Borr Drilling Ltd

NYSE:BORR

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to today's Second Quarter 2019 Results Call for Borr Drilling Limited. [Operator Instructions]I must advise you that this conference is being recorded today, Thursday, the 29th of August 2019. I would now like to hand the conference over to your speaker today, Magnus Vaaler. Please go ahead, sir.

[Magnus Vaaler, Investor Relations Officer]

Thank you and welcome to Borr Drilling Limited Second Quarter 2019 Results Presentation. The speaker on the call today with the company's CEO, Mr. Svend Anton Maier; and CFO, Rune Lundetræ of Borr Drilling Limited. Please remember that our discussions and comments today may include forward-looking statements that involve a number of risks and uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. Please refer to our earnings release that defines forward-looking statements in our annual report of 2018 for information about risk factors. The forward-looking information is based on information as of today, and we assume no obligation to update any of these forward-looking information. Today's call will consist of some highlights from the quarter, some market views and market outlook. We will then open up for participants to ask questions in the Q&A session. I will, with this, turn the call over to our CEO, Svend Anton Maier.

[Svend Anton Maier, Chief Executive Officer]

Thank you, Magnus, and welcome, everyone. The operating revenues in the second quarter were $86.6 million, net loss was $103.2 million and adjusted EBITDA was negative with $4.9 million. Technical utilization was in line with previous quarters and came in at 98.8% in the quarter and 99% for the first 6 months. The result includes $31.5 million in mark-to-market losses related to the forward contracts for Valaris shares. Total remaining exposure on the forward contracts were $36.1 million, as of June 30, 2019.Total accumulated backlog of order in 2019 of $300 million and 3,600 days. Since inception, Borr has generated backlog of approximately $620 million. We completed the loan financing in the total amount of $645 million, which was announced in our previous quarter report. And thereby, the existing fleet is fully financed with no final maturity until 2022. We completed the successful activation and reactivation and commencement of contracts of 5 premium jack-ups rigs in the second quarter and 3 after quarter end. And we completed the initial public offering on New York Stock Exchange under the ticker BORR, B-O-R-R, issuing 5.750 million shares at the price of $9.3 per share. With this, would like to turn the call over to Rune Magnus, our CFO.

[Rune Magnus Lundetræ, Deputy CEO & CFO]

