Earnings Call Transcript - NE Q3 2024

Operator, Operator

Good morning, and welcome to Noble Corporation's Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now hand today's call over to Ian McPherson. Please go ahead, sir.

Ian MacPherson, IR

Thank you, Operator, and welcome everyone to Noble Corporation's third quarter 2024 earnings conference call. You can find a copy of our earnings report along with the supporting statements and schedules on our website at noblecorp.com. This conference call will be accompanied by a slide presentation that you can also find located at the Investor Relations section of our website. Today's call will feature prepared remarks from our President and CEO, Robert Eifler, as well as our CFO, Richard Barker. Also joining on the call are Blake Denton, Senior Vice President of Marketing and Contracts; and Joey Kawaja, Senior Vice President of Operations. 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. Also note we are referencing non-GAAP financial measures on the call today. You can find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and associated reconciliation in our earnings report issued yesterday and filed with the SEC. Now, I'll turn the call over to Robert Eifler, President and CEO of Noble.

Robert Eifler, President and CEO

Thanks, Ian. Good day, everyone, and thank you for joining us on today's call. I'll begin with a brief update on our acquisition of Diamond Offshore, followed by highlights of our capital return program, third quarter results, recent commercial and operational activities, and some market outlook color. Richard will then discuss our financial results and provide guidance for the fourth quarter. Finally, I'll wrap up with closing remarks, and open the floor for questions. As most of you know, we closed our acquisition of Diamond Offshore on September 4, combining two great companies with incredibly rich legacies, and leading deepwater capabilities. I want to extend my appreciation to everyone across both organizations who worked tirelessly to close this transaction in just under three months. This highly synergistic combination brings together over 150 years of combined experience, creating a fleet of 41 rigs, including the largest fleet of seventh-generation dual-BOP drillships in the industry, while also adding $2 billion of well price to backlog. As we pass the 60-day integration mark, we are excited to share some early wins, including meaningful synergies realized that have us on track to achieve our stated targets. Tier management has visited legacy Diamond rigs and customers around the globe, while prioritizing a focused commitment to business continuity through safe and efficient operations. Thus far, everything is proceeding very smoothly according to our well-practiced integration playbook. Next, I'd like to highlight additional progress with our Return of Capital program. Following the execution of $250 million of share repurchases in the third quarter, we have completed $360 million of repurchases under our original $400 million authorization. Our Board of Directors has recently approved a second $400 million authorization, while also maintaining our quarterly dividend here in the fourth quarter at $0.50 per share. We recognize that our differentiated Return of Capital program is a critical factor for investors. And I'm pleased to highlight that we have now eclipsed $800 million in combined dividends and buybacks since we closed the Maersk Drilling combination in Q4, 2022, inclusive of this quarter's announced dividend. Moving to our financial highlights, in the third quarter, we delivered strong results with continued EBITDA and cash flow expansion. On a consolidated basis, we achieved adjusted EBITDA of $291 million, compared to $271 million in Q2. Free cash flow for the quarter was strong at $165 million. These results include approximately four weeks of contribution from the Diamond acquisition in September. Richard will have additional color on the combined results in a moment, but suffice it to say that the Diamond acquisition further enhances our free cash flow profile with significant and immediate accretion. This marks a great start for our combined company. Shifting now to our commercial and operational highlights, first, during the third quarter, we were awarded 4.8 rig years of additional backlog for the four drillships working under the commercial enabling agreement with ExxonMobil in Guyana, further validating the successful commercial and operational model, and extending our visibility in the country through August 2028. We have also recently booked an additional 130 days for the Ocean Endeavor working for Shell in the U.K. North Sea, between March and July 2025 plus options. As of today, our total backlog currently stands at $6.2 billion. In addition to these most recent fixtures, in July, the BlackRhino was awarded a six-month contract with Beacon Offshore Energy, in the Gulf of Mexico, at a day rate slightly below $500,000. This program is slated to commence in the first quarter of 2025 following the rig's