Borr Drilling Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Board Drilling Limited Third Quarter 20 24 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. Anytime during the conference.

Operator

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.

Speaker 1

Thank you. Good morning and thank you for participating in the Boar Drilling 3rd quarter earnings call. I'm Patrick Schorn and with me here in Bermuda today following the Boar Drilling Board meeting is Bruno Morant, our Chief Commercial Officer and Magnus Fowler, our Chief Financial Officer. Next slide please. First, covering the required disclaimers.

Speaker 1

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. This quarter's results were as expected, though slightly below the prior quarter. Recall that Q2 results were boosted by one off benefits related to our Mexico contracts and suspension of the Arabia 1.

Speaker 1

Without these one off items, Q3 adjusted EBITDA of €115,000,000 was essentially flat with Q1. Our core operations performed strongly with a technical utilization of 98.7% and an economic utilization rate of 96.9%. In terms of contracting, we have commenced new contracts at accretive day rates for the Skald, Norva and Nat. 3 other rigs, the Gunnlod, Gerd and Arabia 1 had fewer operational days quarter over quarter as they undergo preparation for outgoing accretive contracts scheduled to start in Q4 and Q1 2025. Our contract portfolio has strong revenue visibility into 2025 with 78% of our fleet contracted through 2025 at an average day rate of $148,000 per day, which is 10% higher than in 2024.

Speaker 1

With the delivery of the Dhar next week, our new build program will be complete, bringing Borr's fleet to 24 premium rigs, the youngest fleet in the industry and a clear competitive advantage. The VAR is now expected to be contracted by early 2025 rather than by the end of 2024 as previously anticipated. The completion of our newbuild program along with a reduced number of special periodic surveys in 2025 compared to this year is projected to increase cash flow in 2025. However, the near term also exceeding demand recently driven oil prices lower, leading customers to greater caution in confirming rig contracts and options and in some instances delaying the start of new projects. This coupled with the lingering impact of rig suspensions in Saudi earlier this year and potential suspensions in Mexico is creating uncertainties in the jackup market in specific regions.

Speaker 1

Consequently, there is a risk of contract delays and potential gaps in activity in the coming quarters. Due to these developments in the market, we have updated our full year 2024 adjusted EBITDA guidance of €500,000,000 to €550,000,000 to be at or about the lower end of the range. This is a dynamic situation where headwinds may also abruptly abate. So we are managing the situation closely and will provide a 2025 adjusted EBITDA guidance on the next earnings call in February. From a cash perspective, we are well positioned for the future.

Speaker 1

Last month, we tapped our 20 to 30 bonds to finance the VAR, our final new build, raising $175,000,000 at more economic costs than the available shipyard financing. We have an undrawn $150,000,000 revolving credit facility, a $45,000,000 guarantee facility and $185,000,000 in cash at the end of the quarter, resulting in a total liquidity of approximately $335,000,000 The Board has decided to continue with a total with a quarterly total shareholder return of $25,000,000 an amount similar to previous quarters. The Board has declared a cash distribution of $0.02 per share for a total of $4,800,000 for the 3rd quarter and committed to buyback $20,000,000 in shares under the company authorized share buyback program before the end of 2024. The fundamentals of the global jackup rig market remain supportive in the medium and long term favoring bore. With an aging global fleet, 30% which is over 35 years old, driving additional retirements and now no new orders in a decade, conditions support our position as the operator of the youngest fleet of 24 premium rigs.

Speaker 1

In closing, I would like to extend our gratitude to the Euronext Oslo Stock Exchange for their support of bore drilling since our listing in 2017. They have provided a supportive environment as our company has grown over the years. With the OSE approving our delisting application, our final trading day there will be December 30, 2024, after which Boar Drilling will maintain a single listing on the New York Stock Exchange. Magnus will now discuss the financial details of the quarter.

Speaker 2

Thank you, Patrick. So going into the financials in a bit more detail. The Q3 2024 total operating revenues were $241,600,000 a decrease of $30,300,000 compared to the 2nd quarter. The quarter on quarter variance was mainly due to 2 one off items in Q2 that did not repeat in Q3 related to the recognition of accelerated amortization of deferred revenue, namely SEK 17,500,000 related to the contract termination for the rig Arabia 1 and SEK 10,600,000 as a result of the amendments made to the operating structure of the Mexico JVs, which became effective April 1, 2024. Total operating expenses decreased by $9,500,000 compared to the 2nd quarter.

