Good afternoon, everyone. This is Iyad Gholam. On behalf of SNB Capital, I would like to welcome you to a conference call with Arabian Drilling Management regarding the full year 2022 earnings results of the company. We will first listen to the management feedback. Following this, we'll open the floor to questions. With no further ado, I will hand over to Mr. Raed Al-Maharmeh, investor relations manager.
[Foreign language]. A very good afternoon to everyone, and welcome to this presentation of Arabian Drilling's financial results for the full year 2022. This is Raed Al-Maharmeh, I'm investor relations manager at Arabian Drilling. I would like to thank SNB Capital for hosting this call. As usual, we have to start with a disclaimer. Arabian Drilling has created this presentation solely for the international audiences, and it may contain forward-looking statements and non-IFRS financial measures. Before we begin, I would like to introduce our two presenters for today's call. First, we have our CEO, Mr. Ghassan Mirdad, who will provide an overview of our company's performance. Secondly, we have our CFO, Mr. Hubert Lafeuille , who will take us through the financial performance of the company in 2022.
In today's agenda, we will cover different topics, including our 2022 highlights, the competitive landscape, our operational and financial performance, and some forward-looking guidance before we open the floor for your questions. I would like now to hand over the call to our CEO, Mr. Ghassan Mirdad.
Thanks, Raed. [Foreign language] and good afternoon to everyone. I will begin this presentation by walking you through the key highlights and business achievements of 2022. Starting with operational highlights, our rig utilization rate was an impressive 94%, which was 44 active rigs out of a total available fleet of 47. We have maintained a low Non-Productive Time of 1.5% and a high Rig Efficiency Index of 93%. We completed 178 rig moves with an average saving of 1.7 days per rig move, which is an equivalent of 10 rig month revenue. At Arabian Drilling, we prioritize quality, health, safety, and sustainability in every aspect of our operation. Therefore, we are proud to report that our Total Recordable Incident Rate, which is called TRIF, was reported at 0.33, well below the target of 0.95.
This result was unfortunately overshadowed by the fact we suffered a tragic loss of one of Arabian Drilling family members in the first half of 2022. While our CFO, Hubert, will provide you with more detailed financial insights, let me share with you some key financial highlights. Our revenue for the year was SAR 2.7 billion with a net profit of SAR 558 million. We also maintained a strong EBITDA margin of 42% and a conservative leverage of 0.8. On the strategy side, we increased our offshore fleet by more than 70% by adding five offshore rigs. However, looking forward, we are aiming to become a player in the unconventional and expanding our operations geographically outside of Kingdom. In 2022, the team achieved three milestones that I will highlight in the next slide.
In January last year, we won the iktva for Total Value Added Excellence Award for the sixth year in a row. In February, we issued our first-ever Sukuk, which was oversubscribed by 3.4 times. In June, we went through a complete company rebranding, symbolizing the beginning of a new era for Arabian Drilling. In August, we acquired two new offshore units, followed by a third one in November. In September, we achieved a record backlog of SAR 9.5 billion due to a five-year contract award with our latest Jasa acquisition, as well as adding Baker Hughes as a new client with a multi-year contract. In November, we completed our IPO transaction with a 61 times oversubscription received from institutional investors. Just to follow up on the two capital market transactions, both the Sukuk and the IPO, I want to highlight that both have received best-in-class awards.
In particular, we received in 2022 Best IPO Award from the Saudi Tadawul Group. These transactions highlight our ability to optimize our capital structure and were perfectly timed with the market expansion we are currently witnessing. We can now review the rig status and competitive landscape. Overall, by the end of 2022, our 44 active rigs represent a market share of approximately 16%. From a total fleet size, when I mean total fleet size is the land and offshore together, Arabian Drilling remains the market leader. Starting with contract awards, in the last quarter of 2022, we were awarded several multi-year contracts with Saudi Aramco and Bakhsh. In the same quarter, we also started an operation for the first two of the five offshore rigs recently added.
Last year, we witnessed a consolidation in the rig market, with KCA Deutag acquiring Saipem, land business at a global level, increasing the land fleet in Saudi Arabia. Looking in the top graph, you can see that part of Saipem went to KCA Deutag. Adding to that, ADIC acquired Seadrill business in Saudi Arabia. Let's now review the operational highlights starting the backlog progress. As you can see in the top left, the yearly backlog evolution grew significantly from 2021 to 2022, reaching a record of SAR 9.5 billion in September 2022. By December, the backlog was SAR 8.9 billion, with an average remaining contract term of 2.2 years per rig. As I just mentioned, we had a record backlog of 2022 with a good number of rigs awarded a three-year contract. Looking at the bottom left graph, this explains the spike of contracts expiring in 2025.
Since we signed most of the contracts in 2022 for three years contracts. Looking at the bottom right, you can see that the largest portion of our backlog comes from Saudi Aramco contracts, followed by SLB. Let's now review our operational performance in more detail. As you can see on the chart in the bottom right, our rig activity was strong, with a very high utilization rate of 94% by the end of 2022, a 14% increase from 2021, thanks to the reactivation of certain land rigs and start of three offshore units. The commissioning of 10 rigs right after an industry downturn followed by COVID brought some challenges in terms of resources like spare parts, equipment, and human resources. That explains why our Non-Productive Time has increased in 2022, as you can see in the chart in the bottom left.
