Arabian Drilling Company (2381) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Arabian Drilling's Second Quarter 2026 Results Conference Call. I will now pass the line to Mr. Raed Maharmeh, Investor Relations Manager. Please go ahead, sir.

Thanks, Rafa. Good afternoon, everyone, and welcome to Arabian Drilling's Earnings Call for the second quarter and H1 2026. We have recently announced our Q2 and H1 2026 financial results, and the documents are available on our Investor Relations website. As usual, we're starting with a disclaimer, so I invite you to read it at your convenience. Following the presentation, we'll be pleased to address your questions. I would like to take a moment to introduce our speakers for today's call. First, we'll hear from our CEO, Engineer Fahad Al-Bani, who will provide us an overview of our performance. Then we'll have our CFO, Mr. Farid Mustafayev, who will take us through the company's financial performance for the second quarter and 6-month period of 2026. I would like now to hand over to our CEO, Engineer.

Thank you, Raed. [Foreign Language] and good afternoon, and thank you for your participation in today's call. Starting with our quarter 2 2026 performance, it was a challenging quarter, primarily reflecting the lowest offshore activity level and overall utilization experienced in several years. Revenue was $765 million, down 6.9% quarter-on-quarter, outperforming our prior guidance despite the temporary suspension of several offshore rigs. EBITDA margin was 32.8%, while operating cash flow remained solid at $243 million, demonstrating the resilience of our business model despite these temporary operational headwinds. The quarter resulted in a net loss of $31.5 million, reflecting the reduction in high-margin offshore activity. While these results do not reflect the level of performance we expect from our business, it is important to view them in the context of exceptionally low offshore utilization experienced in the second quarter. Let me now put the quarter into the broader context of our first half performance. Our first half of 2026 revenue reached $1.6 billion, and EBITDA was $540 million, resulting in an EBITDA margin of 34%. Compared to the first half of 2025, performance was impacted by the temporary offshore suspension and the absence of high-margin rig move that benefited the prior year period. Despite this headwind and low offshore utilization level during the second quarter, we maintained a resilient EBITDA margin of 34% and generated operating cash flow of $524 million. This was supported by operational efficiencies and the early benefit of our cost optimization program. Importantly, activity levels have already started to improve following the quarter end, with 3 offshore rigs returning to operation, supporting our outlook for the rest of the year. Farid will provide more details later in the presentation on the second quarter and first half results and segment performance. Beyond the financial results, our first half performance continued to show the resilience of the underlying business and our leading position in the Saudi drilling market. We indeed the period -- we ended the period with a backlog of $11.8 billion, up 7% year-on-year. Safety and operational performance remained strong with both key metrics, TRIF and NPT, maintained at low levels. We completed 46 rig moves during the quarter with improved rig move efficiency. Although quarter two utilization closed at 71.7%, one of the lowest levels in several years, activity has already begun to recover with 3 offshore rigs returned to operation after quarter end. At the same time, our cost optimization program is delivering encouraging early results and supporting operational efficiency across the business, with further benefit expected during the second half of the year. Turning now to our backlog position and fleet utilization. As I mentioned, the underlying fundamental of the business remains strong. Let me provide a bit more color on our backlog and utilization. [Technical Difficulty]

Ladies and gentlemen, please stand by. We will shortly reconnect with the host.

Here.

Yes, yes. Please go ahead.

Okay. Our contract renewal continue to progress as planned. Since our quarter 1 update, the number of contracts requiring renewal in 2026 has reduced from 18 to 15. This reflects 1 contract expiry moving on to 2027, as well as 2 land rig contract termination, with the effective rigs expected to return to service during the third quarter. The largest remaining renewal milestone is the Elephant Rig gas LSTK tender. The tender results are expected to be announced in August 2026, and the renewal process continue to progress as planned. Importantly, this tender represents the majority of our remaining near-term renewal activity. Once this process is concluded, our contract renewal profile through 2027 becomes significantly lighter, providing greater backlog visibility, reducing renewal risk, and allowing management to increase its focus and growth opportunity beyond the existing fleet. With a strong backlog, improving activity level, and more stable contract portfolio, we remain confident in our outlook for the business. With that, I will now hand over to Farid to discuss our quarter 2 and first-half financial results in more detail.

