Borr Drilling Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Borr Drilling Limited Third Quarter 2023 Results Presentation Webcast and Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be the question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Mr.

Operator

Patrick Schone, CEO. Please go ahead.

Speaker 1

Thank you. Good morning and thank you for participating in the Boar Drilling's Q3 2023 earnings call. I'm Patrick Schorn talking to you from Bermuda and with me here today is Magnus Fahlert, our Chief Financial Officer And Bruno Morant, 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.

Speaker 1

These matters involve risks and uncertainties that could cause actual All results to differ materially from those projected in these statements. I therefore refer you to our latest public filings. Next slide please. The 3rd quarter was characterized by strong operational performance With technical utilization for the quarter above 99%, revenue increasing by 2% and our adjusted EBITDA increasing to CHF88.2 million which is 5% over the 2nd quarter's results. Our backlog quality continues to improve.

Speaker 1

Year to date, we have secured 12 new commitments adding SEK728 1,000,000 to a revenue backlog at an implied average day rate of $161,000 per day. We continue to experience positive developments in utilization in the global jackup market, particularly for modern rigs where marketed utilization stands at approximately 94%. Day rates have continued to appreciate As demonstrated by our latest previously announced fixtures for the Prospector V, the NAND and the IDENT. In addition, we are pleased to announce a 15 month extension for the SKALF at a daily rate of 165 $1,000 per day. The RAN and HILT have recently commenced their new contracts bringing the operating fleet To 21 rigs, we expect Gerd to commence its new contract in early December 2023, at which point all of our 22 delivered rigs will be operating.

Speaker 1

I'm also pleased with the conclusion of our refinancing And the issuance of SEK1.54 billion of secured notes with maturities in 2028 and 2,030. This completes the refinancing of all our secured debt and provides the company with a solid long term capital structure. We've also announced that the Board intends to implement a regular quarterly dividend starting at $0.05 per share, which is subject to required approvals in a special general meeting to be held 22nd December 2023. For 2024, we maintain our estimated range of adjusted EBITDA For full year 2024 to be between $500,000,000 to $550,000,000 Magnus will now step you through the financial details of the Q3.

Speaker 2

Thank you, Patrick.

Speaker 3

We're now on the slide key financial Q3. The Q3 2023 revenues were €191,500,000, an increase of €4,000,000 or 2 percent from the Q2. The €4,000,000 increase comprised of an increase in day rate revenues of €5,300,000 offset by a decrease in bareboat income from Mexico joint ventures of €1,300,000 So the overall increase in the revenues were primarily due to higher day rates for our rigs. Rig operating and maintenance expenses were CAD85,800,000 for the 3rd quarter, a decrease of CAD3.7 million compared to the 2nd quarter. The decrease is primarily a result of a decrease in amortization of deferred costs.

Speaker 3

The total financial expenses net were SEK 50,000,000 for the quarter, which is in line with the previous quarter. And the net income for the quarter was €300,000 Our adjusted EBITDA was 88 €8,200,000 an increase of €4,200,000 or 5% compared to Q2. Our free cash position at the end of Q3 was €94,400,000 Cash increased by €10,600,000 in comparison to the prior quarter and is primarily a result of $34,500,000 cash provided in operating activities, CHF 9,600,000 net proceeds from the sale of shares under our ATM program CHF 10,300,000 repayment of debt And CHF 23,400,000 cash costs for additions to jackup rigs, which is primarily activation costs for our rigs, HILT and Arabia 3. Then moving into the next slide. As Patrick said, we are very pleased to have completed our refinancing for all the company's secured debt now in November 2023, by the issuance of a total of SEK1.54 billion secured notes with a duration of 5 7 years.

Speaker 3

Following this, our main debt maturities are in 2028 and 2,030. The refinancing provides a stable foundation Additionally, we have secured a SEK180 1,000,000 senior secured facility, which includes €150,000,000 revolving credit facility and €30,000,000 guarantee facility. Lastly, The delivery installments for our 2 remaining newbuilds, VAR and VAR, in 2024 are largely funded by a commitment from the shipyard of €130,000,000 of debt per rig. With this, I would like to turn the word over to Bruno Moran, our Chief Commercial Officer.

