Borr Drilling Limited (NYSE:BORR) Q1 2023 Earnings Call Transcript May 23, 2023

Borr Drilling Limited misses on earnings expectations. Reported EPS is $-0.03 EPS, expectations were $0.01.

Operator: Good day and thank you for standing by. Welcome to the Borr Drilling Limited Q1 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, sir.

Patrick Schorn: Thank you. Good morning. And thank you for participating in the Borr Drilling first quarter 2023 earnings call. I am Patrick Schorn talking to you from Hamilton, Bermuda, and with me here today is Magnus Vaaler, our CFO; and Bruno Morand, our Vice President, Commercial. Next slide, first I would like to cover 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 differ materially from those projected in these statements. I, therefore, refer you to our latest public filings. Next slide, the first quarter of 2023 continued the positive trend experienced over the last several quarters with an increase of revenue of 16% quarter-on-quarter and a further increase in adjusted EBITDA of 31% to $72.4 million.

Q1 2023 is also the first quarter where we generated positive income before tax. We reaffirm our previously communicated guidance of adjusted EBITDA of $360 million to $400 million for 2023, and while we expect a similar performance in the second quarter to the first quarter of 2023, we expect further increases in the third quarters and fourth quarters of 2023, as our two remaining stacked rigs are being activated and will commence their respective contracts in the Middle East and Mexico. The first quarter has evidenced our continued ability to add backlog at market leading rates, confirming the tight supply of jack-up drilling rigs in the market. At the same time, we see positive prospects for continuing work for our rigs that are finishing their contracts at the end of this year, both with current customers, as well as in new geographies with new clients.

In February 2023, we completed the issuance of our $250 million unsecured convertible bonds maturing in 2028 and our $150 million senior secured bonds maturing in 2026, enabling us to fully repay our $350 million convertible bonds due in May 2023. This marks the final step of refinancing our debt that was due to mature in 2023 and we now have no significant debt maturities prior to 2025. We expect the improving market, coupled with the positive prospect of access to the debt market at attractive rates will enable a global refinancing of the company, and ultimately, accommodate dividend distributions to shareholders. Magnus will now step you through the financial details of the first quarter.

Magnus Vaaler: Thank you, Patrick. Q1 2023 revenues were $172 million in the quarter, an increase of $23.4 million or 16% compared to the fourth quarter. This was split between $141.7 million of dayrate revenues and $30.3 million of related party revenues, which were variable earnings from our Mexico joint ventures. The increase in revenues was a result of more rig operating days in the quarter now with 20 rigs working. Rig operating and maintenance expenses for Q1 were $85.5 million, an increase of $2.1 million from Q4. This increase was also due to the increase in activity and operating days. Total financial expenses net were $40.5 million for the quarter, a decrease of $8.9 million, mainly as a result of a $3.2 million decrease in financing fees in connection with the prior quarter refinancing activities, a $2 million decrease in interest expense and a $1.7 million increase in interest income.

Income before income taxes was $7.9 million, an increase of $26.4 million compared to the fourth quarter and first time ever with a profit before taxes for the company. Net loss was $7.4 million, a decrease in loss of $13.9 million compared to the fourth quarter. And adjusted EBITDA was $72.4 million, an increase of $17.3 million or 31% compared to the fourth quarter. Our free cash position at the end of Q1 was $90.3 million. Our cash movements in the quarter were primarily driven by $8.2 million cash used in operations, which includes $29.5 million cash interest and $10 million cash taxes paid. $29 million cash flows used in investment activities, primarily rig activation costs and $177.4 million net cash provided by financing activities consisting of the February bond issuances, offset by repayment of debt, including parts of our convertible bonds due in May 2023.

After quarter end, we have upsized our bank loan facility by $25 million in addition to establishing a guarantee facility, which allows us to issue guarantees under our credits in the amount up to $25 million without posting cash collateral. We had $10 million restricted cash related to guarantees at the end of Q1. So, in total, these two facilities provide $35 million of additional liquidity in Q2. Moving to the next slide, please. These graphs show the significant quarterly progression in both revenue and adjusted EBITDA we have made since the beginning of 2023. Our EBITDA in Q1 increased to $72.4 million and we expect that the second quarter EBITDA will have a similar performance to the first quarter due to the same number of rigs working.