We increased our rig move efficiency by 16%, resulting in a total of 305 days saved. Just to put things into perspective, 305 days saved means an additional 10-month rig revenue. This revenue comes without any cost. Looking now at the top left, the Rig Efficiency Index, which is new KPI for Saudi Aramco that gauges the performance per rig and for the whole fleet. As you can see, we remain very strong by the end of 2022. I will now hand over to Hubert, our CFO, to provide a more detailed overview of our financial performance. Hubert?
Thank you, Ghassan. Very good afternoon, everyone. I'm happy to drive you through the financial overview that shows a solid performance for 2022. Let's start with the revenue first. If you look at the top left graph, we have a revenue year-on-year growth of 23%, as mentioned by Ghassan, we close with SAR 2.7 billion. This revenue increase is mainly due to the reactivation of the land rigs that were previously suspended during the COVID, as well as some significant increase that we have seen in the offshore dayrate due to strong rig demand. On the EBITDA side, which is the top right graph, we are showing an EBITDA that has increased by 26% up to SAR 1.1 billion, and we have a flow-through ratio of 46%. Basically, the increase in the EBITDA is the increase in the revenue.
This flow-through ratio of 46% is in line with our expectations. Looking now at the bottom left graph, the net income, you can see that the net income has doubled compared to last year, reaching SAR 558 million in 2022. However, I would like to add that this net income includes a one-off tax credit of SAR 74 million. When we adjust this net income for this extraordinary item, we are looking at an adjusted net income of SAR 484 million, which is still 77% higher than that of last year. Finally, the last graph on the bottom right is showing the CapEx. The CapEx is seven times higher than what we have spent in 2021, and this is mainly due to the offshore fleet expansion. Out of the SAR 1.7 billion of CapEx that we have incurred in 2022, SAR 1.2 billion relates to the offshore fleet expansion.
Going into more detail between our land and offshore segments. We can see that the revenue for the land has increased by 16%, and we show at $1.9 billion, with an average day rate in the mid $30,000. This revenue increase that we have witnessed is in line with the increase in the rig activity. Plus, we have been able to capture some upside on day rate increase in the high single digits. The cost of revenue, which is the bottom graph, has increased in the same proportion than that of the revenue increase. Looking at the offshore on the right-hand side of the slide, the offshore revenue has increased quite significantly by 45%, up to $802 million in 2022, with an average day rate in the high $90,000.
This average day rate includes some of the upside that we've seen on the day rates when we have renewed some of the contracts in 2022. Also, explaining the jump in the offshore revenue is the fact that we have started three new offshore units during the year. One started in April 2022, and then we have two of the five new units that started their contracts in the tail end of 2022, by end of November, early December. Looking at the cost of revenue, you can see that the cost of revenue is slightly lower than what we have seen in the rig activity increase, which is due to the fact that some of the certain offshore assets have reached the end of their useful life in 2022, resulting in a lower depreciation cost in 2022. Moving on to the cash flow.
We are happy to see that we delivered a robust net cash flow generated from operating activity of $1.2 billion in 2022, which basically covered 70% of our CapEx needs. Again, if you look at the graph on the left-hand side, you see cash flow from operation of $1.2 million and the CapEx of $1.7. This is where the 70% ratio is coming. Again, out of the $1.7, just to reiterate, $1.2 was related to the offshore fleet expansion. If you look at the cash from financing activity. In 2022, we used the proceeds of the Sukuk issue to finance our offshore fleet expansion, as well as to optimize our capital structure by early redemption of $1.4 million of bank loans. The IPO proceeds that we received in the last quarter of $0.9 billion are intended to be deployed for regional expansion and inorganic growth.
Looking at the graph on the right-hand side, we can see that the net working capital has decreased by 300 basis points from 18%-15% of the revenue at the end of 2022. I would like to mention that this net working capital at year-end 2022 includes a one-off time mobilization team invoice for the two rigs. If you adjust this net working capital for this one-time mobilization team invoice, then we are basically looking at a net working capital at around 10% of the revenue, which is in line with what we had in 2020. Moving on to the net debt and the leverage. We can see that the net debt has decreased by 8% since 2021 and decreased by 35% compared to 2020.
We have a current total debt of SAR 2.7 billion, which is made up of SAR 2 billion from the Sukuk that we realized in early 2022. We have half a billion from a bank facility that we drew in the last quarter of 2022, and we have SAR 200 million or SAR 0.2 billion that relates to the new liabilities, which is related to the two new rigs that are on bareboat charter agreements for a two-year contract. On the other hand, if you look at our current total liquidity position of SAR 1.8 billion, this SAR 1.8 billion is made of roughly SAR 800 million in cash. We have SAR 1 billion of short-term investment, which is maturing in the first half of 2022. Now looking at the leverage ratio on the right-hand side.
