Yahoo Finance Transocean Ltd. (NYSE:RIG) Q1 2024 Earnings Call Transcript
Transocean Ltd. (NYSE:RIG) Q1 2024 Earnings Call Transcript April 30, 2024
Transocean Ltd. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to today's Q1 2024 Transocean’s Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call is being recorded and I’ll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Alison Johnson, Director of Investor Relations.
Alison Johnson: Thank you, Shelby. Good morning and welcome to Transocean’s first quarter 2024 earnings conference call. A copy of our press release covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on our website at deepwater.com. Joining me on this morning’s call are Jeremy Thigpen, Chief Executive Officer; Keelan Adamson, President and Chief Operating Officer; Mark Mey, Executive Vice President and Chief Financial Officer; and Roddie Mackenzie, Executive Vice President and Chief Commercial Officer. During the course of this call, Transocean management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts.
Such statements are based upon current expectations and certain assumptions and therefore, are subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact future results. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Following Jeremy, Keelan and Mark’s prepared comments, we will conduct a question-and-answer session with our team. During this time, to give more participants an opportunity to speak, please limit yourself to one initial question and one follow-up. Thank you very much. I’ll now turn the call over to Jeremy.
Jeremy Thigpen: Thank you, Alison, and welcome to our employees, customers, investors and analysts participating on today's call. As reported in yesterday's earnings release, for the first quarter, Transocean delivered adjusted EBITDA of $199 million on $767 million of adjusted contract drilling revenues, resulting in an adjusted EBITDA margin of approximately 26%. While the pace of contract awards has moderated somewhat from this time last year, demand for high-specification ultra-deepwater drillships and harsh environment semisubmersibles remains extremely strong with improving day rates and lengthening terms. In fact, earlier this month, we announced a 365-day contract extension for the Deepwater Asgard with an independent operator in the US Gulf of Mexico.
The program is expected to commence in June 2024 and direct continuation of the -- program and includes additional services. The total contract value of approximately $195 million included a $10.9 million lump sum payment, which is not included in the estimated backlog approximately $184 million. As part of the agreement, we will be upgrading the rigs blowout preventer with Kinetic Pressure Control Blowout Stopper units or K-BOS. As we previously highlighted, K-BOS is a device that improves blowout preventer sharing capability and is retrofittable to existing BOPs. Importantly, it also significantly shortens the time for the rig to complete an emergency disconnect, which facilitates the ability to expand the minimum operating water depths of deepwater floaters.
Certain configurations of the device are capable of sharing any tubular and sealing the wellbore in less than one second. Over the past several years, Transocean has worked closely with Kinetic Pressure Control Development and testing of K-BOS as well as with the regulator, the Bureau of Safety and Environment Enforcement or BSEE to earn their support and approval. And I'm proud to report that this will mark the third unit that we've introduced to our fleet. We are encouraged by the positive feedback received from our customers and BSEE and are pleased to see an increased willingness from our customers to pay for this transformational technology. Also in the US, Gulf of Mexico, we just signed a contract for an additional four wells of 15K work on the Deepwater Atlas at our day rate of $505,000 per day in direct continuation of its current program expected to last between 240 and 360 days.
We also announced TotalEnergies exercise it’s remaining option on the Deepwater Skyros at $400,000 per day. While this option, which was negotiated well before those recent market acceleration is materially below current market rates, we are pleased to continue our long-standing and mutually beneficial relationship with TotalEnergies. As we move through the next several months, we expect numerous long-term contracts to be awarded at increasing day rates, reflecting industry participants' recognition of the tightness in the market. Healthy contract durations are one of many factors supporting improved supply/demand dynamics. Excluding the TotalEnergies 10-year contract award, which we consider to be something of an anomaly, contract durations for new ultra-deepwater fixtures reached a robust 511 days in the quarter, largely in line with the 2023 average of 526 days and up from 302 days in 2022.
