Borr Drilling Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 17, 2023

Key Takeaways

  • In Q2 2023, Boar Drilling achieved a 9% increase in revenue to $187.5 M and a 16% rise in adjusted EBITDA to $84 M, delivering a 45% EBITDA margin on a flat rig count.
  • The company added 7 new contracts year-to-date worth an estimated $289 M with an average day rate of ~$163 K, lifting its backlog to 34.1 rig-years ($1.64 B) at an equivalent $132 K/day.
  • Full-year 2023 adjusted EBITDA guidance was raised to $330 M–$360 M, while 2024 EBITDA is now forecast at $500 M–$550 M based on 70% contract coverage at an average $123 K/day.
  • Modern jackup utilization reached 93.9% in Q2, driving longer contracts, fewer tenders and more direct negotiations amid tight supply, which is supporting further day-rate increases.
  • Management is pursuing expedited delivery of two newbuild rigs to capture earlier earnings and is prioritizing a debt refinancing to fund growth and enable future dividends.
AI Generated. May Contain Errors.
Earnings Conference Call
Borr Drilling Q2 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Welcome to the

Speaker 1

Boar 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 Conference. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first Today, Mr.

Speaker 1

Patrick Schorn, CEO. Please go ahead.

Operator

Good afternoon and thank you for participating in the Boar Drilling 2nd Quarter 2023 Earnings Call. I'm Patrick Schorn talking to you from Oslo. And here with me today is Magnus Feiler, our Chief Financial Officer and Bruno Moran, our Chief Commercial Officer. Next slide please. 1st, covering the required disclaimers.

Operator

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. In the Q2 of 2023, we recorded another strong result with an increase in revenue of 9% to $187,500,000 and an increase in adjusted EBITDA of 16% to $84,000,000 on a flat active rig count.

Operator

This brings our adjusted EBITDA margin for the quarter to 45%. We continue to see the market for jackup drilling rigs developing strongly and year to date We have added 7 new contracts and LOAs for a total estimated duration of 17.71 days were $289,000,000 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.

Operator

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 a 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 330,000,000 to $360,000,000 and we expect our financial performance in the Q3 of 2023 to be similar to the Q2, which we expect will be followed by an increase in the 4th quarter when for the first time all of the company's 22 Delivered rigs will be in operation. Supported by our confidence in the jackup rig market, We are in active discussions with Cetrium, formerly Keppel, for an expedited delivery of our rigs Vale and Var to August November 2024, respectfully.

Operator

As we see significant opportunity to increase earnings with having these last 2 top tier rigs available. Following the recent contract awards, Our fleet's contract coverage for 2024 stands at 70%, including firm contracts and priced option 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 $500,000,000 to $550,000,000 Magnus will now step you through the financial details of the 2nd quarter.

Speaker 2

Thanks, Patrick. Q2 2023 revenues were SEK 187,500,000 in the quarter, an increase of CAD 15,500,000 or 9 percent to the Q1 of the year. The increase in day rate revenues were SEK 13,400,000 and the increase in bareboat income from Mexico Joint Ventures was SEK 2,100,000. The increase in revenues was a result of higher day rates and higher efficiency for our JV rigs as a number of contracted rigs for the same quarter on quarter 2020. The rig operating and maintenance expenses for Q2 were SEK 89,500,000, an increase of SEK 4,000,000 from Q1.

Speaker 2

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 SEK 2,100,000 Because Q1 included a CHF 1,300,000 national insurance expense recorded on employee stock options due to increase in the company's share price. The total financial expenses net were SEK 49,600,000 for the quarter, an increase of SEK 9,100,000, mainly as a result of $4,800,000 increase in foreign exchange losses, dollars 1,600,000 increase in interest expense and SEK0.7 million decrease in interest income. This gave an interest income before income taxes of CAD14.2 million and a net income for the company in the quarter of CAD 800,000. Our adjusted EBITDA was CAD84 1,000,000, an increase of CAD11,600,000 or 16% compared to Q1.