Speaker 4

Thanks, Magnus. I would like to provide a brief update on the jackup market and our most recent contracting and fleet developments. Checkup utilization levels have continued to increase since our last report. In particular, the market utilization for modern rigs has now reached 94% With the total number of contracted rigs climbing to 300. Modern rig availability continues to tighten and is now in high single digit territory excluding regionally stranded and sanctioned assets.

Speaker 4

Amidst this tight market, we continue to experience a marked recovery in day rate levels for modern jackups. I'll later provide some commentary about our most recent fixtures that illustrate that. Based on the trend orders In discussions with our customers about their future requirements, we see strong indications of an undersupplied market condition developing in the second half of twenty twenty four and into 2025. Incremental demand is visible across most regions And specifically strong in Southeast Asia, India, Middle East and West Africa. But we know as well some interesting pockets of activity developing in the Mediterranean.

Speaker 4

In line with the views we have shared in our earlier presentations, shipyard order books remain at record low levels and unlikely to provide any relief to supply and demand imbalance. The remaining competitive new built units in China are largely expected to be absorbed by the domestic market. We believe these conditions will continue to support an increasing day rate environment, particularly for young and high performing rigs, placing Boar Drilling in a unique position to benefit from these developments. Year to date, we have secured 12 new mutual contracts, LOIs and LOAs, adding EUR728,000,000 in total revenues and 12.3 years to our backlog. This represents a weighted average day rate of $161,000 per day, which continues to be industry leading.

Speaker 4

In addition to the long term commitments previously disclosed for the rigs Prospector 5 and Mat in Congo, Thor in Indonesia and Aydin in Thailand, I would like to highlight new commitments recently secured for our rigs, Gunwal and Skald. The Gunwal, which is due to complete its current contract in January 2024, Has now secured a binding LOA for a 120 day program in Malaysia with an undisclosed customer. This new commitment will start in direct continuation to this current contract and should maintain the rig contracted until May 2024. We have ongoing discussions with customers in the region and anticipate further commitment for the gun laws in the near future. The Skal has secured a 15 month extension with PTTP in Thailand at a rate of $165,000 per day.

Speaker 4

This extension will maintain the rig firm contracted until September 2025. I highlight that the Aydum and Skald Our both modern rigs with extensive offline capabilities, which combined with our experienced crews enable our customers to materially reduce their well price and costs. The recent awards by PTTEP for these rigs at market leading rigs are strong estimates of the superior performance and value creation enabled by our modern rig fleet. Beyond these recent awards, I would like to note that the rigs Arabia 3, Kew and Ran has recently commenced new contracts increasing our operating rig count to 21. The GERD It's in final stages of contract preparation and is expected to commence a new contract in early December.

Speaker 4

At which point, all of our delivered rigs We'll be operating and generating revenues for the company. For further information about our fleet, I'll refer you to the latest fleet status report made available on our company's website. The company's total revenue backlog currently stands at approximate RMB1.9 billion at an equivalent rate of $137,000 per day. The recent contract awards secured by the company contribute to improve our backlog both in total volume and quality. In terms of future fleet coverage, our firm contract and price options cover approximately 84% of our available days in 2024, providing strong revenue visibility for the year.

Speaker 4

With a positive demand outlook for our rigs and continue to improve rate environment, our near term revenue visibility and long term operating leverage places Borr Drilling in a unique position to benefit from this market dynamic and create significant value for our shareholders. On this note, I'd like to hand the call back over to Patrick.

Speaker 5

Thank you, Bruno.

Speaker 1

So in conclusion, We finished Q3 with continued strong earnings and operational performance. The average day rate of our backlog And therefore, the long term quality of our revenue is increasing by adding contracts at market leading rates. Our 22 delivered rigs are contracted with all of them operating before year end. The supply of jackups to the market will remain constrained as no newbuild orders are placed. The industry is depending on a finite fleet where our rigs are the youngest with excellent operational capabilities.