At the end of 2022, we have a net debt of SAR 0.9 billion over an EBITDA of SAR 1.1 billion, which results in a leverage ratio of 0.8. This ratio is very healthy, and it leaves us ample room for future growth. Let me take you through some guidance statement now. In terms of revenue, we expect the revenue to be in the range of SAR 3.3 billion-SAR 3.5 billion. The revenue growth is going to be supported mainly by the extra revenue generated by the three new offshore units that will be deployed in the course of 2023. In terms of CapEx, we are seeing our CapEx expenditures between the range of SAR 1.2 billion-SAR 1.4 billion, due to the ongoing upgrade shipyard of the three new offshore units that is taking place as we speak. We have some discretionary upgrade programs on existing rigs.
Finally, on the dividends, as we mentioned on a number of times, we expect to distribute our first cash dividends in the fourth quarter of 2023. That dividend will be related to the results of the first half of 2023, and we target a payout ratio of 80% of the net income. Now, as a last comment, I would like to say that the forward-looking guidance do not include the impact of any potential regional expansion. Neither does it Hubert, I think your voice is cutting off.
Okay. Thank you, Hubert. 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. The first question is from Saleh Al-Kharboush from GIB Capital. Saleh, please go ahead.
Assalamualaikum. First of all, thank you for the call and congrats on the results. Two questions from my side, if I may. First question regarding the three unacted rigs. Is there any plan or timeline for these rigs to come online?
Okay. The three rigs, they are now being upgraded to Saudi Aramco specification, and we expect that the three rigs will start in Q3. Two of them early Q3 and one late Q3. It's just the time to upgrade it.
Okay. Very clear. My second question is regarding the IPO expense. Did you book any expense on the P&L in the fourth quarter regarding to the IPO? If yes, how much was that?
I'll take this one since it's a revenue. Yes, the net proceed of the IPO, we mentioned SAR 0.9 billion, which is net of the expense. I believe that the expense was in the region of about SAR 20 plus million.
Which was booked in Q4, right?
Which was booked in Q4, correct. Just as a detail, remember that because the IPO was a combination of secondary and primary offerings, there was a kind of split on cost allocation of the total expense for the transaction.
Yeah. This is the SAR 20 million is for part of the tax end, right? It's not for the whole IPO.
The SAR 20 million corresponds to our enduring portion of the cost of the transaction, it is booked in 2022.
Okay. Thanks, Raed.. That's it from my side.
The next question is from Anu Ponnappa from HSBC. Anu, please go ahead.
Yeah. Hi. Good afternoon, gentlemen. Congrats on a great year and a great IPO. My question is on the accounting side. Could you please give us the depreciation numbers for the land and for the offshore rigs, both for 2022 and for 2021, just for comparison purpose? Secondly, you mentioned that there was lower depreciation in the offshore segment because of lower useful life. How should we look at the useful life in land business, both in land versus the onshore segment?
No. Depreciation [audio distortion] .
We don't I think from a segment reporting standpoint, we don't disclose depreciation in the different segments simply because we don't want to give some EBITDA numbers because of the concentration client. We had a bit of a confidentiality issue in terms of disclosing that number for the purpose of not giving some EBITDA numbers. What I can tell you is that the depreciation follows the useful life of the asset that follows the cycle. Giving some guidance on the depreciation is going to be a bit difficult considering the fact that we are in a very significant CapEx pool. The CapEx, the asset base is going to increase significantly in the coming months.
Saleh, I'm going to add just to the next part of your question. I liked our COO when we were doing the roadshow. He was saying the Eiffel Tower is so old, you maintain the rig well
If you do the maintenance make sure the two parts is well maintained, even the rig can last more than its design.
Okay. That's it from my side. Thank you very much.
Thank you. The next question is from Faisal Al-Azmeh from Goldman Sachs.
Yes. Hi, and congratulations on the strong set of numbers. Just a few questions from my end. You provided us with guidance around revenues. If you can maybe shed some color on what to expect for EBITDA margins next year. Obviously, margins saw a bit of a contraction in Q4 versus Q3. Maybe also, if you can shed some color on what drove that compression, that would be helpful. My second question relates to the CapEx guidance. I am assuming that is mostly growth CapEx. If you can provide us some color on maintenance CapEx for 2023, that would be helpful as well. Finally, maybe if you can shed some color on the GCC expansion and where are we today in terms of those plans and if you can just give us some updates there, that would be very helpful. Thank you very much.
I am going to start with you, Faisal Al-Azmeh. Okay, fine. I guess one of the questions, I mean, the EBITDA guidance, we gave the guidance during the IPO that the EBITDA will be in the low 40s to mid 40s percentage, and we have not changed that guidance. This is basically where we think we are. With respect to the slight compression between Q3, you are referring to Q3 2022 versus Q4 2022 EBITDA, is that correct, Faisal?
Yes. Correct.
Okay. I believe this has to do mainly with the start-up of the two rigs, the 110 and the 170, that started in Q4. One started by late November, and the other one started by early December. You always have some start-up cost, making sure that you have all the two together, making sure that you have all your logistics set up, et cetera. I believe this was mainly due to the start-up of the two offshore rigs.
We should expect some form of a reversal in Q1, I'm assuming. Right? As things normalize a bit higher, is that the right way of thinking about this?
