Offshore drilling contractor Shelf Drilling has boosted its backlog further during the first quarter of 2023, despite experiencing a sequential decline in revenue due to lower effective utilisation across its fleet. The UAE-headquartered giant’s hopes of further improvements within the offshore drilling market are fuelled by the growing rig demand in Asia, which is expected to push day rates to higher levels, enabling the firm to enjoy the fruits of the oil and gas boom and its favourable effects on the rig market’s jack-up segment.
While Shelf Drilling did not repeat the same strong operational performance across its rig fleet from the fourth quarter of 2022, when it benefited from the acquisition of five drilling rigs from Noble Corporation, the company’s results for 1Q 2023 are nothing to sneeze at, as its adjusted revenues were $179.8 million, compared to $214.6 million in 4Q 2022.
The $34.8 million or a 16 per cent sequential decrease in revenues was primarily driven by a lower effective utilisation across the company’s fleet and lower mobilisation and other revenue, partially offset by higher average earned day rates.
In line with this, the UAE player’s effective utilisation slipped to 75 per cent in 1Q 2023 from 86 per cent in 4Q 2022, as four rigs were being prepared for new contracts or contract extensions while one rig completed its last contract in 1Q 2023. However, the average earned day rate increased to $69.7K (i.e. $69,700) in 1Q 2023 from $66.7K ($66.700) in 4Q 2022.
The company’s total operating and maintenance expenses increased by $6.9 million (6 per cent) in 1Q 2023 to $129.2 million, compared to $122.3 million in 4Q 2022, primarily due to higher planned shipyard and maintenance expenses mainly due to three rigs preparing for new contracts in the Middle East, India, and West Africa.
David Mullen, Shelf Drilling’s Chief Executive Officer, commented: “The high concentration of major projects in 1Q 2023 led to a sequential decline in revenue and EBITDA in line with the guidance we provided on our prior call.
“Six of our rigs were preparing for long-term contracts in the Middle East, India, West Africa and the Mediterranean that are scheduled to commence in 2Q and 3Q 2023. As these projects are completed in the near-term, we anticipate significant growth in run-rate earnings and cash flow in the second half of the year.”
Furthermore, Shelf Drilling’s general and administrative expenses of $15.5 million in 1Q 2023 decreased by $2 million compared to $17.5 million in 4Q 2022, primarily as a result of lower compensation and benefit expenses in comparison to the prior period. The firm’s adjusted EBITDA for 1Q 2023 was $36 million, compared to $75.6 million for 4Q 2022, thus, the adjusted EBITDA margin of 20 per cent for 1Q 2023 decreased from 35 per cent in 4Q 2022.
The offshore drilling contractor reported capital expenditures and deferred costs of $82.5 million in 1Q 2023, which shows a decrease of $388.8 million from $471.3 million in 4Q 2022. This decrease was primarily related to $417.7 million for the acquisition of five jack-ups from Noble in 4Q 2022.
The firm’s spending in 1Q 2023 included $22.9 million for acquisitions associated with the ongoing rig readiness project for the Shelf Drilling Victory, which kicked off its new long-term contract in April 2023. In addition, the spending across the rest of the fleet increased by $28.9 million, compared to 4Q 2022 mainly due to out-of-service projects for four rigs being prepared for new contracts in the Middle East, India, West Africa and Italy.
Shelf Drilling further points out that the ending cash and cash equivalents balance of $143.6 million in 1Q 2023 increased by $2.8 million from $140.8 million at the end of 4Q 2022, primarily due to the $44.4 million net proceeds from the issuance of common shares in 1Q 2023 mostly offset by the sequential reduction in EBITDA and high level of capital spending during the quarter.
“Our backlog further increased from the prior quarter to $2.8 billion as of 31 March 2023 across 34 rigs, and we recently secured a contract for one of the two available rigs. Marketed utilisation for the global jack-up fleet exceeds 90 per cent, and we are seeing signs of further demand growth in India and Southeast Asia through the rest of 2023, which should drive continued improvements in leading-edge day rates,” added Mullen.
Subsequent to 31 March 2023, Shelf Drilling secured several new contract awards, including a short-term contract for the Adriatic 1 jack-up rig in Nigeria, which is expected to start in May 2023 along with a new contract for the Shelf Drilling Barsk rig in Norway with a total contract value of $61 million and planned start date in May 2024.
Additionally, the Shelf Drilling Tenacious rig’s contract was amended to include a further 15-month option while the Shelf Drilling Mentor rig secured a one-well extension in Nigeria for around 120 days with a contract value of about 16 million.
“We remain committed to delivering safe and reliable services and providing best-in-class operations to our customers and believe we are well-positioned to leverage the robust jack-up market backdrop,” concluded Mullen.
Shelf Drilling is not the only rig owner, which is looking forward to reaping the benefits from a multi-year upcycle, as the offshore drilling market tightens, since its rivals – Diamond Offshore, Noble, Transocean, Valaris, Seadrill, Vantage Drilling, and Dolphin Drilling – also plan on taking advantage of the anticipated boost in rig demand and a further increase in day rates and fleet utilisation.
While Noble recently won mostly drillship deals with one semi-sub and one jack-up deal thrown into the mix, Transocean got work for semi-submersible rigs and Valaris expanded its backlog with both drillship and jack-up deals.