Shelf Drilling, Ltd. (SHLF), a leading provider of shallow water drilling services, reported a decline in its Q2 2024 adjusted revenue, primarily due to contract suspensions in Saudi Arabia and operational incidents in West Africa. The company announced adjusted revenue of $231 million, a decrease of $21 million from the previous quarter, and an adjusted EBITDA of $71 million with a margin of 31%.
Despite the revenue decline, the company highlighted a strong safety and operating performance, with a year-to-date total recordable incident rate of 0.10 and a year-to-date uptime of 99.4%. During the earnings call, Shelf Drilling also discussed the sale of the Baltic rig and provided optimistic insights into market demand growth in West Africa and Southeast Asia.
Key Takeaways
- Shelf Drilling's Q2 2024 adjusted revenue fell by $21 million compared to the previous quarter, totaling $231 million.
- The company's adjusted EBITDA stood at $71 million, with a margin of 31%.
- Contract suspensions in Saudi Arabia and incidents in West Africa were major contributors to the revenue decline.
- Safety and operating performance remained strong with a total recordable incident rate of 0.10 and uptime of 99.4% year-to-date.
- The Baltic rig was sold for $60 million, and demand growth is observed in West Africa and Southeast Asia.
- Shelf Drilling anticipates a revenue decline in Q3 but expects an increase in Q4 of 2024.
Company Outlook
- Shelf Drilling revised its 2024 financial guidance due to contract commencement delays in Norway.
- The company expects a revenue decline in Q3 2024, followed by an increase in Q4.
- Douglas Stewart will assume the role of CFO, bringing optimism for the industry's long-term outlook.
- Funding needs for Shelf Drilling North Sea will be addressed using available liquidity.
Bearish Highlights
- The delay in the Shelf Drilling Barsk contract commencement in Norway caused a significant shortfall in projected earnings.
- A liquidity injection is needed before the end of the year.
- The company faced five suspensions in Saudi Arabia, which impacted revenue and could potentially affect future operations.
Bullish Highlights
- Shelf Drilling is confident about the market in India and expects long-term growth.
- Positive market conditions are seen in West Africa and Southeast Asia.
- The sale of the Baltic rig is expected to provide additional funds in September.
- Contracts in West Africa are being finalized with announcements forthcoming.
Misses
- The effective utilization rate decreased, and revenue was lower in Egypt and Nigeria due to contract completions and incidents.
- A rig expected to start before the end of Q3 will result in lost revenue in Q4, estimated to be less than $10 million.
Q&A Highlights
- The company is actively pursuing opportunities in South Africa, Southeast Asia, and West Africa.
- Shelf Drilling is confident in the unique capabilities of its remaining four rigs in Saudi Arabia, expecting them to avoid future suspensions.
- A small financial penalty is associated with the delayed contract start with Equinor, with the primary impact being lost revenue and reputation.
Shelf Drilling's Q2 2024 earnings call reflected a challenging quarter with revenue declines due to external factors, yet the company remains optimistic about its operational strength and market opportunities. With strategic measures in place and a focus on growth markets, Shelf Drilling aims to navigate through the current challenges and capitalize on its unique position in the industry.
Full transcript - None (SHLLF) Q2 2024:
Operator: Good day, and thank you for standing by. Welcome to the Shelf Drilling Q2 2024 Earnings Call. At this time, all participants are in listen only-mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. Please note that today’s conference is being recorded. I would now like to hand the conference over to your speaker, David Mullen (NASDAQ:MULN). Please go ahead.