Yeah, I think it's a fair statement. Because when you bring a new rig, especially offshore, you want to take the time and not over push certain. It's just a matter of timing. I think you'll see more in Q2. I mean, typically, you want to get the rig to ready ahead of the rig, right? You start incurring the cost, you start incurring OpEx just before the rig is actually fixing. Yeah.
Thank you. With regards to the CapEx, maintenance CapEx versus your guidance, has it changed from the IPO times of SAR 650 million for the year? Should we add that to the SAR 1.2 billion-SAR 1.4 billion CapEx that you've given?
The sustaining CapEx is part of the SAR 1.2 billion-SAR 1.4 billion. During the IPO, we gave a guidance, I believe, of SAR 7 million or SAR 7.5 million per rig per year. The guidance remains roughly the same.
Okay.
It's part of the guidance. The sustaining CapEx is part of the SAR 1.2-SAR 1.4, yes.
Finally, on the GCC expansion, if you can shed some color there.
Okay. Since we finished the IPO, we were looking at different opportunities to expand. In addition to actually tendering in this tender. What we've seen is once we finished the IPO, several opportunities actually popped up. Some that came to us. It might be a different presentation actually to us, because now they knew that we were financially strong, and we were ready to deploy back to move out. Today, we are in the evaluation. There are two separate opportunities came up, and we're just trying to see which one is the best fit. It's just a matter of choosing the right one.
Thank you very much.
The next question from Ibrahim Al-Ghaith from Arqaam Capital. Ibrahim, please go ahead.
Hello, good evening. Congratulations management in the first results. I have two questions. First one is regarding your financial assets and provisioning practice. I think since in 2018, you booked almost $300 million of $290. Just like, can you say the like more from that part? Also, you are assuming that we should see that the provisioning cost or lower provisioning cost is more like an accounting treatment, and it will not subject a huge CapEx going forward, right? Also, my last question is regarding the day rate. In 2020, it's a function of old and new prices. Going forward, it reflects the fully new prices, right? Thank you.
You want to take the Okay, fine. On the impairment, you are correct. Back in 2018, this was before my time. I think it was 2019. We booked an impairment which was close to $300 million. I think it was $278. This was due to the fact that we regularly test our assets for impairment. We do that on a quarterly basis. At this point in time, back in 2018, we found that one asset was reaching the threshold of impairment, and therefore we took a non-cash charge of $278 million at the time. The condition for those impairments is completely different because this relates to an offshore rig, and right now, given where the day rates are in the offshore, this impairment is no longer relevant. We're not reversing the impairment entry, this is your question. That's one thing.
The second thing is that, yeah, the depreciation, the fact that we have a slightly lower depreciation because some of the assets are coming to the end of life, it's going to be superseded by the fact that we're adding new assets all the time. I don't think it's going to make a difference going forward. It's not an indication that the depreciation cost will go down in the future. If that answers your question. Your third question was about the day rate, I'm not sure. Can you repeat what exactly you wanted to know about the day rate?
Yes. I was asking about the prices that you mentioned, $90 for an offshore is a function of old prices and new prices. If you take an average for the year going forward for 2023 should reflect the full new price, right?
You are correct. When we mentioned that the day rates for the offshore are in the high $90,000, it's an average of the rates that have seen a knock price because they have been renewed in 2022. Also some rigs that were locked and are still locked at their rates prior to the increase. It is an average. It does not include the MPSV. Remember, one of the offshore rigs that we have is not a drilling rig. It's a multi-purpose support vessel. The day rate for that unit does not compare to a drilling rig. It does not include that vessel. It also does not include the three new offshore rigs that are due to start their contract in 2023. You're right.
It's a mixed bag between rates that have seen some uplift because contracts have been renewed and rates that are still on prevailing legacy day rates. You're correct, the one that saw the new prices, it was not severe. For the one that we renewed, if it was for you. Yes. I think that we mentioned on numerous occasions that if you look at the offshore market today, the offshore day rates are north of $100,000.
Thank you, management. Thank you.
Ibrahim. The next question is from Ahmed Hazem from EFG. Ahmed, please go ahead.
Thank you, everyone, and congratulations on the results, and thank you for taking the time to answer the questions. I have a question on the SAR 1.2 billion guidance for 2023. Does that include any growth CapEx related to rigs onshore or offshore that are coming online in 2024 rather than 2023? We understand the offshore rigs, but anything related to 2024 rigs, that would be very helpful. My second question, can you provide the utilization rates by segment instead of the blend of the group, so onshore and offshore separately? That's it. Thank you.
Okay. Thank you, Ahmed. Let me address the question on the CapEx. The SAR 1.2 billion-SAR 1.4 billion CapEx, we have a good sense of that, which relates to the ongoing shipyards that we have for 2023. These are 2023. They are not 2024. We do have in the guidance, we do have some upgrades related to some land rigs that we want to upgrade to increase their marketability. And we have a couple of land rigs that we want to complete the refurbishment in 2023, and we will market them, and then we need to tender them, and then we need to get a contract award. The portion of that CapEx relates to revenue stream that we believe will come in 2024 for the land rigs.
