Borr Drilling Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Borr Drilling Limited 4th 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 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.

Operator

Patrick Shawn, CEO. Please go ahead.

Speaker 1

Good morning, good afternoon and thank you for participating in the Boar Drilling 4th quarter 2023 earnings call. I'm Patrick Schorn and with me here today is Bruno Moran, our Chief Commercial Officer and Magnus Fyler, our Chief Financial Officer. Next slide. 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 results to differ materially from those projected in these statements. I therefore refer you to our latest public filings. Next slide. Our 4th quarter performance has been strong and we have closed the year having achieved several major milestones. In the Q4, revenue increased by 15% to $220,000,000 and our adjusted EBITDA increased to $105,000,000 which is 20% over previous quarter, resulting in a 48% adjusted EBITDA margin.

Speaker 1

Full year 2023 adjusted EBITDA reached $350,000,000 Our backlog has grown and improved significantly in quality during 2023, where we added $728,000,000 to our revenue at an implied average day rate of $161 per day. On the operational front, we have finished the year with excellent technical utilization for the quarter at 98.7% and a total recordable injury frequency of 0.65, the latter being well below the industry average. Both these numbers reflect the professionalism of our operational team who have activated RIGS continuously for the last 3 years and who have successfully commenced operations in numerous new countries. This performance has also resulted in external recognition that is dear to us. And just to name 2, our Rig Saga has been awarded by Shell as Global Jackup Rig of the Year.

Speaker 1

Also we have received the award for the best recordable incident rate for our RIGS skulls and bore drilling as a company from the IADC Southeast Asia chapter. On the left on the right hand side, you see that we maintain operations in 4 main hubs, namely Mexico, West Africa, the Middle East and Asia. This allows us to benefit from economies of scale while remaining diversified enough to provide a stable activity level. There's been significant focus on the announcement by Saudi Aramco regarding their production targets for 2027. On this, I can only comment from a board drilling perspective and based on some of the discussions we had in Saudi a week ago.

Speaker 1

First, we have 3 rigs out of our fleet of 24 rigs working in the kingdom, all three of which are on multi year contracts. 2nd, maintaining a production capacity of 12,000,000 barrels per day versus 13,000,000 barrels per day still requires a world leading activity level and an operation second to none in size. Oil just doesn't come out of the ground by itself, not even in Saudi. And as such, large volumes of activity will continue to be required. And in order to remain most relevant to our customer, we continue focusing on the things we can control, which is the relentless pursuit of safety and operational excellence in order to deliver value to our customers.

Speaker 1

We continue to have a very tight jackup market. Supply has dried up and can only increase once we start to see newbuild orders coming in. And even then, the impact will be several years out as it takes multiple years to get units built and into the market. On the demand side, Bruno will share some additional information in a minute, but also demand remains solid for the next 2 years plus. So based on our view of the business environment and a strong contracted fleet coverage, we maintain our estimate of adjusted EBITDA for the full year 2024 to be between $500,000,000 to $550,000,000 We also announced that the Board approved for Q4 as well a dividend payment of $0.05 per share.

Speaker 1

Magnus will now step you through the financial details of the 4th quarter.

Speaker 2

Thank you, Patrick. So Q4 2023 was a very good quarter financially with quarter on quarter increases in revenues of 15% and adjusted EBITDA increasing by 20%. We continue the sequential increase that we've had now for 8 quarters, as you can see in the graphs. And this trend of increases actually goes back even further, reflecting both that we have been putting more rigs to work and an improvement in day rates. The operating revenues for the quarter was $220,600,000 an increase of $29,100,000 compared to the 3rd quarter.

Speaker 2

This is split in an increase of day rate revenues of $24,400,000 increase, primarily due to 2 more rigs starting up in the quarter and an increase of bareboat income from our Mexico joint ventures of $4,700,000 mainly related to higher economic utilization for 1 rig and the release of an operational cost provision. The rig operating and maintenance expenses increased by 12,700,000 dollars or 15%, an increase that follows naturally from the increase in number of rigs increasing by 2 for the quarter. In addition, we had an increase of amortization of deferred costs of $3,800,000 in the quarter. The operating income increase quarter on quarter was 26%. Below the operating income line, the numbers were driven by total financial expenses net of $59,100,000 which was impacted largely by one off expenses of $8,900,000 recorded related to our refinancing and repayment of all debt.

