Borr Drilling Limited (BORR) Q2 2023 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Borr Drilling Limited Second Quarter 2023 Results Presentation Webcast and Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Patrick Schorn, CEO. Please go ahead.

Good afternoon, and thank you for participating in the Borr Drilling second quarter 2023 earnings call. I'm Patrick Schorn talking to you from Oslo. And here with me today is Magnus Vaaler, our Chief Financial Officer; and Bruno Morand, our Chief Commercial Officer. Next slide, please. First, covering the required disclaimers. I would like to remind all participants that some of the statements will be forward-looking. These matters involve risks and uncertainties that could cause actual results to matter -- to differ materially from those projected in these statements. I, therefore, refer you to our latest public filings. Next slide. In the second quarter of 2023, we recorded another strong result with an increase in revenue of 9% to $187.5 million and an increase in adjusted EBITDA of 16% to $84 million on a flat active rig count. This brings our adjusted EBITDA margin for the quarter to 45%. We continue to see the market for jack-up drilling rigs developing strongly, and year-to-date, we have added seven new contracts and LOAs for a total estimated duration of 1,771 days or $289 million in contract value, which gives an average day rate of approximately $163,000 per day, continuing the building of an increasingly strong backlog. In July 2023, we had previously exercised options on the Gerd, which was active in West Africa canceled. This rig was placed back on the market and we were immediately able to secure new work in the Middle East at more favorable economics. The change of contract for this rig will lead to some idle time before it commences its new contract in December 2023, which will impact our results in the second half of this year. However, at the same time, it will also improve our position in 2024 and beyond for the Gerd. We've also secured a short-term extension to the contract for our rig Prospector 1 operating in the North Sea, a region that is experiencing lower day rate levels than the rest of the world. With the overall market continuing to strengthen, particularly in other regions, we are positive that this extension will provide a bridge towards favorable long-term commitments elsewhere. Based on these developments, our full year adjusted EBITDA for 2023 is now estimated to be between $330 million to $360 million and we expect our financial performance in the third quarter of 2023 to be similar to the second quarter, which we expect will be followed by an increase in the fourth quarter, when for the first time, all of the company's 22 delivered rigs will be in operation. Supported by our confidence in the jack-up rig market, we are in active discussions with Seatrium, formerly Keppel, for an expedited delivery of our rigs Vale and Var to August and November 2024, respectively. As we see significant opportunity to increase earnings with having these last two top-tier rigs available. Following the recent contract awards, our fleet's contract coverage for 2024 stands at 70%, including firm contracts and priced options, with an average equivalent day rate of approximately $123,000. Considering this firm contract coverage and the projected day rates for the uncontracted days, we have narrowed the estimated range of adjusted EBITDA for full year 2024 to be between $500 million to $550 million. Magnus will now step you through the financial details of the second quarter.

Thanks, Patrick. Q2 2023 revenues were $187.5 million in the quarter, an increase of $15.5 million or 9% to the first quarter of the year. The increase in day rate revenues were $13.4 million and the increase in variable income from Mexico joint ventures was $2.1 million. The increase in revenues was a result of higher day rates and higher efficiency for our JV rigs as the number of contracted rigs were the same quarter-on-quarter 20. The rig operating and maintenance expenses for Q2 were $89.5 million, an increase of $4 million from Q1. And this was mainly due to insurance proceeds, which was booked in Q1 and thereby reducing the operating expenses in that quarter. The general and admin expenses decreased by $2.1 million because Q1 included a $1.3 million national insurance expense recorded on employee stock options due to increase in the company's share price. The total financial expenses net were $49.6 million for the quarter, an increase of $9.1 million, mainly as a result of $4.8 million increase in foreign exchange losses, $1.6 million increase in interest expense and $0.7 million decrease in interest income. This gave an interest -- income before income taxes of $14.2 million and a net income for the company in the quarter of $0.8 million. Our adjusted EBITDA was $84 million, an increase of $11.6 million or 16% compared to Q1. Our free cash position at the end of Q2 2023 was $83.8 million. Our cash movements in the quarter were mainly driven by $2.4 million cash from operations, which included $67.1 million cash interest paid and $7.9 million of income taxes paid. We also spent $25.7 million on asset activation costs and drilling equipment, mainly for our rigs, the Hild and Arabia III which are starting up their contracts in the third quarter. We received $9.8 million proceeds from return on previous shareholder funding to our Mexico JVs and we used $161.4 million in financing activities, which comprised of $151.2 million repayment of our old convertible bonds, $35.2 million debt principal repayments and a drawdown of $25 million in debt from the upsize of the DNB loan facility. With this, I would like to turn the word over to Bruno.