David Mullen: Thank you, operator. And welcome, everyone, to Shelf Drilling’s quarter two 2024 earnings call. Joining me on the call today is Greg O’Brien. Yesterday, we published the Q2 2024 Financial Statements for Shelf Drilling Limited and Shelf Drilling North Sea Limited (NYSE:SE), as well as our latest Fleet Status Report on the Investor Relations page of our company Web site. In addition to our press release and the financial statements, we also published a presentation with highlights from the quarter. A recording of this call will be made available on our Web site within the next few days. Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for full year 2024 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate, may or will occur in the future, are forward looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. Also note that we may use non-GAAP financial measures on the call. If we do, you will find a supplemental disclosure for these measures on an associated reconciliation in our financial reports. I will provide an overview of the company’s performance for Q2 2024 before sharing my latest views on the jack-up rig market. I will then hand over to Greg for his remarks and to walk you through the second quarter results and our updated guidance before opening the floor for Q&A. As always, I would like to start my commentary on our earnings call with our safety and operating performance. Across the fleet of 36 rigs, our year-to-date total recordable incident rate as of Q2 2024 was 0.10, showing continued improvement over our full year ‘23 results of 0.12. Our Make It Safer Today program is a key element in driving employee engagement. Our year-to-date uptime at the end of the second quarter was 99.4%, further demonstrating the effectiveness of our operating platform to deliver outstanding service to our customers. As previously announced in early June, we received confirmation that our application for the acknowledgement of compliance for the Shelf Drilling Barks was rejected by Havtil, the regulatory authority in Norway. We have since assigned significant additional resources to address the issues that were raised and we resubmitted a new application early this week. We have also been in constant dialog with our customer and are confident that we will complete this process and commence operations in the fourth quarter of ‘24. In late July, we received a suspension notice from Saudi Aramco (TADAWUL:2222) and the Harvey Ward rig. This is in addition to the four rigs that were suspended in April of this year. We are currently seeking clarity as to the timing and other details associated with this suspension notice, and anticipate that the rig will be released before the end of September. With the number of opportunities available in West Africa, we mobilized the Shelf Drilling Achiever and the Main Pass 4 to the region and subsequently issued notice of termination for the remaining contract term for these two rigs with Saudi Aramco. We expect both rigs to commence operations soon after their arrival in West Africa. The Trident VIII is currently in Equatorial Guinea following an incident, which resulted in severe damage to one of the legs on the rig. We are working with our insurance providers on an insurance claim and expect to have a resolution in the coming months. Subsequent to quarter end, the Baltic rig completed its contract in Nigeria with an indigenous operator and a binding agreement has been signed to sell the Baltic rig for a consideration of $60 million to a buyer in Southeast Asia. The buyer intends to deploy the rig in P&A activity. We view this as a value accretive outcome for this standard specification jack-up rig, and we expect to close this transaction in September. The Shelf Drilling Perseverance arrived in Vietnam in late July and commenced its new contract with PetroVietnam soon after. The Shelf Drilling Fortress recently completed a contract with CNOOC (NYSE:CEO) in the UK and has commenced in direct continuation a new contract with TotalEnergies (EPA:TTEF) also in the UK. The adjusted revenue for quarter two ‘24 was $231 million. The adjusted EBITDA for the quarter was $71 million, resulting in a margin of 31%. The sequential step down in revenue and adjusted EBITDA was largely the result of the suspensions in Saudi Arabia. We have substantially maintained our adjusted EBITDA margin despite the lower sequential revenue due primarily to cost reduction efforts across the company. The delay in the Shelf Drilling Barsk contract commencement has created a significant shortfall in our projected earnings and a need for a liquidity injection into Shelf Drilling North Sea before the end of the year. Greg will provide you more details on our quarter two results and financial outlook for the full year 2024. Brent crude oil prices averaged $83 a barrel during the first seven months of 2024, which is