Speaker 1

This absence of newbuilds It's likely to keep the utilization in the mid-ninety percent with day rates continue to increase. The refinance of our 2025 debt maturity has been successfully completed with the issuance of €1,540,000,000 of secured notes with maturities in 2028 and 2,030. This completes the refinancing of all our secured debt and provides company with a solid long term capital structure. Lastly, we are delivering on the commitment to become a dividend distributing company with the Board intending to implement a regular quarterly dividend starting at €0.05 per share subject to required approvals in a special general meeting to be held 22nd December 2023. In closing, I'm very pleased with the results of the Q3.

Speaker 1

The team has delivered on every front, Strong operational performance and excellent effort on the refinance preparing the company for the long term. This all combined with a business environment that looks bright for the offshore shallow water drilling business. Rest mean nothing else, but to sincerely thank our employees, customers and partners for the milestones achieved this quarter And we will do our best to continue to deliver at the highest standard. Ladies and gentlemen, I would like to end here our prepared remarks And we can go to Q and A.

Operator

Thank you, dear participants. And wait for your name to be announced. Please kindly ask one question and possibly a follow-up question at the time to leave room for other participants. If you do have any further questions, you can please rejoin the question box and click submit. Now we're going to take our first question.

Operator

And the question comes from the line of Frederic Steen from Clarksons Securities AS. Your line is open. Please ask your question.

Speaker 6

Hey, Patrick. Magnus, Bruno, and congratulations on completing the Refi, now in October. My first question relates to Just what that refi enables and you touched upon it in the prepared remarks, Patrick, dividends. You have or you say that intention now is to implement a quarterly dividend Starting at $0.05 I was wondering, are you at this stage able to give any more Color on how that might look in the future? Is this, call it, a baseline type of dividend?

Speaker 6

Do you intend to grow that dividend over time? Or will it just be at any point in time subject to whatever cash you have available for distribution? Any color would be greatly appreciated.

Speaker 1

Yes, Frederic, thanks for the question. So firstly, I would say that With the way that we have been communicating and setting up the company and the development we have seen in day rates and the outlook of the business, It is our full expectation to be generating increasing cash in the quarters years going forward. So therefore, I think it is safe to assume that in that we have the opportunity to eventually increase the returns to shareholders. So clearly what we are discussing now is a start of that with the €0.05 per share. I fully That's to be increasing at the appropriate time in the future.

Speaker 1

At the same time, you know that we also are focusing on deleveraging. So we are doing both things hand in hand. I want to make sure that both get the equal and appropriate attention. But with the way that we see the business today, It is the full expectation that the dividends would be progressively increasing over time, but I think we will discuss that at The time that we have generated those returns, but that is what I would say at this moment is the most likely scenario Looking at the overall business environment and where we are with that.

Speaker 6

Perfect. Thank you. And I also wanted to Touch upon the new builds. You're saying that they're now or in other previous communication delivery looks to be in the second half of next year. And you've also included the payback of that initial capital debt in the maturity profile here.

Speaker 6

So I'm wondering, are you have you progressed on contracting those units Open in any way to just trying to figure out how much incremental cash flow can potentially come from the pair?

Speaker 1

Yes. So I think there is a few things and Frederic you will understand that this is always a little bit of balance you're trying to strike to. On one side make sure that you have a contract in hand when the rig is ready which actual speaking from where we sit today is still a year out. And on the other hand also making sure that you don't too early commit to a contract that maybe is below market price at that time. So we're trying to balance that.

Speaker 1

We are having several discussions with customers at the moment. What we're trying to do is find the appropriate Long term contract where we can place these rigs. And if you look at the fleet that we have, you're well aware that we are having some very specialized rigs With offline capabilities, I would say that these 2 new rigs that are coming are probably some of the best equipped rigs that we will have in the fleet. So therefore, we want to make sure that we spend the appropriate time to get them on the projects that also can benefit To the maximum of the capabilities of these rigs. So we are in discussions with customers, but I don't want to give you the intention that we're rushing towards Contracting there.

Speaker 1

We want to make sure that we take our time and look at it properly with the customers that have the right opportunities.

Speaker 6

All right. Super. I'll jump back in the queue, but thank you so much and congratulations

Operator

Thank you. Alternatively, you can submit your questions via the webcast. Now I would like to hand over to any written questions at this moment.

Speaker 7

Okay. We have one here. Why have you not provided an earnings update expectation for 2023?