For Transocean, this is especially important as with longer terms, our customers are finally willing to co-invest in the deployment of some of the new technologies like K-BOS, HaloGuard, Robotic Riser Systems Intelli-Wealth, and others that we developed, tested improved during the downturn, but we're unable to fully deploy given obvious financial constraints. While some analysts and investors continue to express concerns over the pace of contract awards, I'd like to reiterate two points on that topic I make frequently. First, with dayrates increasing in terms extending, the financial commitment from our customers is becoming far more substantial, requiring far more approvals within our customers' organizations and with their partners, which obviously adds time to the process.
And second, our active fleet is largely contracted through the end of the year. And based on active negotiations, we anticipate filling at least a portion of the remaining availability. As one example, well intervention operations on the Deepwater Invictus have extended significantly with the rig now scheduled to complete that work scope in July. We are also in active discussions for additional opportunities to commence in direct continuation of this work. Additionally, and to emphasize the confidence that our customers have in the duration of this upside, we are actively engaged in conversations for rigs that are not scheduled to roll off contract for one to three years. In fact, all indications continue to suggest heightened demand for at least the next several years.
In its independent assessment, but an assessment that is fully supportive of our view, Rystad anticipates deepwater greenfield CapEx in 2025 will be the highest in 12 years. And that by 2027, total deepwater investment will reach nearly $130 billion, an increase of approximately 40% from 2023. Additionally, there are many important deepwater projects expected to reach final investment decision this year, including BP's Atlantis 4 and 20K Kaskida fields in the US Gulf of Mexico, Shell Bonga North in Nigeria, TotalEnergy's Kaminho discovery in Angola and Venus Discovery in Namibia and ExxonMobil's Whiptail in Guyana, which was approved earlier this month. These predications reinforce our confidence there will be sustained market tightness for the foreseeable future.
With that, I'll hand it over to Keelan to provide a bit more regional color in detail.
Keelan Adamson: Thanks, Jeremy, and good morning, everyone. Jumping directly into the various regions. In the US Gulf of Mexico, the rig supply/demand balance is such that in our analysis, the region could be short one rig in 2025. Customer behavior indicates that they understand they need to secure rigs quickly to avoid missing their project time lines. Notably, we are observing elevated demand from independent operators, both in the form of tenders and direct negotiations. Last month, two independent operators issued tenders for new programs that were not previously in our outlook. One includes a six-month firm term commencing in the first half of 2025 with two, six-month options. The other is for six to nine months of work commencing in the third quarter of 2025.
Additionally, there are two major E&P companies currently out to market for multiyear programs. In Brazil, last month, Petrobras provided an update to its expected demand for floating rig 2030 requirements. This demand forecast suggests Petrobras may absorb up to 30 rigs through 2030, in line with our expectations that as a region for both Petrobras and the international oil companies, Brazil could require 36 floaters as soon as 2025. Part of this forecast is contingent upon discoveries in frontier areas, such as the equatorial margin for earlier this month and for the second time this year, Petrobras disclosed another discovery. Obviously, our confidence that Petrobras will require at least 30 rig proves with each new discovery. The Roncador tender for up to two rigs is expected to be awarded in the third quarter with a commencement next year.
The Sépia tender for up to three rigs is also slightly delayed as commercial proposals are now due mid-May. Petrobras also recently received approval of its discovery evaluation plan for one of its three pre-salt blocks in the campus and Santos basins and is expected to drill an appraisal well in 2024 or 2025. Positive results from the appraisal would likely solidify future development and provide additional support that Petrobras will be at the higher end of its demand expectations. Moving to Africa. if demand materializes as currently expected, Africa could be the region to absorb most of the remaining available active floating fleet and once again play a significant role in the Golden Triangle. In order to satisfy the demand expected by 2025, we believe at least four rigs will be required from outside the region.