Thanks, Magnus. I'll now briefly cover some aspects relating to the markets where we operate. Jack-up utilization levels have continued to increase year-to-date. In particular, the market utilization for modern rigs currently stands at 93.9%, an increase of 1 percentage point since our last report and a level not seen since 2014. Amidst the stacked rig market, we note an increased sense of urgency from our customers in securing re-capacity. This is evidenced by two primary trends. First, the increase in average contract duration; and second, a higher number of tenders and awards, targeting programs with commencement one year ahead or more. As a result of these trends, we note that the two and three-year forward contract coverage of the jack-up fleet has already returned to peak levels experienced in the prior cycle. Further, in recent months, there has been an increasing number of reports of tenders and negotiations concluding unsuccessfully due to no, or limited number of offers received. Additionally, we are experiencing an increased number of direct negotiations as customers attempt to fast track re-contracting. We believe that the combination of strong demand visibility and the near and long-term tightness in the market will continue to provide support to increasing rates. Moving to the next slide. Borr Drilling continues to build quality backlog. Our current contract revenue backlog stands at 34.1 rig years for a total of $1.64 billion. This equates to an equivalent rate of $132,000 per day, which we believe to be industry-leading for jack-ups. Let me provide some more details of fixtures and general fleet developments since our last report. First, the Mist has received a contract from Valeura for 244 days program in Thailand that will maintain the re-contracted into the second half of next year. This award is a result of the strong operational performance delivered by the Mist in its crew, leveraging its unique features and offline capabilities. The Thor has been awarded a binding LOA for 151 day program in Southeast Asia. This contract is expected to commence in December '23 when the rig will conclude its current commitment with CPOC. These awards for the Mist and the Thor will maintain these units contracted until mid-'24. Based on the visible prospects, we project the Southeast Asian jack-up market will be undersupplied at that time which should put us in a strong position to recontract these units at favorable rates. The Gerd has been awarded a binding LOA for a 270-day program in the Middle East expected to commence in December '23. The Prospector 1 received a short-term extension from its current customers in the North Sea, including some options that are subject to mutual consent. As Patrick mentioned earlier, the North Sea continues to experience softer demand and day rate levels. Hence, we continue to actively market the Prospector 1 for opportunities around the globe. All of our 22 delivered rigs are contracted or have future commitments. With the projected contract commencements for the Arabia III and the Hild in Q3 and the Gerd in Q4, we anticipate having all our delivered rigs active by year-end. Moving to the next slide. Since the beginning of 2022, we have continued to experience marked increases to our EBITDA numbers as a result of higher operating rig count and boosted by improved day rates. With recent awards we have secured, our contract coverage, including price options stands at 70% for 2024 and 45% for 2025. Based on the demand outlook and active discussions we're having with our customers, we maintain an optimistic view that our available days in 2024 and beyond will be contracted at rates similar or superior to our recently announced fixtures. On that note, I would like to turn the call back over to Patrick.

Thank you, Bruno. So in conclusion, we finished Q2 with strong earnings, a quarter in which returned $0.75 of every incremental revenue dollar into earnings. The average day rate of our backlog is increasing by adding contracts at market leading rates. The quality of our assets with a fleet that is the youngest in the industry is the backbone of our operation. Based on the demand for rigs in the market and us being sold out at the moment, we have been progressing discussions with the shipyard to accelerate the delivery of our last two rigs. These two rigs could be adding to our earnings as early as the end of 2024. The refinance of our 2025 debt maturity is a key priority for us. With the development of our results and the strengthening of the credit market, we intend to be making first steps forward, possibly as early as this year. The return of cash to investors remains a key objective that we aim to achieve in combination with this refinance. Our operational team remains focused on operational excellence for the sold-out fleet. So in closing, I'm very pleased with the results of the second quarter. The earnings potential of Borr Drilling continues to improve and our long-term value is getting stronger and stronger as the demand for premium asset continues to increase in what we see to be a multi-cycle to multi-year up cycle for the shallow water offshore drilling industry. And with this, I would like to end it here, the prepared remarks section and we can go to the Q&A now.

Thank you. [Operator Instructions] Our first question comes from the line of Greg Lewis with BTIG, LLC. Your line is now open.