Thank you, Fahad. [Foreign Language] and good afternoon, everyone. Let me start with our quarter-on-quarter performance. Revenue declined by 6.9% quarter-on-quarter to $765 million, outperforming our prior guidance. The stronger performance was supported by continued improvement in the land segment, driven by better rig move efficiency, improved maintenance planning, and other operational initiatives, together with a full quarter contribution from the GCC project. EBITDA declined by 13.3% sequentially, with margins moderating from 35.2% to 32.8%. As expected, this was primarily driven by lower offshore activity and utilization during the quarter. However, the impact was partially offset by stronger land profitability and the early benefits from our cost optimization program, which started to gain traction during the second quarter. At the bottom line, we reported a net loss of $31.5 million compared to a profit of $7 million in Q1. This primarily reflects the lower EBITDA contribution during the quarter. From a cash flow perspective, performance remained resilient. We generated $264 million of operating cash flow despite offshore suspensions and ongoing reactivation CapEx, demonstrating the strength of the business and our continued focus on cash generation. Net debt remained broadly stable during the quarter. Net debt-to-EBITDA increased to 2.2x , which we believe is to be the peak level for the year. This is primarily driven by the temporary reduction in the last 12 months EBITDA, and not by an increase in debt levels. I will cover the leverage profile and outlook in more detail shortly. Let me now turn to our first half performance. As shown on this slide, revenue declined by 10.6% year-on-year to $1.6 billion, reflecting lower utilization levels, primarily within the offshore segment, as well as the absence of higher-margin activities that benefited the prior year. Despite these headwinds, the impact was partially mitigated by the continued resilience of our land operations. EBITDA decreased by 21% year-on-year to $540 million, with margins moderating from 38.5% to 34%. Despite lower utilization, a less favorable activity mix, and low offshore contributions, we maintained a 34% EBITDA margin through a disciplined cost management and the initial benefits from our cost optimization program. At the net income level, we reported a loss of $24 million. This largely reflects the lower EBITDA contribution over the period, while depreciation, G&A, and financing costs remained relatively fixed in nature. It is important to note, however, that on a year-to-date basis, both G&A and financing costs declined by a greater percentage than revenue, with costs down 14% compared to 10.5% reduction in revenue. The reduction in G&A reflects the impact of our costs optimization initiatives, while financing cost benefited from a more favorable interest rate environment. Operating cash flow reached $534 million, providing solid support for both our CapEx program and balance sheet. CapEx decreased by 26.8% year-on-year to $356 million, mainly due to the absence of the service vessel investment made in the prior year. Let me now walk you through the performance of our Land and Offshore segments. Looking at the quarter-on-quarter changes, the most notable development was the significant shift in revenue mix resulting from the temporary offshore rig suspensions. Offshore revenue declined by 37.3% during the quarter, reducing its share of total revenue from 33% in Q1 to 22% in Q2. As a result of the lower utilization levels, combined with our decision to maintain our core offshore workforce and operational readiness, given the temporary nature of the suspensions, offshore gross profit margin declined from 32% to negative 6%. We remain confident that offshore profitability will improve as utilization levels normalize in Q3 and Q4. At the same time, the land segment demonstrated a solid operational performance. Revenue increased by 8.2% quarter-on-quarter, increasing its contribution from 77% to 78% of total revenue. Gross profit margin improved significantly from 2.2% to 14%, supported by higher activity levels, improved rig move efficiency, and other operational improvements across the segment. Importantly, a number of these improvements are structural in nature and expected to support performance beyond the current quarter. Looking at the first half performance, total revenue declined in both segments compared to the prior year, with land revenue down 10.7% and offshore revenue down 10.3%, with revenue mix remaining broadly unchanged and profitability declining in line with activity levels. Let me now walk you through the key drivers behind the change in net income from Q1 to Q2. We started the quarter with a net profit of $7 million. As discussed earlier, the largest impact came from the temporary offshore rig suspensions, which reduced earnings by approximately $127 million. But this impact was offset by a number of mitigating factors. First, we benefited from approximately $11 million of one-off items during the quarter. Second, our GCC operations contributed $18 million, reflecting a full quarter of activity compared to the prior period. And finally, operational improvements, cost optimization initiatives, and other efficiency measures contributed approximately $59 million. As a result, Q2 was closed, and net loss was limited to $32 million. While the quarter was clearly impacted by temporary offshore suspensions and what we believe was the most challenging quarter of the year, this bridge highlights the effectiveness of the mitigation actions taken by management. More broadly, it also demonstrates the resilience of our business model. The strength of our land operations, combined with our offshore business and started regional activities, provides a diversified earnings base and helps reduce the impact of temporary disruptions affecting any single segment. Let me now turn to cash generation and liquidity. Despite the temporary offshore suspensions and the ongoing reactivation program, cash generation remained resilient during the quarter. We started Q2 with a cash balance of $566 million and generated approximately $251 million of EBITDA during the period. Working capital remained well controlled with a modest outflow of $27 million during the quarter. We invested $181 million of CapEx during the quarter, primarily related to rig reactivations and maintaining readiness to support the anticipated activity levels. In addition, we had other regular outflows during the quarter. As a result, we closed the quarter with a strong cash balance of approximately $489 million. Overall, we remain focused on cash generation, working capital discipline, and maintaining a strong balance sheet. Let me now wrap up the financial section with a look at our debt profile. Net debt remained broadly stable quarter-on-quarter at approximately $2.4 billion. Looking at the year-on-year trend, net debt declined by 10.3%, reflecting continued loan amortization together with our ongoing focus on cash generation and balance sheet discipline. Let me briefly address the movement of net debt to EBITDA, which increased from 2x in Q1 to 2.2x in Q2. This increase was driven by a reduction in last 12 months EBITDA rather than an increase in debt levels. The EBITDA was impacted by the suspensions experienced during the second half of last year, when the total utilization declined to 75%, as well as the additional temporary offshore suspension experienced in Q2 this year. Looking ahead, we believe Q2 represents the peak leverage level for the year. As activity recovers, EBITDA strengthens and scheduled amortization continues, we expect net debt to EBITDA to trend down progressively and fall below 2x by the end of 2026. Overall, we remain comfortable with our liquidity position, debt maturity profile, and balance sheet strengths. That concludes the financial update. I will now hand over to Fahad.

