Good afternoon, everyone. This is Iyad Ghulam on behalf of SNB Capital. I would like to welcome you to our conference call with Arabian Drilling Management regarding Q2 2024 earnings results of the company. We will first listen to the management feedback. Following this, we will open the floor to questions. Arabian Drilling Management, please begin with your feedback.
Thank you, Iyad. Assalamu Alaikum. Good afternoon, everyone, and welcome to Arabian Drilling Earnings Call for the second quarter of 2024. Our thanks to SNB Capital for hosting this call. We announced our financial results yesterday, and the documents are available on our investor relations website. As usual, we must start with the disclaimer, so I invite you to read it at your convenience. Let me now introduce our speakers for today's call. First, we will get a performance overview from our CEO, Mr. Ghassan Mirdad. Then our CFO, Mr. Hubert Lafeuille, will take us through the financial performance. The agenda for today's session will cover various topics, including key milestones, a review of our operational and financial performance, and forward-looking guidance. We will then open the floor for your questions. I would like now to hand over to our CEO, Mr. Ghassan Mirdad.
Thank you for the introduction, Jamal. Asalaamu Alaikum, and heartfelt welcome to all participants joining us for the earnings call today. We'll begin with a brief overview of this quarter and year to date. We delivered strong growth with excellent operational execution, solid financials, and we have many achievement to celebrate despite the offshore suspension taking effect. On the achievement front, let me start by congratulating and thanking the team that are doing a remarkable job in deploying the unconventional rigs, including the project team, logistics team, operational, safety, and HR on the people side. We managed to reduce the deployment of our rigs from the original plan, 70 days to 45 days, from the arrival time at port to start drilling on site. This would not have been possible without the support of our client and the Dammam Port authorities. Starting with operation.
Our total available fleet has increased from 49 to 53 due to the startup of the four unconventional rigs. However, our utilization rate decreased to 91% due to the offshore suspension. Our 36-month Rig Efficiency Index stays consistently strong at 94%. Over the quarter, our rig move business continued to bring value with 1.1 day saved per rig move, with a total of 38 rig moves. On the safety and sustainability front, this remains our top priority, and we have a few milestones to celebrate. We are very proud to announce that seven rigs reached significant milestones with an accumulated 63 years without any lost time injury, which is an average of nine years with no lost time injury incident per rig. On the sustainability front, we launched three projects focused on reducing CO2 emissions using battery pack, solar panels, and LED lights.
We also published our 2023 sustainability report, which explains in detail all our strategies, achievements, and goals. Moving to the financial highlights, which Hubert will cover later in more details. Compared to H1 last year, both our revenue and EBITDA showed strong growth of 21% and 20%, respectively. Our EBITDA level was 41% this quarter, which is in line with our expectations. We have also declared a dividend of SAR 1.35 per share. On the growth front, we have good news. As mentioned earlier, we see the benefit of our outstanding unconventional rigs deployment, with five out of 10 rigs have started their drilling contract to date. The remaining five rigs are expected to start between now and September, with two rigs starting this month in August.
The three rigs from the second award will come online before year-end instead of Q1 next year, 2025. We also plan to diversify our revenue stream by providing training services to other companies. We have excellent facilities and international well control training accreditation that we intended to convert from a cost center to a profit center. We are working with the local authorities to get certified to provide the training locally. Let's now have a look at the last contract and rig activity update. This quarter, two offshore rigs have begun their one-year suspension, and one rig ended its contract at the end of June, as previously announced. Part of our technical strategy was to have leased rigs that can be returned at the end of the offshore development project in 2027 and to de-risk our offshore exposure....
This enables us to return the rigs quickly with minimal cost, and the 2 leased rigs will be returned as part of any further rig count reduction. This may include the leased rigs currently under discussion for suspension. On the positive side, a one-year contract extension was signed with our client, KJO, Al-Khafji Joint Operations, and we are positioning ourselves with multiple opportunities in Southeast Asia. On the land rig activity side, we see continuous growth in the gas sector, in both conventional and unconventional, and we expect another round of tenders to come. As mentioned, we started drilling operation for 5 unconventional rigs, with the 13 rigs expected to be online by year-end. We also see an opportunity to reposition rigs from oil to gas to improve margin over time in the land sector. Let's now discuss our backlog.
The backlog of SAR 11 billion was approximately SAR 800 million lower compared to last quarter, with approximately SAR 900 million of revenue consumed in Q2, partially offset by the addition of SAR 100 million as we secured a one-year extension for one of the offshore contracts with KJO. We have 6 rigs rolling off contract in 2024, of which 2 are offshore and 4 are land. On the 2 offshore rigs, 1 rig is part of the 3 currently suspended rigs, and the other is our MPSV, which we expect to renew in Q4. On the 4 land rigs, 2 are under negotiation, 1 is under maintenance, and 1 received a one-year extension in July. Moving on to the next slide, we continue to have strong operational KPIs.
Looking at the top left, we kept the Aramco Rig Efficiency Index at a very high level of 94.1% in Q2, with 92% of our rigs scoring in high and superior performance category, which is the highest score achieved in the last four quarters. Please note that these numbers are company estimates, as we have not yet received the Aramco data. On the lower left graph, you can see that our quarterly NPT increased to 1.61%, which was higher than the previous quarter. You know, unexpected service quality events can have an impact on NPT and point at any point of time, until an investigation is completed to understand the root cause. Following the investigation, the NPT will be allocated to the concerned service provider, depending on the outcome.
