Noble Corporation Plc (NE) Q4 2021 Earnings Report, Transcript and Summary

My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation Plc Fourth Quarter 2021 Results Conference Call. [Operator Instructions] It is now my pleasure to turn today's call over to Mr. Craig Muirhead, Vice President of Investor Relations and Treasurer. Sir, please go ahead.

Thank you, Brent, and welcome everyone to Noble Corporation's fourth quarter and full year 2021 earnings conference call. We appreciate your continued interest in the company. You can find a copy of Noble's earnings report issued yesterday evening along with the supporting statements and schedules on our website at noblecorp.com. Joining me today are Robert Eifler, President and Chief Executive Officer; and Richard Barker, 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 a question-and-answer session. 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 some 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, including the risks and uncertainties that could impact our future results, including risks and uncertainties associated with our previously announced business combination with Maersk Drilling. Investors should carefully read our previous and ongoing disclosure with respect to such business combination, included in our press release issued yesterday and in our upcoming Annual Report on Form 10-K that will be filed with the SEC. Also note, we are referencing non-GAAP financial measures in the call today. You will find the required supplemental disclosure for these measures, including most recently comparable GAAP measure, and an associated reconciliation on our website. And with that, I'll now turn the call over to Robert Eifler, President and Chief Executive Officer of Noble.