Thank you, Svend. Hi, everyone, and thanks for dialing in this morning and this afternoon and in Europe. I would now guide you through the financial results of the quarter for Borr Drilling. Operating revenues were $86.6 million in the quarter, generated by an average of 10.6 operating rigs during the second quarter. We commenced operation for 5 new rigs, while the semi-submersible rig, MSS1, had an improved quarter due to 2 months of increased day rates. In addition during the quarter, the Odin have reimbursable logistics revenue of approximately $6.5 million under its contract with PanAmerican energy in Mexico. Day rigs on disposals were $3.9 million in the quarter and remains to standard jack-up rigs: Baug and the C20051. Borr Drilling has been a key player in reducing the oversupply of rigs in the market. These divestments bring the total number of rigs being divested and retired from the international jack-up rig fleet to 30 by the company, including those of Paragon since the beginning of 2018. Rig operating and maintenance expenses were $81.4 million in the quarter, and this includes costs for both operating and flag bridge. Total OpEx for the rigs in operation was approximately $70 million, and this includes overhead. We are running the rigs at number operating costs, well below $50,000 a day and cost for warm stack rigs between $6,000 and $8,000 per day. The adjusted EBITDA for the quarter was negative by $4.9 million. We ended March 2019 with an adjusted EBITDA of close to minus $10 million for the month. Due to 5 rigs commencing in the second quarter, the adjusted EBITDA has increased. And we are pleased to say that in June 2019, we had a positive EBIT -- adjusted EBITDA for the month. With the third quarter of operations of these 5 rigs in the third quarter, in addition to the commencement of further 3 contracts in the third quarter, our budget shows a strong increase in the EBITDA in the third and the fourth quarter of 2019. Depreciation for the quarter was $24.6 million. This is a slight increase from previous quarter due to the delivery of the Thor in May 2019. G&A was $14 million and includes $1 million in noncash share option cost and some increase in legal and professional fees, mainly related to our U.S. listings and our loan financings. Total other income and expenses includes mark-to-market losses on forward contracts relating to shares in Valaris of $31.5 million, and we expect to realize this position over the medium-term. Remaining exposure as of 30th of June was approximately $36 million. Other financial expenses was $8.3 million, mainly consisting of the expensing of previously capitalized cost, related to refinanced debt. Our mark-to-market, noncash loss on the core spread derivative related to the company's convertible bonds, was a total of $5.2 million in the second quarter. Interest expense of -- was approximately $20.1 million. In addition, interest of $4.5 million was capitalized in the second quarter. The net loss for the quarter then was $103.2 million and the loss per share, $0.98. Moving over to the balance sheet. Total assets increased by $282.3 million, primarily due to the acquisition of the Thor at the end of March 2019, and also the delivery of the new building, Njord, in January. This was offset by ordinary depreciation and the impairment of $11 million for the sale of the standard jack-up rig, Eir, in Q1 2019. Total liabilities increased by $442.9 million, mainly due to the $398.6 million increase in long-term debt and the increase in current liabilities.At 30 June, we had free liquidity of $119.8 million, and this includes $75 million under its revolving credit facility. In addition, the $50 million new-build facility, relating to the [ TMR ] and the $50 million lift in connection with the U.S. IPO, plus cash tied up in marketable debt facilities gave us around $250 million of pro forma liquidity and, thereby, full confidence in the liquidity situation. In addition, Borr Drilling has further financial flexibility by the potential sale of 5 unpledged assets, worth an estimated $150 million to $200 million. The company is also considering joint venture ownership structure based on existing assets to strengthen low compressions in key operating areas. These joint ventures, if successful, are likely to free up additional liquidity. The major positive development, however, is that the cash burn for the company is past us and budget shows that we are commenced -- that we are after commencement of the 8 rigs during the second and third quarter, operating revenue will cover all operating and financial cash cost, also including [ length coverage ] based on 15 rigs in operations. With that, I would like to turn the call back to Svend.

[Svend Anton Maier, Chief Executive Officer]