Speaker 2

The income tax expense for the 4th quarter was a credit of $9,300,000 impacted by a $16,500,000 release of a valuation allowance on deferred tax assets, as well as a $9,300,000 release of an uncertain tax provision. That gives us a net income for the 4th quarter of $28,400,000 an increase of $28,100,000 compared to the 3rd quarter and an adjusted EBITDA for the Q4 of $105,900,000 yielding 48% EBITDA margin. Our free cash position at the end of Q4 was €102,500,000 In addition, we had undrawn RCF facility of €150,000,000 dollars So in total, we have approximately $250,000,000 of available liquidity. The cash in the quarter increased by $8,100,000 and this was affected by cash used in operating activities of $79,600,000 This number includes $99,200,000 related to interest paid and approximately $10,000,000 of income taxes paid. And this includes both cash interest incurred during the quarter and the repayment of capitalized interest on our legacy debt.

Speaker 2

In addition, the number was impacted by cash costs related to our financing and timing differences of working capital movements. Net cash used in investing activities were $35,500,000 primarily consisting of $34,000,000 used on jackup additions, which is the activation cost for Hilton Arabia 3 and also some CapEx additions over the fleet as such and $1,300,000 used on newbuild additions. The net cash provided by financing activities was $123,200,000 primarily as a result from the net proceeds of the issuance of the senior secured notes and the net proceeds from our private placement offset by repayment of the debt. Next slide please. Our 2023 full year EBITDA came in at €350,500,000 and our 2024 EBITDA guidance remains in the range €500,000,000 to €550,000,000 At the midpoint of this range, this shows an increase of approximately 50% from 2023.

Speaker 2

We're also very pleased to have completed our refinancing of all the company secured debt in November 2023, and we now have all our debt maturities in 2028 and 2030. The delivery installments for our 2 remaining new builds in 2024 are largely funded by commitment of delivery financing by the seller in the size of $130,000,000 per rig. And additionally, we have secured $180,000,000 senior secured facility, which includes $150,000,000 RCF and a $30,000,000 guarantee facility. The refinancing provides a stable foundation for the company going forward with a fixed amortization profile that allows us to delever our debts. In addition, it also provides us the possibility of distributions to shareholders as evidenced by our implementation of a regular quarterly dividend, which we now have declared for 2 consecutive quarters of $0.05 With this, I would like to turn the word over to Bruno.

Speaker 3

Thanks, Magnus. Now I'd 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 exceeded 95% in line with our earlier projections. It is noteworthy that utilization levels have continued to improve while the market absorbed a few additional newbuild rigs.

Speaker 3

Currently, the shipyard order book stands at 15 rigs, 1 of each has a future contract and 2 are owned by board drilling. The total order book represents less than 4% of the global jackup fleet, a record low level. We highlight again that shallow water projects on average have some of the lowest breakeven prices and continue to be a viable and attractive alternative for our customers at the current commodity prices. Underlying that and according to recent data by Reichstag Energy, global investments in shallow water projects are expected to experience double digit growth in 2024 compared to last year. These factors support our views that the jackup drilling sector should continue to benefit from strong utilization and improving economics.

Speaker 3

Looking forward, we see a market scenario whereby incremental demand should continue to outpace any potential supply growth. From a supply side, based on a study conducted by FERCIS Offshore, it is anticipated that only 6 of the 15 rigs under construction could reasonably brought into the market in the next 18 to 24 months. On the demand side, we anticipate demand for modern rigs to increase by 20 to 25 rigs in the next 24 months or so. Several of these programs are already tendering phase, while others are expected to be tendered in coming quarters. In support of our views, data from S&P Global in their latest work rig forecast project that global jackup demand will increase by 36 units by mid-twenty 25.