Yeah. Hi. Thank you and good afternoon and good morning, everybody. Thank you for all the prepared remarks. Magnus, I guess I wanted to ask a question to you. I mean, clearly, you mentioned the refinancing, you mentioned shareholder returns. Thank you for the next '24 guidance as we kind of look at that at the midpoint that's $525 million. You look at net debt, we're looking like we're trading around 3 times next year on a net debt-to-EBITDA basis. That's a pretty good place to be, but I guess as you think -- and realizing in that number, there are some day rates in the 160s and 170s, which have been pushing and some -- obviously, some rates that are legacy that are below that. But really, what I'm trying to understand is as you think about on like a -- because they -- as good as the market outlook is for the next two, three, four years, there is kind of that mid-cycle type way to think about it. So really, as you think about the cycle and the balance sheet, any kind of color around how you're thinking about what a sustainable debt load is for the fleet, post the -- let's assume we have to take delivery of the two, we're going to have 24 high quality rigs. Any kind of color around how you're thinking about debt. So then we can kind of do our own assumptions around how we think the company has the potential to return cash to shareholders.

Thanks, Greg. And it's true we are seeing a steady increase in EBITDA and what was a question in these calls, two years ago, where our debt levels being too high. We're now are extremely comfortable with the debt levels that we have currently on our fleet. At the same time, it's obviously important to be cautious about the cyclical nature of the industry. So we need to find a good balancing point on where we want to be when it comes to the debt in relation to our projected EBITDA at the time and drawing it down. So it's -- we don't have exactly a targeted level, except I can say that the levels that we are at currently at around $75 million to $80 million is a comfortable level, which I think is an okay assumption to also include in the future as well, which would both be a good level for upcycle, but also in a mid-cycle scenario. Maybe, Patrick, you want to add something on the financing?

No, I think you're absolutely right, we're comfortable with that. And I think you have to combine that as always with -- that we're in a situation where there is no new builds coming to the market. The pricing that we hear on new builds is ever increasing, meaning that the loan to value type of ratios are actually improving in our favor even with the debt remaining the same. The values are going up. So I would say that we're comfortable with where we are today. And going forward, it is probably not the first thing that we intend to bring down, we'd rather leave the debt on the rigs as it is and use the surplus cash to return to shareholders based on what we see at the moment.

That’s great to hear. Thank you for that. And then just talking a little bit about the Gerd, which saw its contract change and then move that rig to the Middle East. I guess, what I was -- I guess, I'm kind of curious, realizing that the Middle East is the largest market for jack-ups. Patrick, I was kind of more interested in some color around West Africa. I mean this seems like a market where there could be opportunities for -- maybe not Borr, but the global market -- the industry to deploy more rigs in West Africa. Just kind of curious how you're thinking about that market just now that we have one less rig -- one less of your rig there. Is that kind of -- yeah, just any color you can talk about West Africa and how you think Borr will participate in that market over the next three years.

No. I think it is certainly a market where there is upside going forward and it's also a market that is close to our heart. So I'll let Bruno give a little bit more color on that, but there's certainly opportunity. Bruno?

Thanks, Patrick. Thanks for the question, Greg. And listen, we remain constructive in relation to West Africa. I think when you think about long-term programs in West Africa, we've been fortunate to have secured previously some of those contracts, including some of the contracts that we have in Congo. What we see at the moment is an increasing number of requirements, including a variety of new exploration programs in places such as EG for instance, or Morocco, for example. It's a tight market already, there's limited capacity out there. With these programs, these exploration programs now taking some of the capacity, things should stay tight. And we hope that in the near future, a few of these programs that are under exploration phase are hoped to be fast tracked by the customers and they could be very quickly turning into a longer, longer prospects as well. So we maintain a positive view. Obviously, in terms of size, as you pointed out, West Africa is nowhere near the same size as Middle East. So the impact that it can have is not as significant, but we do have a constructive view on that market.

Okay. Super helpful. Thanks for the color, Bruno.

Thank you. [Operator Instructions] Our next question comes from the line of Fredrik Stene with Clarksons Securities AS. Your line is now open.

Hey, Patrick, Magnus, Bruno. I hope you're having a nice day so far and thanks for the color and the prepared remarks. I guess my -- the question I really want an answer to, is how you optimally envision a global refi, but I totally understand that, that is a sensitive matter, but feel free to comment on that if you'd like. But while you think about that, I actually wanted to touch on the new builds -- while that you have at Gerd and that you're now considering to take early delivery on. I was wondering, are you able to -- or I think you've discussed it or mentioned it before, maybe it was the previous call that this, having discussion featuring for something like this, it's something that you've considered for some time, but now you've given relatively specific dates. So I was wondering kind of what has triggered these discussions to come to this at this point? Have you had a counterpoint where there are firm opportunities for these two particular rigs that you're chasing? And also how are you thinking about financing these rigs, are earlier commitments still in place or is it -- do you have to think about something new? Any color on that would be helpful. Thanks.