Then we expect further increases in the third quarter and fourth quarter of 2023 as we have our two remaining stacked rigs activated and commencing their respective contracts in the Middle East and Mexico. Now, with this, I would like to pass the word over to Bruno.

Bruno Morand: Thanks, Magnus. I will now briefly cover some aspects relating to the markets where we operate. Based on the IEA’s latest supply and demand outlook, oil markets are expected to experience an increasing supply benefits in the second half of 2023, reaching nearly 2 million barrels per day shortage in the fourth quarter. This benefit should continue to drive increased activity levels and will also result in higher commodity prices. This backdrop continues to support a very favorable outlook for shallow water drilling market. On to the next slide. Jack-up utilization levels have continued to increase year-to-date. In particular, the market utilization for modern rigs currently stands at 93.3% and at a level not sustainably seen since 2014.

At the same time, modern rigs continue to gain market share versus standard rigs, reflecting the customer’s preference for assets with superior capabilities. As time progresses, we expect the tightness in the modern jack-up market to be exacerbated by the fact that over 30% of the current jack-up fleet is beyond retirement age. In a normal scenario, we would expect this attrition to be replaced by newbuilds. However, looking at the next slide, it is evident that extremely low order book levels will be insufficient to offset any future fleet attrition. The combination of high fleet utilization and low order book will continue to drive higher dayrates. On the right-hand side, we illustrate how improving market conditions and increasing number of rigs under contract have driven our adjusted EBITDA figures in the last 12 months.

We expect this trend to continue. Moving to the next slide. Following the previously announced contract for our premium jack-up FELS, all of our 22 delivered rigs are now contracted, representing an important milestone in the history of the company. Year-to-date, we have secured eight new contracts, options, LOIs and LOAs including a contract for the Ran with an undisclosed customer in Americas at leading edge rates. These awards have increased our contract coverage to 95% in 2023 and 59% in 2024. A strong contract coverage in 2023 provides visibility of revenues that support our guidance for the year. At the same time, the available days in 2024 and beyond should provide us with an opportunity to replace legacy contracts on the continuously improving market conditions.

Next slide, please. Borr Drilling continues to be quality backlog. Our current contract revenue backlog stands at $1.69 billion, which represents a substantial increase year-on-year. The equivalent average dayrate increased by nearly 30% during the same period. Year-to-date, we have continued to benefit from positive industry momentum to secure strong new contracts for our rigs. Looking at the four new commitments secured by the company year-to-date, they represent an addition of $177 million to our backlog at a healthy equivalent average rate of $164,000 per day. With all of our 22 rigs being contracted, we have no immediate availability, but continue to work closely with our customers to meet their needs in the future. I will now hand the call over to Patrick.

Patrick Schorn: Thank you, Bruno. In conclusion, I would like to highlight some key aspects defining our performance and success going forward. Firstly, and what you have seen from the information discussed by Bruno, we continue to grow our backlog at dayrates that are market-leading and a true testament to the quality of people and assets. Secondly, we have all delivered rigs in our fleet contracted at this moment. The demand for our rigs remains high and since our rigs are predominantly deployed on development wells, and therefore, production related, where most of our customers have set ambitious goals that can only be reached by keeping rigs and well activity high, we are in general less impacted by short-term oil price volatility.

Thirdly, our first quarter results have come in right on plan and I am very pleased with the efforts of our people around the world making this possible. With this performance we fully intend to remain on the trajectory to deliver the earlier communicated targets for the year with our last two rigs starting operations in the second half of this year. Next, we have started the process of our refinancing our current debt due in 2025. It is our intention to conclude as soon as it’s practical, but this process has started. Lastly, I would like to emphasize that our customer success and the value they can derive from our services is paramount to our success, and therefore, the whole team continues to focus on safe and efficient operations every day for every customer.

Thank you.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Greg Lewis with BTIG. Please proceed.