Speaker 2

Of the overall change, SEK 7,500,000 is related to the Arabia 1. The prior quarter included a one off impact of SEK 4,500,000 associated with the recognition of the accelerated amortization of deferred costs, and the remaining decrease for Arabia 1 relates to lower operating costs as a result of the rig preparing for its upcoming contracts. Net income for the 3rd quarter was $9,700,000 a decrease of $22,000,000 compared to the 2nd quarter. Adjusted EBITDA for the 3rd quarter was $115,500,000 a decrease of $20,900,000 or 15% compared to the 2nd quarter. Our free cash position at the end of the Q3 was $185,700,000 In addition, we had $150,000,000 undrawn under our RCF facility, resulting in total available liquidity of approximately $335,700,000 Cash decreased by $7,800,000 in comparison to the prior quarter and consists of the following elements.

Speaker 2

Net cash provided by operating activities was $48,400,000 which includes $6,000,000 of cash interest paid and $9,700,000 of income taxes paid. Net cash used in investing activities was SEK 187,400,000. This includes SEK 173,300,000 in additions to newbuildings, of which SEK 160,000,000 relates to the payment of the final delivery installment for the Vale, which was delivered in August 2024. The remaining $13,400,000 relates to the activation cost for the 2 new oil rigs, Vale and Var. We also had $14,100,000 cash cost related to special periodic surveys and long term maintenance costs in the quarter.

Speaker 2

Net cash provided from financing activities was SEK 131,100,000. This consists of SEK 154,400,000 in net debt proceeds from the issuance of SEK 100 and 50,000,000 principal amounts under our bonds due in 2028, less SEK 23,900,000 used for the payment of cash distributions to shareholders. With this, I will pass the word over to Bruno.

Speaker 3

Thank you, Magnus. I'll begin by covering our recent contract extensions and rig movements for our fleet. I'll then discuss global and regional markets, recent contracting trends and certain specific events that are of interest to our business. Since our last quarterly call, I'm pleased to report that we secured contract extensions for the Mist, Prospector 1 and Heal, all with current customers. These extensions are a testament to the strength of our performance and the trust we view our clients enabling us to maintain both operational efficiency and consistent revenues across our fleet.

Speaker 3

The Mist operating Valeura Energy Offshore Thailand received a 1 year extension keeping the rig active through the Q3 of 2026. The unique offline capabilities of the unit combined with a strong collaboration of our operational teams enable us to consistently deliver wells ahead of schedule and generating substantial value for our customer. The Prospector 1 in the North Sea has further options exercised by Juan Diaz securing the rigs contract through July 2025. We're currently working with our customer on certain upgrades to the rig that will enable it to operate with 100% green energy supply from a nearby wind farm and deliver this project at near their zero emission levels. Finally, in Mexico, the yield was extended for a period of 5 months.

Speaker 3

The rig is now firmly committed to Q1 2026. We're particularly pleased to see field work commitment to extend the rig more than a year in advance. Now regarding recent movements within our fleet, I'll start in Asia, where I'm delighted to update that the gun laws have commenced operations with ExxonMobil in Malaysia earlier this month. Also in Asia, the door concluded its contract in Vietnam and returned to Singapore earlier this week. We're actively pursuing opportunities for this rig.

Speaker 3

And while we anticipate some idle time in the near future, we remain confident that we'll be back operational in the early part of 2020 5. The GERD is currently in route to Congo and is expected to commence its contract with DNI later this month. And lastly, our teams remain on track with the contract preparations for the Arabia 1 and Bali rigs. Both these units are expected to begin mobilization in Q4 ahead of their respective contract starts in Q1 next year. On a global basis, we continue to experience healthy jackup utilization levels.

Speaker 3

Modern rig utilization levels remain strong above 94% and around 90% if fully adjusted for Aramco suspensions. While there was some commodity price uncertainty in the quarter, the range of current and future grain prices has held consistently above $70 per barrel, a level where the majority of the shallow water projects not only remain viable, but commercially attractive, providing a solid foundation for continued demand in the sector. At regional level, utilization and day rates across Africa, North Sea and Americas have remained steady at levels comparable to those we saw earlier this year. In contrast, Asia and Middle East have experienced a softer environment due to rigs from the Middle East pursuing contracts aggressively within the region. We expect this trend to moderate and likely reverse as supply of available rigs is gradually absorbed through 2025.

