Borr Drilling Limited (NYSE:BORR) Q2 2023 Earnings Call Transcript

Borr Drilling Limited (NYSE:BORR) Q2 2023 Earnings Call Transcript August 17, 2023

Operator: 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.

Patrick Schorn: 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.

Magnus Vaaler: 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.

Copyright: Elnur / 123RF Stock Photo

Bruno Morand: 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.

Patrick Schorn: 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.

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Q&A Session

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

Gregory Lewis: 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.

Magnus Vaaler: 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?

Patrick Schorn: 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.

Gregory Lewis: 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.