a constructive level for E&P investments in shallow water sector. Despite some recent volatility to the downside, the discipline showed by OPEC, combined with the escalation intentions in the Middle East, have helped oil price to rebound to $80 plus level. We remain confident in the long term fundamentals of global energy demand growth, particularly in non-OECD countries. I believe as a result there will be continued to be demand growth for hydrocarbons for years to come. The global number of jack-up rigs declined marginally from 406 in January 2024 to 404 in August 2024 and a market utilization at 93%. These figures do not fully reflect the impact of the recently announced rig suspensions in Saudi Arabia as a number of suspended rigs remain under contract with Saudi Aramco, while those rigs remain in Saudi Arabia. Approximately half of the 22 rigs suspended in round one have been or are expected to be redeployed in the near term. We believe there is sufficient demand globally to absorb the majority of the 27 rigs, and that global market utilization will remain above the 85% threshold. The jack-up activity in India with ONGC recently reached an all-time high of 37 rigs under contract. This elevated activity level was designed to slow the decline in production from the greater Mumbai High complex. However, the production targets were not achieved and the combination of escalating service costs prompted ONGC to reconsider their near term rig requirements. The last two tenders, a three rig requirement for high pressure, high temperature rigs and a more recent four rig tender were cancelled following the round of unsuccessful pricing negotiations. ONGC is currently reevaluating the future rig requirement. However, we do believe ONGC will maintain a level of rig activity above historical norms. And with the addition of smaller indigenous companies that were awarded marginal fields, there is room for incremental growth in 2025 and 2026. The Trident 16 remains idle in Egypt and we continue to have dialog with a number of customers for potential opportunities in the area. However, owing to the economic challenges facing Egypt, we believe that the rig could remain idle for an extended period of time and are therefore exploring opportunities outside of Egypt for the Trident 16. In contrast, the outlook in West Africa and Southeast Asia suggests strong incremental demand in ‘25 and ‘26. In West Africa, we are seeing incremental demand in all the major hydrocarbon producing regions, Nigeria, Angola and the equatorial plate region from traditional E&P operators. And we are also seeing a pipeline of new opportunities with indigenous operators in Nigeria. Since our last update, the Shelf Drilling Tenacious secured a 15 month contract extension with Chevron (NYSE:CVX) and Angola. The Shelf Drilling Achiever and Main Pass 4 are expected to commence operations in West Africa in early quarter four. We believe our track record in delivering operational excellence and value for our customers has helped us realize these contract opportunities at attractive day rates. Southeast Asia and in particular Vietnam, Thailand and Malaysia, are showing incremental demand for jack-up rigs. To date, we have seen a number of idle premium rigs from the Middle East secure work in the region and we are seeing a wave of new tenders for work commencing in ‘25 in the region. The CJ70 market in Norway has stabilized following the departure of other rig designs, and the outlook is positive for ‘26 and beyond. Other sectors of the North Sea market are now largely in balance due to a number of rigs leaving the UK and demand showing modest improvement across the region, principally driven by plug and abandonment activity and carbon capture and underground storage. We expect the rig demand in this market will continue to improve and slowly outstrip supply in the coming years. As of the 30th of June, ‘24, our contracted backlog was $2.1 billion across 33 rigs with a weighted average day rate of $89,000 a day and a market utilization of 92%. The backlog number reflects approximately $500 million of value on the three rigs that were suspended with Saudi Aramco where those contracts have not yet been terminated. As announced earlier, Greg will now replace me as CEO, and this will therefore be my last earnings call. I’ve now assumed the role of Executive Chair of the Board and look forward to supporting Greg in my new role. I’m extremely proud of what we have accomplished since the inception of Shelf Drilling in 2012, and would like to thank our investors and all other stakeholders for your support over the past 12 years. I’m confident in the long term prospects for our sector and excited about the opportunities for our company under Greg’s leadership as we continue to deliver safe and best in class operations to our customers. I will now hand it over to Greg for his remarks.