Speaker 3

And based on the recent market trends and customer preferences, we anticipate the lion's share of this incremental demand will be fulfilled by modern rigs. We maintain a constructive view on the Asian, Indian and Middle Eastern markets and let me provide you some data points that support our views. In the Middle East, recent announcements by NOCs indicate the potential for several multiyear, multi rig programs, particularly in Qatar, Kuwait and the neutral zone between Saudi and Kuwait where the large Aldora field development is expected to be tender soon and should alone require 4 additional high specification jackups. In India, we note ONGC stated plans on securing 6 new rigs as part of their fleet renewal strategy, noting that the average age of their current fleet is approximately 40 years old. This requirement is over and above OAGC's open tenders and unfulfilled demand from prior tenders, including the recent HPHC requirement.

Speaker 3

Similar renewal ambitions have been recently indicated by ADNOC and Sinopec. In Asia, Petronarm activity outlook indicates incremental demand of 2 to 3 rigs in Malaysia within the next 24 months. Similar activity levels are projected to increase in Vietnam and Indonesia. Outside these areas, we see pockets of long term activity developing in places such as Angola, Libya, Americas and Australia to name a few. The demand outlook coupled with our customer discussions support our positive view of the strength, duration and resilience of the cycle.

Speaker 3

In 2024 to date, we have received 3 new commitments adding a total of $82,000,000 in backlog to the company at an average of $166,000 per day. These commitments include contract extensions for the Norva with BWE in Gabon, contract extension for the Mist with Valeura in Thailand and a binding letter of award for the tour with an undisclosed customer in Southeast Asia. Following these awards, our fleet coverage for 2024 has further increased to 87%. Considering our prospects and based on ongoing discussions with our customers, we remain positive about our ability to secure follow on work for our rigs rolling off contract during the year with limited white spaces if any. Our only rigs expected to roll off contract in the first half of the year are the Prospector 1 in the North Sea and the gun lot in Asia.

Speaker 3

We're currently in advanced discussions with customers about continued work for these rigs and will provide further details in due course. In relation to our new built units, Vail and Var, we continue to make progress with the completion of their construction and commissioning and remain on track to have these units delivered around the Q4 this year. These units are currently being offered for several opportunities and are attracting considerable interest from our customers. We remain positive about our ability to secure meaningful term work for these units ahead of their delivery. On this note, I'd like to hand the call back to Patrick.

Speaker 1

Thank you, Bruno. So in conclusion, Bruno has walked you through the current utilization. Our view of the demand increase over the next 18 to 24 months and the corroboration of these numbers by IHS and P Global, we are in a supply constrained market with continued demand increases which is the basis for further day rate increases going forward. Our 2024 adjusted EBITDA remains unchanged at $500,000,000 to $550,000,000 This is underpinned by a strong contract portfolio which is covered currently at 87%. The refinance of our 2025 debt maturities has been successfully completed with the issuance of €1,540,000,000 of secured notes with maturities in 2028 and 2030.

Speaker 1

This completes the refinancing of all our secured debt and provides the company with a solid long term capital structure. Lastly, we have delivered on the commitment to become a dividend distributing company. The board approved for Q4 as well a dividend payment of $0.05 per share. Ending on what for board drilling our customers is the most important performance indicator which is delivering operational excellence safely. This will continue to have our utmost attention going forward.

Speaker 1

Ladies and gentlemen, I would like to end here our prepared remarks and we can go to Q and A.

Operator

Thank you.

Speaker 4

Hey, Patrick, Magnus Bruno. Hope all is well, and thank you for taking my question. I wanted to start with 2024 guidance. EBITDA reiterated between €500,000,000 €550,000,000 based on the contracts you announced earlier this month, you have reached 87% of fleet coverage, as you say. So I was wondering, can you give some color on how we would end up in either on either side of that range.