Thanks, Craig, and thanks to everyone joining us on the call today. I'll kick off today with a recap of the key strategic milestones we achieved in 2021, followed by some commentary on our global operations and the rig market before turning the call over to Richard to review our financial results for the quarter. The last year has been transformative for Noble. I'm proud to be a part of an organization that can execute a high paced and challenging strategic plan such as the one we delivered in 2021. In February, Noble emerged from restructuring and quickly closed our acquisition of Pacific Drilling. Our stock was re-listed on the New York Stock Exchange in early June while the management team and board explored various strategic growth opportunities. In the second half of the year. Our operations team successfully entered Norway concurrent with the divestiture of four jack-ups in Saudi Arabia. To cap off 2021, we announced an historic agreement to combine Noble Corporation with Maersk Drilling, which is on track to close mid-2022. This combination will create a world-class offshore driller with the youngest and highest-spec fleet and a combined track record of industry-leading utilization. Together, our complementary cultures with unwavering commitments to safety, operational excellence and customer satisfaction will allow us to better serve our customers. We expect to realize a $125 million in annual run rate synergies within the first two years after closing which makes this combination accretive to both sets of shareholders. As a combined company, we will have a robust balance sheet to serve our best-in-class fleet creating a strong platform for cash flow generation in today's offshore market and even further as the recovery continues. Beyond Noble, the broader offshore rig market made a remarkable recovery in 2021. After being written off for dead during the depths of the pandemic, ultra-deepwater market rates grew by over 50% in just the last three quarters of 2021, led primarily by fixtures in the U.S. Gulf of Mexico. Commodity prices obviously supported the demand growth and we expect offshore rig demand to improve going forward in all market segments. On the back of strong cash flows, our customers' drilling budgets are generally up by double digits in 2022 versus 2021, and project sanctioning in 2023 is on pace to be beyond pre-pandemic expectations. We expect 2022 to bring continued day rate improvement across market segments. As well as an increase in longer duration programs in the EDW segment. With that as a backdrop, we will transition to some perspective on the global market highlighting Noble's activities in each region along the way. The U.S. Gulf of Mexico continues to lead the floater recovery in utilization and rate appreciation. Also driven by elevated ultra-deepwater demand and limited rig availability, we have seen an increased operator preference to direct negotiate their programs as opposed to running off in tenders. With respect to our activities, Noble currently operates four drill ships in the U.S. Gulf of Mexico, and we are very pleased to announce the continued relationship with Murphy on the Noble Stanley Lafosse through the exercise of two optional wells at $300,000 per day. We also look forward to commencing work for QuarterNorth Energy with the Noble Faye Kozack in the very near future. The U.S. Gulf of Mexico's continued strength presents a number of additional opportunities for us. We are encouraged by ongoing discussions with customers around their forward plans in the basin. Dropping down to South America. The deepwater demand is largely located in two key regions. Guyana, Suriname and Brazil. Let's see Guyana and Suriname first. As many of you know, Noble has four drill ships operating in Guyana under our commercial enabling agreement or CEA with ExxonMobil. We've recently received a conditional award of 7.4 rig years under that agreement, which continues to build on the collective value achieved through close collaborative - collaboration between our two organizations. This value is further evidenced by the positive impact to the local community where Noble employs nearly 300 Guyanese nationals as one of several initiatives underway to benefit the communities in which we operate. To provide supporting detail, the award specifies the additional rig years are subject to government approvals and final project sanctions for the Yellowtail project, and also reallocates the existing term evenly across all four rigs. Once the conditions are satisfied, the extended CEA will provide utilization visibility into the fourth quarter of 2025. As mentioned on previous calls, this agreement includes a periodic pricing adjustment mechanism that keeps day rates in line with current market. In addition to the four CEA rigs for ExxonMobil, the Noble Gerry de Souza is preparing to mobilize to Suriname for its contract with APA Corp., where the work history between our two companies in the basin is expected to deliver exceptional drilling results. This legacy Pacific Drilling rig has been upgraded with a second BOP and an MPD system enhancing both its capabilities for this contract and its competitiveness against seventh generation drill ships for future drilling programs. Finally, as depicted in yesterday's fleet status report, we are grateful for the opportunity to drill a well in Guyana starting in the second quarter for Repsol using our jack-up the Noble Regina Allen, which recently concluded its contract in neighboring Trinidad and Tobago for BHP. Further south, Brazil continues to play an important role in the deepwater segment with significant potential for demand growth. The potential demand is estimated to require as many as 10 incremental floaters in Brazil over the next several years representing almost a 50% increase to the 21 floaters under contract there now. In West Africa, the deepwater market recovery lags the Americas as this key offshore basin was particularly impacted by the downturn. West Africa's active drill ships supply slid from over 25 in 2014 to as low as 5 in 2020. But indications of a demand recovery are emerging there too. The tendering activity increased through the fourth quarter with a bulk of opportunities in Ghana and Nigeria. Noble, both directly and through legacy Pacific Drilling possesses significant operational history on the continent and are actively competing there today. I would like to now offer a few thoughts on the harsh environment jack-up market starting with the Norwegian Continental Shelf. Norway and the customers and suppliers operating there are at the forefront of technology and policy innovation to build a sustainable energy future in oil and gas. Going forward globally, the barrels with the lowest carbon intensity and lifting costs will be produced and Norway's are among the lowest on earth making this a new and important part of Noble's future. The Noble Lloyd Noble, a CJ70 design jack-up began its first well in Norway for Equinor in the fourth quarter. This design of jack-up is the largest, most efficient and operationally capable in the world. We expect our customers in Norway, to continue to prefer these ultra harsh jack-ups for shallow water projects, and even competing in the transition zone between shallow and mid-water. These rigs are more comparable to drill ships and jack-ups on several financial dimensions, including new build cost, maintenance and operating costs as well as premium day rates. As we've signaled in previous quarters, we acknowledge that 2022 will be a transitional year for demand in Norway as the activity lull created by the pandemic works through the pipeline of projects. However, the exercise options on the Noble Lloyd Noble keep the rig working into 2023 and recent market announcements only bolster confidence in the Norway market long-term. We look forward to serving Equinor and new customers there as activity normalizes over the coming years. Elsewhere in the North Sea, such as the UK, Danish and Dutch sectors, rig demand remained steady. This region is highly competitive at present with many drillers working hard to string together continuous work. Noble has four jack-ups currently located in the region and we expect some idle time this year on the two uncontracted rigs. For the rest of the globe, Noble currently has operations in Australia and the Middle East. The Noble Tom Prosser continues to operate in Australia for our clients Santos, who has now exercised three of its nine one-well options keeping the rig busy into the fourth quarter of this year. We also remain hopeful to secure additional work in the Middle East on the Noble Mick O'Brien, which has spent the last 3.5 years working for Qatar Gas. Lastly, in a challenging Southeast Asia deepwater market, the Noble Clyde Boudreaux has concluded its contract with Premier and mobilized to Malaysia. Despite the rig's great operational history, the inconsistent utilization and depressed rate environment prompt us to divest of the asset and we are currently making plans to do so. In summary, market movements over the quarter are clear and strong indications of recovery, and we expect continued demand improvement across all market segments. Noble is focusing on executing on our strategic priorities and is well positioned to benefit from the recovery. I'll now turn the call over to Richard to provide an overview of our financial results and guidance.