On the top right, our rig move performance was also consistently strong, with an average of 1.1 days saved per rig move. If you multiply the 1.1 days saved by the number of rig moves completed, we have effectively gained an additional 42 drilling days in Q2. This proves, again and again, that OFSAT is a key enabler for our business. On the bottom right, you can see the three offshore rigs are now stacked. Two of these rigs are currently undergoing mandatory planned recertification activity and will be warm stacked until their next assignment. With that, I will now hand over to Hubert to go through the financial performance. Hubert?
Thank you, Ghassan, and good afternoon to everyone on the call. First, let's have a look at some of the key numbers for the quarters. We stayed consistent in Q2, continuing our strong start to the year. We closed Q2 revenue with SAR 939 million, a slight contraction of 3% compared to Q1. Our Q2 EBITDA was SAR 386 million, slightly below that of Q1 by 5%, with a margin of 41% in line with our expectation. We saw some record high CapEx this quarter, with more than SAR 600 million spending. Our free cash flow remains negative at -SAR 299 million, as our growth CapEx cycle is in full swing. However, our cash flow from operation before working capital change remains strong, slightly below SAR 400 million per quarter.
We are showing a return on equity of 10.1% based on our last 12 months net income over an equity position of SAR 5.9 billion. We closed the quarter with a net debt of SAR 2.42 billion and a leverage ratio of 1.5 times, which is slightly higher than the 1.2 times of the last quarter. Now, let's get into a little bit more detail and have a side-by-side comparison, first quarter-on-quarter and then year-on-year. So let's look at the trailing quarter comparison, which is the upper graph.
Looking at the revenue first, as mentioned, we see a slight quarter-on-quarter decrease of 3% from SAR 967 million to SAR 939 million, mainly due to the offshore rig suspension of -SAR 33 million, and partially offset by the startup of four unconventional land rigs of SAR 14 million. Following the slight revenue contraction, EBITDA also decreased by 5% quarter-on-quarter, from SAR 405 million to SAR 386 million, mainly due to the suspension of the offshore rigs of -SAR 30 million, which was partially offset by the contribution and the mobilization cost deferral of the unconventional land rigs of about SAR 13 million. For the suspended offshore rigs, we incurred in the quarter full cost due to some of the planned maintenance activities for equipment recertification that Ghassan has mentioned.
Therefore, in the quarter, the revenue loss had almost 100% flow-through impact on the EBITDA in Q2. We will start seeing the cost going down by the end of Q3 as we are downsizing the rig crew after the completion of the planned maintenance activities. In Q2, we have recognized a one-off non-cash asset impairment charge of SAR 105 million to adjust the book carrying value of one land and one offshore rig. Our net income was therefore adjusted to exclude this impairment for like-for-like comparisons. In Q2, our adjusted net income decreased in comparison to the previous quarter by 14% from SAR 146 million to SAR 125 million, due to additional depreciation cost of SAR 15 million and reduced financial income of SAR 7 million as the excess cash is depleting.
On the CapEx side, there is SAR 307 million or 100% increase in spending quarter-on-quarter, mainly coming from the unconventional land rigs worth SAR 265 million, and it also includes offshore rig moving equipment to support fleet expansion, as well as one land rig upgrades. Moving now to year-on-year, H1 2024 versus H1 2023 comparison, which is shown on the bottom graph. Looking at the revenue first, we see a year-on-year increase of 21% from SAR 1.6 billion to SAR 1.9 billion, mainly driven by the contribution of three offshore rigs that were added to the fleets in Q3 of 2023. Along with the increase of the revenue, EBITDA also increased 20% year-on-year, going from SAR 658 million to SAR 791 million.
This increase, which is driven by the revenue growth, is partially offset by the start-up of the unconventional rigs, which was incurred in H1 2024 for approximately SAR 29 million. Now, excluding the start-up cost, the normalized H1 2024 EBITDA margin is approximately 43%. Moving on to the adjusted net income, we see a slight year-on-year decrease of 4% from SAR 282 million to SAR 271 million. The additional net income from the increased rig activity was offset by increase, mainly in the net interest expense of SAR 69 million, the unconventional start-up of SAR 29 million, as I just mentioned, as well as increase in staff costs of about SAR 40 million, some of which is expected to ease off in H2.
Now, to conclude, looking at the CapEx, we've spent SAR 919 million in H1 2024, about SAR 137 million more than H1 2023, and this was mainly driven by the unconventional rig expansion. In H1 2024, we spent approximately SAR 650 million with the unconventional rig. That makes up roughly 70% of the total CapEx spend. And the total bringing the total CapEx spend on this program to approximately SAR 1.2 billion. Overall, if you look at the extensive 13 unconventional rig CapEx program, we estimate that the total program is around SAR 2.1 billion-SAR 2.3 billion, and therefore we have spent a little bit more than half of the program to date. As most of you know, Arabian Drilling operates on two different segment, which is land and offshore.