Speaker 2

Our free cash position at the end of Q2 2023 was CAD83,800,000. Our cash movements in the quarter were mainly driven by CAD 2,400,000 cash from operations, which included CAD 67,100,000 cash interest paid and SEK 7,900,000 of income taxes paid. We also spent SEK 25,700,000 on Asset activation costs and drilling equipment, mainly for our rigs, the Hill and Arabia 3, which are starting up their contracts in the Q3. We received SEK 9,800,000 proceeds from return on previous shareholder funding to our Mexico JVs. And we used SEK161,400,000 in financing activities, which comprised of SEK 151 point euros 2,000,000 repayments of our old convertible bond, euros 35,200,000 debt principal repayments and the drawdown of SEK 25,000,000 in debt from the upsize of the DNB loan facility.

Speaker 2

With this, I would like to turn the word over to Bruno.

Speaker 3

Thanks, Magnus. I'll now briefly cover some aspects relating to the markets where we operate. Checkup 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 tight rig market, we note an increased sense of urgency from our customers in securing rig capacity.

Speaker 3

This is evidenced by 2 primary trends. 1st, the increase in average contract duration and second, a higher number of tenders and awards targeting programs with commencement 1 year ahead or more. As a result of these trends, we note that the 2 3 year forward contract coverage of the jackup 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 increased number of direct negotiations as customers attempt to fast track recontracting.

Speaker 3

We believe that the combination of strong demand visibility and these near and long term tightness in the market will continue to provide support to increasing rates. Moving to the next slide, Board Drilling continues to build quality backlog. Our current contract revenue backlog stands at 34.1 rig years for a total of $1,640,000,000 This equates to an equivalent rate of $132,000 per day, which we believe to be industry leading for jackups. 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 2 44 days program in Thailand that will maintain the re contracted into the second half of next year.

Speaker 3

This award is a result of the strong operational performance delivered by the Mist and its crew, leveraging its unique features and offline capabilities. The TOR 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 Misti Latour will maintain these units contracted until mid-twenty 24. Based on the visible prospects, We project that Southeast Asian jackup market will be undersupplied at that time, which should put us in a strong position to recontract these units at favorable rates.

Speaker 3

The GERD has been awarded a binding LOA for a 2 70 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.

Speaker 3

With the projected contract commencements for the Arabia 3 and the HILT 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, stand 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.

Speaker 3

On that note, I would like to turn the call back over

Operator

to Patrick. Thank you, Bruno. So in conclusion, We finished Q2 with strong earnings, a quarter in which we turned $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.

Operator

Based on the demand for rigs in the market and us being sold out at the moment, We have been progressing discussion 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 Our operational team remains focused on operational excellence for the sold out fleet.

Operator

So in closing, I'm very pleased with the results of the Q2. The earnings potential of Boar Drilling continues to improve And our long term value is getting stronger and stronger as the demand for premium asset continues to increase and 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 and A now.

Speaker 1

Thank Our first question comes from the line of Greg Lewis with BTIG LLC. Your line is now open.

Speaker 4

Yes. 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.

Speaker 4

I mean, clearly you mentioned the refinancing, you mentioned shareholder returns. Thank you for the next 2024 guidance. As we kind of look at that at the midpoint, that's $525,000,000 You look at net debt, We're looking like we're trading around 3 times next year's on a net debt to EBITDA basis. That's A pretty good place to be. But I guess as you think of and realizing in that number, there Some day rates in the 160s and 170s, which have been pushing and some obviously some rates that are legacy that are below that.

Speaker 4

But really what I'm trying to understand is, as you think about on like a because, hey, as good as the market outlook is for the next 2, 3, 4 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 We have the take delivery of the 2, we're going to have 24 high quality rigs. Any kind of color around how you're thinking about that So then we can kind of do our own assumptions around how we think the company has the potential to return cash to shareholders.