Thank you, Rune. So far in 2019, we have commenced 9 contracts. Since previous quarter, we have secured 4 additional contracts. Three had contract extension for the Dhabi II, 18 months contracts for Odin with Pemex, 4 to 5 months contract for the Prospector 1 and 12 months with a letter of award for the Prospector 5 starting 2020. We are currently participating in more than 20 tenders, many of which also included multi-year, multi-rig contracts.We will continue to follow our disciplined bidding strategy, which is further supported by the tightening of the market. We have expectations that a major part of our presently available 8 warm-stacked rigs will be committed within the next 6 months.Looking at the share price of public offshore [Audio Gap]companies, one may question whether the whole industry is obsolete. If we take one step back to put things into perspective, offshore produces 27 million barrels per day, which is $60 per barrel is worth almost $600 billion per year. The 18 million barrels produced in shallow water is worth approximately $400 billion. In addition, there is significant offshore gas production. Put that into context of a public part of the industry that you can buy today at the stock exchange at $9 billion in equity valued for $32 billion for the enterprise value. Keep in mind that we still get 57% of all the energy in the world from oil and gas. This is 15x bigger than renewable. Offshore oil production alone is almost 3x larger than renewable converted into barrels of oil equivalent per day. We believe that oil and gas consumption will remain with us for the foreseeable future and is a resource base that needs continued investments.We are proud that we have achieved in Borr having gone from 0 rigs in operations to currently 15 in the last 20 months. We have a current portfolio, including majors such as Exxon, Total, Shell as well as NOCs such as Pemex and ADNOC. We are now employing over 1,600 people and established a top-class operation, which has also confirmed by winning the safety performance award for jack-up rigs in the North Sea in 2018. Furthermore, day rates have doubled from the level seen 18 months ago. Despite of all the solid fundamentals, this has, unfortunately, not been reflected in our share price. We cannot control the stock market. But rest assured, we will continue to build a solid and profitable company. With Borr being the only pure-play modern jack-up company, we feel it is important to highlight the difference between our markets and both the U.S. onshore market and the floater markets. Over the last 18 months, the oil price has been between $85 in October 2018 and $50 in December 2018. In this volatile oil price environment, the U.S. onshore rig count is down 6%. The floater rig count is up 7%, but the jack-up rig count is up 21%. As highlighted by both Halliburton and Schlumberger in the Q2 conference calls, the shallow water market has experienced a strong and accelerating growth. This is expected to continue into 2020 and beyond. This growth is driven by drilling in low-cost oil and gas reserves in the Middle East.Breakeven of these fields are typically around USD 20 to USD 30 per barrel with short lead times between investment and cash flow. The jack-up rig count in the Middle East has doubled since 2010 and is 14% higher than when oil prices were $100 per barrel in 2014. This is very different from the floater market, where activity in key deep water markets, such as Brazil, has dropped by more than 50% since the peak. With ongoing tenders in the UAE, Qatar, and Saudi Arabia, this region can add more than 60 additional units in the near future. Unlike the floater market, where drilling intensities going down due higher production per well, the jack-up drilling intensity is going up. In year 2000, Saudi Arabia had 2 rigs working for every 1 million barrel of shallow water offshore production. Today, you need 12 rigs to produce the same number of barrels. In the market where activity dropped off after the oil price crash in 2014, the oil production is falling sharply. Mexico reduced the rig count from 52 units in 2014 to 19 at the start of 2019, resulting in production decline of 30%. With the new administration in place, Mexico is committed to counter the decline. Pemex have already awarded 15 contracts, of which we have secured 3. There are still not allocated rigs for the 9 of the contract, which we see as an opportunity to participate with our available rigs. Mexico has further opened the market for international operators, which will also require additional rig capacity.This includes, amongst others, our rig, the Odin, that is currently successfully operating for PanAmerican energy in Mexico. During the second quarter of 2019, global jack-up drilling rig fleet utilization has continued its upward trend. Utilization for modern rigs built after year 2000, have so far in 2019 have increased by 8% points up to 89%. Whereas the modern rig count is up by 42%, the standard rig count is down by 50% since 2014. The 32 available modern rigs also include units that have been cold stacked for a significant time and will require a large amount of CapEx to reactivate. In addition, some of these rigs are further restricted by being owned by local-drilling companies, not participating in international markets. Most of the international drilling contractors are now fully committed, and the effective number of capable rigs available in the market now is down to below 20 units. Day rates continue to improve. We have recently fixed contracts at 100,000 per day and above, and we also see several of our competitors fixing 6-digit levels. In addition to improving day rates, we see a tendency where more operators are pay part of the mobilization and excavation cost. Contrary to the deep water floater to the market, most fleet is built after 2008, more than 40% of the jack-up fleet is older than 30 years. We believe modern rigs are 20% to 30% more efficient are also more capable to support deeper and more challenging wells. Age requirements in tenders are becoming prevalent, which is clearly represented by recent tenders and awards which we can see from this slide.We have discussed our ability to contract our remaining available rigs. What gives us confidence is what we, today, intend as in direct negotiations. The rig demand has grown from 296 rigs in 2017 to currently 365. Based on visible incremental demand shown on this slide, we have a high confidence that this will pass the 400 mark of operating rigs within the next 12 months. At the start of the downturn in the industry, we've witnessed 103 rig stranded in Asia. That number as quickly diminished to 28 units. This shows that the market has been able to absorb a significant amount to perceived oversupply. The growth in China has taken away a lot of yard supply in the area. The remaining units have, in several instances, been offered and awarded multiple contracts at the same time. This has created an impression amongst EMP companies that the availability of rigs are higher than reality. With several of these operators now having to walk away from contracts due to them and not being able to sort rigs, this uncovered demand will likely to be retendered and create further improvements in utilization. We have been asked, if we have entered into the market too early? However, it's an interesting observation that major part of the high-quality rigs at yards are now being committed, and the remaining rigs either have higher price tag or lower specification than the Borr fleet. Quoted contract prices from yards are now between $180 to $200 million with additional cost accruing for the building period. Borr has a uniformed fleet with few rig designs mainly built at world-class yards in Singapore. This combined with a proven track record of activating 5 new build, means we have full control of cost and time for getting units really. All the activations have been completed at or below budget between $12 million to $14 million. These units are budget to generate approximately $18 million in annual EBITDA. This compared to some of our competitors, which bought rigs at alternative yards at lower price. But in reality, when including significantly higher activation cost and lower day rates will generate significantly lower returns. We have shown some examples in the slide gathered by industry intelligence. But please note that this might not be apples-to-apples comparison as the competitors have added significant contract-specific upgrades included in activation cost. However, the important thing to note is that EBITDA to CapEx ratio. We have recently witnessed drilling contractors publicly subscribing to the spending pledge, which is an interesting development. Based on current day rates, which are whole fleet contracted, we will have the possibility to generate $500 million of EBITDA and free cash flow of $350 million, that is equal to more than 1/2 the current market cap. As stated, the company will, with 15 rigs in operation, cover all operating financial cash cost. For every new rig, we put to work in the current market, the cash flow will improve by approximately $20 million from contribution, from the contract and reduced stacking cost. We still have 16 rigs left to contract, and every rig contracted equals 4% free cash flow to equity. This might seem aggressive as of today, but as stated in our report, when the market becomes tight, day rates moves fast. In 2005 and '06, rates went from $95,000 to above $200,000 in a timeframe of 12 months. So to sum up, jack-up rigs continue increase from 296 to 365 since 2017 to 89% utilization of marketed modern rigs. Standard rigs in the shipyard is down from 103 to 28. Visible demand of at least 40 incremental rigs. Borr has commenced contracts for 8 modern units from March to August 2019. Currently, positive free cash flow from operations after financing cost, 1 incremental rigs fixed at current day rates of $100,000 a day gives $20 million a year in FCF, 4% versus market cap, strong increase in EBITDA expected in the coming quarters, financing completed. Thank you, and now I will hand it over to Magnus.