Tenders include ExxonMobil's two-year firm opportunity and Shell's one-year firm opportunity in Nigeria, among others. Both of these have multiyear options. Southeast Asia currently offers a variety of opportunities, such as PTTEP in Malaysia and Brunei, E&I in Indonesia and Shell in Malaysia. There could be a shortage of one floater in the region to fulfill these programs, if they are all awarded as anticipated in late 2024 or early 2025. In India, Reliance is out to tender for up to 2 years of work with options. And with the recently revised commencement do, RKG 1 could be well placed to secure this opportunity. Switching over now to the high-specification harsh environment market and specifically Norway. The local high-spec semi fleet remains effectively sold out through 2025.
We have also observed a shift in customer procurement processes for future projects. Similar to what we've seen in other regions like the US, Gulf of Mexico, tenders are being utilized less frequently in favor of direct negotiations. As an example of customers looking further into the future, we just signed a letter of intent, subject to final partner approval for the extension of the Transocean Spitsbergen by three wells estimated at 150 days plus 6 priced option wells in direct continuation, which is currently anticipated to be July 2025. We will disclose full details once the extension becomes a fully binding contract. In Australia, known requirements are expected to commence in 2026 and onwards, including Impax and Chevron's next phase in some of their respective field developments.
We believe at least one additional rig will be required to fulfill these programs as all six floaters currently in country are likely to be occupied in that time frame. Including our two rigs, the Transocean Equinox and Transocean [indiscernible], which we believe are well positioned to pick up further work in country at the end of their respective programs. Now I'd like to take a few moments to discuss our operational performance and provide some insight into the themes that contributed to our first quarter revenue falling short of guidance. As Mark will elaborate upon in his comments, the drivers behind our first quarter revenue results are primarily attributable to delays to rig start-ups in Australia and Brazil due to longer-than-anticipated mobilizations, extensive customer acceptance, processes and operational start-up issues, as well as extended contract preparation for the KG1 in India, extreme adverse weather impacting our operations in Norway and lastly, downtime on the Deepwater Titan.
Regarding the Titan, the rig experienced a downtime event related to the initial deployment of its second 20K BOP. The BOP was pulled back to surface and following an evaluation, we concluded the most efficient path forward was to redeploy the rig's first 20K BOP, which had already been utilized successfully in operations following completion of its scheduled maintenance. The rig returned to full operational status during March and has performed well as it did since it commenced its initial contract in mid-2023. As with any new equipment or new technology deployment, it is not uncommon to experience some early life performance issues. However, Transocean has extensive experience and safely and efficiently bringing new equipment and technology to the market, which includes a tried and tested playbook on how to work closely and collaboratively with our OEM partners to identify and correct any reliability related issues in a timely and effective manner.
While we are certainly disappointed to have suffered this downtime, it is important to note the safety of our operation was never compromised. Understandably, the previously discussed challenges had a significant impact on our quarterly results, leading to an unusual and disappointing revenue efficiency of 92.9%. However, as they are largely onetime discrete events and with the rest of our fleet continuing to operate with impressive reliability, we remain confident in our ability to consistently deliver safe, reliable and efficient operations across our fleet. I'll now hand the call back to Jeremy.
End of Q&A:
Jeremy Thigpen: Thanks, Keelan. As part of our efforts to improve the consistency, efficiency and repeatability of our operations, we continue to make progress with our automation initiatives in the first quarter. We achieved another milestone with our jointly owned Intelli-Wealth system as we performed simultaneous fully automated online drilling, tripping and offline stand building operations on the Transocean Norge in Norway. And we are currently preparing for an upcoming deployment in the US Gulf of Mexico. We also achieved a milestone with our Robotic Riser system. We have handled more than 2,000 joints of Riser across our three installed systems. In addition to supporting the consistency of our operations, Robotic Riser also limits the exposure of our personnel to high-risk areas on the drill floor.