Yeah. Okay, thank you. On the utilization rates, will you be able to provide the utilization rates between segments onshore and offshore?
Sure. I think this is something that we have already shared in the last conference. Looking at year-end 2022 from the utilization rates, on the onshore, we have 35 rigs working out of 38. For the offshore, we basically have full utilization. All the units are working. We have three units in shipyard that will start in 2023.
On the NPT times for the onshore and the offshore, is there anything materially different than the 1.5% between onshore and offshore?
I'll be honest, I don't have the information at the tip of the
Typically there is no much difference between NPT and offshore, onshore because in the land and offshore, I know. I don't recall the numbers, but I would say maybe because we have more land rigs than offshore rigs, so maybe you'd have a bit on the land. I think they're almost the same. I can't be certain.
Okay.
Typically, I would say, maybe Jasim correct me if I'm wrong, I would say, remember, the difference between the land and the offshore is that the land, we have a rig move process, which does not exist in the offshore, right? The offshore, 100% of the time, the rig is on a rig. Whereas in the land, we are not on a rig during the rig move. I believe that we might have a slightly higher NPT on the land because of the component of the rig move which does not exist offshore.
It doesn't mean anything. It's not material.
Got it. Okay. Thank you very much. That answers my question. Thank you.
Thank you. The next question is from Akber Khan from Rayan Investment. Akber, please go ahead.
[Foreign language]
You are now unmuted. I think we have an issue with Akber. The next question is from Sherif, also from Rayan. Sherif, please go ahead.
Gentlemen, thank you for the call. Just wanted to confirm the three rigs which are coming into Q3, these are offshore rigs or land rigs?
Offshore rigs.
Offshore rigs. This will be again at a higher price compared to the existing ones, given its high specifications.
Yes. I mean, it's coming on the new rigs that we got managed to get.
Right. There are rigs coming for renewals in 2023 as well. This again will be contracted or will it take a while some while till the time we see some contracts coming on them?
Usually before the contract comes to expiry or renewal, us and our clients, we sit together and negotiate the extension of these contracts.
Right. Has that already started? When are these coming up for renewal?
Yes. It started. The discussion has started already.
Right. You mentioned about expanding into the region, and there are other regional players who are willing to expand into Saudi. How do you see competition from them coming in? Then you go to interaction markets, how do you try to beat the incumbent there? What's your strategy on that, and what sort of IRRs you will look at when you want to expand to the regional markets?
First of all, I think, having our experienced team, we think we can add a lot of value when we expand. From IRR, it's different if you want to go to Kuwait. It is completely different if you want to go to Oman or Bahrain. Each country has its plus and minus. You cannot treat them the same. It all depends which opportunity comes first for us. Today, for example, Oman, if I have access to Oman today, the two rigs that are not utilized, I can put them on a contract straight away. Whereas Kuwait has a higher because of the high specification, and the high demand on land rigs, which we might have a higher IRR in Kuwait. It all depends on the strategy to each country.
All right. Thank you.
You're welcome.
Thank you so much.
Ladies and gentlemen, I would like to remind you, if you have any further questions, please raise your hand or type in the Q&A box. The next question is from Muath Alsulaim from Sabeen Investment. Muath, please go ahead.
Thank you for the call. I have a question on the regional offshore expansion that you have guided. Where are we today and how the regional contracts would impact the earnings?
I mean, this is a follow-up from the answer I answered before. It all depends which country you would go to and the rates. The impact is depending on which country you go to, number one. Number two is, we are looking at different opportunities. After the IPO, actually more opportunities came to us. Before, we were scouting for opportunities, trying to see different companies and see which one that we see is the best in terms of returns but as well as the culture from a culture perspective. After the IPO, some companies came to us, and this opened extra opportunities for us. That's good for us, but it just means a different bandwidth to evaluate and make sure which one works for them. It's just taking more time because of the different evaluations.
Thank you.
The next question is from Yazeed Al-Rumaihi from NCB Capital. Yazeed, please go ahead. Yazeed?
Yes. Hi. Do you hear me now?
Yes, I do.
Yeah. First of all, congratulations on an amazing result. I have two questions that are related to each other. First, we see margins that jumped or leaked by a significant amount. Is that sustainable, and is that due to the dayrate increase for the offshore rigs and a single-digit increase for the onshore rigs?
I will answer them together. There is two main elements. One is, as you said, the increase in the offshore, and we've seen an average of 35% price increase because of the demand for offshore, not only in Saudi, in the whole region, there is huge demand. That was one. As well, during COVID, we had some factories and some of these rigs came back.
To operation. There were some of the land rigs that we just had a high single-digit day rates. All of them added to the total figure. Do you want to add anything?
No. Just to say, on the land, we've seen the day rates increasing a high single-digit number, which basically covers the cost escalation. We are okay with maintaining the profitability that we have on the land segment. The offshore, of course, is accretive in the sense that the increase that we've seen in the day rates is more than covering the cost escalation. Also, we have also seen some cost escalation in the offshore, in particular, when it comes down to personnel compensation, due to the number of rigs that needs to be deployed. We have a very large number of rigs that need to be deployed in a very short frame. That creates some tension on the workforce side, on the compensation side.