Speaker 1

Very good. That is a good question. We're getting towards the end of the year and we have previously guided That for 2023, we expect to be ending the year between $330,000,000 3.60 $1,000,000 of adjusted EBITDA and looking at the results that we have so far Delivered in the 1st three quarters plus the visibility we have on Q4, we are right on track to be delivering right in that bracket. So that's why we haven't further discussed that. We're right on track to deliver 2023 as guided And we hope to be discussing and presenting to you that early next year.

Speaker 7

Thank you. And then we have another one. What was your weighted average number of operating rigs through Q3?

Speaker 3

Yes, that was just below 20, so Rounded up 20 rigs operating in Q3. Then we have Morrig is commencing now in Q4. 1 already commenced in Mexico with the hills and then Le Ram, lastly, starting operations and then we will then have all 22 rigs operating by the end of the year.

Speaker 7

Okay. Thank you. I think we can go back to the phone queue, please.

Operator

Thank you so much. Now we're going to take our next question. Just give us a moment. And the question comes from the line of Frederic Steen from Clarkson Securities AS.

Speaker 3

I

Speaker 6

just wanted to Hello, Bitmap, on the market. Bruno, you seem to be very confident How things are developing and in terms of contracting strategy broadly as you show here on the chart, you pretty much covered 2024, so it should be good confidence in the guided EBITDA range for that one. But just now over the past 3 months or really in the second half of the year, I think on the floater side, one of the themes that have been recurring is White space in 2024 that matching availability with contract startups have caused some gaps in utilization. So my question, is this something you're seeing in any way in the jackup space? Or do you I think that you'll be able to effectively keep your fleet contracted close to 100% for the foreseeable future.

Speaker 4

Thanks, Frederic. Great question. Now listen, I think we start now with a very strong coverage already in 2024. When I think about the rigs that are having some white spaces in 2024, the vast majority of that is in the second half where we see A pretty strong demand for our rigs and we see customers obviously increasing their Sense of urgency in securing contracts for these rigs. We see very limited correlation between The dynamics of the deepwater market and the shallow water market, we see our customers still very much committed to securing capacity.

Speaker 4

I think if I look, for example, anecdotally to the Skou, which is a rig that we extended now in Thailand, traditionally, PGTP would have run through a tender process to secure the rig. I think understanding the limited availability of rigs in that market, They decided to direct negotiate with us that award, which speaks for the understanding of our customers' need to secure rigs Rather fast before the capacity disappears. So I think the fundamentals are all very strong and I see limited Risk for us in terms of re contracted and white spaces. Obviously, we mentioned before about our more muted view on the North Sea. So we're working To find alternative commitments for the P1 at the moment the rig is contracted into Q1 potentially into Q2 subject to options.

Speaker 4

I think that's obviously something we're working hard towards. But in general, we remain very confident on our ability to maintain rigs utilized for 2024 Very, very muted. Open space.

Speaker 1

Maybe to add to that a little bit, Frederic, I think that what you see in the deepwater is based on a completely different set of customers than what we see in the shallow water. In the shallow water, we see that the there is a very big Scarcity of modern rigs and that continues to be there. We see very strategic long playing customers. And let's not forget we're on the short cycle barrel. We can produce much faster from the moment that we start drilling Versus any type of a deepwater development.

Speaker 1

So the barrier to start anything deepwater versus continuing to develop the production In shallow water it's very different and I think that that is a market that probably going forward will continue to diverge And I'm very pleased that we are only playing in the jackup market so to say.

Speaker 2

All right.

Speaker 4

Thank you so much,

Speaker 6

the both of you. That's all I had. Have a good day.

Operator

Thank you. Thank you. Now we're going to take our next question. Just give us a moment. And the question comes from the line of Richard Ahmed from Emsaw Asset Management, your line is open.

Operator

Please ask your question.

Speaker 5

Hi, there. Just wanted to ask about the exposure to Pemex. So In terms of the receivables that you've got, is this $90,300,000 of receivables the full amount of receivables from Pemex? And I mean how much of this is past due? How has that been?

Speaker 5

How has that dynamic been playing out? Is this A concern in terms of working capital use and getting paid on time. So, yes, I would just appreciate your thoughts on that. Thank you.