Thank you, Robert, and good morning all. Contract drilling services revenue for the fourth quarter totaled $192 million versus $231 million for the third quarter. The decrease in revenue was largely due to the sale of our four jack-ups working in Saudi Arabia in November, the Noble Gerry de Souza completing its contract and mobilizing to the shipyard for upgrades, shipyard time on the Noble Hans Deul and the impact of Hurricane Ida on the Noble Globetrotter II. This decrease in contract drilling services revenue was partially offset by the start of the Noble Lloyd Noble contract in Norway in late October. Our contract drilling costs were $183 million in the fourth quarter and we're down slightly compared to third quarter, largely due to the removal of OpEx on the Saudi jack-ups. We included a lot of information in our press release around the impact to our fourth quarter and full-year result of the Noble Globetrotter II and the Noble Hans Deul incidents. Instead of repeating all the detail, I will share what we think are the two key takeaways. Firstly, the incidents had a combined negative impact on our fourth quarter adjusted EBITDA of approximately $20 million. This includes reduced revenue associated with both rigs and the repair-related expenses on the Noble Hans Deul. Secondly, both rigs were back operational in December. We have a few minor loose ends to tie up, but the impact is really limited to 2021. These events had no impact on our 2022 guidance. Adjusted EBITDA for the fourth quarter was $12 million, down from $47 million in the third quarter. Our full year 2021 adjusted EBITDA was $97 million, which is towards the low end of the previously guided range. Capital expenditures for the full year 2021 were $170 million. This is slightly below our previous guidance range as certain projects totaling about $15 million were delayed into 2022. I'll discuss our 2022 guidance in a moment. In early November, we closed on the sale of our Saudi jack-ups, which generated approximately $290 million in cash, net of transaction fees, expenses and settlement of working capital. We also received the remaining portion of the CARES Act tax refund of approximately $17 million in December. This additional cash inflow allowed us to pay down the full amount borrowed under our revolving credit facility. At the end of the year, we had net debt of $22 million comprised of cash of $194 million and debt in the form of second lien notes of $216 million. Our revenue backlog at the end of the year stood at 41.2 billion. This backlog number does not include the conditional award of 7.4 years of contract term with ExxonMobil in Guyana. Turning now to full year 2022 guidance. We maintain our previously announced ranges for adjusted revenue of $1.05 billion to $1.125 billion and for adjusted EBITDA of $300 million to $335 million. Importantly, we expect meaningful sequential improvements in our financials as we move through both the first and second quarters of 2022. The first-quarter improvement is driven by three main drivers. Firstly, a return to operations and a full quarter contribution from the Noble Globetrotter II and the Noble Hans Deul. Secondly, a full-quarter contribution from the Noble Lloyd Noble and the Noble Faye Kozack. Thirdly, the impact of improving ultra-deepwater day rates which will be directly reflected in our rigs operating in Guyana as those rigs reprice on March 1st per the CEA. These improvements will be partially offset by the fourth quarter contract completions for the Noble Clyde Boudreaux and the Noble Sam Hartley. As we move into the second quarter, the biggest drive is that the sequential improvement are expect to be a full quarter contribution of the improved day rates for the rigs operating in Guyana as well as improved day rates for the Noble Faye Kozack and Noble Stanley Lafosse. Additionally, we expect a full quarter contribution from the Noble Gerry de Souza. Across our fleet, we currently project 87% of our calendar days to be operating days in 2022. This excludes our cold-stacked rigs, the Meltem, the Scirocco and the Noble Clyde Boudreaux. Of these operating days, we currently have 77% under firm contract. The remaining assumed operating days are made up of options or ongoing customer discussions. Our updated 2022 capital expenditure guidance, net of client reimbursables is $130 million to a $145 million. This increase is related to approximately $15 million of capital that rolled over from the fourth quarter of 2021. Excluded from this range is approximately $25 million of capital for new projects that are directly requested by our customers and will be reimbursed by our customers. Including this reimbursable capital, our total capital expenditures for 2022 is expected to be $155 million to $170 million. In 2022, we expect stock-based compensation of approximately $27 million. Our adjusted EBITDA guidance includes stock-based compensation expense. Additionally, we expect cash taxes of approximately $40 million in 2022. We continue to remain focused on controlling costs and exercising strict discipline when making capital related decisions. To that end, we have decided to scrap the Noble Clyde Boudreaux. The go-forward economics for this rig are extremely challenged when factoring in its opportunity set for new work in Southeast Asia versus it's stacking cost and required upcoming capital investment. Inflation clearly remains a concern for most industries moving into 2022. We are seeing increased inflationary pressures in various areas of our global business, especially in North and South America. On the labor side, we are experiencing the familiar demand-driven challenges associated with a cyclical industry, in addition to the well-publicized water labor market challenges. A large component of our workforce is international, which hasn't yet seen the magnitude of the inflationary pressures that we are starting to experience in the Americas. From a supply-chain perspective, we are starting to see inflationary pressure and we expect that to increase through 2022. We continue to aggressively manage our business and our costs in this inflationary market. 2022 is expected to be a pivotal year for Noble from a financial perspective. Through a combination of strong cost control, smart economic and capital-related decisions and improving market dynamics, we expect to generate an attractive level of free cash flow. That concludes my prepared remarks and I'll now turn it back to Robert.