SPS and MPD upgrade that are underway. Following the BlackRhino's MPD upgrade, we will have 15 rigs equipped with MPD, enhancing our dominant position in this increasingly essential technical domain. In South America, the Faye Kozack successfully commenced its contract with Petrobras in Brazil, and set a new pre-salt drilling record on its first well. Hats off to the crews of the Faye Kozack on this impressive accomplishment right out of the gate. In Colombia, the Discoverer has successfully drilled its first well for Petrobras, and we look forward to continuing to work on this important gas development for the region. In the U.K., Ocean GreatWhite resumed its contract with BP in early July following equipment repairs. The contract is now expected to continue through April 2025, with priced options following that. Finally, the BlackLion in the Gulf of Mexico, and the Deliverer in Australia, both moved to substantially higher day rate contracts in the mid-to-high 400s during the quarter. Now, I'd like to share a brief word on the market. The core fundamentals of our business remain structurally sound. Global energy demand is increasing. Energy security remains a global priority, and offshore supply represents a highly strategic and advantaged resource priority for the upstream industry. Also, over the last several quarters, open demand for floaters continues to track at a historically high level of above 100 rig years of demand from tenders and pre-tenders in the public domain. Excluding the substantial additional volume of work that stems separately from direct awards. Against this backdrop, recent contracting activity for deepwater rigs has shown an encouraging uptick. After a slowdown in the second quarter, the industry saw an improvement in backlog booked, with 26 ultra deepwater rig years contracted in Q3, marking a 20% increase over Q2 and in line with the strong contracting level seen in 2022 and '23. While the majority of these recent fixtures have contract start dates in late 2025 or later, leaving the wide space of the first half of 2025 unaddressed, we do believe that these are the first of many signs supporting a demand uptick in late 2025 and early 2026. As you can see on our backlog slide on page five of the earnings presentation, we currently have 56% of our total marketed fleet committed for 2025. As you drill a little further into the mix, our marketed floaters are 59% contracted next year, and our tier-1 drillships are slightly above 75% committed for 2025. Our higher-end units with near-term availability are the Voyager, Valiant, Gerry de Souza, and Venturer. I would say that today we have active conversations and leads behind all of these units. In our sixth-gen fleet, we currently have more active conversations on the Discoverer and the Deliverer than we have had at any time since we acquired these units. So, the contracting outlook there is promising. Meanwhile, the Globetrotters similarly have a number of active leads for 2025 work, almost exclusively for intervention programs as we have previously indicated. The timing associated with these opportunities collectively supports a potentially meaningful ramp in utilization in run-rate EBITDA compared to our current level by the second half of 2025 although there's obviously still some work to be done to convert these opportunities to firm backlog. I would also say that the nature of the discussions and negotiations with our customers over the past few weeks has been increasingly active and constructive as 2025 customer budget allocations are beginning to take shape. If the next several months plays out as we currently envision, then we should see a backlog in utilization and collection next year. Given the abundance of active opportunities, we have elected not to stack any rigs at this time. However, if demand does not materialize as expected, then we will move decisively to stack one or more 6G units as the market dictates. On the jack-up side, despite some continuing and more recent NOC headwinds, the market has remained quite resilient with global demand recently eclipsing 410 rigs and marketed utilization at 93%. Noble's jack-up fleet utilization improved from 77% in Q2 up to 83% in Q3. We currently have 11 of our 13 rigs contracted at an average day rate of approximately $145,000 per day. North Sea operators have generally taken a tentative approach to capital deployment ahead of last week's budget announcement in the U.K., which unsurprisingly introduced incrementally higher taxation on the upstream sector. Amid these fiscal and regulatory crosswinds, we expect the North Sea jack-up market to continue to be characterized by relatively constrained demand visibility. But note that early indications of the market reactions to last week's U.K. budget news are generally neutral, at least not significantly negative. Thus far, that market has been more stable over the past couple of years than we might have expected against the consistently difficult contextual backdrop. With that, I'll now pass the call to Richard to cover the financials.