Speaker 3

As we look back at the Q3, customer concerns around commodity price along with supply chain constraints drove delays in commitments and partner approvals resulting in slowing contract activity. Despite these, outstanding tenders and inquiries along with a visible pipeline of opportunity points to a reverse of this trend as we progress into 2025. In fact, we have noted an increase in tender issuances in Q3 2024 compared to the same period last year. Now before I hand the call back, I'll provide some commentary around the recent developments in Mexico. We are aware of reports suggesting Beamex intentions to reduce spending levels in Q4 and potentially short term reductions in jackup activity levels.

Speaker 3

Following a recent change in their executive management, we understand that Pemax will be focused its year end efforts on projects that return maximum short term value with emphasis on cost management. However, at this time, we have not received any formal communications or notification from Pemex regarding any changes to their budget or potential rig suspensions. Based on the government, MPMEX restated commitment to increase reserves and maintain production levels at 1,800,000 barrels per day, we expect that reductions in activity, if any, will be likely short lived. And based on open inquiries and ongoing discussions, we remain optimistic that in fact activity level in Mexico for 2025 will remain strong on par with or above 2024 levels. In line with the administration stated goals to focus on high value activities, we believe our high performing and proven fleet is well positioned to continue to serve Pemex.

Speaker 3

Further, we highlight that initial indications have been positive in relation to the commitments of the new administration of Pemex to find a constructive solution for issues associated with delayed payment. This is clearly a fundamental aspect to support activity levels in the country going forward. In closing, we will enter 2025 with nearly 80% coverage for our fleet available days at a stronger average day rate of $148,000 per day. With these robust revenue visibility and strengthening pipeline of opportunity, I remain confident that we're well positioned to maintain strong fleet coverage through 2025 at levels comparable to those we achieved this year. With that, I'd like to hand the call back over to Patrick.

Speaker 1

Thank you, Bruno. So in conclusion, we have confirmed that the guidance for full year 2024, which has been the guidance put in place at Q3 2023 will be at or around the lower end of the original $500,000,000 to $550,000,000 range. Considering the flurry of downward guidance revisions given by our peers during the year, I feel Boar Drilling delivers very well in comparison. Looking at the backlog for 2025, both qualitatively as well as quantitatively, I think we are in a good place again. Lastly, the Board has decided to continue with a quarterly total shareholder return of $25,000,000 an amount similar to the previous quarters.

Speaker 1

The Board has declared a cash contribution of $0.02 per share, totaling $4,800,000 for the Q3 of 2024 and committed to buyback $20,000,000 in shares under the company's authorized share buyback program before year end. I would like to leave it at this and continues with questions and answers.

Operator

Thank you. Our first question comes from the line of Charles Olson of Fearnley Securities. Please go ahead. Your line is open.

Speaker 4

Thank you, and good morning, Patrick, Magnus and Bruno. And this question perhaps is for you, Bruno. I was thinking about the, call it, the dialogues with the various clients out there. How is that dynamic change through the, call it, evolution of the year? And as far as we're seeing a lot of tenders or tender activity being, call it, postponed, delayed and re tenders, I guess that leads to changing dynamics?

Speaker 3

Yes, Truj. Thanks for the question. I mentioned in the early notes that we've continued to see programs shift to the right. I think this is a fair statement. But equally, I think the pipeline continues to grow positively.

Speaker 3

So we mentioned we see some risk of near term idle time for rigs that roll off contract in the early part of the year. That seems to strengthen as we get to the back end of the year. In terms of the dynamics in general, we mentioned in earlier notes that some regions have been more sheltered from these near term concerns about supply. In West Africa and Mexico, we have continued to fix rigs at levels comparable to those we've seen earlier in the year. Inevitably the markets that are perhaps a bit more assessed more benign like Southeast Asia have seen a bit more of an aggressive complexity behavior.

Speaker 3

That said, if I reflect a little bit on Southeast Asia, obviously, we our rigs are mobile. We continue to look the bank employment opportunities for them across the globe. That said Asia is a key market for us and our rigs are very unique feature. So we will play by the constraints that exist in the region, but we feel very positive that these unique position that we have will continue to allow us to stay at the leading edge and have better utilization for those rigs than our peer group. So that's kind of short what we're seeing at the moment, Raul.

Speaker 4

Yes. And thank you. And as a follow-up and as far as you think about the market and the incremental demand, if you where do you see, call it, the strongest incremental demand heading into 2025 and then also glinting into 2016? And secondly, as part of that question, what about, call it, Middle East? And then any view on Aramco and when they are going to sort of change tactics again?