Speaker 4

With 8% to 7%, would we still see 500% minimum? Or what's the moving parts here to kind of underperform or outperform versus the mid?

Speaker 1

All right. So Frederic, thanks for your questions. I mean, at the end of the day, we are still in February. So I think that the range that we have is appropriate. What it depends on is that we fill the 87% as we expect.

Speaker 1

The more we fill it, the more we will be towards the upper range. The more we are with day rates over $150,000 per day, the more we will be at the upper range of that, right? So I think that those are the moving pieces. So it is really filling up the 87% further to 100%. And as Bruno mentioned to you, we have many discussions ongoing, and we expect to be able to manage any white spaces very well, and we expect minimal for the year.

Speaker 1

And secondly, you have seen from the day rates that when the contracts that we have announced so far that we are at the higher range of what we would normally have considered when making this type of forecast. So the more you see us announce higher day rates of the 170 plus the more that is going to make us end up in the upper range of our guidance. But that's probably all I can say this early in the year.

Speaker 4

Thank you, Patrick. And just on the rig sector, you mentioned the Prospector 1 and the Gunda that the 2 rigs coming off contract now in the first half of this year. Prospector, that's the only rig you have in the North Sea currently. Is it fair to assume that it will remain in the North Sea? Or are those discussions for elsewhere?

Speaker 1

I don't want to give you fully our commercial envelope at the moment. But we've always said that the North Sea is not a key market for us. However, there is interesting bits of work. And if we can tie enough of that together, you could have a scenario in where we would remain around the North Sea, so to say. And there's other scenarios as well.

Speaker 1

But I would say that we intend to be announcing relatively soon the outlook for the P1 for the rest of the year. And on the gun law that you're asking, I think that Bruno, you want to say a few things about the gun law?

Speaker 3

Yes, sure, Patrick. And I think the gun law is a rig that has been performing very well in the region where it's located. It's one that has unique features and certainly one that I think our customers would like to maintain in the region. We obviously acknowledge that moving rigs across regions comes with certain efficiencies and we remain positive that the rig will remain operating in Asia.

Speaker 4

Perfect. Thank you. And then just finally, you're declaring dividends EUR 0.05 this quarter. You also have a share repurchase program in place for EUR 100,000,000, but you haven't really I think it's less than €1,000,000 if my math goes correctly on that. Can you give any color on how you would think about the trade off between higher dividends or more share repurchases initially since at least on my numbers, the real kicker on cash flow is coming in 2025 beyond.

Speaker 4

So it would be interesting to hear what you're thinking now for 2024, if higher dividends or more cash allocated to share repurchases would make the most sense for you.

Speaker 1

So I think firstly you are right that clearly the larger amounts of cash are going to be available in 2025. But it's also clear from the way that we see the year shape up that there is opportunities to also in 2024 continue to distribute to the shareholders. You know that we are focused on deleveraging and that at the same time, we want to make sure that there is a return for the shareholders as well. At this moment, I can tell you that the Board wanted to have both instruments available, meaning end share buyback as well as a dividend distribution, which is currently in place. I think that there is as a second guidance where there is going to be focus on that with more surplus cash becoming available, I would expect the dividends to be increasing over time.

Speaker 1

And then I think on a quarterly basis, based on where the share price might be, the Board will make a determination on where we are going to go, whether on the share buyback side or more towards dividend. But I think you have seen that the current sentiment is very much towards dividend being the 2nd consecutive quarter in which the board continues to focus on dividend. Apart from that, I would say follow us here in the quarters to come and we'll be able to give you more info on

Speaker 4

that. Thank you very much Patrick and team. That's all from me. Have a good day.

Speaker 2

Thank you.

Operator

Thank you. We will now take the next question from the line of Greg Lewis from BTIG. Please go ahead.

Speaker 5

Hey, thanks and good afternoon everybody and thanks for taking my questions. Patrick, I was hoping you could provide a little bit more color around the new builds. It sounded like in your prepared remarks, these are looking at potentially going on term work. Kind of curious a couple of things here. How you're kind of thinking about balancing these rigs into the market and the spot market versus term.