Greg O’Brien: Thanks, David. Reported revenue for Q2 2024 of $234 million included $3 million for amortization of intangible liability. We’ll continue to focus on and refer to adjusted revenue, which excludes the impact of this noncash item. Adjusted revenue for Q2 of $231 included $212 million of day rate revenue, $12 million of mobilization and bonus revenue and $7 million of recharges and other revenue. Adjusted revenue for Q2 declined by $21 million or 8% relative to Q1 2024. The sequential revenue decrease was entirely at the parent company with lower revenue in Saudi Arabia following the contract suspension of four rigs, the Main Pass 1, Main Pass 4, Shelf Drilling Achiever and Shelf Drilling Victory, lower revenue in Nigeria following the leg damage incident on the Trident 8 and lower revenue in Egypt due to the contract completion of the Trident 16 in Q1. This was partially offset by higher revenue for two rigs that started new contracts, the Trident 2 in India in March and the Baltic in Nigeria in April. Revenue at Shelf Drilling North Sea of $28 million was substantially in line with the prior quarter. Both the Shell (LON:SHEL) Drilling Barsk in Norway and Shell Drilling Perseverance in Vietnam were out of service for all of Q2 preparing for their new contracts. Effective utilization decreased to 80% in Q2 from 86% in Q1. Effective utilization at the parent company was 84%, down from 91% in Q1, mainly due to the suspensions in Saudi and the leg damage incident on the Trident 8 in West Africa. Effective utilization for the five rig fleet at SDNS was 58% in Q2 due to the two rigs that were out of service. Average day rate was $82,000 per day in Q2, unchanged from Q1. Operating and maintenance expenses of $142 million in Q2 decreased from $150 million in Q1, primarily due to lower operating costs on two suspended rigs in Saudi and cost reduction and deferral measures taken across the company. This was partially offset by higher costs for the other two rigs that were suspended in the Middle East that are now mobilizing to West Africa. At the SDNS level, operating expenses increased sequentially by $3 million to $38 million in Q2, mainly due to higher shipyard costs for the Shelf Drilling Perseverance, which commenced its contract in Vietnam on August 1st. G&A expenses of $16 million in Q2 decreased from $18 million in Q1, mainly due to a net decrease in provision for credit losses at the parent level. Adjusted EBITDA was $72 million in the second quarter, representing a margin of 31% compared to $80 million and 32% in the prior quarter. Adjusted EBITDA was negative $14 million at Shelf Drilling North Sea and $86 million from the rest of the business in Q2. Income tax expense was $8 million in Q2, down from $9 million in Q1. And year-to-date tax expense of $17 million represents nearly 4% of revenues. Net interest expense of $46 million for the quarter was $10 million higher than the prior quarter due to $10 million of one-time expenses associated with the SDNS debt refinancing transaction completed in Q2, the majority of which was non-cash. Non-cash depreciation and amortization expenses totaled $48 million in Q2, up from $41 million in Q1, mostly due to higher amortization of deferred costs for two of the suspended rigs in Saudi Arabia. The quarterly net loss attributable to controlling interest was $15 million in Q2. Capital expenditures and deferred costs were down sequentially by $11 million to $38 million in Q2, which included $16 million of spending at SDNS. At the parent company, lower expenditures were incurred on Trident 2, which returned to operations for its new three year contract in India and on the Main Pass 1 following its contract suspension. Spending at SDNS continued to be driven by contract preparation costs for the Barsk in Norway ahead of its new program now expected to commence in Q4 and for the Shelf Drilling Perseverance, which started its new contract in Vietnam at the beginning of this month. Our consolidated cash balance as of June 30th was $138 million, which was $37 million higher than the balance at the end of March. Cash at the parent company increased from $88 million to $101 million, primarily due to a sequential decrease in capital spending and a reduction in working capital. Cash at Shelf Drilling North Sea increased from $14 million in March to $37 million at the end of June, mostly due to the net cash inflows from our debt refinancing transaction. Following the announcement of the delayed contract commencement of the Shelf Drilling Barsk and Norway, we have revised our financial guidance for full year 2024 in our release yesterday. Fully consolidated adjusted EBITDA is now estimated between $290 and $335 million compared to our last guidance in May between $330 and $375 million. At the SDNS level, we now anticipate full year EBITDA between negative five and negative $10 million, a decrease of $40 million from the last guidance range. This reflects a start date for the Shelf Drilling Barsk in late October or November 2024. We were very disappointed with the delayed startup in Norway but we are confident that we will complete the regulatory approval process and commence the rig’s contract in Q4. This is a critical priority for us in the coming months. This delay does create a funding need at SDNS of approximately $48 million that we intend to address in the near term. The full year 2024 EBITDA guidance for the rest of the business remains unchanged between $300 million and $340 million. We expect revenues to decline sequentially in Q3 following the suspensions in Saudi, but anticipate an increase in Q4 once the two rigs mobilized from the Middle East to West Africa commence new