In this slide, we look at each segment, focusing on the quarter-over-quarter and year-over-year revenue and gross profits. As a reminder, gross profits includes the direct operating cost of the rig, which also includes depreciation expenses, but does not include G&A nor interests, interest or tax. So for the offshore segments, looking at the first graph on in the top left, we noticed a slight decrease in the revenue quarter-over-quarter of about 8%, from SAR 453 million to SAR 490 million. We also see a decrease in the gross profit of about 11%. Now, this was due to the suspension of two offshore rigs that were effective at the end of May.
On the other hand, if we compare on the year-on-year numbers on the right side, we see a strong increase in the revenue of 31%, from SAR 601 million to SAR 872 million, and our gross profit has also increased by 32%, in line with the revenue increase, and driven, again, by the contribution of the 3 offshore rigs that were added to the fleet in Q3 of 2023. Now, moving on to the land segment, which is on the bottom, which is the bottom graph. There are a lot of moving parts, that makes the side-by-side comparison uneasy, and as we move into H2, we expect to see our cost bases and profit normalize and gel into a more steady state business.
So starting off with the quarter-on-quarter revenue, there is a slight increase of about 1% from SAR 514 million to SAR 520 million, and this was due to the start-up of the unconventional land rigs in Q2, which brought an additional SAR 14 million of revenue, partially offset by a mobilization fee and a well site preparation fee that we recognized in Q1 of about SAR 11 million. We also see a decrease in the gross profits of about 18%, with a lot of ups and downs offsetting each other. But overall, most of the Q-on-Q variance boils down to a one-off credit of SAR 60 million that we recognized in Q1, related to downsizing the payout of a retention plan that was introduced mid-2022.
Going to the year-on-year number, we see a revenue increase of about 6%, going from SAR 969 million to just over SAR 1 billion. This increase of SAR 65 million is mainly coming from the additional rig activity of SAR 33 million, including the SAR 14 million from the unconventional, as mentioned several times, as well as higher rig move revenue and client chargebacks on reimbursable logistic services. On the other hand, we saw a decrease in gross profit of about 35%. The contribution from the additional revenue was offset by the start-up of the unconventional land rigs of about SAR 29 million, as well as an increase in the depreciation base of about SAR 34 million, including SAR 8 million for the 4 unconventional rig that started in Q2. The next slide is a cash flow bridge that provides a snapshot on the cash movement for the six-month period.
So overall, we started with a cash position of SAR 1.4 billion, to which we added net income before tax of SAR 166 million, and non-cash item of SAR 613 million. This was offset by CapEx spending of SAR 990 million, of which 70% related to the unconventional rig, which is about SAR 650 million. And then the remaining SAR 269 million of CapEx include mainly offshore rig move equipment, one land rig upgrade, as well as some facility and ERP upgrades. Now, we also paid out SAR 225 million of dividends related to H2 2023 periods, and we met our financial obligation with a repayment of SAR 83 million on one bank loan, as well as the lease for the two offshore rigs.
In addition, we had SAR 99 million net interest payments, which includes finance income from short-term deposits of approximately SAR 18 million. Finally, the last piece of the bridge includes a net working capital increase of SAR 174 million and other elements, mainly related to Zakat and income tax payments for about SAR 38 million. Moving on to the detail of our debt profile. Our gross debt position remained roughly the same during the quarter. We have a total borrowing of SAR 3 billion, which is made up of SAR 2 billion in Sukuk, as well as two bank loans of SAR 500 million each. We started repaying one of the bank loans with a payment schedule of SAR 25 million per quarter, and the repayment schedule for the second bank loan will start in 2025, with an additional SAR 25 million principal repayment per quarter.
The company net debt position of SAR 2.42 billion has increased by approximately SAR 665 million or 38%. As mentioned earlier, our net debt to EBITDA leverage ratio has increased to 1.5 times on account of cash allocations on the CapEx spending. Going forward, we are likely to draw on additional debt to finance the remaining unconventional program, and we already have a bank facility of SAR 500 million secured at very competitive price. Consequently, our leverage ratio will continue increasing and peaking at around 2+ times. My last slide relates to 2024 guidance. At this point in time, we reiterate our revenue guidance, expect to be in the range of SAR 3.6 billion-SAR 3.9 billion, reflecting a year-on-year growth of 4%-12%.
This guidance factors in the suspension of the offshore rigs. We also reiterate our CapEx guidance, with expected spending to be in the range of SAR 2.1 billion-SAR 2.4 billion, as we continue to invest in the unconventional CapEx program. As mentioned by Ghassan, we've also paid out a dividend of SAR 1.35 per share for H1 2024, with a distribution date of the 22nd of August. This conclude my section, and I will now hand it over to Ghassan for his closing remarks.
Thank you. Thank you, Hubert. In closing today's presentation, our key metrics and KPIs are in the green in H1, financially and operationally. Losing offshore contract is the nature of the beast in our sector across cycles. We had planned for this with the two lease rigs that can be returned quickly with minimal financial impact. We continue to monitor operational adjustment by Aramco, impacting our sector, both offshore and land. As mentioned in Q1, we always expected a softening of the offshore market in 2027 upon completion of Aramco's development project. The decision from our client accelerated the timeline, and our segmental mix is evolving as a result, with a greater land contribution and gas in particular. This will bring long-term sustainable in a sector that is crucial for Saudi's energy transition.