[Magnus Vaaler, Investor Relations Officer]

And operator now we are ready to take questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Greg Lewis from BTIG.

[Gregory Robert Lewis, MD and Energy & Shipping Analyst]

I guess I'd like to dive in a little bit on the 20 rigs tenders that you guys are currently in the market for. Just I guess since we're asking one question, just a few questions around those 20 tenders in terms of you mentioned about potential joint ventures as we think about for trying to win some of these tenders. Any way to quantify how many of these might require a Board to sell rigs or be part of a joint venture? And then just the second part of that question is, as we look at those 20 tenders, are these primarily in areas where Borr already is or are these for potential new markets as you guys look to try and expand your footprint, if that's necessary?

[Svend Anton Maier, Chief Executive Officer]

Okay. Starting off with a question on the joint venture. I mean in these parts that we are now active, we see definitely a desire to enter into joint ventures with local partners that are looking for capacity. Typical parts of the world could be Central America and the Middle East.It's going to be different types of joint ventures based on the need, and how they can participate in the joint venture. But of course, that will free up capital for us, if it's a real joint venture where they buy into the assets.

[Gregory Robert Lewis, MD and Energy & Shipping Analyst]

Okay, and then just a follow-up on the -- are these tenders, primarily, where Borr is already working or are we thinking about branching out other opportunities elsewhere beyond, sort of, the North Sea mix or West Africa, Asia area?