Thanks, Richard. Before we close and move to Q&A, I want to reiterate how transformative 2021 was for Noble. We completed our restructuring, re-listed on the New York Stock Exchange, closed two strategic transactions and announced our historic plans to combine with Maersk Drilling in mid-2022. The whole Noble organization remains focused on drilling safely and efficiently for our customers and creating value for our shareholders. In addition, we've taken a number of steps to reduce the environmental footprint of our fleet. For example, recent investments in the Noble Lloyd Noble have reduced NOx emissions by over 90%. Additionally, we have several initiatives that use automation and digital technologies to improve the safety and efficiency of operations on the rigs across the fleet. We will continue to do our part to be responsible in the decisions we make to protect the environment. I'm proud of the Noble team and excited about the year ahead. And 2022 will truly be a pivotal year for Noble. If the market recovery continues, our combined - excuse me, our company combined with Maersk Drilling will be the platform to invest in offshore drilling. The combined Noble will have one of the youngest and most technically advanced fleets driven by a culture of safe and efficient operations, unrivaled customer service and sustainability. The company will also benefit from attractive diversification across customers, assets and geographies. All of these serve to create a platform that has tremendous upside and significant cash flow potential. As shown in the presentation given on the announcement of the deal, the combined company would generate well over $1 billion in EBITDA under an illustrative scenario that now seems quite plausible. I believe strongly that offshore oil and gas will continue to be an important component of global energy supply for years to come, and Noble will be an industry leader in serving our part of exploring for and developing these critical resources. That concludes our prepared remarks. Thank you for participating in our call today and I'll now turn it back for Q&A.

[Operator Instructions] Your first question comes from the line of Greg Lewis with BTIG. Your line is open.

Robert, I was hoping - realizing that the rig's pricing in Guyana doesn't reset for a couple of weeks. Kind of curious if you could give us any color how we should be thinking about that. Clearly, one of your competitors recently announced some $300,000 plus a day rates in Gulf of Mexico. Is this something where we should kind of just be looking at broker estimates and averaging? Any kind of color you can give us around there because - since it's just such a big driver of future revenue. And then there's that reset coming up in September also. So just kind of curious how you're thinking about that.

Sure, Greg. It's a good and fair question. And so, we've agreed with our customer there not to disclose rates. And so, with - I guess a couple of things. First, we've got our revenue guidance and tried to make that tight to help out with that because we've got, as you said, such a big driver there. Secondly, I guess just to remind that those rates are set kind of five or six months prior to when they kick in, generally. And when their set are intended to be a rate that a prudent contractor would contract under at that time for work in Guyana. And so, it's a fast-moving market, which is a good thing, and I think, to your point, kind of looking at curves and some of the information out there, I think it is a fine way to look at it. I'm sorry, we're not going to disclose more specific information on it but I do think it follows the market curve that's applicable at the time of negotiation.

And really not to focus on this too much, but basically, based on those comments, it sounds like the bigger step-up should be - is it fair to say that there's probably a bigger step up in September than there is in March?

We haven't negotiated September yet. And...

Okay. I thought you said six months in advance. That's fine, that's fine. Okay.

Yes. Five - Four to six months, kind of that range. And that hadn't been done and Richard's comments - and he made some comments about the step-ups we see in Q2 - Q1 and Q2 this year that are driven by the entire fleet, of course. But yes, we'll start to see some step up early first half of this year.

And then just - as I think about the Globetrotter I in the Gulf of Mexico - I mean clearly that rig is coming up for renewal this summer. And the Gulf of Mexico is - seems to be an extremely tight market, any which way you look at it. Do we kind of have any sense for, or should I say, do we think that rig kind of goes into the spot market or are we kind of seeing signs that maybe this rig could continue to be extended?

Yes. So that rig is going to go into the spot market. We are bidding it both in the Gulf of Mexico, the U.S. and Mexico side as well as some other places around the globe where it's uniquely capable. So we have a number of conversations on it and I feel pretty good about continuing work for that rig but it is going to go into the spot market.