Richard Barker, CFO

Thank you, Robert, and good morning or good afternoon all. In my remarks today, I will briefly review the third quarter highlight. Then, touch on the outlook for the remainder of the year and 2025. Contract drilling services revenue for the third quarter totaled $764 million, up from $661 million in the second quarter. Adjusted EBITDA was $291 million in Q3, up from $271 million in Q2. The adjusted EBITDA margin for the third quarter was 36%. Cash flow from operations was $284 million, net capital expenditures were $119 million, and free cash flow was $165 million, which was burdened by transaction costs related to the Diamond transaction. All of the aforementioned figures reflect the approximate four weeks contribution from Diamond in September. For your reference, if legacy Diamond had been included in our results for the full quarter, as opposed to just from closing on September the 4th, Q3 adjusted EBITDA would have illustratively been close to $350 million. As summarized on page five of the earnings presentation slides, our total backlog as of November 5th stands at $6.2 billion, which includes approximately $500 million that is scheduled for revenue conversion in the final eight weeks of this year, and $2.6 billion that is scheduled for 2025. As a reminder, this backlog does not include reimbursable revenue or revenue from ancillary services. The Diamond integration is progressing well. We are on the way to capturing the $100 million of announced energy and continue to expect to have 75% captured within one year of closing. Referring to page 10 of the earnings slide, we are providing guidance for the fourth quarter as follows. Total revenue is in the range of $850 million to $890 million, which includes approximately $30 million to $35 million of reimbursable revenue, adjusted EBITDA between $275 million and $305 million, and net capital additions between $105 million and $135 million. The biggest drivers to the reduction in fourth quarter revenue in adjusted EBITDA when compared to Q3 that includes the Diamond rigs for the full quarter is the current shipyard project for the BlackRhinos, as well as the Globetrotter I and Voyager finishing up their program. I would note that where we expect full-year 2024 adjusted EBITDA to come out based on the midpoint of this Q4 2024 EBITDA guidance would correspond very closely to the midpoint of the guidance range that we put out right at the beginning of the year when adjusting for the Diamond acquisition. As Robert previously alluded to, we are reasonably and increasingly constructive about a variety of contracting opportunities over the next few months, which could drive an inflection in our total backlog as well as support a materially higher level of EBITDA potential in the second half of 2025. However, until these opportunities come to fruition, I think it is reasonable to infer that the fourth quarter run rate EBITDA of the combined Noble and Diamond fleets represents an approximate indication of where the business is tracking into the first half of 2025. We will look to cut out full-year 2025 guidance in conjunction with our year-end 2024 results. As an organization, we remain laser focused on maximizing capital returns to shareholders. Despite a near-term outlook that has been negatively impacted by various contracting opportunities moving to the vice, we still expect 2025 to represent a nice step up in free cash flow. Supporting this 2025 free cash flow step up is an expected reduction in CapEx. As previously stated, CapEx for both the Legacy Noble and Diamond fleets should be trending materially lower next year following the peak of the five-year SPS cycle in 2024. For reference, the illustrative combined company's 2024 total CapEx on a full 12-month basis is expected to be approximately $550 million. Looking ahead to next year, we expect this to reduce by approximately 25% to 30%, which will provide another free cash flow tailwind. As evidenced by our actions to date, we look forward to returning essentially all of our free cash flow to shareholders. With that, I'll turn the call back over to Robert.

Robert Eifler, President and CEO

Thank you, Richard. Before we turn to Q&A, I'd just like to provide a few closing remarks. First, I'd like to thank our employees for your continued effort and commitment to the highly exacting standards that we hold ourselves to with our first choice ambition. This cuts across HSE, operational excellence, reliability, service posture, integration, buy-in, and a culture of supporting one another and making the right decisions day in and day out. Through our journey over the past two years, you have gone much further than just integrating companies and have created an innovative industry leader. At the same time, we have positioned Noble to deliver differentiated cash flow for our shareholders through variable cyclical conditions, while the slowdown in contracting velocity that we have witnessed over the past year has created a near-term drag on expected earnings growth for the industry. We remain constructive on the multi-year fundamental outlook and also optimistic that the next leg up in the cycle will begin to come into focus with contracting developments over the next few months, building throughout 2025. We will be watching 2025 upstream spending plans closely. But thus far, early indications are that our customers are, on average, planning for higher offshore spending next year. For Noble, we expect the next few quarters to track relatively flat from an EBITDA perspective, before an expected step up in the second half of 2025. Through this progression, we will look to deploy surplus free cash flow above the current $2.00 annualized dividend toward share repurchases going forward. So, I'll wrap up there. Operator, we're ready to open the call for questions.