Speaker 1

Thank you. Magnus, could you take this question? Yes.

Speaker 3

I can answer it. So we have currently 5 out of our 7 rigs in Exigo is operating through our joint venture and an integrated service provider where the ultimate customer It's Pemex. So and you are correct on the balance sheet. Our current receivable from the JV It's SEK 90,000,000, which is ultimately a Pemex paying. We have over the past Quarters, I'd say, years, received consistent payments from Pemex And have received them regularly.

Speaker 3

There is obviously some buildup in the balance, which is A combination of more activity that we have on the rigs and also that the contract rates for the rigs actually went up from last year into this year. But just all in all, we have received Very consistent payments and don't see that as a very immediate threat. We also have Through our JV and through the integrated service provider, in the event that there is a payment delay or payment hold up, We also have a clause to receive regular payments from the integrated service provider To be sufficient to keep our rigs operating and to cover operating costs so that there's no funding needed From Boring to the JV to continue to operate the rigs.

Speaker 5

Thank you. And yes, no, that's very helpful. And just in terms of From an accounting perspective, are these JV results consolidated into yours? So does the EBITDA numbers for example include 50% of the JV results or how does that work?

Speaker 3

No. So we bareboat our rigs, The 5 rigs into the JV. So what you will see in our financial statement is the line below the day rate revenue. It's the bareboat charges that we do into the JV. So they're not consolidated, So we are bareboating the rigs on a sort of bareboat rate into the JV.

Operator

Thank you. Thank you. Now we're going to take our next question. The next question comes from the line of Jules Olsen from Fearnley Securities. Your line is open.

Operator

Please ask your question.

Speaker 2

Thank you. Hi, guys. Well done on the quarter and on the refinancing. I echo Fredrik on that one. Just a couple of questions, Bruno, starting with you.

Speaker 2

In terms of on the market, I mean day rates continue to move higher. What are you seeing in terms of, call it, improvements on the T and Cs? I mean, are we seeing any big changes or small changes there? And also adding, what do you see in terms of contract duration moving outside of the Middle East where most of the activity It seems to be the case for now. Is it changing given the, call it, tightening market dynamics?

Speaker 4

Thanks, Rolf. Thanks for the question. Bruno here. Listen, for sure, terms and conditions go hand in hand with our Pricing power, we have been looking at the contract terms that we have with our customers and improving and bringing back to Terms that we have closer in 2014 and moments where we have more pricing power that goes into every component of the contract from Payment terms to reduce rates in contracts, allowances and so on and so forth, markups and so on and so forth. So obviously, That is part of what we've been doing with the customer.

Speaker 4

We expect that to start actually reflecting in the number of dollars dropping to the bottom line positively. Everything is being looked after very carefully. It's all part of a larger economical view of the contracts. Now in terms of the second part of your questions and duration of contracts, you're right in saying that when you look at Aramco and lot of Contracts in 5 years 5 years plus, that seems to be kind of a strong benchmark of what a long term contract looks like. That said, I wouldn't say that in other parts of the world, the contracts are short term in Asia.

Speaker 4

We see in Asia, for example, a variety of our customers coming out with tenders for 2 years plus contracts. We've seen a few recent tenders, of course, West Africa and the Med as well for a multiyear contract. So we see Clearly, the contract duration is increasing. We mentioned in the earlier conference call as well that one of the trends that we have seen, Particularly across the NOCs is that they seem to be moving from project hiring to portfolio hiring. So instead of looking for rigs To deliver a particular project, they're looking for rigs that add capacity to the portfolio and give us some flexibility on deployment and obviously that causes The general contract duration to go longer.

Speaker 4

So I think it is true that the Middle East was the first one to come in a meaningful way in terms of duration, But I do see all of other regions following kind of same footsteps, considered the tightening market and give you the rig availability.

Speaker 2

Okay. Thank you, Bruno. And then Patrick and Magnus over to you guys. On the And switching gears over to the bond. On the excess cash flow sweep, When that comes into play in 2025, my understanding is that the bondholders can elect to utilize that function or not.

Speaker 2

And If you don't elect to use that, the cash is essentially free to use by the company For other means, including dividends, is that the correct understanding?