Speaker 3

Yes, sure, it's Rolf. And we've kind of gave a play by play before on demand and I think that remains quite a bit unchanged. I think in the Middle East, there are some interesting pockets of activity that will be that are in the horizon and that includes as I said earlier, Kuwait, KJO and obviously we see ONGC now resuming as well contracting. So there's some pockets of demand in the Middle East that are quite interesting. In terms of Aramco specifically, it's hard to put a view on what Aramco is going to be doing.

Speaker 3

The reality is that they are back at levels activity levels now that are not much superior to where they were before they start contracting rigs. So I think we're at a point that we are at or at the floor or activity levels that we would expect from a run, but I don't think there's a lot of change. Now I think if oil price improves during the year, I think there is a good chance that Aramco could be resuming that. I think that this is probably more a second half of twenty twenty five event than it is a first half of twenty twenty five event. But that's something that we're monitoring as things move along.

Speaker 3

Now in terms of the other regions, we do see interesting pockets of activity in West Africa. And we do believe that Americas, including Mexico, will provide some potential upside in demand in 2020 in 2025 as well. And in both regions, I think we're quite well positioned to tackle that. Asia, we do see some demand is a bit more discrete. I don't think that we are looking at very long programs and that's likely to absorb some of the excess capacity that is in the region as we go into 2025.

Speaker 3

That's why I said earlier that the 1st part of 2025 looks a bit more challenging for Asia, but that should normalize as we get into the year and the pipeline strengthens.

Speaker 4

Excellent. And thank you for a detailed answer. Thank you, Frank.

Speaker 2

Pleasure.

Operator

Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Frederic Steen of Clarksons Securities. Please go ahead.

Operator

Your line is open.

Speaker 5

Hey, Patrick and team, hope is hope all is well. And I thank you, Runeaport, for good market commentary on Folsa's question. I have two things that maybe more relate to the balance sheet and the shareholder returns. First, could you maybe elaborate a bit on kind of not the change in distribution policy, but why you felt like it was right to actually swap quite a bit out of the cash dividend and put that into share buybacks? That's the first one.

Speaker 2

Hi, Fredrik. Thanks. So I think with the recent developments that we have seen in the share price and the pressure and the share price going down quite substantially over the past months, the board was of the opinion that to maintain the gross amount of our shareholder returns is appropriate. However, that it would be more attractive for our shareholders if we buy back our shares at what we see as very low and attractive levels and as low implied values of our rigs. So I think that is the main reason for the sort of change in that strategy on the returns.

Speaker 2

So I think also going forward, this is going to show that we have we can be dynamic when it comes to either shareholder returns through dividends or to buy back shares if we find that more attractive.

Speaker 5

Okay. Thanks. That's very helpful. And do you think the potential swap for or ability to go between pure dividends and share buybacks, Should we read anything into that in terms of the gross amount that you plan to distribute? Or is this more about allocating to what you think is accretive also going forward?

Speaker 5

I guess my question really relates to what should we expect of stability around those gross returns?

Speaker 2

Yes. I think it's it's important to reemphasize that the gross amount that we are distributing is the same. So although the cash amount and dividend goes down, we are compensating for that through using the same gross dollar amounts to buy back the share. So that's important in the communication from the board here that the distribution amount in gross term is the same. So it's more about finding the most attractive way of returning that to shareholders.

Speaker 5

Yes. Thank you. And second theme, you've done kind of reclassify the way you book revenues from Mexico and how you've structured that. Pemex has, in general, been a bad payer of receivables. And I think kind of the amount of standing on your receivables side increased quite a lot this quarter.

Speaker 5

So you're kind of building working capital. Is that mostly PEMEX related as well? Or are there other things that have impacted that movement right now? And I totally get the comments before that Pemex wants to work on this in the future, but just want to get a clear picture of current status.

Speaker 2

Yes. No, it's true Mexico is has a fluctuating way of paying off. And so it's true that over the past 2 quarters, we have received lower payments from Mexico than we would have expected when looking at what we have invoiced. So Mexico is definitely part of the buildup in the accounts receivable that you see. We are actively looking into ways to monetize on the receivables.

Speaker 2

There are several other service or larger service companies that have been successful in obtaining factoring agreements with Pemex. And this is something we're actively looking at. And I'm optimistic that we can get something done there. I think the second part is account receivables also increased due to fluctuations and there's natural fluctuations in accounts receivables due to when invoices go out, when invoices are approved and sent to customers and obviously when they pay. So there we currently have a situation also where we have some collections outstanding from a large IOC in Africa that has been slower than expected over core trends.