Operator, Operator

Your first question is from the line of Eddie Kim with Barclays.

Eddie Kim, Analyst

Hey, good morning. Just wanted to start with your outlook for the first half of next year, and some of the white-space concerns, you were one of the first to call out white space across the industry. Could you just expand upon the reasons you're seeing for these utilization headwinds in the first half, some of your peers have talked about customer capital discipline, delayed FPSOs, is that what you're seeing as well? And I guess the concern, which is reflected in the stock prices over the past three to four months, is that this white space could linger into the second half of next year, and maybe even into '26. So, could you just talk about your confidence level in rig demand rebounding in '26 after what looks like a pretty big air pocket of demand next year?

Robert Eifler, President and CEO

Certainly. That's a question that many are thinking about right now. I'd say there are some conflicting factors at play. You're right; there is potential opportunity in the first half of next year. You've mentioned a few reasons for the delays, which certainly apply in certain cases, but there are additional factors contributing to other delays as well. Generally, there seems to be a lack of urgency to drill at the moment, primarily due to a strong focus on capital discipline. This commitment helps explain why some projects are being pushed back slightly. However, on the positive side, we have a large dataset of open tenders, final investment decisions, and subsea tree orders that indicate the work is available. Analysis shows that the wells planned for drilling have very low breakeven costs. Behind the scenes, as we noted earlier, the level of discussions has picked up significantly in recent months, particularly over the last month. We're observing data related to tendering and an increase in conversations, along with several indicators suggesting that the work is forthcoming. Therefore, we remain optimistic about improvements in late 2025 and 2026.

Eddie Kim, Analyst

Got it, that's great to hear. Thank you. My follow-up is just on your commentary around potentially stacking rigs. You said that if demand doesn't materialize as you expect, you might elect to stack one or more of your 6G units. What are your thoughts at this stage around potentially warm stacking one of your 7G rigs, which we just saw from one of your peers? It sounded like based on your commentary on having active discussions on all your 7G rigs, that warm stacking wasn't in your plans for next year at this point, but if those conversations don't materialize into contracts, could we potentially see one or maybe two of the 7G rigs potentially warm stack next year as well?

Robert Eifler, President and CEO

So, we're back into kind of this sliding scale of definitions around stack. I would say that we certainly will minimize costs when the outlook doesn't support them. That's just rational business. I would not anticipate that we would take dramatic measures around the seventh-generation rig. And if we were to define dramatic, that might be one that would make us less marketable against other working rigs right now.

Richard Barker, CFO

Thanks, Eddie.

Kurt Hallead, Analyst

Hi, good morning, everybody.

Richard Barker, CFO

Good morning.

Kurt Hallead, Analyst

Hi, thanks for all that color. Always appreciate that. So, just kind of curious, right, we look out into the back half of next year and into 2026 and things start to look a lot more constructive in terms of contract timing and so on and so forth. You indicated an inflection, right, in EBITDA in the back half of the year. Just kind of curious as to what you think that magnitude might begin to look like without giving specifics around guidance.

Richard Barker, CFO

Yes. Hi, Kurt, it's a good question. Obviously, we haven't provided specific guidance here for 2025. We'll look to do that as we normally do with our year-end results. Obviously, we talked about the first half of the year being somewhat flat, if you will to Q4. I think one interesting data point is Q3, right, where if you combine Diamond with Noble for the full quarter, EBITDA was closer to $350 million for the quarter, right? And so there's obviously upside to that as well. So, we're talking about a kind of a flat first half of next year and then the inflection from there on could be significant, but obviously, it's subject to winning some of the work that we're going after right now.

