Noble Corporation Plc (NYSE:NE) Q3 2022 Earnings Conference Call November 3, 2022 9:00 AM ET
Company Participants
Ian Macpherson – Vice President-Investor Relations
Robert Eifler – President and Chief Executive Officer
Richard Barker – Senior Vice President and Chief Financial Officer
Blake Denton – Vice President-Marketing and Contracts
Conference Call Participants
Fredrik Stene – Clarkson Securities
Samantha Hoh – Evercore ISI
Operator
[Call Starts Abruptly] All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a Q&A session. [Operator Instructions] Ian Macpherson, Vice President of Investor Relations. You may now take over your call.
Ian Macpherson
Thank you, Devon, and welcome everyone to Noble Corporation’s Third Quarter 2022 Earnings Conference Call. We appreciate your continued interest in the company. You can find a copy of our earnings report issued yesterday evening, along with the supporting statements and schedules in our website at noblecorp.com.
Joining me today are Robert Eifler, President and Chief Executive Officer; and Richard Barker, our Senior Vice President and Chief Financial Officer. Also joining are Blake Denton, Vice President, Marketing and Contracts; and Joey Kawaja, Vice President of Operations. For today’s call, we will begin with prepared remarks, followed by Q&A.
During the course of this call, we may make certain forward-looking statements regarding various matters related to our business and companies that are not historical facts. Such statements are based upon current expectations and assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially from these forward-looking statements and Noble does not assume any obligation to update these statements. Please refer to our SEC filings for more information regarding our forward-looking statements.
Also note that we are referencing non-GAAP financial measures in the call today. You can find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation in our earnings report and filed with the SEC.
With that, I’ll now turn the call over to Robert Eifler, President and CEO of Noble.
Robert Eifler
Thank you, Ian. Good morning, welcome everyone and thank you for joining us on the call today. I’d like to begin with some opening remarks about our recent milestones and objectives related to our business combination with Maersk Drilling, and then provide some views on the market outlook and our global operations before turning the call over to Richard to review the financial results and outlook.
First of all, let me say how excited I am to finally be speaking today on behalf of our newly combined company. And also remind the audience that next quarter’s Q4 results will be our first quarter as a combined reporting entity.
Like many of our senior leadership team, I’ve spent much of the past month since we closed the merger visiting with our teams and crews across the globe, and I have been incredibly galvanized by these interactions and by having an opportunity to observe firsthand the value and the power of our complimentary cultures and capabilities.
When we define the strategic rationale for this combination among the critical components was the importance of creating the necessary scale with which to forge deep customer relationships in a platform for leadership in innovation and sustainability. We view these factors as essential to maintaining first-choice status amongst our blue chip customer base. These collaborative long-term commitments with some of the largest and most influential operators in our relevant markets are foundational to our business. Both in terms of the high quality revenue backlog that they provide, as well as the opportunity to drive efficiency and improvement through the drilling and completions life cycle with our customers.
Integrating a combination of this size and complexities of monumental undertaking and we are well underway. As a reminder, we are targeting at least $125 million of annual cost synergies to be realized within two years. Meanwhile, the internal team at our newly formed offshore impact center is monitoring our integration efforts and filtering actions for our rig crews so that they can stay focused on our operations and safely removed from the noise of integration. Our entire company is laser focused on business continuity and ensuring seamless service delivery for our customers.
Next, we’re very excited to announce today the authorization of a $400 million share repurchase program, which is a key first step of a capital allocation framework, which establishes our priorities for use of cash. Richard will give more detail on that in a moment. Providing a significant and sustainable capital return program has been a key rationale for the merger, and our financial profile is highly complementary with this rationale. We believe that our equity represents an excellent investment opportunity and therefore buying back shares represents an attractive return for our shareholders.
As we assess the forward outlook for our business, of course, extraordinary uncertainty and risks abound with respect to inflation, recession, interest rates and geopolitical unrest. However, the macro backdrop for oil and gas remains comparatively more straightforward. Arresting runaway global inflation will be difficult, if not impossible to achieve without significantly higher investment and upstream oil and gas period.