Thank you, Farid. Let me now turn to our outlook for the third quarter of 2026 and our key priorities. Looking ahead, we expect the third quarter revenue to increase by approximately 4% to 6%, supported by the return to surface of 3 offshore rigs. While only part of the benefit will be reflected in the third quarter, we expect a strong contribution in the fourth quarter. Our full year CapEx guidance remained unchanged at $700 million. While the second quarter reflected the full impact of the offshore rig suspension, the financial effect was significantly mitigated through disciplined cost management. Our cost optimization program delivered approximately $25 million of saving during the quarter, with further saving expected through the rest of the year. Importantly, most of these initiatives are expected to deliver sustainable and reoccurring benefits beyond 2026. We're also encouraged by the early results of our land business efficiency initiatives and expect their benefits to become more feasible as additional land rigs return to service. As we move through the second half of the year, our focus is increasingly shifting from utilization recovery and operational optimization towards growth and expansion opportunities. Above all, our commitment to safety remains unchanged. Safety is at the core of every operational decision we make as we continue to deliver strong operational and financial performance while maintaining the highest standard across our operations. With that, we conclude today's presentation, and I will now hand over to Nathan to open the floor for questions.

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

I have one question, just one on the final remarks about the focus shifting back to growth. Would you be able to provide us some color on what's the latest on upcoming tenders and how you're positioning the company? In the past, you were very active on some of those unconventional gas tenders. So when you look forward, would you be a bit more focused on land versus offshore? And then when you look at other geographies as well, what would be the appetite to look at some tenders in Kuwait, Oman, or other GCC countries? Thank you.

