ADNOC Drilling Company P.J.S.C. (ADNOCDRILL) Earnings Call Transcript

Ladies and gentlemen, welcome to the ADNOC Drilling's First Quarter 2024 Earnings Webcast and Conference Call. My name is Max Cominelli, Vice President of Investor Relations. Before handing the floor over to the main speakers, I would like to draw your attention to the disclaimer that you find in the second slide, which I encourage you to read carefully. The text contains important information. We advise caution in the interpretation and limits of historical data and forward-looking statements. I would like to remind you that this presentation and the recording of this call will be available on our website shortly after the end of the call. Today's presenters are our Chief Executive Officer, Abdulrahman Alseiari; and our CFO, Youssef Salem. [Operator Instructions] I will now hand over the call to our CEO, Mr. Abdulrahman, who will lead you through the strategic developments and the key highlights of the quarter.

[Foreign Language] Thank you, Max, and welcome all, good day. I'm really pleased to be here today to discuss the company's first quarter 2024 results, along with the value-added strategic developments. As the strategic partner at the heart of ADNOC Upstream, we continue to execute our strategy, delivering long-term value to our clients, shareholders, and UAE, with the utmost attention to safety and the environment. For the first quarter 2024, our total recordable incident rate was 0.63, which is in line with our target. The strong commitment to the highest HSE standards remains our number one priority. Additionally, we are also on track on our emissions targets. On the financial side, Q1 2024 revenue grew 24% year-on-year to $886 million, with EBITDA rising even faster, an impressive 31% year-on-year, allowing us to keep delivering an industry-leading margin of 49%. We also experienced excellent growth in our net profit, which increased 26% year-on-year to $275 million, reiterating our continued growth. Our journey to become one of the world's largest owned and operated drilling fleet continues. During the quarter, we added 8 rigs. All of those rigs are hybrid land rigs, which supports our ESG agenda. With these additions, the owned fleet at the end of March 2024 stood at 137 rigs, including 4 lease-to-own land rigs. We remain committed to our future proofing strategy after successfully completing our first investment in Gordon Technologies under our JV, Enersol. Reflecting our results and continued significant growth, the Board of Directors is recommending an enhanced progressive dividend policy that will see dividends grow by at least 10% per annum for the next 5 years, setting a higher minimum growth rate. Also today, we announced a transformative step in our company with the award of a contract for $1.7 billion for the development of the unconventional energy resources in the UAE. Next slide. The contract is set to be served by a newly established company, Turnwell Industries, that we expect to effectively consolidate. We are partnering in Turnwell with strategic players and have signed a term sheet with both SLB and Patterson. By establishing Turnwell, we aim to focus on the execution and exploration of the unconventional resources. The first phase is for 144 oil and gas wells over the next 2-plus years. Abu Dhabi today holds an estimated 220 billion barrels of unconventional oil and 460 TCF of unconventional gas in place. The opportunity in the unconventional energy presents outstanding scale with the production potential comparable to some of the most relevant and conventional energy resources in the United States. This huge potential brings to us a transformational opportunity, as the UAE's unconventional energy resources will require many thousands more wells to be drilled, and ADNOC Drilling is in the prime position to deliver them. I'll now hand over to Youssef, our CFO.