programs. The recent announcement of the additional contract suspension for the Harvey Ward in Saudi is not expected to have a material impact on full year 2024 EBITDA. We’ve also revised our 2024 guidance on capital spending now expected between $135 million and $160 million. This represents a $10 million decrease from our prior guidance range based on targeted savings and reductions across the fleet at the parent level, for which our guidance is now between $95 million and $115 million. This does include the mobilization costs associated with the redeployment of two rigs to West Africa for new programs that we expect to start in Q4. At the SDNS level, full year 2024 guidance on capital spending is unchanged between $40 million and $45 million. [Technical Difficulty] I will provide brief updates on the Trident 8 and [Baltic] rigs and we expect to have more clarity on the insurance claim process for Trident 8 before the end of Q3, and we’ll provide further updates [Technical Difficulty]. For Baltic [Technical Difficulty] the transaction is scheduled to close next month and we expect an attractive price to the rig [Technical Difficulty] we are confident that we’ll capitalize on opportunities for our fleet in the region, including the [Technical Difficulty] being mobilized from this fleet. We also intend to provide operations and management support to the buyer of the Baltic [Technical Difficulty] transaction can create another business opportunities for us in the region [Technical Difficulty] well. These two events on the Baltic and Trident 8 should result in a material cash inflow to the company between now and the end of the year. We announced in late July that Douglas Stewart will join Shelf Drilling as CFO. Douglas has extensive experience in our sector and will be a fantastic addition to our team. We’re excited to have him officially on board in the coming weeks. I’d also like to thank David again for his great leadership since we started Shelf Drilling, and I look forward to his continued support in his new role as Executive Chair. The developments in Saudi Arabia and Norway have created some short term headwinds for us in 2024. However, we are encouraged by the increasing levels of activity in West Africa and Southeast Asia, and expect to quickly redeploy the majority of our rigs that were suspended in the Middle East. In addition, we have built strong earnings and cash flow visibility at Shelf Drilling North Sea for 2025 and beyond with the backlog additions in Norway, the UK and Denmark in recent months. Despite these near term challenges, we maintain a very optimistic long term outlook for our sector and specifically Shelf Drilling. Oil and gas production from our core shallow water markets will continue to play an essential role in meeting the world’s ever expanding energy needs for decades to come. And we expect jack-up supply and demand to remain tight for the foreseeable future. As always, we will be extremely focused on operational execution, as well as free cash flow generation and believe the business will be well positioned as we head into 2025 and beyond. We’d now like to open the call for Q&A.
Operator: [Operator Instructions] The questions come from the line of Michael Boam from Sona Asset Management.
Michael Boam: I just wanted to ask, in terms of the Barsk, what is the delta for each month that it’s not operational in terms of cash need at SDNS? And then you’ve talked about an incremental cash need of $40 million at SDNS. Will you be looking to resolve that at the SDNS level or using the liquidity that’s available at the Shelf Drilling level?
Greg O’Brien: So the impact of each month of delay is between $7 and $8 million, that’s effectively the lost revenue with the delayed start of the contract. We had anticipated a start date in May or June, that was clearly our plan earlier this year. We now expect it to be sometime in Q4. So that’s the entire driver for the revision in our expected earnings for this year and that effectively creates a dollar for dollar funding need. We thought we had filled that liquidity need with the bond financing we did in Q2, so we obviously didn’t anticipate this delay. On how we expect to finance the need, there’s not a huge amount of debt capacity at Shelf Drilling North Sea. We filled the original funding need with a bigger bond. The new document does not have a lot of permitted language around incurring additional debt. So this is probably an equity need at Shelf Drilling North Sea. It’s clearly an important investment and asset of the company. So we’re going to plan to support Shelf Drilling North Sea and plan to have more specific details on that over the next few weeks.
Michael Boam: So when you say equity, I mean, are you going to raise equity at Shelf Drilling or are you going to use the available liquidity of Shelf Drilling to support SDNS?
Greg O’Brien: The latter. Yes, we don’t see an equity need at the parent company at all.
Operator: [Operator Instructions]. The questions come from the line of Fredrik Stene from Clarksons Securities.
Fredrik Stene: I guess thank you, David, for talking to you every quarter now for a couple or even more than that years, and good luck as the Executive Chairman. Although, I’m sure the company is in very good hands with Greg. So with that, I’ll jump to my questions. You’re at least on the [Indiscernible] [Shelf Drilling] level, you’re maintaining EBITDA guidance if I have my numbers correctly, between 300 and 340, which was also the implied guidance from Q1. So now with the Harvey H. Ward also facing a suspension, I would like to hear what’s going to make you end up in either the low end or the high end of that range? That’s my first one.
