Borr Drilling Ltd

NYSE:BORR

Earnings Call Transcript 2021-Q2

[Operator]

Hello, and welcome to the Borr Drilling Limited Q2 2021 Results Presentation. My name is Hanna, and I'll be operating your call today. [Operator Instructions] I now have the pleasure of handing over to your CEO and CFO, to begin today's presentation.

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Good morning, and thank you for participating in the Borr Drilling Q2 Earnings Release Call. I'm Patrick Schorn, the CEO, talking to you from Oslo, Norway. And on the call with me today is Magnus Vaaler, our CFO. Next slide. For good order, 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. Before we give the details of the quarter, I would like to take a few minutes and explain where we are in the journey of building the best jack-up rig company in the market. In the last few years, our efforts have largely been focused on assembling the largest fleet of young premium jack-up rigs through the selective acquisition of high-quality assets at attractive prices. This has resulted in a fleet of 28 premium jack-up rigs with an average age of 4 years. In the process, creating the company and making these acquisitions, we have also retired assets that didn't meet our minimum standard. As such, we have removed 27 jack-up rigs from the market, leaving us with a young and open space. Next slide. So where are we now? We are Dual Listed in Oslo as well as on the New York Stock Exchange, giving us access to a significant pool of investors. Today, we have 13 rigs active and operating, extending from the strong success rate of tender awards in the second quarter. With the additional visibility we have today, we anticipate having up to 17 rigs working and generating revenue by the end of this year. Our operation with 13 rigs active is cash breakeven and provides us with a solid foundation to activate additional rigs from. This is enabled by a debt structure that has a low cash interest cost, so even with our net debt standing at $1.9 billion, the associated cash flow and therefore, all are very competitive. Next slide. From the status today, now going to what is next. On the operations side, we intend to continue to put rigs to work at accretive rates. With 17 active by year-end and based on our current tendering outlook, we estimate to have 23 rigs working by the end of 2022, resulting in a 100% utilization of the delivered fleet. Financially, we will continue to be focused on our cash flow going forward on one side, as this is key for our ability to continue to activate and mobilize new rigs; and secondly, we require the cash flow to refinance the debt, where the first maturities are currently in Q1 2023. We are exploring at the moment with some of our large debt holders how we best address that for our mutual benefit. Let me now hand it over to Magnus, who will discuss the financial highlights.

[Magnus Vaaler, Chief Financial Officer]

Thank you, Patrick. I will now walk you through the key financials of the second quarter 2021 and other highlights. Q2 2021 revenue increased by $6.4 million, up 13% in comparison to Q1. $4.4 million of the increase is from related party revenues which is variable earnings from our Mexico joint ventures. The remaining $2 million can be attributed to higher day rate earnings. In addition to increases in revenue, we also saw a decrease on rig operating and maintenance expenses for the second quarter, decreasing by $1.4 million or 3% from the previous quarter. General and admin expenses decreased by $3.9 million quarter-on-quarter to $7.9 million. The decrease is partially due to lower general corporate overhead costs in addition to lower legal fees as Q1 was impacted by amendments to our financing agreements. We believe that the G&A level for Q2 should be reflective of our expected run rate on corporate overhead costs going forward. The total financial expenses reflected a relatively low capital cost on the company's debt at an average interest rate of 4.7% year-to-date. Net loss for the quarter ended at $59.9 million, which is a $5.5 million increase from Q1 2021. The main reason for the negative development, the increase of $21.7 million comes from equity invested investments. This relates mainly to the performance of our integrated well services joint ventures in Mexico, which experienced substantial idle time in the quarter. Following quarter end, we have completed the sale of our stake in the Mexican Integrated Well Services JV and released $26.5 million in cash in connection with the sale. The exit of the IWS part of our Mexico operations should give a more streamlined operations in Mexico going forward. And additionally, recently, we have been seeing substantially improved cash collections from Pemex in our Mexico JVs. This should improve our collections from the joint ventures going forward. Adjusted EBITDA for the quarter was $3.7 million, improving by $14.4 million from Q1. This is a result of the mentioned improved operating revenue and the reduced costs. Our cash position at the end of Q2 was $32.4 million, a decrease of $16.6 million compared to Q1. The overall decrease is a result of cash used in operations of $10.9 million, which included interest paid of $13.7 million and a tax retention receipt of $5.4 million, and we have cash used in investing activities of $5.7 million, which includes activation and long-term maintenance costs of $4.9 million. Next slide, please. This slide shows you an overview of the employment of our Fleet. Year-to-date, the company has been awarded 28 new contracts, extensions, exercise options and LOAs arise, representing approximately 6,400 days and $542 million in revenue. This excludes any exercise option periods. The most recent update to our fleet over year is that we have entered into 2 previously not announced LOAs and LOIs for 2 rigs in West Africa for a total duration of 2 years plus options. The most likely rigs for these 2 contracts will be the Natt and the Frigg and the startup is at the end of this year. We're also progressing in negotiations for further contracts to be completed shortly. And based on these discussions, we expect to have 17 rigs operating at year-end 2021. This will see many of our long factories brought back to the market. The reactivation costs for these typically span from between $2 million to $4 million per week, substantially lower than the activation of a new build of a cold factory. Turning to the next slide. This slide gives a positive look at the cash generation of the company, years numbers of rigs working at different rate levels. We have highlighted that the 13 rigs that are currently operating, which shows we should be cash positive from operations at a day rate of average $80,000 per day. We've also highlighted the column showing 17 rigs, which is the number of rigs we expect to have working at the end of the year when taking into account our current visibility on negotiations and tenders. At an average rate of $80,000 per day, we should generate $50 million of incremental cash on an annual basis with the same cost assumptions. And with this, I would like to turn the call back to Patrick.