[Svend Anton Maier, Chief Executive Officer]

We are in most of these parts of the world present. So we are trying to focus our efforts in those parts of the world to keep the synergies of having a bundled set up in these parts of the world. Of course, there are opportunities that are more one-off in parts, probably not, but our preference is, of course, to stay in those areas where we have a solid setup. Like I said, that creates so many synergies. So that's our target, and that's our strategy. But most of these activities are in the parts where we already are participating.

[Operator]

And the next question comes from the line of Lillian Starke from Morgan Stanley.

[Lillian Starke, Research Associate]

I just wanted to ask a little bit more on what you mentioned that the market could be getting up tighter, and this happens in quite a fast manner. From what we see in terms of the pace of the awards, it seems that clients are in no rush to spend at the moment or at least that appears from, sort of, where pricing have been moving. But I was just wondering if, from you stand, have you seen a change in behavior that indicates that there is actually a little bit more of a rush to spend that could move the balance in the jack-up market more from a buyers' market into getting more pricing power to rig operators, like yourselves?

[Svend Anton Maier, Chief Executive Officer]

Absolutely. I mean over the last few months, we've seen constant requests for more rigs. Before I could -- we had to contact. I think that, that has turned around now. We're actually getting weekly requests for rigs. Like I said, we are participating now in 20 tenders that have -- are of newer date. So it's definitely an increase in activity, and I can now see that in [Audio Gap] generally, the market sees that the jack-up -- the modern jack-up fleet availability is tightening. So yes, there's a huge spike over the last couple of months.

[Lillian Starke, Research Associate]

And if I could just follow up on that one. In terms of the behavior that you're seeing from -- are you still seeing some outlying pricing coming through, or that has narrowed much more in these as-of-late tenders?

[Svend Anton Maier, Chief Executive Officer]

Could you repeat, I didn't get the first part, sorry.

[Lillian Starke, Research Associate]

In -- are you seeing some of your competitors still with pricing well below, sort of, outliers bidding at the very low end of the range, or is there a bit of normalization upon which the ranges are coming through?

[Svend Anton Maier, Chief Executive Officer]

The rates are coming through, and we see that there is a lot more discipline when it comes to [ bidding ] modern rigs. Of course, there are certain markets where there are older rigs being offered at a lower rate, but these are the markets. And these tenders, we're not participating.

[Operator]

And the next question comes from the line of Lukas Daul from ABG.

[Lukas Daul, Analyst]

When you look at the tender pipeline. And you, sort of, previously said that you expect to -- because that you are available to be contracted by the end of the year, is that still the expectations? Or if you, sort of, look over the next 10, 12 to 18 months, I mean you show what you were generating EBITDA at current day rates, but I guess the question is more about how high utilization of your fleet can you achieve? So some color on that would be appreciated.

[Svend Anton Maier, Chief Executive Officer]

Lukas, I think if you look at the -- it's like I mentioned, the 40 rigs that are required that we know as of today absorbs pretty much most of the modern fleets. So and some of these tenders that we're participating now will already conclude in the next couple of months. So we are very positive that the 8 rates that we now have available, where we are -- that we are tendering will be contracted or committed within the next 6 months. The Middle East is every day coming with new demands, and that alone would take most of the available capacity of the modern rigs.

[Lukas Daul, Analyst]

Okay, that's good. That's pretty much unchanged from what you said before. And then just to clarify, are you saying that -- with the rigs that you're working now, are you sort of positive -- in positive operational cash flow position? Meaning, you cover your interest expenses or -- because I think you, sort of, mentioned both of the alternatives, so just to make clear that I understand it correctly.

[Rune Magnus Lundetræ, Deputy CEO & CFO]

Luca, this is Rune. So when we -- in the third quarter, we'll move up to 17 rigs operating, we will have enough cash flow to cover operating expenses, and the related interest expense. If we deliver according to our budget, when it comes to operating uptime and, of course, that the rigs commenced on time.

[Lukas Daul, Analyst]

Okay. Good. And then with the liquidity that you have in place, are you, sort of, comfortable that you have what it takes to put your whole fleet to work? Maybe because clients are willing to pay for mobilization and you get money up front or because you generate enough operational cash flow?