Greg O’Brien: So I think David mentioned that the suspension we think would start before the end of Q3. So that would likely result in lost revenue in the fourth quarter. We’re clearly trying to see if there are marketing opportunities for the rig but that’s probably the base case that that rig does not generate revenue in Q4. So that impact is relatively modest and it’s less than $10 million. We’ve continued to look at ways to reduce costs. Costs came down pretty meaningfully on a sequential basis from Q1 to Q2. I think the biggest swing factor and the reason the range is still relatively wide is start dates on new programs for the two rigs that we’re moving to West Africa. So we haven’t been so specific about whom those rigs are going to work for or when they will start, that’s by design. But we remain very confident those rigs will start pretty soon. So they’re on the same heavy lift vessel that will arrive in West Africa in the next few weeks, and we’re pretty confident those rigs could start operating towards the beginning of Q4. But if that were to slip that would be relatively meaningful from a revenue impact standpoint. So I think that’s the biggest swing factor when those two rigs go to work. It’s not if, it’s when those two rigs start new contracts.
Fredrik Stene: And second, taking a bit of a broader approach to your fleet now, you said in your prepared remarks that 2024 maybe has been a year with a bit more headwinds than one would have wanted, both from Saudi and from India and now Egypt as well having the idle Trident 16 there. So I was just wondering, again, on a high level, how you think about fleet optimization, sizes of the fleet versus what’s coming off or needs to be recontracted, because clearly you don’t want to end up in a situation where you’re partially, call it, cannibalizing day rates at the cost or at your own expense in a way if you have that too much idle capacity at the same time? So if you have any thoughts at this point around that, I think, that would also be super helpful to hear.
David Mullen: Fredrik, I’ll start with that one and Greg can add comments. And likewise, I want to thank you for all the interactions we’ve had over the past 12 years. I thoroughly enjoyed it. But in terms of the market, so let me talk a little bit about India. The India situation is really not as bad as it looks and what we’re seeing in India, there’s quite a lot of demand coming in India. We know programs. So we do believe that ONGC will relaunch some of these tenders. And it was a little bit of a reaction to the fact that they fell short of the production targets and that’s probably more geology than anything else. But there’s also a pricing issue. You may have seen something recently that was put out on Bloomberg where the government is going to elevate the price that they can sell gas for. And I think something will follow on liquid hydrocarbons, which helps ONGC. And there is a compelling need in India to have a better balance between imported energy and domestic energy, because right now, the balance is escalating with the passage of each year and we’re probably somewhere around 85% reliant on energy sources from outside of India. So there’s a real need to better balance that. So I do think long term, India activity will remain positive. The other thing that’s going to add a little bit into 2025, 2026 is that a number of smaller companies got these marginal fields awarded some years back, and they’re getting to the point where they have to do something. So again, you’re going to see a number of smaller independents, which will -- it’ll be short term work but collectively, you’re probably looking at another two or maybe even more incremental rigs. So I do see that there’s a potential for growth in India over time. We’re going through a period where ONGC is reappraising and looking at how they better deploy their asset fleet. But ultimately, I think they’re going to maintain an activity level that’s on the high end of their historical rig count. If we look at Egypt, it’s a very specific situation. It’s the fact that the Egyptian economy has been really hurt by the escalation and tension in the Middle East. The Suez Canal was a very important means of earning foreign currency as was the tourist industry. And when you take those two pillars away, you’re really -- the country’s hurting for foreign currency and they need foreign currency to pay for the oil and gas exploitation in the Gulf of Suez and the Mediterranean. But that will resolve itself. I mean, I can’t guess when, but I do think, Egypt’s going to remain with challenges for ‘25. Hopefully, sometime in ‘25, this situation resolves itself. And as I said, the markets, we see market, a very positive market in West Africa. We see a very positive market in Southeast Asia. So we do see opportunities. And look, we can’t disclose the specific details at this point in time. But what we have clearly indicated is that the Shelf Drilling Achiever and the Main Pass 4 are going to work, and we directionally indicated that’s going to be in West Africa. So we see West Africa is a very important region. We were very happy with sales proceeds on the Baltic. And we recognize that actually selling one rig provides an opportunity for another rig coming out of the Middle Eastern region. So in balance, we’re feeling pretty good about the market. There’s no doubt that there’s near term headwinds. But once we clear ‘24, we think ‘25 we’ll see rigs go back to work. And we should expect a good year in 2026. Let me take a pause there and pass it to Greg and see if you’ve got anything to add.