Speaker 5

And really, Ben, I'll also ask, are we assuming any revenue contribution in 'twenty four from maybe the rig that's supposed to be available later this year?

Speaker 1

No, that is fair, Craig. So let me say a few things, although I'll leave the lion's share of this for Bruno. So the way that it looks at this moment, one of the rigs will potentially 2, maybe 3 months be available for service in 2024. The second one is only going to be really available to drill, call it, January 2025. And I think that what we were talking about seeing the additional demand of 24 to 25 rigs from our perspective.

Speaker 1

There is some interesting term work in that. And for us, it is really a matter that we want to see that these rigs get on some interesting contracts that have a bit of longevity in them. So term in this is important. But Bruno, maybe you can talk a little bit more about what you're seeing and where we're focused on. And I guess that people are quite interested when we would be interested in committing to award any work to these.

Speaker 3

Thanks, Patrick. Yes, Greg, and we mentioned a little bit in the last quarter, these rigs that are being delivered late in the year are probably some of the most capable rigs that we have in our fleet. And because of that and because of the prior track record success of the Cesar rigs operating in Asia, they have been attracting a substantial interest from customers, particularly ones that are very performance focused. Obviously, taking a rig out of the yard and everything that comes with it is not a small commitment. We're looking preferably to find work that has volume and volume I would say programs that are 18 months plus ideally to take them out of the yard.

Speaker 3

We're not concerned obviously about them finding continued work, but I think it's obviously preferable if we can find a good balance between attractive day rates and a term that makes it easy for us to phase the rig into work.

Speaker 5

Okay, super helpful. Thanks. Then I guess just really given that you provided some great detail on the Indian market, realizing that's not a primary market for you guys. And just because it's timely around the decisions by Saudi Arabia last year in January around reining in some CapEx. Clearly, Saudi Arabia is a huge market.

Speaker 5

I can go and look at the 80 plus rigs there and look at different ages and quality of rig. Do you have any sense for maybe as we look at Saudi Arabia, how we could see maybe some rigs kind of move out of there and where they could go? Or is it something where a lot of those rigs are kind of nearing their useful life and maybe some of those rigs in Saudi probably aren't working in 3 to 5 years?

Speaker 1

No. I think, Craig, it is a question. Clearly, Saudi is a tremendously large market that does govern what happens in the rest of the world. So I mean all I can tell you is from the discussions that we had. And I think from everybody in the drilling department, it is quite clear that even with a non pursuing 13,000,000 barrels but staying at 12,000,000 barrels, the amount of work and the amount of wells that need to be drilled is drill extraordinarily large that requires a tremendous amount of rigs on land as well as offshore.

Speaker 1

So I think that that is the key thing in it. Overall, I think that it is possible that some rigs at a certain moment roll off contract and are possibly not getting their contracts renewed. It's absolutely possible. It is clear that the decision criteria that Aramco in general uses are performance, safety and cost. So I think that all of these things are understood.

Speaker 1

It is possible that they call some of these rigs, but I think that that is not going to be tremendous amounts. And I think we should all take at least some information that there wasn't after the announcement a knee jerk reaction or where rigs came falling out of the woodwork and a lot of works was being stopped. So I think that we just need to let it work through the system, Whatever comes out of Saudi and if there is some rigs that are coming out from the description that Bruno gave of the market, these rigs are going to be absorbed quite easily. And as you have stated, some of them could be significantly old and operators might just decide not to further invest and maybe write some of them off. But I think let's just refocus on what we can.

Speaker 1

We just want to keep performing as well as we can. And I don't think that there is an enormous amount of rigs coming out of Aramco that couldn't be absorbed in the market as we see the market developing today.

Speaker 5

Perfect. Super helpful. Thank you very much.

Speaker 1

All right.

Operator

Thank you. We will now take the next question from the line of Michael Baugham from Sonae Asset Management. Please go ahead.

Speaker 2

Actually, all of my questions have been answered already. Thank you very much.