Another way to think about this is we have now added over 1,100 working hours where our personnel were not exposed to red zone risk. Finally, before handing it over to him, I just want to recognize and thank Mark and the rest of the Transocean team who earlier this month worked together to complete a tremendous $1.8 billion refinancing in conjunction with amending our revolving credit facility. Needless to say, these are very important transactions, which extended our liquidity runway and started the process of simplifying our balance sheet as we position ourselves for what we believe to be a multiyear up-cycle. And for Mark, personally, I think these transactions represent an excellent capstone to an exceptionally successful career. This professionalism isn't truly something we witnessed across our organization as a whole day in and day out.
And for that, I would like to thank each member of the Transocean team and wavering commitment to delivering safe, reliable and efficient operations for our customers and value for our shareholders. Change in continuous improvement are the constants in our industry, and are team has continuously demonstrated an ability to adapt as we progress further into the sustained -- In conclusion, the outlook for our assets and services remain strong. With the tightness of supply, the active negotiations and the $500,000 per day glass ceiling now broken in multiple jurisdictions around -- we are confident that we will continue to grow our backlog throughout the year. As we work towards securing more contract awards, we remain entirely committed to our operational execution with a focus on efficiently converting our $8.9 billion of backlog to revenue and cash flow.
With that, I will now turn the call over to Mark for what I can't believe will be the last time he will discuss our financial results. Mark?
Mark Mey: Thank you, Jeremy, and good day to all. During today's call, I will briefly recap our first quarter results and then provide guidance for the second quarter. I will conclude with an update on our expectations for the full year 2024, including our latest liquidity forecast. Before I get to the results, as Jeremy mentioned, we recently completed refinancing transactions totaling $1.8 billion, upsized by $300 million from our initial offering of $1.5 billion. The proceeds from the bond offering were utilized to fully redeem the 7.25% senior notes due 2025 and a 7.5% senior notes due 2026 and partially redeemed 8% senior notes due 2027. With remaining outstanding balance on the ladder notes is approximately $525 million.
Approximately $92 million of the 11.5% senior guaranteed -- that were not tendered will remain outstanding until the end of July at, which time funds be placed into irrevocable escrow accounts will be utilized to put the many balance and fully retire the issue. These transactions improve our unsecured debt maturity profile, simplify our capital structure and combined with the recent extension of our revolving credit facility through mid-2028 enhanced our financial flexibility. On the latter point, we are pleased that the current formulation of the credit facility permits us at a point in the future the flexibility to make restricted payments, including distributions to shareholders and share repurchases. On currently aforementioned transactions, Moody's upgraded transaction's corporate family rating to B3 from Caa1, reflecting the improvement in the AHS outlook for the company and its business.
We are confident we will continue to demonstrate the qualities necessary to receive further ratings upgrades as we continue to delever our balance sheet through the sustained cycle. As we reported in our press release, which includes additional detail on our results for the first quarter, we reported net income attributable to controlling interest of $98 million or $0.11 per diluted share. After certain adjustments, we reported adjusted net loss of $22 million. During the quarter, we generated EBITDA of $199 million, as is typical in the first quarter of the year, operating cash flows were negative at $86 million, largely due to payments for a payroll rated costs and interest payments. In addition, we continue to incur substantial contract preparation costs, as we return the Deepwater Orion and Transocean Endurance to operations and advanced preparation of the Transocean Equinox during the quarter.
Negative free cash flow of $169 million in the first quarter reflects aforementioned negative $86 million of operating cash flow and $83 million of capital expenditures. Capital expenditures for the quarter included $45 million related to the seventh-gen plus newbuild Deepwater killer under construction as it prepares for the inaugural contract for Petrobras in Brazil. Looking closely at our results. During the first quarter, we delivered adjusted contract drilling revenues of $767 million, at an average daily revenue of approximately $408,000. This is below our previous guidance, mainly due to the reasons Keelan mentioned in the prepared comments, including delayed contract commencements with Transocean Endurance, Deepwater Orion and KG1. Low revenue efficiency for the Deepwater Titan, and the impact of adverse weather on operations in Norway.