Speaker 5

Okay. All right, perfect. That was very helpful. Thank you very much and have a good day.

Operator

Thank you.

Speaker 5

Thanks, Ludwig.

Operator

We will now take our next question. Please stand by. Our next question comes from the line of Chris Lee of Evercore ISI. Please go ahead. Your line is open.

Speaker 6

Hi, team. Thank you for taking my questions. Just following up on Pemex, I know you guys gave out a lot of commentary around your expectations, but just kind of curious to know if there isn't a major change to their capital plans for 2025, is it fair to assume Pemex rigs could potentially get an extension? It seems like the 5 rigs in Mexico have been extended over the past 3 years. So just any color around this would be appreciated.

Speaker 3

All right, Chris. Indeed, our raising in Mexico continues to deliver quite successful programs for Pemax and they've been instrumental in assisting Pemax in maintaining production levels. So in general sense, I do believe that based on the state and commitment from the government administration to maintain production levels that those rigs will be a key component in the future of the activity in country. So we remain optimistic that there is obviously a long term future for those rigs in Mexico. Clearly, Mexico activity level is not at peak levels and Pemex has been fighting hard to offset depletion levels, which are quite high in country.

Speaker 3

So I think the general statement and the ambitions of the governments in terms of production levels with increasing reserves continue to point actually towards a potential for an increase in activity in Mexico in 2025 and beyond, right? How we tackle that and how much of that we could be looking to? Obviously, it is a function of several things, including how the payment situation resolved. But we remain optimistic that we have a long term outlook in Mexico indeed.

Speaker 6

Got you. And also it seems like 2024 is particularly CapEx heavy year driven by SBS. How should we be thinking about incremental CapEx for 2025 and what it really means for the cash flow in 2025 versus 2024?

Speaker 2

Yes. So definitely, we have lower CapEx into next year, first of all, because of the 2 new builds that we have delivering this year. It's a large part of our CapEx, both on the delivery installments and on activation cost also to get them ready to drill. We budget around SEK 20,000,000 per rig in activation costs. So at least we will spend that on the first rig in the Vale, which has an upcoming contract.

Speaker 2

Additionally, as you said, we have a quite heavy SPS program now in 2024. Going into next year, we have budget for around 2 rigs going through SPSs. And typically, we say it's around $5,000,000 to $6,000,000 per SPS. I think also we have obviously some regular long term maintenance over the fleet, which we typically say is between around $1,500,000 per rig per year. So I think that's the area you can expect CapEx to be going into next year.

Speaker 6

Got you. And I guess lastly, if I could squeeze in another question. Bruno, during 2Q, you mentioned there was an incremental demand of 15 to 20 rigs over the next 12 to 18 months. Could you provide additional color in this or if there is any changes made to this outlook? And what kind of commercial opportunities are you seeing on the longer term, 2026 plus type of in the longer term period?

Speaker 3

Sure, Chris. And it's a good point because the situation in the market is fluid and we continue to review our demand outlook to make sure that we have a good grasp on it and we understand how it's been changing. And we conducted a very similar exercise to what we've done last quarter this quarter. And I think the general conclusion here is that in order of magnitude, the numbers of the incremental demand that we see in the kind of next 18 months remain largely unchanged. But as I said earlier in the call, I think what has changed and we need to acknowledge is that some of these demand were expected to be a bit on the front end of these 18 months seems to be pushed a bit more towards the back end, right?

Speaker 3

But in general, in terms of order magnitude of demand, we are tracking along what we said in the earlier quarter. So that's positive. And for us, and when I look at 2025, we have a little bit of exposure in the front end of the year. And I think the door that has become idle is an example of that. And that's largely our focus.

Speaker 3

I think as we go into the back end of 2025 that exposure is definitely less concerning for us. We do see quite long term programs now starting to shape in 2026 and I had mentioned a few earlier in the call like KOC, KJO and frankly I think things remain quite fluid, but it wouldn't surprise me if we start seeing potential upside even in Saudi activity levels recovering as we go towards the back end of 2025 into 2026, Chris. So that's kind of the way we see at the moment.

Speaker 6

Got you. I really appreciate the color. I'll turn it

Speaker 2

back to the queue. Queue.

Operator

Thank you. There are no further questions. Speakers, please continue.

Speaker 1

In this case, we would like to thank everybody for their attention and listening into the call. And we look forward providing you with further updates to the business here in the coming months. Thank you very much.

Operator

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

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