We believe that gas will continue to grow, both on the conventional and unconventional front, and we are well-positioned to capture it. Now is also a good time to shift our focus on consolidation, opportunities, and new revenue streams, as our investment cycle is peaking with all 13 unconventional rigs coming online by year-end. As promised, we are set to deliver continuous top-line growth for the full year. I will now hand over this to SNB Capital for the Q&A session. Thank you.
Thank you, Ghassan. Ladies and gentlemen, we will now start the Q&A session. If you wish to ask a question, please raise your hand or type in the Q&A box. Thank you for holding until we have our first question. Okay, our first question comes from the line of Ricardo Rezende from Morgan Stanley. Ricardo, please go ahead.
Thanks for taking my question. I guess just following up on something that Ghassan said about Southeast Asia. In the past, you have mentioned Kuwait and Oman as well. So if you could just give us a little bit more color on the regional expansion, if there's any updates on the other GCC countries as well? And my second question is on the margin recovery. We know that margins have been pressured by the pre-startup costs on all the gas rigs that you got, and now with this phenomenal job you've been doing on the startup ahead of schedule, should we think about margins being back to normalized levels by the second half of next year? Thank you.
Okay. So on the expansion, when on Southeast Asia, it was mainly on the offshore. And, what happened is we had several meetings, we met clients, and we've seen good opportunities. The challenges what we have now is you have, you have a lot of rigs in the market, you know, when they, when the suspension of 20 rigs. So there is a lot of available fleet at the moment to take. The challenge as well is when we try to look into, you know, going with a alliance with the company, most of the companies actually operate in Saudi, and as well they have suspended rigs as well. So they would more lean to put the rigs first.
Having said that, we think we still have opportunities, but it's not as easy as it was at the beginning of the suspension. On the Kuwait, I think there will be tenders coming by year-end, and I think we're set up to... That we can participate in these tenders. The only tender that was there before, we were certified just after, we were qualified just after the tender was almost at the end of it, so we could not participate. That is on the expansion front. What was the other question? Is on the margins. I think you're right. You have a very valid point. So at the beginning, you know, H1, we were covering most of the cost of the startup, and now starting the five rigs will ease up.
I mean, even the five rigs that started, four rigs started in H1 and one just after H1. I mean, they just started at the end, so it's only SAR 14 million. So but we'll see in H2 better coverage with the five rigs and the remaining other rigs as well, and hopefully bringing the rigs that were supposed to start in Q1 next year to come this year as well by year-end. So we'll see an improvement over there. And as well, in addition to the rigs, we have several cost initiatives that we're working on to improve as well, and kind of compensate for the drop of the offshore.
Yeah.
If I may just, if I may just add, I think that in terms of margin, what we're, what we're thinking is that obviously the offshore will impact in the short term of margin, but it will be offset by the unconventional that are gonna come online. I mean, you know, we expect that, you know, the unconventional will bring about SAR 200 million to SAR 250 million to SAR 300 million in H2, in additional, in additional revenue. And with margin that are accretive to the land segment, the margin are gonna be in the mid-30s percentage points around. And then there are a number of cost initiative as well that we're doing to reduce our cost basis.
So, all in all, we think that, you know, the margin overall, we should see a contraction from low- to mid-40s to low 40s. This is where we, this is where we see where we're gonna end the year.
This includes the 3 rigs suspended, and we're expecting 1 as well, that is suspending right now. So the 4th. So still we are within, you know, what we expect, you know, low 40s.
Yeah. So based on what we know today, based on the information that we have, I mean, this is where we see the margin target by the end of the year.
Okay. That's very clear. Thank you.
The next question is from the line of Oliver Connor. Oliver, please go ahead.
This question was just on the unconventional piece. You mentioned around possibly a new tender coming through. I'd seen that, Aramco being quite busy with a few packages and have mentioned 23 unconventional rigs coming. I'm just trying to get a sense of the order of magnitude that you see in terms of unconventional rigs to tender later this year. And then the second point is probably just more of a broader point on the sort of Saudi rig market. There's been a lot of chatter around more suspensions on jackups and also potentially some suspensions on onshore rigs. Just trying to get a sense if you have a view on either of those in terms of direction of travel for the second half of this year. Thank you.
Okay, okay. You're right. So we will see coming tenders for the unconventional. We don't know the size yet, but there will be like one or two coming in, maybe something in this year and early next year. In terms of suspension, we see that Aramco is going for a second round of suspension. We're expecting five rigs. One is coming towards our way. And on the land, there will be suspension on the land. However, it's all focused in the oil. On the gas is continued to be strong, and we expect even in the conventional gas, that there will be more rigs coming.
So in the oil front for Arabian Drilling, I think we have good number of rigs that we can convert as well to gas conventional. So if that's the case, it's gonna be more accretive, so it's good for us in that aspect.
Yeah, I think, yeah, just, just to be clear, I think the oil, you know, the land rig and the oil, some of them are the least accretive rigs that we have because they are very low day rates. So, you know, if any of those rig gets suspended, I mean, to be honest, it's not gonna move the needle at all. I mean, if anything, it will give us the opportunity to reposition some of the rigs for the gas that we still... for which we still see the growth coming.