Greg Lewis: Yeah. Thank you and good afternoon. Patrick, thanks for all the color you provided. I was hoping to kind of get your thoughts around realizing that we don’t really have much — we are pretty much contracted out here for the next couple of months, but I guess, say, as we look in the back half of this year, as we think about some of these rigs that are rolling off contract, and you mentioned the development work, I guess, there’s a two-part question here. One is, given the fact that it’s development, should we more expect, I guess, whether we want to call them extensions or continuations of this work, and to that point, as we look across the fleet, is the market tight enough where we shouldn’t be thinking about base in the basin rig mobilizations at this point?

Patrick Schorn: So, thanks, Greg. I think, firstly, on the development side, I think, what it really means is that many of our customers, as you know, are predominantly national oil companies. And with the targets that they have set themselves and communicated, there is a very large volume of work that needs to be carried out to actually reach these targets. So any short time — short-term oil price volatility, I think, is going to not immediately impact, because the targets that are set, the contracts that we have that are related to this are all long-term, some in excess of five years. So, therefore, I think, that it is really the lifeline to keep the production going on the shallow water drilling and based on the customer profiles that we have, I fully expect that to continue.

Now your second question on whether or not it is time to maybe move some rigs from certain regions to others. I think it is true to say that we early on in this process have already started to reallocate rigs from certain areas, and for us, it was predominantly the North Sea to other areas where we saw better rates and better volumes of work and we did that quite early on, so today we are not effective that much. I think you will see still some changes geography wise, but not that many. So I would think that all of the basins are going to have additional demand and I think that also the overall price that we see is fairly uniform around the world. So I wouldn’t say that there’s many weak pockets that you see shifting into pockets where more money can be made, except maybe that the North Sea continues to be an area of weaker performance, I probably want to leave it at that.

Greg Lewis: Thank you. Perfect. Thank you very much for taking my questions.

Patrick Schorn: Thank you.

Operator: Thank you. One moment please. And the next question comes from Fredrik Stene with Clarksons Securities. Please proceed.

Fredrik Stene: Hey, team. Hope you are well and happy to see all these high rates here on your second to last slide, $164K average so far this year is definitely impressive. So I wanted to dive a bit into that number or the dynamics that you are facing right now. I think kind of, firstly, are you experiencing any reductions or push back right now, anyway, obviously, you are not — since you are seeing these rates, but how have client behavior changed as we started to move into the kind of upper end of the range here between $150K per day and $200K per day?

Patrick Schorn: All right. Thanks there, Fredrik. Maybe I will give Bruno the opportunity to give his view on this as he’s dealing with it on day-to-day. Bruno?

Bruno Morand: Yeah. Thanks for the question, Fredrik. Listen, we see, around the globe, it’s noticeable that we have been securing rates at the leading edge and I think a lot of that has to do with the fact that we have premium assets equally that we pride ourselves with a leading premium services to our customers. In a variety of geographies, we have seen our rigs delivering these wells much better than operators being used to in the past and that has converted to, I think, a level of preferential treatment and certainly higher rates. There’s no doubt that there’s a new rate environment, the rates have been increasing, the customers, obviously, are adjusting to the new environment, and from time to time, we see pushbacks.

But I think the fact that we have been consistently driving the rates up is a reflection of the premium rigs that we have, the premium services that we have been delivering and that is effectively reflecting on the rate that we have been securing.

Fredrik Stene: Perfect. Thanks. And as a follow-up to that really in your discussions with clients, are there any, call it, differences between the NOC discussions on the majors and IOCs that you are working for in terms of how fast they are turning around, willingness to pay and just general P&Cs other than the risk?

Patrick Schorn: Well, I think, the dynamics are very similar across the Board, Fredrik. Obviously, when it comes down to NOCs, the discussions in a lot of the regions come down through a tendering process that obviously takes its own course. But the variables that we are discussing at the moment — the conditions that we are discussing at the moment are very similar across the Board.