And even as our biggest IOC customers continue to solve for the right balance between their long-term energy transition objectives and responding to the current supply crunch, we remain confident that oil barrels with the lowest lifting cost and lowest carbon profile will be structurally advantaged over the long run. The strategic positioning of our new fleet toward the deepwater and harsh environment shallow water markets is in fact a very purposeful reflection of that view, particularly with the Golden Triangle and Norway ranking very favorably in the global supply stack on both economic and CO2 metrics.
Our customers 2023 spending budgets are currently under development against the backdrop of a healthy, albeit still significantly backwardated crude price strip. With Brent futures prices tapering from the mid-90s per barrel current spot price down to the mid-70s per barrel through 2024, 2025 timeframe, which is the relevant – which is relevant to the planning cycle for offshore rig demand.
Meanwhile, Brent prices have averaged close to $100 per barrel year-to-date. But even though the shape of the strip will likely serve to temper the rate of spending growth over the near term, it’s also very important to keep in perspective that 80% of the offshore projects in the FIDQ [ph] have estimated breakeven thresholds at or below $40 per barrel. Additionally, all of our internal and external commercial intelligence clearly indicates a higher level of deepwater rig demand next year relative to current levels, which are still recovering from a multi-year stretch of under investment.
We remain confident that we are in the early stages of a multi-year upturn in offshore drilling and with deepwater day rates already well into low to mid $400,000 per day and with limited inventory of stacked rigs that can come back into the market. We believe the underlying fundamentals for our business are extremely promising. The supply demand fundamentals for deepwater rigs are pretty straightforward. The current utilization rate on 100 or so marketed UDW rigs remains around 85%, where it has been for the past six months to eight months.
The fulcrum of pricing power, however, has been at the high end of the market where mid-90% utilization of the 46 dual BOP drillships has driven day rates into the low to mid $400,000 per day range. Our marketing intelligence indicates a likely demand increase for deepwater next year, which should exert further upward pressure on an already type market.
We had several new contract fixtures in the third quarter on the legacy Maersk Drilling side of the fleet that I’d like to highlight. First, the drillship Noble Viking received a contract extension from Shell and Malaysia for an additional eight wells at a day rate of $408,000 per day, including MPD services. That contract extension is expected to run from November, 2023 to August, 2024. As a reminder, this rig does have about five months of downtime scheduled ahead of this new program, which includes a special periodic survey.
Next, the drillship Noble Voyager had a six month option taken up by Shell with the base operating day rate increasing from $295,000 on the current contract up to $422,000 starting in April, 2023 with a drilling program in Mexico. Among our deepwater semis, the Noble Developer was awarded a one well contract with Shell in Brazil at $411,000 per day, including mobilization, which commits that rig into the middle of next year.
The drillship Noble Gerry de Souza has the next contract rollover in our deepwater fleet later this quarter, and we hope to communicate with you again soon with positive news regarding that rigs next engagement, which could commence in the first quarter of next year. Given the timing of contract roll off for a couple of our deepwater semis, the Noble Discoverer and Noble Developer, we do expect gaps in between contracts for one or both of those rigs in 2023.
Now onto the jack-up side of the business. The harsh and ultra-harsh environment markets for Noble’s jack-up presence is now heavily focused our witnessing steady demand and utilization above 90% with day rate traction remaining comparatively more moderate thus far. With European markets responding to rising energy supply challenges, license and permitting indicators for jack-up activity in the region are constructive, but we nonetheless continue to see the upturn for our jack-up business developing on a lag compared to the dynamics in the deepwater segment.
With the combination of Noble and Maersk Drilling, we are now the market leader in the CJ70 class of jack-ups, which are the top spec jack-ups in the world in the workhorse of the Norwegian continental shelf. As a reminder, two of our five CJ70s, the Noble Invincible and the Noble Integrator will soon commence under a renewed five-year frame agreement with Aker BP that extends through 2027. This framework encompasses up to a $1 billion of total potential work scope over the next – over the five year period.
There is some variability around the scheduling of this activity and we have highlighted on our fleet status report the near-term windows in which the work scopes are not yet defined. We have shown these as option periods for Aker BP. Our current expectation is that we will partially but not entirely fill these windows in 2023. While the activity schedule for these rigs beyond 2023 remains extensive and should keep both of these rigs very well utilized over the next five years. And across our entire CJ70 fleet, we continue to expect a former NCS market to materialize by mid-2024.