Speaker 2

Yes. Thanks, Greg. And it's true we are seeing a steady increase in EBITDA. And what was A question on these calls, only 2 years ago, where our debt levels are a bit too high. We now are Extremely comfortable with the debt levels that we have currently on our fleet.

Speaker 2

At the same time, it's obviously important to I'll 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, I'm 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 €75,000,000 to €80,000,000 at 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?

Operator

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 newbuilds coming to the market. The pricing that we hear on newbuilds 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.

Operator

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.

Speaker 4

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 jackups, 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 board, 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 yes, just any color you can talk about West Africa and how you think for We'll participate in that market over the next 3 years.

Operator

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?

Speaker 3

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 We 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 and there's limited capacity out there.

Speaker 3

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 Our hope to be fast tracked by the customers and they could be very quickly turning into a 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.

Speaker 4

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

Speaker 1

Thank you. Our next question comes from the line of Frederic Steen with Clarksons Securities AS. Your line is now open.

Speaker 5

Hey, Patrick Magnus, Bruno. Hope you are having a nice day so far. Thanks I guess, 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 newbuilds, well, and the well that you have at Garden 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 Having discussion with Sequium for something like this is something that you've considered for some time, but now you've given relative to specific dates.

Speaker 5

So I was wondering kind of what has triggered these discussions to come to At this point, have you I've had a comment to a point where there are firm opportunities for these 2 particular rigs that you're chasing? And also, how are you thinking about Financing these rigs, are your commitments still in place? Or is it do you have to think about something new? Any color on that would be helpful. Thanks.

Operator

All right. So there's obviously quite a few things around the 2 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 to 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 $35,000,000 $40,000,000 of EBITDA per year a piece. So this is a large amount of earnings that we could put our hands on.

Operator

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?

Speaker 3

Yes, indeed, Frederic. We have had I mean, let me start by saying that those 2 rigs in particular are Quite special in terms of their capabilities and that in nature make them quite attractive in the market. We have 2 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.

Speaker 3

We have had including a couple of customer 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.

Operator

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 2024 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 fact pay the shipyard right out.

Operator

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, which 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 it's 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.

Operator

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 2 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.

Operator

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 stripes more again How strong the market is at this moment and that's why we 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.

Speaker 5

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 1 year less of holding costs.

Speaker 4

So in

Speaker 5

a way, you'd have better cash flow in 2025 if you're able to bring it forward. Is that the Right way

Operator

to Yes. 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 it off if there's any cost related to acceleration, but clearly, we are looking and making sure that this from an economics point of view, there is a good benefit to it.

Speaker 5

Yes. No, certainly. Final one before I hand it back. Just touching upon the market. You guys have We've been pushing, I think, leading edge to everything in all regions that you operate.

Speaker 5

And now we're in this upper half of $150,000 to $200,000 And typically, the data points that companies announce, they are 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 the $200,000 per day barrier in some way?

Operator

No, without giving our whole commercial framework away, we're not quite there yet, but I can but we'll continue to move. And 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 a 2 in front yet and we haven't bid anything with a 2 in front of it yet, but it is getting closer and closer And we are certainly getting in ranges where we are past the 175,000,000 if you look at the latest That is being put in front of people. And I would hope that, that leads to contracts hopefully concluded here in the next 3, 4, 5 months, right? So as you say that these things are somewhat dated, but we 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.

Operator

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 is it's very much not so much that we increase 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.

Speaker 5

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

Speaker 1

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

Speaker 6

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.

Operator

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 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 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.

Speaker 6

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

Operator

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 forego 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 'twenty four and beyond. I mean in 'twenty four, it stands at 30% open.

Operator

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 forego 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.

Operator

But Maybe Rune, you can give your view on some of this more from a global view of where you see rates go and

Speaker 3

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 in the regions oftentimes result in rig shifts across regions, which is something that we consider very carefully as well.

Speaker 3

To the same tune that maintaining rigs contracted with a 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 this 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.

Speaker 3

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.

Operator

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 talking to you again real soon. Thank you.

Speaker 1

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

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