Thank you, Mr. Abdulrahman, and good day from me as well. As you know, we operate one of the world's largest integrated drilling services companies by rig fleet size. Over the first quarter, we added to the fleet a total of 8 hybrid land rigs, bringing our total rig count to 137 rigs, up 19% year-on-year, an impressive annual growth. We are very proud of the progress achieved, supporting ADNOC in reaching a production capacity of 4.85 million barrels per day and on track to successfully achieve 5 million barrels per day capacity by 2027 with 142 rigs. The 8 hybrid rigs are gradually beginning operations with the majority of them expected to commence in the middle to end of the second quarter. Drilling activity remained robust as we drilled 139 wells in the first quarter, broadly in line year-on-year. Rig availability increased to 97% versus 96% in Q1 last year. The OFS business continued a strong performance with 13% overall improvement in Q1 2024, Integrated Drilling Services drilling efficiency versus last year's benchmark. Moreover, we performed IDS on 49 rigs in the quarter, 9 more compared to Q1 last year and 1 more versus Q4 2023. Moving on to our decarbonization initiatives. Next slide please. Starting with camps emission abatement. There has been good progress in Q1 with our Madinat Zayed camp having been connected to the grid since February, while our Tarif camp is scheduled for connection by the second quarter of 2024, followed by our Habshan & Bu Hasa camps in the second half of the year. Moreover, we completed the installation of our first solar panels to power a mobile camp. As you know, we ordered new hybrid land rigs, most of which are already in the rig count while also implementing the battery energy storage system, which will be installed in new-build rigs and select existing rigs. Also, some of the 16 hybrid rigs ordered in full year 2023 already commenced operations, while the remaining will be deployed throughout the rest of 2024. With regards to sustainability initiatives, we are monitoring consumption to identify gaps and areas of improvement, optimizing diesel consumption from introduction targets while further electrification initiatives remain under evaluation. In addition to our current initiatives and efforts, we expect our Joint Venture, Enersol, to play a key role in supporting our decarbonization agenda. Moving now on to the financials. Next slide, please. I'm happy to say that we had a record first quarter, kicking off 2024 on a very positive note. We delivered our highest ever quarterly revenue of $886 million, up 24% year-on-year. This then translated into EBITDA growth of 31% year-on-year to $437 million, with a margin of 49%, while net profit grew 26% to $275 million. Sequentially, revenue increased 5% and EBITDA grew 3%. Before heading to net income, I would like to highlight 2 line items in our income statement for the quarter. Firstly, starting from this quarter, Enersol's financial results have been accounted for by ADNOC Drilling through the equity method in the share of profit of joint venture line of the income statement. It's still a small contribution as we closed the first deal only in January, but will grow significantly over time. Secondly, as you know, this was our first quarter since the Abu Dhabi taxes were applicable to ADNOC Drilling. The company accrued $27 million in taxes in Q1 on the back of the introduction of a 9% income tax from the 1st of January 2024. We have invoiced our clients for the reimbursement of these taxes. On the bottom line, excluding the one-off full year impact in Q4 depreciation discussed during our last earnings call, net profit was down 4% sequentially, mainly driven by higher interest expenses. Cash from operations stood at $347 million at the end of the first quarter, up from $226 million in the same period last year. This was driven by higher profits and positive working capital evolution driven by continuous focus on collections from clients. Net working capital as a percentage of revenue stood at 11% at the end of the first quarter of 2024, a significant improvement year-on-year, driven by collections. The normalized ratio at the end of Q1 was 12% and stable versus Q4, once adjusted for the impact from phasing of capital expenditure related payments at quarter end. Cash CapEx for the quarter, excluding prepayments and accruals, stood at $110 million as we continue to deliver on the rig acquisition program. We expect CapEx to be in the range between $750 million and $950 million for 2024. The balance sheet remains healthy with net debt of around $2.1 billion at end the of March, leading to a leverage ratio at 1.3x EBITDA. Let's look at revenue for the different segments. Next slide, please. In Onshore, first quarter revenue increased 16% year-on-year to $411 million from $355 million, driven by increased Onshore activity on the back of new rigs commencing operations. Sequentially, revenue in the first quarter decreased 1% due to less operating days in the quarter. Moreover, as you may recall, fourth quarter 2023 benefits from the positive impact from long-range rig moves, excluding which segment revenue would have increased sequentially by 3%. Offshore Jack-up had another remarkable quarter with first quarter revenue increasing 51% year-on-year to $278 million from $184 million. This was mainly driven by higher activity from the additional jack-up rigs. The contribution from the jack-ups that started in December 2023 led to a sequential revenue growth of 24% versus the fourth quarter of 2023. Moving on to Offshore Island, the first quarter revenue amounted to $51 million in line with first quarter of 2023, as activity was broadly stable year-on-year. Sequentially, first quarter revenue decreased 2% driven by less