Outside of Norway, we are increasingly encouraged by strong activity levels in an improving pricing environment that’s evident across the UK and other areas of the North Sea. Although several of the most recent contract fixtures and exercise options across our harsh environment jack-up fleet have reflected legacy pricing with day rates below $100,000. We do have visibility leading edge fixtures improving to the $120,000 to $130,000 per day range for programs commencing in 2023. This improvement in the harsh environment segment is consistent with the direction of the broader offshore drilling market cycle, and we view this as a leading indicator of the later recovery that we see developing in the ultra-harsh segment as well. So the takeaway here is that we would earmark the mid cycle earnings potential of our jack-up fleet as optional upside to what we expect to realize in 2023.
That concludes my opening remarks. And now I’ll pass it on to Richard to provide his commentary on the financials.
Richard Barker
Thank you, Robert, and good morning or good afternoon everyone. In my remarks today, I will provide some brief highlights of our third quarter results; discuss that capital structure as well as our outlook for the remainder of the year. However, I’d like to start by discussing our share purchase program, which is a key component of our broader capital allocation priorities.
Today, Noble has a scaled platform and a conservative balance sheet that is well positioned to generate cash through the cycle. Our ordered priorities as it relates to the use of cash are as follows. Firstly, to maintain a conservative through cycle balance sheet coupled with significant liquidity. Secondly, to invest in the maintenance and maximum potential of our existing working fleet. Thirdly, to return at least 50% of our free cash flow to shareholders through share repurchases and or dividends. And lastly, to target disciplined and accretive investment opportunities. Returning capital to shareholders is a key rationale for the merger and we are pleased to be able to announce this $400 million buyback program.
Turning now to our quarterly results. Given the merger closed on October 3rd after the end of the quarter, Noble’s third quarter results reflect Legacy Noble Corporation prior to the business combination. Contract winning services revenue for the third quarter totaled $289 million versus $262 million for the second quarter of 2022. This quarter’s revenue is positively impacted by full quarter of operating days for the Noble Regina Allen, the commencement of operations for the Noble Houston Colbert and the Noble Sam Hartley and a day rate increase on September 1, for the four rigs operating in Guyana under the CEA.
Adjusted EBITDA for the third quarter was $97 million compared to $84 million in the previous quarter. This translates to an adjusted EBITDA margin of approximately 32% for the quarter. Capital expenditures totaled $41 million in the quarter. Free cash flow in the third quarter was $44 million. As disclosed in our press release revenue and adjusted EBITDA for legacy Maersk Drilling in the third quarter were $283 million $63 million respectively. Capital expenditures were $35 million.
Noble’s revenue backlog stood at $3.9 billion as of November 2. This revenue backlog does not include additional non-drilling services that we expect to provide as part of existing contracts. Our balance sheet remains extremely robust with net debt as of September 30, adjusted for the closing of the business combination and the sale of the Remedy Rigs of approximately $190 million.
We will have a cash need in the fourth quarter of up to $185 million for the compulsory purchase, which is essentially the squeeze out of the remaining Maersk Drilling shares. This maximum cash amount assumes that all the Maersk Drilling shares that are subject to the squeeze out, approximately 10% of legacy Maersk shares are settled for cash as opposed to settled for Noble shares. Any shares settled cash is a share buyback at a previously set price of approximately $29 for Noble share. As a reminder, whether to settle for cash or shares is the decision of each individual shareholder.
I disclosed the closing. We’ve received preliminary commitments from a group of banks to refinance the existing Maersk Drilling credit group debt with a new three-year $350 million bank term loan and a three-year $150 million facility with a so lender. The current Maersk Drilling revolving credit facility will be terminated and we will use balance sheet cash to pay off a portion of the existing debt of the Maersk Drilling credit group in order to achieve this proposed capital structure. We are targeting to complete the refinancing after closing of the squeeze out in mid-November.
As of September 30, we had $220 million followed under the Noble credit facility. Driving, this is a provision in Noble’s credit facility that we sell a collateral rig, we must either reduce commitments in the amount of net cash proceeds or within a certain period of time, reinvest those proceeds in new collateral. In September, in order to satisfy this provision related to the sale of our Saudi fleet in 2021, the Noble Group acquired the Noble Gerry de Souza from the unrestricted PACD subsidiaries. This $220 million drawn amount was paid down on October 6 with cash proceeds received from the sale of the Remedy Rigs, and as of today, there are no borrowings under our $670 million facility.