[Rune Magnus Lundetræ, Deputy CEO & CFO]

I don't think that contracting older rigs and putting them to work is keeping me up at night. I think we have enough visibility, and we mentioned some of them in the reports examples to sell some of the older assets and also we mentioned the JVs. We have some marketable securities and also the financing we have in place. So I think we -- and as you said, where we see trending, where you get more upfront, more payments in several of the tenders. I think that's very much manageable. And also, we don't think that all the rigs will commence at the same time. So this will be staggered even though there might be committed in a fairly short period of time that the commencement will happen over time, so we're comfortable with that.

[Lukas Daul, Analyst]

Okay, and would you have a number of how much of your contract-preparation cost flew through the P&L in the second quarter?

[Rune Magnus Lundetræ, Deputy CEO & CFO]

I'm sure we can find out of period, but it's not something that I have on top of my head. If you sort of an accurate answer, so I think we have to take that offline.

[Operator]

And the next question comes from the line of Frederik Lunde.

[Chr. Frederik H. Lunde]

So I sense a bit of frustration over the share price during the presentation here. But if you look at the estimates for 2019 have come down quite sharply, and this could, of course, expectation haven't been realistic in the first place. But now that you have a quite good visibility based on tenders and/or our negotiations on the future, would you say, consensus figures for next year EBITDA about $170 million is realistic?

[Rune Magnus Lundetræ, Deputy CEO & CFO]

Obviously, we put a number on next year's EBITDA, [ Frederick ]. So I'm not going to sort of confirm that number or anything else or any other number for next year.

[Chr. Frederik H. Lunde]

Okay, could you also just help how to think about OpEx and terms and conditions on Pemex contracts. Is that sort of a standard OpEx or is there different scope and cost in those?

[Rune Magnus Lundetræ, Deputy CEO & CFO]

I think what you can assume for the 3 Pemex contracts that there's a margin on the base day rates of about $50,000 per day per rig, and then there is the integrated Val services part, which has upside potential depending on how we perform against the operating agency. So it's pretty straight forward on the OpEx side in those 3 contracts, and they're all very similar.

[Chr. Frederik H. Lunde]

Great. Final question if I may, you previously entered in [ bid ]. I guess that's off the table, given the financial markets. But this could also present opportunities and bonds are trading at a bit discount now compared to the issue price. So are you seeing opportunities to arbitrage on the asset market versus the bonds, for example?

[Rune Magnus Lundetræ, Deputy CEO & CFO]

You mean, if we are going to buy bonds?

[Chr. Frederik H. Lunde]

Yes. And to possible selling assets, for example, and you get equity returns on your bonds currently that would be I guess derisking and also attractive shareholder return?

[Rune Magnus Lundetræ, Deputy CEO & CFO]

I think we are preserving the liquidity for time being. If we do anything that will free up more liquidity, I think, that is something that will be -- the preferred use of that will be on a ramping up operation as I told Lukas in last question.

[Operator]

[Operator Instructions] And the next question comes from [ Ethan Keller ] from [indiscernible]

[Unknown Analyst]

I wanted to understand when you guys will be fully transparent on day rates and disclosing them in the fleet status report?

[Svend Anton Maier, Chief Executive Officer]

We still -- I think we'll still continue to disclose our fleet status report like we do today, and then we see how things develop over time. So no decision has been made on that yet.

[Unknown Analyst]

With the increasing rates, why not have that kind of more public marker for you guys?

[Svend Anton Maier, Chief Executive Officer]

I think it will come over time, but I think for the time being, I think, we will continue to disclose our activity the way that were done and then we will see how things develop going forward. And then some -- you have clients who treat us very confidential, so it's something we will have to take like I said all the time.

[Operator]

There are no further questions at this moment. Please continue.

[Magnus Vaaler, Investor Relations Officer]

So this concludes the second quarter 2019 results presentation for Borr Drilling Limited. Thanks, everyone, for listening in.

[Operator]

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.