operating days in the quarter. In Oilfield Services, first quarter revenue increased 16% year-on-year to $146 million from $126 million driven by increased activity in drilling fluids and directional drilling. Sequentially, first quarter revenue decreased 1%, mainly due to activity phasing, for example, lower frac activity in the first quarter. We expect the overall volume of activity of the segment to increase throughout the year in line with planned phasing and driven by IDS rigs ramp-up and unconventionals. Now, let's see the next slide, what revenue performance meant for EBITDA. Over to next slide, please. Starting with Onshore, EBITDA for the first quarter increased 10% year-on-year to $190 million with a margin of 46%, supported by realized cost efficiencies. Sequentially, EBITDA decreased 6% to $190 million from $203 million on account of higher operating expenses, driven by incremental manpower costs, mobilization costs incurred for our operations in Jordan, along with associated costs for rigs which commenced operation in the quarter. This was partially offset by cost efficiency measures. Offshore Jack-up EBITDA in the first quarter grew 73% year-on-year to $182 million with an industry-leading margin of 65% representing an expansion of around 8 percentage points. Sequentially, EBITDA increased 23%, driven by strong revenue growth. In Offshore Island, the first quarter EBITDA decreased slightly to $31 million in the quarter from $32 million in the prior year, with a margin of 61% due to stable revenue and slightly higher OpEx. Sequentially, EBITDA decreased 6% due to a moderate increase in maintenance costs related to 3 rigs gradually starting operations later in the year, starting from the second quarter. I would like to highlight that given the contractual framework with the client, the restart of operations of these rigs is not expected to substantially contribute to an increase in revenue. Lastly, OFS EBITDA increased 48% year-on-year to $34 million with margin improvement of 4 percentage points to 23%. This was supported by a $2 million share of net profit from Enersol joint venture. Sequentially, EBITDA decreased 15%, driven by lower margin activity mix with more directional drilling and lower frac activity. Next slide, please. Following another record first quarter, we can say that we're on track with our full-year 2024 and medium-term guidance. Our guidance includes only the contribution of the initial phase of unconventional, while it does not cater for the second phase, which could unlock significant contribution from the potential delivery of thousands of wells, as mentioned by Mr. Abdulrahman. We will effectively consolidate the unconventional operations financials. Exact details will be shared upon signing of the definitive documents with the partners in Turnwell. In the near term, we currently expect a second quarter sequential growth trending towards the mid-single digit versus Q1 for revenue and EBITDA, with a trend similar to that we saw in the first quarter versus fourth quarter 2023. As a general trend, for the remaining quarters this year, we project broadly similar sequential growth between quarters as we deliver on the rig fleet program. For this reason, we expect the second half with revenue EBITDA higher than the first half. This slide is a summary of where we are on 2 key developments that are not captured by our guidance, starting from Enersol. After completing the first transaction, acquiring the stake in Gordon Technologies, the U.S.-based leading player in measurement while drilling, we are in final stages on 3 further transactions in segments fully complemented our business, such as drilling and precision manufacturing, completion and intervention. To give you a sense of potential size, we expect from Gordon Technologies and the 3 transactions and annual pro forma net income up to $50 million for ADNOC Drilling upon competition. Signing of those is expected in 2024. Furthermore, we have 6-plus transactions in advanced stages. Based on current visibility, Enersol is expected on a fully invested basis to contribute to ADNOC Drilling an annual pro forma net income up to $100 million, subject to closing of all transactions. On another strategic front, the regional expansion into the GCC region. We are progressing and targeting selected markets with accretive potential upside. As we speak, we are in advanced stages for prequalification on drilling and services with regional NOCs, particularly in Oman and Kuwait. Our goal is to build a presence in these adjacent markets through our integrated offering, unparalleled experience and proven track records. Before handing back to Mr. Abdulrahman, I would like to touch on our new dividend policy, which focused on optimizing capital allocation through sustainable and progressive distribution. Under the new dividend policy, we aim to grow dividends by at least 10% per annum on a DPS basis over the next 5 years between 2024 and 2028. The Board of Directors, at its discretion, may consider additional dividend over and above the progressive dividend policy after considering growth opportunities while maintaining a net debt-to-EBITDA ratio of up to 2x, excluding transformative M&A. The policy will be subject to shareholder approval at an upcoming General Shareholders Meeting. I'd like to highlight that the total dividend for 2024 is expected to be at least $788 million, representing a 10% year-on-year increase. As per the policy, dividends are expected to be paid semiannually, with final dividend distributed to shareholders in the first half and the payment of the interim in the second half of each fiscal year. That concludes my remarks. Thank you, everyone. And now I will hand over to Mr. Abdulrahman for his closing remarks.