All right. So there's obviously quite a few things around the two new builds, but let's start with the overall opportunity that we see. Clearly, the market is so strong at this moment that for us to have more rigs to put the work at current and improving rates is incredibly beneficial, much more beneficial than having the rigs sit at the shipyard and being delivered a year later. I mean, these rigs will generate $35 million, $40 million of EBITDA per year a piece. So this is a large amount of earnings that we could put our hands on. And I would say that the only reason to pull it forward is because we see some real opportunities for these earnings and we have customers that are interested to the tune that, Bruno, maybe you want to comment a little bit on the latest engagement you had regarding this?

Yeah. Indeed, Fredrik, we have had -- I mean let me start by saying that those two rigs in particular are quite special in terms of their capabilities. And that, in nature make them quite attractive in the market. We have two sister units currently operating and doing a fantastic job for their respective customers and that has kind of set the reputation, particularly in Southeast Asia, where the sister rigs are. And we do see increasing number of opportunities. A lot of these opportunities are, in fact, already targeting the second half of next year. We have had, including a couple of customers visiting the rigs. I think it's premature to say that they will be contracted overnight, but we do have a high level of confidence that it won't take too long to have them out there. So we are quite optimistic in a combination of a strong market and very, very premium assets.

Okay. Thank you, Bruno. Then when it comes to the finance, you were asking whether the financing is on rigs. And at the moment, we have financing on these rigs, as you know. But bringing them forward and having them delivered in '24 and our desire to refinance as fast as we can, you obviously start to get into a situation where this would be just become part of the refinance in which we would, in actual effect, pay the shipyard right out. So I would say that is a more logic scenario to follow and you -- as you rightfully mentioned, I'd love to lay out the plan exactly for the refinance, but you understand that, that at the moment is not something that can happen. We will talk about that after we have that in place. But I think the key thing is on these two particular rigs, we are having opportunities. We can improve our earnings by bringing it out early. The market doesn't need to be any stronger than what we see today. And from a financing perspective, it fits very well with our refinance program that we are fully preparing for. So I think that is how it fits together. And as we have mentioned several times, sold out at the moment, we'd love to have our hands on those type of rigs because even though you might say that many of our customers have gone through a cycle of increasing demand, we still see a lot of demand for capable rigs, but particularly when it comes to lump sum turnkey type of jobs, anything related with offline capabilities and high efficiency, there is absolutely a place for it. So that is why we are keen and that's why we are somewhat pushing it. You mentioned earlier that we are indeed talking for a while with the shipyards. And I think that you have to see that from two angles. On one side, it needs to be very clear that these shipyards have a lot of work on their plate at the moment with normal shipbuilding activities, which basically means that anything that any rig contractor is trying to do is coming over and above the normal workload, very hard to find actual shipyard capacity. So this is for us actually trying to complete our last two rigs. You can imagine if you would extrapolate that to any new build scenario, what this is going to do in time for the delivery time, but also what this is going to do for the delivery price. So I think it kind of under -- strives more again how strong the market is at this moment. And that's why we'd rather get our rigs out and are able to generate earnings with them. So that is the reasoning behind it, and I hope that we touched on most of the points that you were asking about.

Very helpful commentary. Thank you. And just a follow-up to this fast track or potential fast-track delivery. In that case, I guess you would also have approximately one year less of holding costs. So in a way, you'd have better cash flow in '25 if you're able to bring it forward. Is that the right way to understand it (ph).

Yeah. Absolutely, right. Yeah. So there is a cost for us to have them delivered later. So there is also there a benefit of doing it faster. Now obviously, you would have to trade that off if there's any cost related to acceleration. But clearly, we are looking in making sure that this from an economics point of view, there is a good benefit to it.

Yeah. No, certainly. Final one before I hand it back, just touching upon the market. You guys have been pushing, I think, leading-edge everything in all regions that you operate. And now we're in this upper half of $150,000 to $200,000 and typically, the data points that companies announced, they are dated in a way, they're based on discussions that took place a while ago. So are you -- if you're able to comment on it, are you currently discussing opportunities that would cross to $200,000 per day barrier in some way?