Fredrik Stene: Okay. Perfect. Thanks. And then, Patrick, I mean, I am sorry for doing a second question here, but I think it’s important here, the refi that you — the refi process that you have started to accelerate, as you say on the last slide here, are you able at this point to give any thoughts or pointers around how you think an optimized capital structure will look like? Is it an RCF, is it one large bond, two large bonds, any color you can give at this point would be super helpful?

Patrick Schorn: Sure, Fredrik. No. I mean, and you understand that, we can’t give you the full insight into everything that we are working in. But we want to make sure that we communicate appropriately what is clearly on the forefront for us for a long time to find a way to get ourselves into a situation where we can distribute cash in different ways. But maybe Magnus is better placed here than me to talk a little bit about what we can say currently about the refi process and some of the aspects around it.

Magnus Vaaler: Yeah. Thanks, Patrick. I think we are very encouraged by seeing the recent transactions in the market on financings, both with our own bonds in February and also other market participants coming to the market and doing re-financings recently at good levels. And we will obviously be ensuring that we are prepared to hit the market when the opportunity opens up and rather sooner — sooner rather than later, how that financing will look structure wise. We are obviously looking into several different versions of that and that is something we need to come back to. But it’s — like Patrick emphasizes, we are obviously looking for a structure, which clearly creates a path to shareholder distributions, which we currently cannot do, but we will enable us to do that in a refi.

Fredrik Stene: Okay. Great. Thank you so much all. That’s my questions for now. Have a good day.

Patrick Schorn: Thank you, Fredrik.

Operator: Thank you. One moment for our next question, please. And it comes from the line — just give us a second. We are experiencing technical difficulties with the next line. [Operator Instructions]

Magnus Vaaler: Okay. We have some questions from the web, so we can…

Operator: All right.

Magnus Vaaler: …probably jump to that. There is a couple of questions around the recently announced contracts for Ran, $162,000 per day implied. The question is, what is the dayrate levels being negotiated as we speak?

Bruno Morand: I will take that question, Patrick. At the moment, I think, we have been consistently securing fixtures in the range of $150,000 to $160,000 and now crossing that order. It’s fair to say that these are negotiations that are age to some extent and we see future negotiations going in the upward direction. We have talked about some numbers earlier. With all the activity level increase that we are anticipating in the projections, I think, it’s fair to say that as we come to the second quarter or the second half of the year, the rate range that we expect is — should be the above $175,000 range. I think this is where we have been guiding so far, anticipating so far.

Magnus Vaaler: Thank you.

Operator: All right. thank you.

Magnus Vaaler: We can go back to the phone questions, please.

Operator: Thank you, sir. Let me bring to stage. One second please. It’s coming from the line of Charles Olson with Conning Securities.

Charles Olson: Yes. Hi, guys. Thank you for taking my question. Hi, Patrick. Hi, Magnus. Hi, Bruno. Just asking quickly on the market and in terms of dayrates going higher, which is great to see. What about the T&Cs in the contracts? Are we able to improve those as we move along or how those — that’s part of the contract is looking?

Patrick Schorn: I think, Charles, I think, it’s a very good question. I mean one of the things that, obviously, we focus on is the overall dayrate. But what is important to us are all the factors that influence our earnings and as you well put other, Ts and Cs are extremely important. So equally as we are looking at the dayrates and the absolute number of that, we equally have efforts around all aspects of the Ts and Cs. You can imagine rates for mobilization, rate for contract specific equipment, any type of repair times, any type of rig moving types and any of the commercial aspects related to that in the downturn, we are probably more stacked against us, and of course, in today’s environment are much more a discussion that we also have again with customers.

So I would say the equal interest that we have to move the dayrate up, equally we are discussing with the customer’s changes to the Ts and Cs, and I would say, it has equal importance and focus as the normal dayrate discussions.

Charles Olson: Yeah. Okay. Thank you. So, hopefully, we are starting to see the grace periods going back in and stuff like that, which has obviously helped us for your economic utilization. And on the cost side, and clearly, I mean, a lot of rigs moving into the Middle East. What’s the current status in terms of inflation? How does that impact the environment in that region considering that the — it is — and as you see all those guys are trying to get rigs through yards and on contract. I mean that’s a pretty high pressure on any environment?