In the near term, we will manage the business for two separate credit groups, the legacy Noble Group and the legacy Maersk Drilling Group. Both groups will be extremely well collateralized and have significant available liquidity. Ultimately, we will look to collapse them into one credit group. The currently contemplated refinancing of the Maersk Drilling Group, which has a three-year term affords a significant flexibility to pick the optimal time to get the right and appropriate financing for Noble.
I now like to discuss our guidance for the fourth quarter. We project adjusted EBITDA between $155 million and $175 million and capital expenditures of between $65 million and $85 million. As we look towards 2023, we remain encouraged by the outlook to our business on the floater site, excluding the two cold stacked rigs, we currently have over 60% of our available days contracted for 2023. Ongoing customer conversations give us confidence into further rewards before the end of the year.
On the jack-up side, we currently have over 50% of our available days contracted for 2023, and we are also encouraged by the current level of customer dialogue. With the delayed recovery and day rates for jack-ups versus what we have experienced for floaters as well as the expected softness in the Norwegian jack-up market for 2023. We do not expect to realize the true earnings power our jack-up fleet until beyond 2023. We are managing the inflation pressures that are prevalent across all industries. We continue to expect our total rig level expenses to increase in the high single-digit range in the second half of this year as competitive second half of 2021. While it is clearly a dynamic macro market, we currently expect to come under similar inflationary type pressures in 2023.
Our integration activities are well underway as we work towards realizing the $125 million in cost synergies. We expect to have realized over 70% of these savings on a run rate basis during the fourth quarter of next year. As previously disclosed, we expect the full synergy total to be realized within two years. We expect the cost to achieve these synergies to be consistent with precedent transactions of this nature, which is expected to be within a range of a onetime cost of $1 to $1.25 for every $1 of annual synergies realized. This excludes typical deal advisor fees.
I’m candidly excited about our financial position, which has been transformed over the last couple of years, and I look forward to discussing the results of the consolidated company on the next earnings call.
That concludes my prepared remarks and I’ll now hand the call back to Robert.
Robert Eifler
Thank you, Richard. It has been a long journey since November, 2021 when we announced our business combination with Maersk Drilling, but it has been more than worth the wait. I’d like to extend a huge thank you to all of our employees worldwide who have worked so tirelessly to get us to this exciting launch point in Noble’s next chapter. Including our offshore crews who have stayed focused on safety and operational efficiency throughout.
As I said earlier, we are vigilant about the risks in the global economy as well as the varying slopes of improvement across the different parts of our fleet here at Noble, and we do not take lightly the burden of execution that we need to achieve throughout this crucially important business integration. Getting this integration right is absolutely predicate to everything we want to achieve, and our organization is laser focused on the job at hand.
Ultimately, though the outlook for our industry and especially the outlook for Noble as both a drilling contractor of choice and as an investment proposition is extremely promising from our perspective. With that, we’re exciting. We’re excited to be leading our offshore drilling peer group in the generation of free cash flow and returning significant capital to shareholders.
Operator, we’re ready to now to move on to Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Fredrik Stene. I am sorry, Mr. Stene has retracted his question. I am sorry, he has retracted it again. Mr. Stene, your line is open.
Fredrik Stene
Hey guys, [Technical Difficulty]
Robert Eifler
Hey Fredrik, we’ve got, I’m sorry to interrupt you. We’ve got a bad connection here and we can’t really hear you.
Fredrik Stene
Okay. Can you hear me now?
Robert Eifler
Yes, that’s much better. Good afternoon.
Fredrik Stene
Okay. Okay, cool. Good afternoon. So my question, I think what I said, congratulations on a nice quarter here. I think the headline used for me was the share buybacks and I guess the merger has kind of allowed you to move forward on something on the shareholder return side. So, I wanted to kind frame a question around that. Two things, you’ve grown $200 and you talked briefly about it, but gone $220 million on your credit facilities. Is that targeted towards any debt buyback? Because I wanted to kind refresh us on the dividend and share repurchase restrictions on your current debt, one thing is having the program in place, but are you, can you go out today and buyback shares or what’s kind of left to see that happen?