Okay. Great. And then just one more from me. You announced the retirement of the Clyde Boudreaux realizing that the Maersk transaction hasn't closed. They obviously have a semi over in Australia. As you think about the footprint, right - I mean, clearly, we're building a golden triangle/plus Norway fleet. How important is the rest of the world - I mean, Robert as you view it? How do you think about that? And really what I'm trying to understand is, given where the rigs positioned are, it would seem like you might want to - is there any thoughts about maybe buying into any of these markets - the Asia, just given our footprint, where it is today?

Yes, it's a good question, and I guess I'd say we think about asset classes, probably before regions in some ways. And there's obviously close communication between those two but we're focused on really high-quality assets and making sure, very importantly, that we can maintain utilization on those assets. That was the thesis with Pacific Drilling and we put those rigs to work and of course, both Maersk Drilling and Noble enjoy industry-leading utilization among our two fleets. So I'd kind of beat this drum a lot internally, but it's an asset intensive business. You have to keep the rigs working. That's really what generates cash flow. And so, dodging your question a little bit but I would say, we're focused on both asset types and basins where we feel confident around the utilization.

[Operator Instructions] Your next question comes from the line of Fredrik Stene with Clarksons Platou Securities. Your line is open.

And nice to have you on again. I have a few questions regarding your, call it legacy Pacific assets, the Meltem and the Scirocco. I was wondering, given how we've seen - I think I asked the same question actually last time. Have you come across any opportunities or any counterparties that would be willing to pay up for those assets to get them back into the working fleet? Or are they still not really a part of your active bidding fleet? That's the first one for me.

Okay. Yes, thanks, Fredrik. So they're - the short answer is, they're not a part of our active bidding fleet right now. We said previously that we would look to recoup our investment within some firm contract if we were going to be willing to reactivate anything, and that includes a return on the investment. And in almost any conceivable scenario, other than some very, very possible - small possible exception but that - there's a lot involved in achieving that hurdle, and obviously, the rate but also term. And I would argue that right now, term associated with rate doesn't support reactivation. But you also have to have time between when you signed the contract and when you started it to actually do the work, and you have to have contract terms that support and protect that investment. And perhaps most importantly, has to be the right use of capital at the time you make the decision. So I think there's a number of missing components right now from our perspective, and the markets' moved quickly since we acquired those assets, obviously, in a good direction. But right now, I think there are some missing components to putting them back to work.

That's very helpful. On though - that matter, you mentioned term here. Obviously the CEA under 7.4 years there is, I think on an aggregated basis more term then usually gets signed. To kind of follow up on Greg's question, put it another way, are you able to - the $1.2 billion that you have in backlog is not including these additional years. Are you able to give us any idea as to what that backlog would be if you did include it?

The way - I kind of - we've agreed with the customer but we do have various backlog disclosures out there and we do have to - when that award becomes concrete and the conditions are met, we will update the backlog numbers then. We make an assumption, but since it's a moving rate under the CEA, we make an assumption and we make, I would say a very conservative assumption and essentially stretch out rates through the entire term under that one conservative assumption. So we don't put - we don't input a number of rates over that term, we just apply one conservative rate to it when we do announce it.

Okay. Then I'll wait for that. But I tried. It's last the - a last question from me, relates to shareholder returns. So I think, before the merger with Maersk was announced, you seemed, to me at least, very vocal about your ambition to return money to shareholders if that was through dividend or share buybacks. You're obviously in a very different liquidity position now compared to the legacy cap structure. And I understand that there won't be any dividends paid out while the Maersk work is being completed. But is it fair to assume that when that goes through, paying out to shareholders will be high priority of yours?

Yes. I think that's very fair to say. There's obviously, as you noted, certain things that we can't do prior to actually consummating the transaction with Maersk and obviously, any return of capital policy will be a decision for the new Board as well post-closing. But, clearly our view at Noble is that returning capital is really important in to - throughout our sector, and I think that obviously will be a keen focus for the pro forma company. We do think that the company is going to be set up fantastically well to be able to do that just given all of the benefits of the pro forma company. So, I think there's more to come here - I mean, obviously, any announcement will be after closing of the deal.

There are no further questions at this time. I will now turn the call back over to Mr. Craig Muirhead.

Thank you for your participation on today's call, and your continued interest in Noble. Brent, we appreciate your time coordinating today's call. Good day, everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.