Again, it's more than covered by the increase that we've seen in the day rates.
You see it going forward, demand will remain strong for the upcoming years, if not upcoming months?
When you say demand, today, there is no more tenders for offshore. Saudi Aramco awarded approximately 40 rigs, and now each provider is trying to get the rigs into the country. This is the demand that Aramco set. These are all the demands. This is where we are. We know all the extra rigs that are going to come. Excepting if things change, that Aramco wants to add more, but we don't see that at the moment. 40 rigs, like I said, is a lot. To add 40 rigs in a year and a half is a lot of rigs to be added in a short period of time.
Thank you, guys, and thank you, [audio distortion].
Thank you, Yazeed. The next question is from the Q&A box from Akber Khan from Rayan. He's asking, you mentioned SAR 20 million in IPO charges taking in Q4 2022. This still leaves Q4 operating costs up three times versus Q3. Is that correct?
Q4 operating cost up three times? Sorry, I'm not sure I understand the question.
His point is despite the IPO charges, the FCNA in Q4 operating cost in Q4 is still three times higher than Q3. Is there something else missing?
There is a lot of cost. There is the branding.
Yeah.
There is a lot of cost that came actually because there was a lot of things that were going last year. I mean, we had IPO, we had change of brand. There was branding. There was a lot of things that came previously, don't underestimate that.
Yes, correct. Q3, we have to watch out because there was also this one, we have taken a tax credit adjustment. I don't know if this is in as part of the numbers that he's been looking at. Q3, there is a one-time tax credit related to adjusting the deferred tax. I don't know if this is part of the numbers that he has looked at. I'll be happy to look into more detail if Akber needs, if he wants to-
Yeah
get in touch with us. We will be happy to look into more detail. It's hard to comment without seeing exactly what kind of figures he has been looking at.
Okay, thank you. I think he tried to ask question live, I think he has a problem in the mic. The next question is from Rene from Jadwa Investment. Rene, please go ahead.
Yes, hi. Thank you for the call and the presentation and the opportunity to ask questions. Basically, there is one clarification. The three stacked rigs, those are the land rigs. Is that a CapEx, part of the CapEx that you're putting in to upgrade, and you expect those three rigs to come online in the end of 2023, pretty much? Those are not the three offshore rigs that are coming next year. Is that correct, the stacked ones?
That's right.
Oh, okay.
They are two land rigs. Yeah.
Okay.
Yeah, we took 25 out of 28 from the land rigs.
Yeah.
At the end of the year, we had three stacked rigs.
Okay.
One of them actually started a contract in the first quarter, I mean, this quarter, actually. The two other land rigs that are stacked are both idle, uncontracted, and they need some refurbishment. They are part of the discretionary upgrade that we want to do in 2023.
Okay.
To put them back to work, this is where we're saying that it's mostly unlikely that we'll have any revenue stream for those two rigs in 2023. More likely in 2024.
Okay. Very clear. Thank you. One more question, if you may. With regards to the three offshore rigs that are coming this year, could you give us the exact time at which the day rates were set?
The time at which the day rates were set?
Yeah.
It was last year.
Last year.
I believe So the first two was around mid-2022.
Okay.
The backup number three was in Q3, Q4.
Q4.
Yeah, Q4.
Q4.
Okay.
Yeah, you can assume that there is probably four to five months delay between the two contract awards.
Okay. That means that right now the current rates are higher than where these were contracted at?
For the last one, you mean?
The last one and the other two, the mid-2022.
I think all three at the prices after we increased the price of an existing rig for offshore. They came at the high end.
Okay.
They would be higher at the average dayrate that we just shared with you, because we said that all new contracts that came in 2022, either new contract award or contract renewal, all the dayrates were north of $100,000.
Okay. Since those contracted rates, have rates gone up further?
In terms of contracts, especially demand between Saudi Aramco and ADNOC, the demand was so huge and there is not enough supply of offshore rigs, and that caused the price hike.
Okay. We can assume that if there are renewals this year, they will be at higher rates than even these three that got contracted.
I'm not sure, Rene. The rigs are booked high, I don't think it will go higher. The only reason we're going to have higher than the rigs we have today-
Is if Saudi Aramco puts new rigs.
Okay. You don't see that. You don't expect that.
Yeah. They already awarded 40 rigs offshore. They really got what they wanted.
The point that we need to make is all the prices that we distributed, all the dayrates have already been given.
We're assuming on the expansion.
Yeah. On the expansion, we have a couple of rigs. We still have to capture the upside on the dayrate.
Yeah.
Regarding your question, whether we can expect the dayrates to go up and up. My point is that all the prices have been distributed. As Ghassan rightly mentioned, the only way we can create another increase in the dayrate, I guess, is by higher demand. It's all about the dynamics of the supply-demand, right?
Yeah.
Mm-hmm. Okay, clear. Thank you so much.
You're welcome.
The next question is from Abdelmalek Essalen from ALMA Investment. Abdelmalek, please go ahead.