Operating and maintenance expense in the first quarter was $523 million. This is below our guidance, primarily due to the delay of in-service maintenance in the active fleet and delayed contract preparation costs. G&A expense in the first quarter was $52 million. Turning to cash flow and the balance sheet. We ended the first quarter with total liquidity of approximately $1.3 billion, including unrestricted cash and cash equivalents of $446 million, approximately $240 million of restricted cash for debt service and $600 million from our undrawn revolving credit facility. I will now provide an update on our expectations of financial performance for the second quarter and full year 2024. As always, our guidance reflects only contract related rig reactivations and/or upgrades.
For the second quarter of 2024, we expect adjusted contract drilling revenue of approximately $866 million, based upon an average fleet-wide revenue efficiency of 96.5%. This quarter-over-quarter increase is mainly due to the incremental activity with Transocean Endurance and Deepwater Orion operating for a full quarter, the Transocean Equinox and KGI starting their respective contracts during the quarter and higher revenue efficiency following the resolution of the downtown event and the Deepwater Titan in the first quarter. This is partially offset by reduction activity on the Transocean Barents in KG2, as the rigs began contract preparations. We expect second quarter O&M expense to be approximately $570 million. This quarter-over-quarter increase is largely due to incremental activity related to the previously mentioned four rigs and to an increase in in-source maintenance costs.
We expect G&A expense for the second quarter to be approximately $60 million. This quarter-over-quarter increase is primarily related to transaction fees or the debt financing, debt refinancing and entry earlier retirement program that was offered to longtime employees. Net interest expense for the second quarter is forecast to be approximately $138 million. This includes capitalized interest of approximately $8 million. Capital expenditures for the second quarter are forecast to be approximately $92 million, including approximately $55 million related to preparation of Deepwater Aquila for its 3-year contract with Petrobras in Brazil. Cash taxes are expected to be $17 million. Now, I'll provide an updated guidance for the full year 2024. At approximately $3.6 billion, we now expect our adjusted revenue to the lower end of the range provided on our previous conference call in mid-February.
This includes approximately $215 million of additional services and reimbursable expenses. This change in expectation is due mainly to three factors. There are four mentioned delays in contract commencement on the Transocean endurance, Deepwater Orion, KG1, the downtime on the Deepwater Titan and the longer-than-expected well programs in the Deepwater Atlas and KG2, which delays the rig's transitions to higher day rate contracts in the second quarter. We now expect our full year O&M expense to be between $2.2 billion and $2.3 billion. The higher end of this range is primarily the result of anticipated higher reimbursable expenses. Finally, we anticipate G&A cost to be around $210 million. Our projected liquidity at the end of year 2024 is approximately $1.4 billion, reflecting our revenue and cost guidance and including the $575 million capacity of our newly amended and extended and undrawn revolving facility and is inclusive of restricted cash of approximately $395 million most of which is reserved for that service.
This liquidity focus includes 2024 CapEx expectations of $231 million, of which approximately $134 million is related to the Deepwater Aquila and approximately $97 million for sustaining and contract preparation CapEx. As I signed off for the last time, I'd like to reiterate my gratitude to the entire Transocean organization as Jeremy expressed in his remarks. This team is second to none, and I'm immensely proud to have worked with each one of you for the past 9 years. I'm confident in our ability to deliver value for our shareholders and look forward to seeing the progress continue as Thad Vayda assumes the role of CFO. Being worked alongside Thad for almost a decade, it is clear, he is a strategic thinker who brings financial discipline, experience and expertise, along with a deep understanding of the offshore drilling market.
These attributes should ensure a seamless transition, both internally and externally and can you tend to serve Transocean and its shareholders well. Congratulations against that. This concludes my prepared comments. I'll now turn the call back over to Alison to introduce questions and answers.
Alison Johnson: Thanks Mark. Shelby, we're now ready to do questions. And as a reminder to the participants, please limit yourself to one initial question and one follow-up question.
Operator: [Operator Instructions] Our first question from Kurt Hallead with Benchmark. Your line is open.
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