Patrick Schorn: Yeah. No. I think it is fair to say that, I mean, the world, of course, experienced inflation in general. On top of that, we have an extremely hot market. It is something that we see reflected in pricing that we are getting from OEM, so particularly the drilling technical equipment. What you see in certain geographies some pressure on wages as well and particularly in markets where you are more linked to a certain local content percentage or certain local content value that you need to be delivering. So these are having costs, but I think that they are staying in line with what we expected. It has not gone completely crazy yet. So we are actually quite pleased on how we have been able to manage that. Although I would have to say that, if there are another 30 to 40 rigs that are coming in certain geographies to work that obviously is going to put more pressure on the human aspect and this is where we have been focusing a lot to make sure that we have the appropriate technical personnel on our rigs.

So that when we start, we also can start with the appropriate performance and having the technical uptime and economic uptime at very high levels as if these rigs were working for a long time instead of being recently activated. So I think that we feel that we are in a very decent position and we will have to see how we manage the hot market going forward, but it has our attention, but it has not been something that has come to any levels where it creates unmanageable stress at this moment.

Charles Olson: Okay. Thank you. Just jumping to the refinancing, and perhaps, Magnus, is the right one for this one. But anyways, talking about accelerating the global refi. Should I think about this as more a second half of 2023 event rather than 2024, by the looks of, even perhaps the third quarter is that pushing it a bit?

Magnus Vaaler: I think like we said, I think, we are doing all we can to prepare ourselves for the best and optimal timing and use the windows as they arise. We have seen very positive movements in the financial markets or in the financing of our industry peers recently and seen the interest for industry. So I think it’s a good time for we are finding financing. So exactly what the timing of the financing will be is obviously difficult to say, but we will put in place the process is now to be ready as soon as we can.

Charles Olson: Yeah. Okay. Thank you. And finally for me, if I may, though, just a quick one on consolidation, obviously, a lots have been going on. There are still a few things to be done in that regard perhaps. I don’t know what’s your thoughts here, Patrick?

Patrick Schorn: Yeah. No. I mean I didn’t expect that we would be passing this call with not a question about that. So I think that there is still opportunities out there. For us, it has been a few things have been absolutely key. We have a set of equipment that is working very well for us and allows us to perform at very high levels. So whatever we would do, when you think of consolidation or any type of M&A type of work, we would want that to be safeguarded. So whatever we need to do needs to be with assets that are of similar nature as ours, obviously, to keep that performance on where it needs to be. Secondly, we have also been very clear that it is extremely important to us that we are continuing our focus on the refi, and therefore, the ability to return cash to shareholders.

So if we would consider any of these type of activities, we would very well keep in mind that we safeguard as much as we can the dividend provision to the shareholders. So therefore the structure that we would need to have on anything that would be looking like M&A, it would require to be in a position to really start generating cash on an extremely short basis, because otherwise, for us, it doesn’t matter and I think that what we are saying is that at 24 rigs, we have a great business of a great size. So there’s only very specific types of M&A that for us would ever be possibility. I think the value that is in M&A, if you want to look at it from that point of view, we are sold out, and we are able to really get a very good value for the rigs that we have.

So from that perspective, obviously, we see that as a key capability that we would like to exploit as much as we can. But from that point, we are looking at things that could be possible, but like I said, we have a very strong commitment to the dividend distribution by the short — with a very short timeframe and that’s what we will stay true to.

Charles Olson: Okay. Good. Thank you guys for taking my questions.

Patrick Schorn: Very good. Thank you, Charles.

Magnus Vaaler: Thank you.

Operator: Thank you. And I am not showing any further questions and we will pass it back to our CEO, Mr. Schorn for his final remarks.

Patrick Schorn: Very good. I think that we had a very good round of questions. Thank you very much for your attention and interest in Borr Drilling and we look forward to speaking to you again soon. Thank you very much.

Operator: And with that, ladies and gentlemen, thank you for participating and you may now disconnect.