Robert Eifler, President and CEO

Yes, I'd love to just add, Kurt, that one of the reasons we considered putting out guidance here, but one of the reasons we elected not to and to stick with our kind of normal cadence of putting it out early next year is because we do have a tremendous amount of work under negotiation right now. It felt like the cost benefit of waiting on that was worth it given just what you're talking about. These outcomes on an individual tender obviously are binary for us. So, we think kind of waiting and seeing how some of this plays out is right before we put any more color than we have here on this call out there.

Kurt Hallead, Analyst

That's great. I appreciate that. So, maybe just kind of another follow-up here, right, you indicated that incremental cash flow will go back to share buybacks and you have the $400 million authorization. I'm just kind of curious now on capital allocation now that you have a little bit more debt on your balance sheet than you've had prior to the acquisition. What's your thought process in terms of cash structure?

Robert Eifler, President and CEO

Yes, we're happy with where we sit today on the cap structure, and we plan to continue obviously, the dividend, as mentioned. From there, we're looking to supplement with share repurchases as there's excess free cash flow.

Kurt Hallead, Analyst

That's great. Appreciate it. Thank you.

Robert Eifler, President and CEO

Thanks, Kurt.

Greg Lewis, Analyst

Hi, everyone. Thanks and good morning. I hope you’re all doing well. I have a question about the jack-up fleet. You have a strong presence in the North Sea with your high-end CJ70s and CJ50s, along with a few rigs located around the world. As we look at the jack-up market, it appears there are still buyers and companies aiming to expand internationally, moving from positions in the Middle East. Could we see Noble focus more on its core market in the North Sea and possibly sell off some of the good quality, premium jack-ups that may not align with your future strategy?

Robert Eifler, President and CEO

Yes. Look, I think we're where we've always been. I would reiterate that while at this point, some of the jack-ups do seem more scattered globally outside of the North Sea. They're certainly not inefficient. They're producing cash flow. As you say, they're good rigs with great crews and great customers. So, we have no urgency or motivation to do something. But I think we've shown through history that we're going to make rational business decisions when one comes in front of us there. To the extent that that is the right thing for our shareholders, then we, of course, would consider if there's a strategic move there.

Greg Lewis, Analyst

Okay. Following up on the questions you mentioned, Robert, about the sliding scale of stacking, I don’t believe we will cold stack any of the 7th-generation rigs. Do you have any rough estimates on potential cost savings in that scenario? For example, if a rig operates at a seventh-gen cost of around $150, $160, and we don’t find work for a while—not just 90 days, but possibly three to four quarters—can you give an idea, even without a specific number, of how much we might reduce that cost? I'm thinking particularly about those three or four 7th-gen rigs that may not have opportunities until later in the year.

Robert Eifler, President and CEO

Yes. Let me do this, Greg. Let me give you a couple of the points on the sliding scale might be helpful. So, you mentioned kind of full working OpEx and I would say that that scale slides down to around $40,000 to $50,000 per day before you need to go into a preservation type stack, a cold stack to reduce costs from there. Depending on the region, depending on where you can stack the rig, there's a lot of different variables along that, that would kind of determine where you end along that scale. But I think those are probably the endpoints, if that's helpful.

Greg Lewis, Analyst

Super helpful. Thank you very much.

Operator, Operator

Your next question is from the line of Fredrik Stene with Clarksons Securities.

Fredrik Stene, Analyst

Hey, Robert and team. I hope you're doing well, and thank you for the detailed prepared remarks. I believe it has been mentioned already, but I wanted to confirm that you are noticing more opportunities in the market and that, particularly over the last month, there have been substantial discussions that could lead to increased work, which would enhance utilization from the latter part of 2025. Can you provide more details regarding the geography of these opportunities? Are there specific regions where you are feeling particularly positive? Additionally, could you shed some light on key regions not just for 2025, but also for 2026 and 2027 to give us a sense of the long-term prospects? Thank you.