With minimal CapEx.
Yeah.
Min CapEx. I hope I answered your question.
The next question is from the line of Jared. Jared, please go ahead.
Two oil land rigs were released. I just wanna get clarity on what that means. Does that mean they were working last quarter, and they're not gonna work this quarter? That's the first question. The second question is, you mentioned that obviously there's a lot of jackups now in the market looking for a new home. Is selling your jackups to another player an option, or is that not an option? Thank you.
So, on the land rig, I think one will come back to operation end of the year. I think if there is any suspension on the land rigs, I think it's just temporary, not like the offshore. I think the offshore is, once suspension is there, it's there, but in the land, I think it will rebound next year. In terms of the sale, yeah, we're open. If there is an opportunity to sell, yes. I mean, we're looking at one of the rigs that actually came to an end of a contract, and we did not renew it. It's a rig that is more than 40 years old, and we were thinking of selling it.
Because if we upgraded it, it's gonna cost us more than SAR 25 million, and then we're, you know, if we get—if we keep it and then we get it suspended, then you wasted your money. So, we are open for selling it, the rig as well. And actually, there is a couple of, I mean, contacts they're asking for it as well.
Okay, thank you.
Ladies and gentlemen, as a reminder, if you have any further questions, please raise your hand or type in the Q&A box. We have a follow-up question from Ricardo. Ricardo, please go ahead.
Hi, just a follow-up, and apologies if I didn't understand it correctly. On one rig that you said that it might be suspended as well, have you already been officially communicated, or just by this stage of negotiations, you believe that the chances of having an additional suspension, it's highly likely?
No, they just recently communicated to us, and we're just seeing the opportunity that we can keep it or not. So we're assuming that it's gonna be gone, will be suspended.
Thank you.
The good thing is, you know, it's gonna go one of these leased rigs, so it's gonna be a minimal impact to the cost, yeah.
I mean, we're just going to execute the strategy that we put in place back at the beginning when we started leasing the rig, which was, you know, to have a bit of a buffer in case of softening in the market. So now we're gonna play this card. I mean, if this rig comes up, then it will go back to the owner and with minimum impact.
Just a follow-up question on this. What would be the cost of early returning this leased rigs?
Contractually, there is early cost, which is gonna be—I mean, it's gonna be in the range of SAR 10 million-SAR 30 million, roughly.
And this is-
It depends, I mean, it depends when you exactly... I mean, you know, you cannot, you cannot give a number until you know exactly-
Right
... when the rig is gonna be returned, right? Because, I mean, the more, the more you use the rig, and the less the early termination fee is, because the closer you are to the contract date, right?
So the cost that Hubert is alluding to is, when we received the rig, we did some upgrades. So these upgrades, you know, usually get the cost of that CapEx depreciated by the contract duration. So the more the rig stays, that means less, so
It's for the assets, yeah.
It's for the assets, yeah.
More for the utilization, yeah.
But from the three rigs that ended their contracts, two of them are leased, right? So two of them will be ended now, right?
No, no, no. So, for the three rigs that end the contract, none of them are leased.
Okay.
Actually, two suspension and one ended.
So two suspended, yeah, two suspended and one, one whose contract was not renewed, so these are assets that we fully own. Now, we're talking about a fourth suspension, and this fourth suspension relates to a lease rig. So this is why we're saying this one, you know, this one is the buffer, and we're just going to return it to the owner. I mean, the two lease rigs that we took, again, they were never part of... They were, I mean, they were a buffer, and it was a bit of a tactical move from our side just to make sure that, you know, we have some excess capacity that we can easily get rid of.
Because we thought that at the end of the completion of the development program, there would be a bit of a softening in the market. So all we do is we're just returning them to the, to the owners a bit earlier than planned. That's all.
Mm.
But it was part of the strategy. And, and this, I mean, the decision that we took at the time, is something that now we can see serving us.
Yeah
... serving us well.
Now, I wanna highlight one thing that is very, very important, that might come to your mind. Why we did not release and the three rigs that was suspended before, why didn't we release the leased rigs initially? And the reason for that, we did the full cost-benefit analysis. And what we saw is, if imagine I released those two leased rigs. I have two rigs that are right now doing major certification, which takes a month to two months. That was planned part of this year. So if I suspend these two, and as well lease two, that means I have four rigs of an average of four months that's gonna go from my revenue bottom line. Plus, you know, the mobilization of the year. So it was a decision looking at cost.
So this, I think now is paying off very well for us. We're upgrading, we're recertifying the rig, and it's in the final stages to be ready to be deployed anywhere. And now we're going with the leased rigs going. If one comes, it's gonna be one of the leased rigs right now.
One thing that I would like to clarify as well on the leased rig. So, the early termination fee that we just mentioned is also gonna be offset by the fact that we will have to an accelerated recognition of the deferred mobilization revenue. Because, you know, as the rig where we see, there was... The rigs were coming with a mobilization fee, and the revenue was recognized over the three years of the contract. So if the rig is returned earlier, you will have an early termination fee, but that early termination fee will be more than offset by the accelerated recognition-
Correct
... of the, of the deferred mobilization revenue. I hope, I hope I'm making myself clear.