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Thank you, Magnus. Next slide. Looking at the overall market being driven by the amount of CapEx, our customers invest offshore, it is clear from the graph on the left that a significant increase in the amount of development well investment is anticipated. Even more important is what you can see on the right-hand graph, which is the year-on-year growth expected in shallow water wells. Clearly, the market segment Borr Drilling is operating in is set for growth. Data from IHS Markit estimate based on detailed reviews of drilling programs that the number of shallow water wells to be drilled will increase from around 1,675 in 2021 to approximately 2,000 in 2022. This 19% increase in activity is expected to create solid momentum to move daily rates going forward. Next slide. Global competitive jack-up rig utilization stood at 81% at the end of the quarter, an increase of 1 percentage points quarter-on-quarter and 3 percentage points since December 2020. The utilization for the modern jack-up fleet has increased at a faster pace since the beginning of this year, standing at 83% as of August 2021. Tendering activities have accelerated in recent months with several term programs and multiyear tenders ongoing. Based on these tenders, our active discussions with customers and third-party rig demand projections is anticipated that over 30 additional rigs will be contracted in the next quarters, particularly driven by national oil company or programs. Contracting activities have remained strong in the second quarter and continued its upward trend, with a total award of approximately 128 jack-up rig years in the second quarter, which is comparable to the pre-pandemic fourth quarter of 2019. The share of contracts awarded to Borr Drilling has significantly increased when comparing 2021 year-to-date to full year 2020, which can be seen on the graph on the right-hand side. Next slide, please. In conclusion, I would like to reemphasize some of the key points. Firstly, the market is moving and the macro environment is creating a unique set of opportunities for Borr Drilling. We have the right equipment that is currently being requested by our customers. Equity is strengthening. Currently, we are operating 13 rigs, and we expect to be able to announce in the coming weeks having up to 17 rigs working by year-end. Looking further out, based on the projections we have made related to which rigs and capabilities are required by which customers, we anticipate to have up to 23 rigs working by the end of 2022, leaving us sold out at that point. Our strong focus on cash flow has caused us to structurally improve our setup in Mexico while continuing to service the large volume of work we perform with our partners next. Based on continued collections and the reduced risk allocation, our new setup, we expect to maintain a cash-generating operation in Mexico. Together with our main creditors, we are working to construct a sustainable long-term capital structure. The incremental cash flows from operations are facilitating a much broader palette of financial options when it comes to optimizing our capital structure. We intend to update the market further on this in the current and the next quarter. And lastly, ladies and gentlemen, the environment is changing and exciting times are coming. Our modern assets in combination with our strong operational team, against a strengthening macro backdrop is providing an exciting opportunity going forward, and I hope you agree an interesting investment opportunity. Ladies and gentlemen, thank you very much. We will now go to Q&A.