Hi. First of all, congratulations for the great results. Just a bit of general characteristics. Firstly, what did you do with the commodity? We're looking about in terms of the asset yields, the return of equity, the margins all have improved to, I think, a lifetime record, or at least from available finances, it's a record number. If you could shed some light about this outlook, how would you go within the near future? How would you guide from a margin profile for the future? Also now given this innovative delivery of dayrates, would you guide for the near future? Would you guide it to continue on the same rate?
Of course, I know that you already said that you don't expect Aramco to have any more tenders, but given the current situation, the current uptick in the market, would you expect it to continue at the same pace? Of course. If you could generally guide us through the current, the future committee in terms of margins, in terms of dayrates.
We can go to the guidance. I'll just say something. I think these rigs that were awarded, the 40 rigs that were awarded, normally in over three years, five years, depending from one provider to another provider. You won't see another increase until the term of the contract expires. I don't think there is now. I know if Saudi Aramco decides that they want more offshore rigs, which may be not because they really got 40, there is a bit of a constraint because the market doesn't have rigs available at the moment. That will push the price up. I don't think now, I think it's settled. It's going to stay until the contract expires, which is three years or five years, depending on each contract extension that they have and they want.
I don't think there will be another spike for another three to five years.
Just a follow-up question. You talked about seeing some price escalations late last year. Do you think that these price escalations would be more than enough to offset the repricing of all the rigs on your prices?
On the land, I think the price increase that we have seen on the hiking this year covered the escalation of cost that we've seen in inflation. Offshore rigs, because as I said, we've talked about offshore rigs, we had more on the offshore that covered the escalation that we could see. Having said that, for the offshore, we really see a good chunk of escalation on pricing. Mentioned by Hubert, the compensation line went up. You can imagine, you're adding 40 rigs. Each rig contractually is just above 100 employees. 100 multiply by four is just 4,000 employees you want to get in. You can see the pressure on people maintaining their employees in place and not being poached for that one. You see other suppliers like, for example, catering is going high, and we see some escalations from other contractors as well.
Very clear. Thank you.
You're welcome.
Thank you. The next question is from Sayed Asker from Alayan. Sayed, please go ahead.
Hi. Yeah. Thank you. Thank you very much for the presentation and congratulations on the phenomenal results. I have a question regarding the growth which is coming from your view on the growth, which is coming from the Jafurah field, basically. Given, as you said, as you mentioned, that Aramco might not give any new tenders in the near future. Other than the Jafurah, what are your growth avenues available for you?
Just to be exact, we don't see new tenders for offshore. Just to be clear, it's offshore that we don't see. On land, there might be tenders that comes out. We don't have a concern on rig on land, there might be tenders. Thus, I'm talking more on the offshore, that we will not see more tenders for offshore. That's, I think, what we see in the market. In the Jafurah, what was the question about Jafurah?
Jafurah that how do you see? Is the company ready to?
I get that. Yeah. Okay. From our knowledge, Saudi Aramco is committed to the unconventional, Jafurah, the tender out actually that we are actually as you speak, we're kind of putting strategies around the tender. As mentioned during the roadshow, there is a big number of rigs that are going to increase for the unconventional, Saudi Aramco is still doing it in parts, not adding them all together. The first tender is out, we expect another tender will come out for the unconventional.
Okay. My second question, I know it's in very early stages.
Like there is a normalization of relationship between Iran and Saudi. Do you think that the company might get going forward in this gas field, which is shared between Iran and Qatar? This could be the growth avenue for you?
Well, I never thought about it, but I mean, the rig is there, right? The rig is right there. I think today, our rigs are completely really committed to Saudi Aramco at the moment, and I think the contracts are now for long-term, so it's going to be very difficult. If things go fine, and if the opportunity comes, you're just in the same sea, right?
Yeah.
No, it's not. I didn't think about that. I think it's too early to say right now.
Yeah, because why am I asking this is because I do believe in the region, Arabian Drilling is the one which is most qualified for. You have very high efficiency levels than all on the criteria.
I think us and other competitors as well who play in the offshore are equally have that. It's not a potential rig. I think we all have that opportunity. The only challenge that we would face, because we operate from Saudi, and we operate from Iran. It's still too early to say right now.
Okay. One more thing. I just wanted to add a reminder for you. During the roadshow, you said you will invite the investors for the rigs visit.
Visit. That?
Yeah. We are waiting for this.
I'll keep my invitation there. Whoever is interested, please send an email to ir@arabdrill.com, block a day, and we'll take care of the rest. There'll be a visit. We have to make sure you have training. It's basically an hour training on some of the aspects of safety, and then we can organize the visit.
Okay. Thank you.
Thanks. The next question is from Akresh Kumar from SICO. Akresh, please go ahead.
Good evening, gentlemen. Thank you for your time, and congratulations on the results. I have a quick question on the utilization rate. Is it calculated on active rigs or total rigs?
It's the active rigs divided by the total rigs. You have to exclude the three rigs that are in the shipyard offshore. They're the ones that we prepared to start. When you look at the rigs that are in Saudi, the rigs that are active divided by the total rigs that are in Saudi.
Okay.
44 divided by 47.