Greg O’Brien: No, I think that was a good and comprehensive summary. Maybe the kind of direct question, Fredrik, you’re asking about fleet size and positioning. We’ve never thought about the business like we’re working towards a magic number on the number of rigs. We do think scale is important and we do have scale. We have 31 rigs in the parent company, 36 in the group. And we’ve always tried to have scale within markets. So we will likely have two less rigs at the end of the year with the Baltic, which we’ve talked about, which we think is a very positive step for multiple reasons. The Trident 8 situation, not a good event. But those are the things that can happen in the business, and that’s why you make sure you’re protected with insurance. And potentially having two less rigs isn’t a problem for the company, we still have clear scale. And to David’s point, it sort of indirectly opens up opportunities in another market. West Africa is a place we see incremental demand. So we’re unfortunately used to changing dynamics in this industry, things tend to not move in a straight line. This year has been different than we expected. But we’re working as quickly as we can to address some of these new developments that have popped up, and we think we’re making good progress there. We do now have a couple of other rigs on the standard specification side that don’t have perfect near term visibility. Would we consider selling another asset? That’s a possibility. We’ve had a few inbounds from third parties looking at buying a rig that could be converted to a production unit. So that could be an interesting idea for one or two units, probably not more than that. We feel like our standard fleet has always been undervalued in the markets even more so today than where we were at the start of the year. So that’s another option we may look at in the coming months. So hopefully, that’s some helpful context just around how we think about size of fleet and positioning.
Operator: The question comes from the line of Gregg Brody from Bank of America (NYSE:BAC).
Gregg Brody: Just can you talk a little bit the Saudi decision to suspend more rigs. Can you just talk a little bit about what you think is going on there and do you think they’re done?
David Mullen: Again, I’ll start that. So this was a surprise. It was unexpected. At the last round of suspensions, the message we got from Aramco was, this is it for 2024. We may reappraise in 2025 but this is it for ‘24. And look, it was a question I asked them. And the kind of feedback I got is that they’re continuing with their production cuts in OPEC, which has put a pretty low bar on what they’re going to produce and what they’re going to sell. And added to that the other thing that has transpired is that they’re producing a lot of condensate as a result of the gas onshore, which is an at additional liquid barrels. So the combination of the two has given them more production than they’re really able to sell. The next part of the question is, is that it? We believe, at least, that’s it for 2024. Will there be future suspensions? I don’t think so, but I can’t categorically say they won’t. I think, you know, they’re very quickly going to [reach] [Technical Difficulty] they need that level of activity to sustain the production. There is no doubt that there is decline onshore, and offshore remains the primary source of incremental barrels. So let’s just wash through the fact that they almost doubled the rig count in a very short period of time. They will settle at a level that was above the baseline of where they were before. And that baseline was around about 55 rigs. So right now there, I think it’s 67, 68 rigs. So they’re not very far from the baseline of where they were prior to this big ramp up in activity. And I think that’s -- so it’s just my -- and this is just my opinion. My opinion is that they’re pretty close to the floor of -- the level of activity they need to be able to sustain the production profile they’ve got. But it’s just my opinion.
Gregg Brody: And just I’m not sure if you said it, the Baltic proceeds. When do you expect those to come in and is that a potential source of the equity needs at SDNS?
Greg O’Brien: We think the transaction will close in September. And so as soon as the sale closes we’ll receive the full purchase price. So indirectly, that’s right. I mean, we feel like we’ve taken good steps to shore up cash flow and [liquidity] and we think we could support SDNS, if we need to. So that sale is clearly helpful in that situation.
Gregg Brody: And just West Africa, it sounds like you’re close to having something there. Is there sort of a sense of when you think we’ll know what those contracts look like?