Without giving our whole commercial framework away, we're not quite there yet, but I can -- but we'll continue to move. And like Bruno was mentioning that there's contracts where there is not enough bidders to actually complete the tendering process, all of this is leading to ever increasing day rates. So I don't think we have seen anything with the two in front yet, and we haven't bid anything, but a two in front of it yet. But it is getting closer and closer. And we are certainly getting in ranges where we are past the 175, if you look at the latest stuff that is being put in front of people. And I would hope that, that leads to contracts, hopefully concluded here in the next three, four, five months, right? So as you say that these things are somewhat dated, but you see it continued to move. And I think that there is an understanding for many of the customers that if you want the premium equipment, then that is what they need to pay. And if you don't pay it, your neighbor pays it. So I think it is the whole question of are we playing fair to our customers. I think it's very much -- not so much that we increased prices unreasonably. It's really if customer A doesn't pay for it, customer B is willing to pay that price. And that's why it ratchets up the way it does at this moment.

Great. Thank you so much everyone for the commentary. I’ll hand it back. Have a good day.

Thank you.

Thank you. Thank you. I'm showing no further phone questions at this time. I will now hand the call back over for any webcast questions.

Thank you. We have two questions from the web. I'll start with the first one. Are you still looking to actively refinance debt? And do you think Borr is likely to begin dividend payments in 2024, if refinancing is successful by the end of the year.

So as I said in the comments and what I commented on, particularly on the conclusion slide, is that the refinancing of our debt is a key priority. And we are encouraged by the recent refinancing in our industries and the strength in the credit market. We are very keen to refinance at the earliest opportunity. And as we have indicated, this is for us the way to be able to return cash to investors in the form of dividends. I would expect that we are in a position to make the first steps towards this refinancing within this year and we are preparing ourselves accordingly. So I do think that this is going to get traction during this year already. And as we have said, we expect to be in a position at that time to then also start to look at dividend and getting some of that cash returned to our investors. So I would say that is our position at this moment. I cannot express in a different way than just say that this is the key priority for management at this moment and the first opportunity that we have to refinance, we will.

All right. Thank you, Patrick. The second one, it was mentioned earlier that direct negotiations are increasing as customers want to speed up the recontracting process. What is Borr Drilling strategy here in terms of the risk of fixing out rigs on long-term contracts in an increasing day rate market.

Okay. I'll let Bruno answer that in more detail. But I think in general, there is always this concern that in an up market, you are getting too much of your capacity too early on in the cycle committed by which you forgo the higher day rates. I think we're very clear on that. And I think we have shown a very good discipline with looking at the open contract space that we have in '24 and beyond. I mean in '24, it stands at 30% open. So us being able to fully benefit from the increasing market rates. So I think that is one thing to it. On the other thing, and that's what we've always said as well, the more we are starting to approach the $200,000 per day, we are certainly willing to take some fairly long-term type of contracts, meaning that, yes, you will forgo any increase over that. But I think that with that, we have a fantastic return on the investments that we make. So that is, in general, the view on it. But maybe Bruno, you can give your view on some of this more from a global view of where you see rates go and how we feel about that.

Sure. Sure, Patrick. And I think it's important to note that oftentimes, direct discussions, direct negotiations with customers, relate to rigs that are currently operating in their respective regions. I think over the years, we've demonstrated how disciplined we have been in terms of fixing, waiting for the right opportunities, finding the right opportunities and it's no different at the moment. Obviously, with the market as tight as it is at the moment, incremental requirements on the regions oftentimes result in rig shifts across regions, which is something that we consider very carefully as well. To the same tune that maintain rigs contracted with our customer is of value to us. it is of huge value to our customers as well to avoid mobilizations, avoiding idle periods and so on and so forth. So in these negotiations, we're obviously very mindful of all of these aspects to ensure that we secure the best deal possible. Out with that, I think it's important to highlight that over the course of the cycle and not leading the rates, it's obviously a function of how mindful and disciplined we are in the market, but it's a lot of function of the quality of our assets and the quality of our operations. And we see in a lot of ways, the contract that we're negotiating with the customers, they're coming to us because they're familiar with the results that we are currently delivering for them or that we have delivered for them in the past. So I think that's something that we consider very carefully as well in our negotiations. I'll probably leave it to that but the bottom line is the discipline that we show to the cycle stays intact, irrespective of that being a tender or direct negotiation.

Thank you, Bruno. I think with this, we have reached the end of the questions. I would like to thank you very much for your interest and attention to the story that we have to tell and we look forward to talking to you again real soon. Thank you.

This concludes today's webcast and conference call. Thank you for participating. You may now disconnect.