Thank you for the question. First of all, our focus, as I mentioned before, is to just have full utilization of offshore rigs and our gas LSTK contract and other opportunity that we're looking at it as we speak. For our international expansion, this is part of our strategy, and we're looking at several opportunities as we speak. And we're pursuing in the future any opportunity that fits our company, and we're looking at it as we speak, as we mentioned. And as we -- as of now, we've still our rigs in the GCC countries working, and we're looking for any other opportunity in Kuwait or other than Kuwait. Any opportunity, we're evaluating one by one. We're going to, [Foreign Language], expand, as we mentioned before, because this is part of our strategy.

If I may follow up, we've seen some of other companies looking at doing M&A in the region as a way of expanding internationally at some very decent valuation. Are you looking at doing the same? Or would you be looking to do more organically?

Ricardo, this is Farid. So basically, we're looking at everything, right? Right now, everything is on the table. We're looking at organic growth, inorganic growth. And so we're evaluating all these opportunities.

Our next voice question comes from Anna Kishmariya from UBS.

Hopefully, you can hear my question. I have a couple. First, around this LSTK contract. We saw recently that there were some awards from Aramco on other contracts, despite the conflict still ongoing in the region. Do you see any risks that this LSTK new award that you expect in August could be postponed? Or do you think it's very close now, and we'll hear announcement any day soon? The second question, also around the LSTK, would be around the rig number, because we previously discussed on this call that there is upside to the previous 11 rigs that were operating under this contract. Do you see more rigs which could be awarded for this LSTK? And my third question will be, given the more brighter outlook that you are currently sharing for third quarter and fourth quarter, do you see you could be in the position to reinstate dividends for this year?

First, to answer your first question, there is a risk now or something? We don't see any risk, and hopefully we'll announce this LSTK, as we mentioned, this month, in August. And the second question, we're looking for 11 rigs as we speak now. However, there is potential to increase the number of rigs, and we'll put it also in the announcement if there is any increase more than the 11 rigs. We'll announce it also in the time. For your third part, go ahead.

On dividends, maybe to give a bit of background. As you remember, the decision was back in 2025, Board took a decision to pause dividends. And this decision was driven by the suspensions that happened in '24, '25 and resulted in overall losses for the year, for 2025. So this was a prudent decision aimed to protecting our long-term interest of our shareholders by preserving cash and prioritizing capital allocation. At that time, Board also noted that dividend policy would be reviewed as market conditions and business performance improved. So at the moment, Board continues to evaluate the situation closely and will revisit the dividend decision, and we'll communicate any updates in due course.

[Operator Instructions] Our next voice question comes from Alex Comer from JPMorgan.

Yes, just a real quick one for me. In the onshore business, you mentioned that some of the changes that lift that margin were structural. Is that margin that you achieved in the second quarter, is that a good proxy for the rest of the year? Or should we expect that to drift down a little bit as we go forward?

Yes. Hi, Alex. Thanks for the question. So look, we had a very big improvement in Q2 in land margins, right? From 12% to 14% on gross margins. So majority of that improvements are coming from structural changes. So yes, they will stay, but obviously we had some one-off improvements as well. So probably it's a good proxy for the rest of the year, but it includes some one-off items in Q2 as well. Definitely will be improvement compared to Q1.

Our next question is a text question from Rabih Moussa, QIC Asset Management. What utilization rate should we expect in Q4?

Thank you for the question. We're expecting really the utilization to increase. And we're expecting more than 85% utilization. For offshore, we're expecting the third quarter 100% utilization in offshore. However, as aggregate land and offshore, we're looking between 85% to 90% utilization.

Our next voice question is from Ildar Khaziev, HSBC.

Just a quick clarifying question for me, please, on your third quarter guidance. It seems to imply that the onshore revenue will be slightly weaker quarter-on-quarter, offsetting the stronger offshore performance. Is that the correct conclusion?

Hi, Ildar. Yes, that's a fair conclusion. Partially, the activity in Q3 for land business will be impacted by the timing of the rig moves. Yes, so that's a timing impact. It is not material, but there is some impact for Q3 compared to Q2.