Yes, that's clear. Ladies and gentlemen, a kind reminder, if you have any more questions, please type in the Q&A box or raise your hand. We have a question from Ibrahim Atya. Ibrahim, please go ahead.
Presentation. One question, or actually a follow-up question on why you suspended the owned rigs rather than the leased one. So the question, can you, going forward, replace the owned by the leased one instead of marketing the owned one?
It's a, it is a possibility, yes. It is a possibility.
Is it into consideration to save on the cost?
I mean, it is one of the outcome that we might.
It's part of the discussion that we're having.
Yeah.
Sorry, come again, please.
It is part of the, you know, one of the scenarios that we might do, execute and do. We just have to, you know, the thing is, we just have to wait, because now Aramco is going for the second wave of offshore suspension. So we just wanna make sure and gauge what's happening. You don't want to change and then stop again. So this is the only thing. But we're looking... It is— You're very right, it's one of the options that we have.
Excellent. One question on the onshore market. So-
Mm-hmm.
and this is related to the suspension or possible suspension of onshore rigs.
Yes.
How easy is it to convert from conventional to unconventional, from oil to unconventional gas, et cetera? 'Cause based on my understanding, there is not much of a difference between them.
You're very right. Very, very true. The only thing is the... How much horsepower is the rig? So if it was 1,500 horsepower, mainly it's an oil rig. The gas is, you know, 2,000 and more than 2,000 horsepower. And if you have 2,000 horsepower, like today, we have like, I think three or four rigs-
Yeah
... that are in the oil that actually can be going to gas. And all you have to do is update some of the equipment like BOPs, choke manifold. I mean, it's SAR 5 million-SAR 10 million of an upgrade if you need to, if you don't have the equipment. And it's very easy and it's fast. This is going to conventional. Now, unconventional, I mean, there is a. It's more CapEx, and you need to add the skidding package. Doable, but it's more cost, and it takes a bit more time.
Sorry, can you repeat the last point in specific?
Sure.
I couldn't understand it.
Okay. So moving from oil conventional to gas is very easy. It's just you buy some more equipment to upgrade. As long as the rig is a 2,000 horsepower or more. Now, to go to unconventional, it will need more CapEx. You need to do the skidding, and it takes a longer time.
Okay. Okay. Excellent. Perfect. But the high spec in the oil shouldn't be margin accretive and profitability accretive, because you mentioned the one that will be suspended is a lower return profile rigs, right?
Yes. So if you move to gas, which is the fastest and easiest to go to conventional gas, it's more accretive.
It will be accretive.
Accretive, yes.
And even the upgrade is well justified by good return profile, the upgrades in terms of the-
Yes. Yeah. So the upgrade... Yeah, you're right. So the upgrade is, you know, $5-$10 million, but some of the equipment we might have already, actually. So you don't have... Not all the rigs that you need to acquire these equipment. Some of them we have already.
All right. Perfect. Thank you so much, Mr. Mirdad. And-
I mean, just to add to your question, I mean, the focus in gas, we've seen what the minister has said on the gas. We've seen what the CEO of Saudi Aramco talked about the gas. The exploration that happened in the Empty Quarter, the unconventional is growing. So there's a lot of focus on gas, and this is good news for us. And I think Arabian Drilling is set where we have a very good base that we can grow there. Be it, you know, from our fleet, if there is a suspension in the oil, it'll be very good for us.
... Excellent. And probably I have one more question on the unconventional gas. So, we were in the wait and see mode to see the actual profitability and the actual OpEx of these lands, and probably we are two months into this, so can you give us some indication of was it higher than you expected, lower than you were expected, et cetera?
Yeah. I think, you know, if you look, I mean, the four rigs came, you know, literally in the-
Yeah, tail end.
Tail end of the H1, right?
Yeah.
It was supposed to come in H2. We managed to push it ahead.
Yeah, I think, I think it's a bit too early to say, because honestly, you know, if you look at this quarter, so you know, the rig came towards the tail end of the quarter. And then within the quarter, you have, you have start-up costs, you have deferred mobilization costs, you have operating costs. So it's really, it's really a mixed bag. So, so it's not,
Too early to say.
It's a bit too early to say.
Too early to say.
For sure, by Q3, we'll have a much
Better
... we'll have a much clearer picture. But again, we're quite confident that those unconventional rig will be accretive to the overall land in advance.
Yeah. Yeah.
All right. Perfect. Thank you, Mr. Ghassan. Thank you, Mr. Hubert. Thank you.
You're welcome. You're welcome.
Is there any information about the second wave of the suspension? So how large is it, and...
I mean, us as a contractor, we don't know, but I mean, we know one is coming our way. And I think what I know, it's like five offshore. And the land, to be honest, we're not sure, to be honest, yet.
I mean, ARO, ARO is two because this is probably they have,
Yeah. ARO, ARO, yeah. ARO disclosed two. So out of the five, if you see out of the five, ARO took two, which is Valaris, and us, one, so that's three. There is two more.
There is two more for two other drilling contractors.
Yeah.
Is it typical to have suspension in the onshore?