Robert Eifler
Yes, it’s a good question. We have significant flexibility within our credit agreements today to be able to go buy back shares. So that’s not a concern for us. The reason we had $220 million drawn on the facility, what was, is a provision in the facility as it relates to the reinvestment of proceeds from asset sales. So when we sold the Saudi fleet last year, we had a period of time to reinvest that capital. And so essentially we did that during the third quarter, and so that’s why we had $220 million drawn. We’ve actually, once we, now that we’ve received the cash proceeds from the Remedy Rig sale, that’s now being paid back down again. So as we sit here today, we don’t have anything outstanding under our RCF.
Fredrik Stene
Okay. No, that’s good to know and good to get clarification on your ability to actually repurchase all shares. And I have one rig specific question, as well before I retire from the queue. You have the Gerry de Souza rig that’s rolling off now according to the fleet just that towards the year, and then I think, or at least, on our newsfeed [ph], I think that rig has been mentioned as a potential front runner for able to contract with TotalEnergies in Nigeria, which makes sense since it’s the current operator as well.
So, without going into kind of specific opportunities and things that you find kind of sensitive in nature, but what are the chances do you think of follow up for that rig and what would be a fair assumption on downtime before it commences in New York?
Richard Barker
Yes. So it’s a little bit too early for us to talk conclusively about follow on work for that. But we are, I’m not losing sleep. We’re confident that that, that rig gets a follow on contract and start for that, we think first quarter of next year.
Fredrik Stene
Thank you very much. I think out a part feedback for next year as well. Right. That’s all for me guys. Again, nice to see progress here and looking forward to or actually one thing dividends if that’s something you’re considering as well, or only share buybacks for now?
Richard Barker
So this authorizations for share buybacks. And so that’s all for now. And so anything related to dividends would be at some point in the future, but we’re really pleased with what we’ve announced here yesterday.
Fredrik Stene
Super. Thank you so much, guys. Have a good one.
Operator
Our next question comes from Samantha Hoh with Evercore ISI.
Samantha Hoh
Hey guys congrats on closing the deal and on the nice quarter and the share purchase program.
Robert Eifler
Thanks, Samantha.
Samantha Hoh
With kind of curious in terms of just how your customer conversations are going. It was interesting to see that you guys didn’t really participate in the Noble tender – not Noble, the Petrobras tender. I just wonder if you’re really, spending more time in terms of having more private conversations these days or anything you can share in terms of the tone of conversations with customers and, how they are viewing that the Maersk fleet now that you have that in your hands.
Blake Denton
Yes, thanks for the question, Samantha. This is Blake. Happy to answer that one and please to be on the back of three weeks of steady customer visits between Joey and myself. So it’s a appropriately time question. Yes, I think the response or the feedback we would say from those conversations is incredibly encouraging. I think we would, we’ve seen customers recognize the, the benefits strategically that these two organizations represent on a combined basis and with respect to ongoing the demand picture looks good and we’re well suited with a high-spec young fleet to continue to do well in the market.
Samantha Hoh
Okay, great. And then just maybe a question on the CapEx, the $65 million to $75 million guidance for 4Q, is that a pretty good run rate going forward? Or should we think about more variability?
Richard Barker
Yes, it’s – so the range is $65 million to $85 million to Q4. I think as you, when we announced the deal back in November of last year, we talked about a $250 million kind of average over a five year period. Obviously inflation since then it has impacted everything. So, I think it’s fair to assume that that number is probably higher over five year average period. I think we do expect, just given the age of some of the rigs higher capital in 2023 and 2024, obviously that’s part of that five year average. And something obviously we’ll provide more guidance around here at some point either later this year or early next year.
Samantha Hoh
Okay, great. That does it for me. Thank you, and congrats again on the quarter.
Robert Eifler
Thank you.
Operator
There are no further questions at this time. Mr. Macpherson, I turn the call back over to you.
Ian Macpherson
Thank you everyone for joining us today. We appreciate your interest and we’ll look forward to speaking with you again next quarter.
Operator
This concludes the Noble Corporation third quarter, 2022 Financial Results. Thank you for attending today’s presentation. You may now disconnect.
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