Thank Youssef and the team. To recap, we have delivered another strong quarter, fleet expansion, exceptional growth, supported by strong cost performance across the organization and resulting in leading margins in the industry. This growth financially and operationally is reflecting in our new progressive dividend policy, which aims to enhance distribution and overall shareholder returns. We are also delivering on the growth strategy with the creation of Enersol, which has completed its first transaction, while also starting a transformative G&A in the unconventional energy development via Turnwell. Our objective is to enable our clients' capacity growth through safe, efficient and sustainable operations that support our ESG agenda. I would like to thank the ADNOC Drilling team again for this strong performance. Thank you for joining us today, and I will now hand over to the moderator to open the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Ricardo Rezende of Morgan Stanley.

My first question is related to the unconventional announcement. When you discussed that there might be many more thousands of wells to be drilled on unconventional, would you have any indications on how many incremental rigs could that require compared to the 142 rigs that are in the guidance by the end of this year? And then the second question is related to the regional expansion. We've seen some jack-ups being suspended in Saudi. Would your regional expansion be more on the offshore or onshore? I guess what I'm trying to think is would you be a potential buyer for some of those assets that have been idled because of the developments in Saudi?

Thank you, Ricardo. This is Abdulrahman speaking. Now on the first part on the number of wells or number of rigs, the unconventional, it's a journey that we are starting. Unconventional, from a technical point of view, I mean, the life of the wells normally is totally different from what we do on the conventional activities. So the number of wells definitely will be thousands because of the demand, what kind of capacity is targeted to produce. And that definitely will be the operator call for in terms of how much growth you would like to go into the unconventional having in mind the conventional is there also. But definitely those are unconventional resources, which is available to be recovered, I mean, as we are talking, the number is 220 billion of crude oil, 460 TCF of gas. Now huge numbers. And if we assume certain percentage, let it be 10%, again, this big recovery that has to be done. Now in terms of number of wells or number of rigs, from experience, we would expect because of the amount of activities that will require, probably it will go to only the intermediate phase, probably it will go from 20 to 30 rigs. But again, it depends how much of the program will be there. Now on the other part, on the jack-ups, which is available, we had a program for the growth plan in the offshore. And as we have mentioned in the past, I mean all our plans or planned jack-ups that we wanted to purchase, it's already ordered. Actually, the last 2 are expected to come hopefully within the next couple of months to Abu Dhabi to start operation, hopefully, between July, August, hopefully. So that's the plan. Now is there anything else to come? We will be looking at opportunities. If there is any opportunity that we can work through, we will think about it as a piecemeal. But, definitely land rigs is totally different because the unconventional is mainly on the land or is only on land now. I hope that answers, unless Youssef, would like to add?

No, no, fully agreed with Bu Mohamed. I think Bu Mohamed has provided an estimate of 20 to 30 rigs on unconventional, assuming [indiscernible] illustrative 10 wells per rig, that's 200 to 300 wells. ADNOC has communicated that they would like the 1 billion cubic feet of gas per day from the unconventional by 2030. So extending that 200 to 300 wells per year towards the 2030 will probably give you an estimate that this is kind of, let's say, in the low end of the, let's say, call it, thousands of wells range. So potential upside, even above that. And as Bu Mohamed said on the expansion side, we are looking at opportunities. We have mentioned in the presentation that we are very close to prequalification imminently in Oman and Kuwait, which is the organic route we are pursuing. And in parallel to it, continue to evaluate the inorganic route. These 2 markets are by definition, are predominantly onshore market. And hence, this is where the onshore opportunity is the closer opportunity from a regional perspective.

Our next question comes from Waleed Jimma of Goldman Sachs.

Two questions from my front. First one is on the unconventional front. Just wanted to ask if you could please confirm if the $1.7 billion is part of your current guidance. And second of all, in terms of the phaseout of the onshore rigs you expect to commence operations in Q2. Have these rigs started operations? Or are they expected to begin towards the end of Q2?

Thank you, Waleed. I'll take the second part and you can take the first part, Youssef. On the rigs that are planned, definitely, we started receiving whatever we are planning in Q1. Actually, we had 8 rigs in Q1. And there is another 6 to 8 rigs to come in Q2. As we talk, I mean, most of the rigs are in Abu Dhabi, are getting worked out, rigged up kind of thing and getting ready for integration. So hopefully, in the coming couple of months, those rigs will be also active and will start operation apart from the other 2 jack-ups that I mentioned also. The first part was on the $1.7 billion on the...

Yes, yes. The $1.7 billion is part of the guidance, but only the $1.7 billion. And hence everything after that is a kind of a substantial upside to the guidance. And also on the first point on the guidance, also the 3 additional onshore rigs starting also joining the fleet in Q2 is also part of the guidance. That's why we're very confident now with these rigs [indiscernible] we're going to be hitting the mid-single digit growth guidance in Q2 as well as basically taking out fleets by the end of Q2 to the 140 rigs, which puts us kind of again well on track for finishing the year with 142 rigs plus and hitting the overall year guidance.