David Mullen: Very soon, I would say -- because we anticipate the rigs will arrive within the next three or four weeks. And very soon thereafter, they’ll start work. So we should be able to announce that in the coming weeks.
Gregg Brody: Isn’t it handy just not a lot to disclose it, or we’ll hear more about what’s the driver of that announcement?
David Mullen: We’re just finalizing the details. So we’re not really in a position to disclose it at this point in time. But we wouldn’t signal what we have signaled if we weren’t absolutely sure this is going to happen.
Operator: The questions come from the line of Nikhil Bhat from JP Morgan (NYSE:JPM).
Nikhil Bhat: I have one on your remaining rigs in Saudi Arabia. You just have the High Island rigs in now. Could you comment on the utility of these rigs to Aramco? And if you believe they could -- if Aramco does another round of suspensions, could they potentially be at risk as well?
David Mullen: What I can say is that those rigs have rather unique capabilities. So we believe that those four rigs will not be suspended with a future round of suspension. But I can’t categorically say that won’t happen. But let me explain a little bit what the uniqueness of the rigs are. First of all, all four rigs have shallow draft capability. And all the modern rigs that are working in Saudi Arabia don’t have that capability. And the Safaniya field, which is the largest offshore field, goes all the way onshore. So it has very, very shallow draft requirements. So we do believe that these rigs have quite unique capability. Added to that the High Island 9 and the High Island 5, which are two rigs that are working in workover mode, there are only three rigs in the entire fleet of Saudi Aramco that have what they call a simultaneous operation capability. That allows the rig to work on platforms with open wellheads where they will not require to shut those platforms in when we’re doing workover operations. So again, those rigs have quite unique capabilities. So we think the four rigs we’ve got remaining are likely or unlikely to suffer suspension in the future. But you nothing is absolutely guaranteed in that respect. We never imagined we would be hit with five suspensions, especially given the fact that according to Aramco’s own performance metrics, we were ranking number one of all the contractors. So, yes, it’s been very disappointing for us, very painful, because we felt performance should have maybe mattered more than what it appears to have done. And I’m spelling that out because I felt the pain of that. I think that we were a little bit unfairly treated. And clearly the local contractors and those people who had premium jack-ups on maiden contracts where there was a degree of protection on them were given priority above us. But we do feel and I do feel that the four remaining rigs will have differentiation when it comes to special capability.
Greg O’Brien: The only point I would add on that, so our four rigs are of the same design. There are only a couple others in Saudi with one other contractor. And I think [ADES] is now the only one that has any shallow draft capable rigs still operating in Saudi. About a month ago, they announced a 10 year extension on one of their shallow draft rigs, which I think is just a sign that rigs of this nature are pretty unique and hard to replicate, if you will. So despite what’s happened from an activity standpoint in Saudi this year, we do think those rigs should be as well protected from a design and feature standpoint but also from a performance standpoint.
Nikhil Bhat: So on that topic, I know it’s early days. But could you give -- probably comment on sort of your plans for Harvey Ward? You sort of indicated that there could be space in West Africa for another rig. Is that what you’re currently thinking about?
David Mullen: Actually, probably not on that particular rig, because we’re pursuing another opportunity that happens to be in the region. I’m not really -- I’d rather not share any more details about that. But we are chasing an opportunity that’s actually within the region. The two rigs that have mobilized out of Saudi have purely gone to South Africa. The Shelf Drilling Victory, we see -- that rig is very, very marketable. So we see opportunities for that rig in Southeast Asia, in West Africa, and we expect to secure something pretty soon for that rig as well.
Nikhil Bhat: And last quick one from me. On the Barsk, is there any compensation or remedy that needs to be paid to Equinor for the delayed contract start?
Greg O’Brien: I mean, there was original commencement window that was three months, from May through July and then a period of time after that, that does have sort of a financial penalty component, but I’d say is quite small in the context of where we are. The impact is much more lost revenue, the impact reputationally frankly for us and the knock on effect to Equinor. But yes, there is a small direct financial penalty for this delay that’s built into our revised guidance for 2024.
Operator: Thank you. Currently, there are no further questions registered. This concludes today’s conference call. Thank you all for participating. You may now disconnect your lines. Thank you.
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