On the onshore, I mean, usually this is not something that Aramco does very often. I mean, the only time we found suspensions was-
During-
... COVID time, you know? And the land is a swing, you know, if you want to reduce OpEx very fast, you just stack this. But usually they won't stack it, and they will tell you, "Look, be ready to move fast." I mean, the unconventional, as soon as the. Sorry, not unconventional, during COVID, I mean, it was very fast, saying, "Get back now," you know? So I think the suspension might come. It's not like the offshore. Offshore suspension, you can kiss it goodbye. It's not gonna come back. But the land, I think it will come back later on next year.
I mean, we had, during the COVID time, we had up to nine land rigs being suspended from a few months to up to a year and a half, and all of the land rigs were called back at a point in time.
Yeah.
Now, this was COVID, right? So it was a different environment. So how this is gonna play out, we don't know.
But historically, other than COVID, it never happened before.
To the best of my knowledge.
Yes
... never happened before.
Up to my knowledge.
Prior to COVID, never happened before.
Thank you so much. The next question is coming from Madhu Appissa. Madhu, please go ahead.
... to suspension. So you mentioned that you have already received notice for one rig suspension, so in that makes in total four rigs.
Yes.
Then you're expecting another wave of suspension from Aramco.
No, no. This is the second wave. This is the second wave.
Okay.
The the five is the second wave.
Okay. So in total, four rigs are suspended as of now?
Yes. Yeah.
Okay. And of this 4 rigs, how many do you think you'll be able to redeploy in the overseas market by the end of this year?
It's gonna be a bit difficult. I'll be very honest. We are trying our best. We might sell. So out of the 4, 3 were suspended, and one we, that came to the end of the contract. So we have 4. The one that came in the contract, you know, there is a chance maybe we can sell. We're doing our best, but as I said, you know, there is so much rigs in the market. So we're doing our best, but it, I think it's gonna be challenging to have this year. It will be a plus for this year.
All right. So, will there be any compensation by Aramco, given that, you know, the suspension has been a bit unexpected, and now we are expecting it onshore also? So, will there be any compensation?
So, if you look at the way they ask for the suspension, you know, you have – let's say you have a new rig that came in. Usually, in the new rig, you have a clause of early termination. What Aramco does, they release the old rigs that doesn't have a termination clause. And then you can negotiate that you wanna shift to another rig. If there is an ETA, if there is an early termination, they'll tell you, you have to waive it. Otherwise, they will release your other rigs. So they're, it's a very well managed by them, actually.
Okay.
They have-
Very, very flexible.
Very flexible for them, yeah.
Very flexible for them. I mean, I mean, the suspension, I mean, the way it works, I mean, the only historical that we have on the suspension was during the COVID. And the way it works in the suspension, and the way it is drafted in the current suspension, that in theory, in theory, your, the backlog is preserved, right? Because the duration of the suspension is added back at the tail end of the contract. So in theory, your backlog is preserved, and it's just the timing. It's just a difference in the timing of when you recognize your revenue. Now, practically, at any point in time during the suspension, they can still terminate the contract.
Mm-hmm.
So, so-
Yeah
... so at this point in time, the backlog doesn't mean anything. But it's just that based on historical, what we've seen in the past is that the backlog was preserved, the rigs were called back from suspension, and then they continued the contract, you know, adding the suspension period in the contract time.
Yeah. But keeping in mind, for offshore, I don't think they will come back.
... Okay. And in case they come back, would they be, you know, paying you for, you know, the charges that you'll have to incur for-
Oh, yeah
redelivering those rigs?
I mean, yeah, if they call... So, if the rig goes out, you will—Aramco is, I mean, we're very flexible—they were very supportive. They say: "Look, if, if, if you have another contract somewhere else, we will just terminate the contract. We'll just, you know, everything will be okay." So if they terminate the contract, and they want the rig back, there is, there is mobilization, there is.
Yeah.
Usually it's a new contract, so you'll be more-
Start from scratch.
You've got to start from scratch, yeah.
Okay. And, Aramco recently decided to award for Jafurah Phase Two, 23 rigs are expected, and you mentioned that you're expecting only 1-2. I'm wondering why such a low number, given that you're-
Can you... Sorry, I'm maybe you-
Yeah, so Jafurah, yeah, Jafurah Phase Two, plan has, you know, been initiated, and 23 rigs-
Yes
are expected to be awarded. And you mentioned earlier in the call that you're expecting 1-2 coming your way. I'm wondering,
No, no.
1 to 2.
Okay. So the 23 rigs was the previous tender, which we won 13 rigs. Now we expect 1 or 2 rounds of tenders coming our way, not 1 or 2 rigs.
Okay, so how many rigs in total can be-
I mean-
for Jafurah Phase One and Jafurah Phase Two?
So, the Phase One that was went out, that we won, we won 13 out of 23. So that was Phase One. Phase two, we'll see more tenders, and I think maybe it will be two batches, but we're not sure. You know, it can be-
Uh
... It can be 5-10 rigs every ten tenders.
Okay. Okay, clear. One last question on the 13 rigs. You mentioned that, you know, you're expecting it to be deployed by the end of this year, but earlier in your press release, three of them were supposed to start in quarter one, 2025. So-
Yes
... if they're going to be deployed this year, will it be Q4? And is that the reason that-
Yes
... you're keeping your revenue guidance intact despite one rig suspension?