Our next question comes from Afaq Nathani of International Securities.

Congratulations on a great set of numbers. Just a little bit on the unconventional side. If you could elaborate how should we be looking at the potential financial contribution from this front? Do the rigs have the same contractual setup over the fixed IRR as of the conventional -- as to the conventional rigs? And what is the potential -- how big is the potential for this segment? If you could pull a number to it for Abu Dhabi as a whole and for ADNOC Drilling's part to play In that? That's one. And on the second part is this is the first quarter with the tax expense. So just wanted to get some idea on how the experience has been in terms of passing on the impact of the tax expense to the clients? And how have you guys been able to fully pass on the impact? Or are you taking some hit of it as well?

Thank you, Afaq. Youssef, if you can?

Yes. Maybe starting with the tax piece. So we are not taking any impact. We are able to fully pass it through to the clients. We have already invoiced our clients already for the tax impact. Hence, it is a fully pass-through. And then on the unconventional side. So basically, what's happening is we've set up Turnwell. We're going to be retaining at least a 55% stake in Turnwell. We are onboarding SLB and Patterson with up to a 45% stake in the first phase. We will effectively consolidate the financial results of the unconventional, either by consolidating Turnwell as subsidiary and/or by consolidating the contract itself because the contract is awarded to ADNOC Drilling first. And then effectively, there is an award from ADNOC Drilling to Turnwell. As we get into the next phase of the unconventional, there will be a reevaluation of the stake and hence potentially we may end up with a higher stake than the 55% or effectively capturing the value of that stake upfront in the form of a consideration. And the margin profile of that contract will be closer to our Oilfield Services business margin given the very high intensity of services, specifically within the unconventional, given the addition of the fracking, which results in the services forming the majority of the overall contract value.

Okay. So if I understand right, so the margin on unconventional will be closer to the OFS margins. That's what you said, right?

Correct.

Our next question comes from Alex Comer of JPMorgan.

A couple of quick questions from me. Just to clarify, here, in terms of the unconventional rigs, you said 20 to 30. So that is on top of the 144. So just to confirm on that. And then also there's some debate about how much oil and gas we'll need going forward. Obviously you've got OPEC in play as well. But just within this opportunity, how much do you think will come from gas versus oil? And then also, with regard to the $50 million to $100 million that you talked about as contribution from the JV, when might we see that in terms of which year?

Thank you, Alex. Now for the unconventional rigs, yes, the one would say the 20, 30 rigs that's potential to come hopefully in -- for the next phase will be over and above the 142. Now the other part on the oil and gas.

So we see that fairly balanced between the 2. Obviously, on the gas side, this is driven by the 1 billion cubic feet of gas per day incremental production from the unconventional, which ADNOC is seeking by 2030 and hence, that is the primary strategic driver of the program. Having said that, the same unconventional fields do have a kind of a massive reserves of unconventional oil, which exceeds 200 billion barrels. And obviously, these barrels, even though they have a higher cost of production than the conventional, are still highly economic from a production perspective and improve the overall economics of the project when you look at kind of oil and gas combined. And hence, we see a fairly balanced well count between the 2 programs. In terms of the timing of impact, so we start to see it from this year itself in '24 effectively impact on bottom line because effectively we're going to be starting -- we already have 6 rigs and 1 frac fleet, working on unconventional as we speak. These are being migrated as we speak into Turnwell. And hence, it's a continuation and acceleration of work already being done and hence, the bottom line from the unconventional will already appear partially in this year. And then 2025 is where we have the full-year impact of Turnwell. Very similar story to Enersol as well. Our JV with Alpha Dhabi, where this year, we already start to see the initial impact from bottom line from the acquisition. And then next year is where we have the full impact, which can potentially be up to $100 million net income impact for ADNOC Drilling share from Enersol. And the unconventional is not far off from these numbers. Well, that $100 million number if you look at the unconventional contract, the $1.7 billion contract, there also contribution to ADNOC Drilling from that contract will also not be far off. Looking at both together, we're looking at a couple of hundred million dollars kind of impact as we look at kind of partially in '24 and then fully in '25 from these contracts.

Can I just confirm? When you said the $100 million from the unconventional, is that your 55% or is that the 100%?

That is our share. That is our share, which is partially linked to our economics in Turnwell as well with the 55% as well as our overall economics, including the fact that this contract is first being awarded to ADNOC Drilling and therefore, ADNOC Drilling gave the contract award to Turnwell.