Speaker 3

Yes, that's correct. The cash sweep mechanism of the bond starts on the basis of the 2024 Results, so then in 2025, when the annual report is out, it's purely in the Election of the bondholders to say yes or no to that. And it's also obviously then based on the free cash flow that we were generating the year before. We do we are allowed To use the money for what we want, obviously, but there are dividend restrictions in the bond, which relates to the regular 50% of net income, which is very common. And then in addition, you have certain baskets, which is currently there was a starting basket of SEK 75 €1,000,000 that you could pay out plus the €50,000,000 that was raised in equity also added to that €75,000,000 basket.

Speaker 3

So Starting up from now, we have SEK 125,000,000 and then it grows with the net income that we generate in the company.

Speaker 2

Yes. Okay. That's understood. Thank you.

Speaker 6

Thank you.

Operator

Thank you. Yes, speakers, there are no further questions on the phone. I would now like to hand the call over for any recent questions.

Speaker 7

We have another one here. How will

Speaker 5

the 2 newbuilds be financed?

Speaker 3

I can answer that. So the 2 newbuilds we have are scheduled to be delivered In August November next year, we brought them forward by 1 year because of our the outlook in the market and we see a good potential To put this rig to work, the delivery installment per rig is SEK 160,000,000. We have financing committed on those newbuilds from the seller or the yard of SEK 130,000,000 Each, which we also show in the graph that we have in our presentation. Very low amortizing in the 2 first years, On the SEK 15,000,000 per year. So the remaining SEK 30,000,000, which is cash to be paid at delivery, We expect to be able to or we will handle from our cash from operation.

Speaker 7

Thank you. And then another one. With the refinancing complete, will Borr look to increase

Speaker 1

So thank you. Clearly, it It's always a possibility. Our position in that is that we have a very unique fleet of 24 Fairly uniform modern jackups with which all are of a very similar vintage and are The youngest fleet in the industry. So for us to combine anything with that, we would want to make sure that we can appropriately combine it Our operating philosophy and that it is something that fits the fleet. So it could be that here and there a rig might be available that Would fit our aspirations where we could generate additional value from.

Speaker 1

On the other side, we are also very clear on the fact that with 24 rigs, if that's all we were to have, we can run a very proper business And have a great cash generating capability. So I think the view that we currently have is maybe best Described as we'll clearly grow some if there is value we can generate, But we don't have to grow. So for the right opportunity, we will evaluate and otherwise we'll continue to work with the assets that we have. And that is as you well know a very specific fleet. So I'll probably leave it at that.

Speaker 7

Thanks, Patrick. I have another one here. Are you seeing a bit of a pause in jackup day rates? And what will be the impetus for rates to step

Speaker 5

up again into the 170s and beyond?

Speaker 4

All right. Thanks. Let me tackle that. I think the answer is no. We've seen obviously significant recovery In the last few quarters, consistent fixtures now for our fleet have been in the 160 and even into the 170 territory.

Speaker 4

Obviously, it's a meaningful increase. We see that on the back of that, our customers have been rejumping their portfolio, Trying to bring things forward, readjusting their strategy to cope with the market. As I mentioned in my remarks, we do see a significant Increased potential in activity for the second half of twenty twenty four and into 2025. Some of it Probably a smaller part still is out for tender. We expect a significant amount of new tenders to hit the market in the coming weeks months.

Speaker 4

We think that obviously as soon as that is the case and confirm that visibility is confirmed in a way of tenders That should support further increase in market rates. So I am confident that as we progress into 2024, The rate levels will continue to improve. I don't think we have stopped. Worth mentioning that we are in a supply constrained market. At the moment, we're still at rate levels that are far below previous peak and certainly still far below Price parity with new views.

Speaker 4

So that should provide us in the market in general a good opportunity to We consider prices are pushing higher as activity levels increase.

Speaker 7

Thanks, Bruno. I think with that, we'll turn the word back to Patrick.

Speaker 1

All right. Thank you very much and Thank you all for the interest in Boar Drilling. We look forward to update you on further progress in the quarters to come and we will talk at that time. Thank you very much.

Operator

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.

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Borr Drilling Q3 2023
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