I think having the five rigs starting ahead of time was one. These rigs will come end of... I don't think they will have much impact. The one that is coming, what's supposed to come next year, will come this year, will be very, very minimal impact. They'll come in Q4, maybe the last month, last month or last November, December.
Yeah. I mean, the reason why we kept the guidance, the revenue guidance, the same is because when this revenue guidance was published the first time around, it already included that there will be some rig suspensions.
Yeah.
So we had assumed already some rig suspension.
Yeah.
And now, so now there is the rig number 4, which is coming to us, and that rig number 4, as I said, I mean, from a revenue standpoint, it's not... I mean, you know, there's gonna be an accelerated revenue because of the deferred mobilization. So it's... So it's, we're still, we're still within the guidance.
Yeah.
We're still very comfortable with the guidance.
But rig four was not expected. It was not, it was not, we were not expecting that rig four.
No, again, this is based on what we know today, right? I mean, tomorrow, something else comes, and then...
Yeah.
but based on what we know today, I mean, we, we're comfortable reiterating the guidance because we already had cooked in the guidance, that, you know, there might be some rig suspension, and this was done since, you know, since the guidance was first published.
Yeah. We're still trying, we're still trying with Aramco to revert the decision, but, you know, let's assume the worst is better.
Okay. Clear. Thank you.
I have two questions, one about the cost of the suspended offshore rigs. So the revenue will be stopped, of course, but the operating costs will continue for how long?
So, as I said, the operating cost will continue until we finalize the completion of the planned maintenance activities. So this relates to certification of well control equipment and other equipment, which is a mandatory requirement. I mean, it's—
License
... certification of a cyclical nature. Every five years, you need to recertify your equipment. So as long as those activities are going on, basically, you know, we'll keep most of the crew. And then when we finish, then basically we will start significantly downsizing the crew. And what we'll do is, at the end of the day, we'll keep a skeleton crew, looking after the three rigs. Because the three rigs are physically in the same location, right? So we'll keep one crew on one rig, looking after the three rigs.
Yeah.
We will see this downsizing towards the end of Q3, as we complete the ongoing maintenance activities.
Just to add as well, some of these rigs that are being suspended, we're just shifting the crew to the unconventional. So the cost of recruiting can, you know, reduce from that aspect as well. Now, of course, the offshore rig needs more people because you have the marine part, which we don't need in the land.
Okay. Another question is about we heard that the competition in the onshore market is quite intense, especially from Chinese drillers.
Yeah.
So is this the case, or how, how is it, how is it going?
No, I mean, I think it's not just the Chinese. I mean, you're right, by the way, Chinese is there, but it's, there's a lot of players. It's not like few. I mean, there's a lot of players in the land, and it's very, it's not like the offshore where, you know, it goes up and it goes down very high cyclical. So, But you have to understand, the requirements of Aramco standards is very high. So the Chinese, they might be cheaper, but they still have to obey with the standards of Saudi Aramco. So it makes them go up in cost.
Are they competing in the unconventional as well?
... So, I think this is a plus that I actually give credit to the team. I mean, the Chinese dominate the unconventional. They've been there for some time. They're the only players in the unconventional, yet we managed to penetrate with 13 rigs. So, I think with having the Chinese in, yet we penetrate, I think it was a good thing. And, we'll try to see how we can accelerate our learning curve to show Saudi Aramco how we can do better.
Thank you. Then we have one more question in the Q&A box from Abdulaziz Al-Falij . He's asking, "Do you have a plan on how many rigs you are trying to bid for on the upcoming Jafurah tenders?
I mean, to be honest,
I mean, I think it's all about... I mean, would the-- I mean, you know, if we can maintain the market share that we have-
Yeah.
you know, it's something that,
But it's just, you know, I mean, this, this is, I would say, I mean, I know how much numbers we want to bid for, but it's just strategically, I don't want my competition to know. So, we, we plan to participate, but, excuse me to refrain from, from answering this question, because it's, it's, if, if the competition knows how much I'm, I'm tackling, they can plan their, how they want to bid for it as well.
Thank you. I think that was the last question. Do you have any final remarks, Ghassan? You go.
No, I would say thank you very much for the time. Thank you very much for your trust in Arabian Drilling. We all know that, you know, our stock got a strong hit than others. It's, you know, with this offshore suspension is an event that, you know, an event that happened, a bump on the road, and we just have to manage it. This is our job. It's the nature of the beast that we work with.
Yeah.
I think it's the trust that you guys given on our shoulders, we just have to manage how we can maintain the profitability of the company, and as well grow. I mean, there is good news. Hopefully, we're looking at... You know, this is the best time for doing a transactional event, right? I mean, with all of what's happening right now-
Yeah
is the best time to look at, and we're evaluating different opportunities.
Yeah.
And hopefully, you see how we come strong out of this.
And this offshore bump on the road is not something that's going to derail a growth trajectory. I mean, we've been saying for quite some time now that, you know, the next area of growth in Saudi is the gas, and we still see potential and we still see opportunities. So-
Yeah.
And we will, we will, we will be there.
Not to mention the expansion out of Saudi.
Yes, yes.
Thank you very much.
SNB Capital would like to thank Arabian Drilling-