Robert Eifler, President and CEO

Sure, there's not much new information to share. Opportunities exist globally, but are more prevalent in the Golden Triangle. Overall, not much has shifted since our previous updates, with the U.S. market remaining relatively stable. We see stronger growth potential in South America, especially in CARICOM, and in West Africa, along with some smaller opportunities outside the Golden Triangle. The key regions for 2026 and 2027 remain the same; Suriname is expected to come online significantly, along with several opportunities along the West African coast and eventually Mozambique on the East African coast around that timeframe. I should have highlighted Namibia on the West more specifically, but there isn't much change from our earlier assessments. Our primary focus is on ensuring these opportunities materialize according to the timelines we've set, rather than tracking any significant shifts in their locations.

Fredrik Stene, Analyst

No, that's helpful, nonetheless. Also, since you're a mixed player with floaters and jack-ups, have anything, call it, changed lately in how you would rank the different segments against each other? Are you more confident about floaters than you currently are about jack-ups, et cetera? Any thinking you can provide around how you weigh the two on a relative basis given your market and market outlook?

Robert Eifler, President and CEO

Yes, our growth has been primarily focused on floaters, and we have seen significant potential in that market, especially at current valuations. The recent news has been more negative regarding jack-ups compared to floaters. While I’m not sure if trading has reflected that to the same extent, there appears to be increased market concern about jack-ups lately. Nevertheless, the numbers for the jack-up sector have remained relatively stable, which could be attributed to a larger overall market size. Utilization rates are still above 90%, around 93% as we quoted. We are paying close attention to developments in the North Sea. While we have some initial signs, it's still too early to determine the direction for 2025 in that region, and we are monitoring the situation closely. We have also shared our insights regarding the floater market, where we remain optimistic.

Fredrik Stene, Analyst

Yes. Thank you very much. Just a final super quick one, on the integration work with Diamond, you have a target of $100 million, if I remember correctly, 75% done within a year. Do you see at this point, chances that you'll actually get more synergies out of it than the $100 million you're budgeting?

Robert Eifler, President and CEO

Yes, Fredrik, there's obviously a good chance that that's the case. Obviously, in the Maersk transaction, we announced $125 million and then increased that after about a year to $150 million. I would say that the integration is progressing as expected, and there's definitely opportunities to achieve more than $100 million of total synergies here.

Fredrik Stene, Analyst

Perfect. That's all from me. Thank you and have a good day.

Robert Eifler, President and CEO

Thank you.

David Smith, Analyst

Hey, good morning. Thank you for taking my question.

Robert Eifler, President and CEO

Good morning.

David Smith, Analyst

I was glad to hear about the active conversations for the discoverer and the deliverer. I'm curious about the developer though, which I think last worked in September '23. Could you talk about your outlook for that rig and what the operating costs look like during this extended idle period? I'm guessing that could be lower than an idle 7th-gen drillship.

Robert Eifler, President and CEO

Yes, we have taken steps to reduce costs. I consider all of the D rigs to have the same outlook. We have several leads, and we will certainly maintain our current pace. There is no change in the expectations we provided regarding the first half of 2025. However, it appears there will be additional opportunities starting in late 2025 and continuing into 2026.

Richard Barker, CFO

Yes. And Dave, from a cost perspective right now, think about that kind of in the $100,000 a day kind of range from an OpEx perspective.

David Smith, Analyst

I'm sorry, for the Developer, that operating cost per day?

Robert Eifler, President and CEO

Yes, correct.

David Smith, Analyst

Okay.

Robert Eifler, President and CEO

Well, yes. Essentially, consider the scale from fully operating at close to 150, down to a lower figure.

Richard Barker, CFO

Yes.

David Smith, Analyst

Great. That's all I got. Thank you.

Operator, Operator

At this time, there are no further questions. I would now hand today's call back over to presenters for any closing remarks.

Ian MacPherson, IR

Thanks, everyone, for joining us today. And, we'll look forward to speaking with you again next quarter. Have a good day.

Robert Eifler, President and CEO

Thank you.

Operator, Operator

This concludes today's call. Thank for joining. You may now disconnect your lines.