Operator

No problem.

Speaker 2

You're my help.

Operator

Thank you. There are no further phone questions. Turning the call over for webcast questions.

Speaker 3

Thank you.

Speaker 6

Are you seeing any changes in the length of contracts being asked for by clients?

Speaker 1

All right. Bruno, do you want to take this question? Sure.

Speaker 3

Really, we see, as I mentioned in my previous remarks, we do see now an increasing number of long term tenders either on the market or coming to the market soon. Certainly, in the jackup space, you're always going to have a substantial number of smaller programs in places like Southeast Asia, for example. You inevitably have programs that are short in nature. And I think the beauty of this market is really the combination of both things. We will focus on obviously having visibility of our backlog for the fleet, but not ignoring that short term opportunities provide as well attractive opportunities to reprice in a tight market as we are.

Speaker 1

In the big scheme of things,

Speaker 3

we do see the contract durations of the holding. And in different regions, you have different profiles, obviously, and nothing this is a bit of a nature of the particular geographies. But in general, we do see the contract durations holding and potentially elongate a little bit with the tenders coming up in the market now.

Speaker 6

Thanks, Bruno. What is the opportunity set looking like in terms of expansion of the fleet? And what about the under construction rigs seeking buyers? What is Borr's view on this opportunity?

Speaker 1

So we are very happy with the size of our fleet as we have stated many times. So I don't see a scenario where we'd be interested in selling the 2 rigs that are under construction. As Bruno mentioned earlier, we had very fruitful discussion with a variety of parties that are interested to contract them. And that's really the business we're in, us being a drilling contractor and using our rigs. So I don't see selling as one of the preferred or likely avenues.

Speaker 1

When it comes to overall expansion of the fleet, I think that there is as we have said in the past, there's always opportunities and we will look at them carefully, but we will want to make sure that some of the key strengths that we have remain intact, meaning that we want to make sure that we continue to have a very solid financial footing that any assets that would be added to the fleet are very similar in age and equipment as what we currently operate, which that if you just set that as your parameters, the opportunity set actually becomes fairly small and might be a rig here or there. So I would say at this moment, we focus very much on our own fleet. And as some opportunities come, we will evaluate them, but they are not the main focus of the management team.

Speaker 6

Thanks, Patrick. Last one. The leading edge day rates have been flat at around 100 and $65,000 to $170,000 a day for the last 6 months. When do you think we are seeing the next leg up potentially hitting the 200 ks mark?

Speaker 1

Yes. I think that that is a fair question that obviously I will hand over to Bruno. But I think that it is the flattening of the level as we have been at a very high level. And actually we have been able to get these level of contracts across the world in every region. And I think that that is a major step forward what we have.

Speaker 1

And Bruno, maybe you can comment a bit on what we are tendering today and the rates you are expecting and therefore when you think you'll be getting towards the $200,000 Sure, sure, Patrick. And when we look at the market at the moment and

Speaker 3

as I mentioned in my remarks, we do see a lot of opportunities now hitting the market and more to come, right? And it goes out saying that it is a market about utilization, it is a market about tightness. With these additional requirements, particularly multiyear requirements, potentially soaking some of the remaining capacity, then is when we would expect day rates to accelerate further. I'll fall short of providing more details on our particular bidding rates, but it's fair to say that our offers continue to push on the upside and frequently are getting very close to the higher end of the 100s and not too far shy of the $200,000 a day. I think in the second half of the year, as a lot of these standards come to the market, that's when we expect a higher acceleration.

Speaker 3

But it continues to move in the right direction. I mean, as an average, we were at 161 during last year. This beginning of the year, we are at 166. And as Patrick highlighted, this is not hanging on one fixture and either hanging in one region. It's been a development that is happening across the globe, which is very positive to see.

Speaker 1

Okay. Then I understand that we have reached the end of our questions. So thank you very much for your attention. And we look forward again talking to you real soon with the next updates. Thank you.

Operator

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

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Borr Drilling Q4 2023
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