic benefit for the farm terms of the contract. So we would not be out.

Any any EBITDA as a result of those cancellations and we would obviously have the opportunity to market those units to other clients.

That's great and if I could throw one more follow up America.

Look like deepwater rig.

If the UK stage.

Stage.

Softer for longer is there any reason those rigs couldn't be marketed for deepwater work and as a the eastern mat or maybe West Africa.

Yeah, we could consider marketing both of those rigs outside of the North Sea I mean, both have capability suited for other regions, whether it's a large stack space for remote operations or in the case of the great wide operating in high current environments.

We obviously continued to access opportunities both in the north sea and outside but I have to tell you. Our base case right now is to keep those rigs in the North Sea area.

The great White is really odd daily suited for west of Shetlands work and there are a number of programs coming up late 24 25 for that rig could potentially secure further term an endeavour is a workhorse rig with huge deck space that allows it to load up on.

Completions and related equipment onboard the rig and provide a relatively low cost cost platform for our customers to drill and complete wells offshore.

Great I appreciate all that thank you.

Thank you.

As a reminder to ask a question. Please press star one line on your talent.

Please stand by for our next question.

Our next question comes from.

Clark Security teacher line is now.

Hey, Brian .

<unk> and I hope you are well.

I have cheese I think broader.

Questions.

First.

Wanted to touch should be on the <unk>.

<unk> and in discussions.

There's been a few M&A transactions softer.

B and a bunch of jewelers emerged from from chapter 11, and Diamond has been.

Ah named up has been mentioned.

Type of pension.

Candidates to be part of that for some time. So I was wondering if you're thinking it wrong, where you are <unk> in this.

Drilling.

Fear has since changed you happy to be aware you work today or are you actively looking for.

Something to do either being acquired or acquiring something else.

Yeah. Thanks for the question Frederick.

I'll start by noting.

You know.

We are ultimately.

Pursuing the interests of our shareholders and as our stock currently twice a day.

In terms of multiples of 2024, EBITDA were relatively low compared to the majority if not all of our peers and so primarily we're seeking value for our shareholders I will say diamond is in a unique position, where we can continue as a stand alone driller.

With optionality to consolidate smaller peers or obviously, we have the option to consolidate with the larger Pierre.

As you know we previously disclose we explored consolidation and I can tell you that we continue to evaluate opportunities today.

Thank you and I think a good follow up protecting what's my next question.

You are saying that there.

Keeping our shareholders interest in in mind, so separate to begin mana.

Parts are you.

Activity, having discussions or arms.

Capital structures shareholder returns and I know, how you can optimize that's on a standalone basis.

Yeah, I guess, you you said that the <unk> or three months.

B net negative for the full year, but.

Any color you can share our thoughts you've made around that would be helpful as well.

Frederick This is Dominic with regard to our our view on that from a from a.

That stack perspective, as well as returning money to shareholders. It's a it's really as we said in the past. It's a really of 2024 issue as we get as we progress through 2000, 2003, and early 2004 and pay down our CF.

At that time, we would have the the opportunity to investigate.

Opportunities to convert our current that back to something that is more regular way that enables us to.

Relieve ourselves of some of the constraints we have from the covenant that are related to the emergence of bankruptcy.

So once we once we go through that process and have the cash flow generation too too.

Optimize our current outstanding debt and then consider opportunities at that point, it's really at the end of 2024 story before we are able to really take advantage of that opportunity.

Okay. Thank you very much.

Quick on them them there.

Ocean Greatwhite, you mentioned nephew.

I had some <unk>.

Punitive and prices for that have you any color on whether or not you think BP exercise those options and have that changed.

Often EPL I'm just thinking on this and I'm just kind of relation to your occupation calls from the payback that's.

Which I think we've covered by the firm period, but that the options would give you economics above that.

Frederick our understanding is that the Shallying VP project will qualify for investment credits that apply against the the most recent energy profits lemme. So from from that perspective, I believe VP on that project are shielded from the excess tax costs associated with that the rig has a <unk>.

<unk> with BP estimated at roughly 608 days, each and we would anticipate that B P will ultimately exercise most if not all of those options.

That timeframe should they should they proceed in that manner would have us well placed for the future opportunities that are present west of Shetland starting in late twenty-four early 2025.

Great. Thank you so much.

For me.

Thank you thanks Roger.

No further questions at this time.

Now like to turn the conference back to Bernie for closing remarks.

Thanks to all for your participation in today's call. We look forward to speaking to you again in the next quarter and I'll note that we recently updated our investor deck on our website.

So the latest and greatest information is available there. Thank you very much have a good day.

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

The conference will begin sheltie to raise and lower Yohan <unk> one one.

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