That's correct. Right now, when we say utilization rate of 94% at the end of 2022, is 44 rigs divided by 44 active rigs operating, generating revenue, divided by a total available fleet of 47. That 47 does not include the three rigs that are in shipyard. Because those rigs are not considered being available if you want. The total fleet size is 50, but available is only 47. When we look at the utilization, we always look at compared to what is available, what could be marketplace and is sitting in the parking lot, not working, not generating revenue, no contracts.
That's really helpful. This is not for the entire 2022. This is for when you are exiting Bahrain. It's for that, the 90%?
Yeah. It keeps changing, but we take a snapshot. The presentation has a snapshot at the year-end. From the year to year, I mean, a year is time enough because we start with some of the rigs that we start drilling out.
Okay. Thank you for the clarification. Just one last bit. I know you have answered this multiple times, but I just wanted to clarify this. Out of three stacked land rigs, one is already contributing from Q1 and two are not contracted, but you plan to upgrade it, and the CapEx is included in the guidance. Am I right?
That's correct. What we said as well is we said it's unlikely that any revenue stream from those two rigs will come into 2023, more likely next year.
Okay. That's helpful. Thank you very much.
The last question that we have in the Q&A box is a follow-up question from Rahman Hassan. He's asking, can you shed a light on mobilization revenue, and how we should look outside?
In the mobilization rig, it's a window of kilometers. If you move the rig by X kilometers, you charge this. If you go to a higher kilometer, you charge extra. This is very difficult to forecast because it all depends on Aramco. Do you want to move the rig close, or you want to move far? When you move a rig from the eastern province to one in the northwest, it will be mobilization. Now, how often that happens doesn't happen that often, but sometimes it happens. It's not easy. Correct me if I'm wrong.
No. I just want to clarify. It's a question about the mobilization or the rig move because the rig move is slightly different. The mobilization revenue is a one-off fee, lump sum fee that you get at the beginning of the contract. This is what you get paid for bringing the rig from wherever outside of the kingdom, wherever, up until on the well location. I just want to clarify, is the question raised about rig move or mobilization? It's mobilization, I think.
Yeah, I think I answered that. Just to clarify, there is two mobilization. Just to differentiate them, we call rig move or mobilization. Mobilization is when you acquire a new rig and you have a contract with Saudi Aramco. You mobilize rigs from Singapore. We mobilize two rigs from Singapore to Saudi. For each rig, there is a mobilization fee. It's a one-time fee that the client pays us. However, the rig move revenue is we move a rig from one well to another well.
Land rig.
Land rig. Yeah.
The mobilization revenue from an accounting standpoint, that revenue is being deferred and amortized over the primary term of the contract. If you have a 3-year contract, basically you will recognize the mobilization revenue over the 3 years of the contract. Likewise, the mobilization cost that you have incurred to bring the rig to the well location is also amortized over the duration of the contract.
I hope we understand the question correctly.
I think so. Thank you so much. I think there's another question in the Q&A from Abdulrahman from an OIL. Abdulrahman, please go ahead.
Congrats on the results, and thank you for this opportunity. I just have a quick question regarding the unconventional gas field. Does the unconventional gas field have lower IRR than the conventional gas field? Therefore, we should expect if the tender comes out for Ajlaf-4, we should expect for these rigs to have lower profitability compared to the conventional gas. Also you mentioned the current tender, part of tender is out. How much is the tender in terms of rigs, in number of rigs in that tender? That's it. Thank you.
You can assume that it is a lower IRR, but the return is at more than six rigs. Either you want to play part of that or not. Now you have to understand the one thing, it might seem like lower IRR, but at the same time, there is big room of efficiency gains. Just to give you an example. Usually, you move the rig and you move the whole camp with it. In this case, for example, you have the rig drilling in a certain region or area where you can have the camp not moved. The cost of moving the camp is totally eliminated. As much as, yes, you're right, we expect that we have a low IRR, but there is a massive room that you can gain with efficiencies. That comes with scale.
Instead of if you win one rig, there is not much you can play around. When you win three, four, or more rigs, then you can really play with the scale and how the economy of scale will reduce your total cost and try to get a higher IRR return. The thing is, you want to be in, you learn, and make sure you have the efficiencies, and then with the more tender that comes in, you want to go with it, and you already know what your cost is.
Yes. Regarding the second question, you mentioned that some of the tenders is out. How much is the number of rigs in the current tender?
I think 12. 12 or 13. I think 13 in total.
13? Okay.
One three.
Thirteen?
Yeah. One three.
Okay.
One three over multiple packages. Yeah.
Thank you so much.
I think that was the last question. Arabian Drilling Management, back to you for any final remarks.
I want to say this is our first earnings call. I'm happy that you joined us. I'm happy with the questions. I'm happy with the engagement. When you work all the time, this tells me that you guys are interested in our stock, and I'm very happy. Please reach out to us through our IR email. It is in the presentation on who to reach out. I really look forward in the future call that we're going to have. [Foreign language], hopefully, we have good news every time we have an earnings call, we will catch you more. Thank you very much for your time. Appreciate it. [Foreign language].
Thank you so much. At SNB Capital, we would like to thank Arabian Drilling Management for taking the time to conduct this call. We would like also to thank all participants for attending. We wish you a pleasant day. Thank you.
All right. Thank you very much