[Operator]

[Operator Instructions] Our first question today comes from Vidar Torsøe of SB1 Markets.

[Vidar Torsøe]

Assuming the market appreciates in your commentary today, I just wanted to hear if you could expand on your utilization ambitions. You expect 17 rigs on contract by year-end and 23 by year-end '22. What can you offer us in terms of different investments? It would clearly be positive the cost of [indiscernible] able to deliver as promised, but investors are going to underwrite those kind of numbers without you providing some comfort.

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Yes, Vidar. So thank you for the question, and you're absolutely right. It is an exciting time, and things are changing significantly for us at this moment. One of the key things that we want to make sure that we get everybody on the call to understand is that we do have a lot of negotiations that are about to be terminating and contracts to be signed. And that is clearly -- for a rig to be working now at the end of this year, we clearly have to have a lot of confidence and need to have the contract practically at hand. And what we will be doing going forward is in the weeks to come, share with you the contracts as we sign them, as we get them fully firmed up to make sure that you can see a sufficient substance to the statements that we have made. And with that, we intend to be, very shortly, be able to give you a very clear picture on how we get to the 17. Going forward, getting from there to the 20 -- at the end of 2022, is purely based on the tenders that we are working on at this moment that if we were to win as much as we tender, we practically could not service all the requests that we have at this moment. So from that -- and clearly, going out into '22, where the commercial aspects are still much more fluid and therefore, I wouldn't want to give you too much information on which customer and where it is. But I can tell you that based on the information that we share in the following weeks, the 17 you'll see coming. And from their building on to the 22, is something that is happening in, practically all the operating areas where we are doing some additional work, clearly more work in West Africa. Some of it in the Middle East where you might be aware -- might have been aware that quite a few larger tenders are being exercised at this moment, and there is additional work in Asia. And I would say that even on all of those, in addition to that, we have more work opportunities in Mexico as well. So I would say it is not concentrated in one particular area, it is across the board. The 17 we'll be sharing with you shortly. And the 22, we will keep you updated as the quarters progress, so you can see that there is sufficient substance behind the news that we're sharing with you today. I hope that answers your questions, and I hope you -- and I can -- from a commercial point of view, I can't give you all the details yet on stuff that is further in the future.

[Vidar Torsøe]

I appreciate that, Patrick. And unfortunately, I understand you can't share all the details, although I would love to get them. As a follow-up, could you share some thoughts on how you see the margins in the different regions? Like there was a jack-up in North Africa, second a higher cash flow than a jack-up in Southeast Asia, and how does that stack up to the North Sea? In other words, where do you find them most attractive regions on a per unit basis in this? Some color would be greatly appreciated.

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Yes. I think that one of the things that we haven't touched on, and I'll bring it back a little bit later is some of the things around cost inflation. But let's first talk a little bit about the top line and the day rates in the different areas. I would expect to see a gradual increase as we would expect to see with the utilization going up and less units being available. I would say that there is going to be very decent rates in West Africa and North Sea, competitive environment in the Middle East and Asia. Might be slightly different than -- might be lagging a little bit on that. Obviously, it depends a little bit which customer you're talking about and what level of equipment is required for their particular operation. So I would say that is a little bit on how we see it at this moment. One of the things that we have to be clear about that it is getting harder and harder to man the rigs as quick and effective as we would want. And this obviously goes hand in hand with no cost to it. So right now, we have been able to very well handle this. But this is an industry issue that we'll have to be dealing with. Traditionally, some of the operating costs in the far are very well managed and therefore, you would be able to make in many cases, very good money with significant lower day rates. I think that, that is something that we have to see going forward how it develops. But I think that it is fair to say that the industry is going to see some cost inflation, which is part of the reason why some of the cost increases that we have to push further towards our customers as well. So it is not purely a land rep based on the commercial actions here in the market, it is purely a necessity for the cost increases that we see. How that gives you a bit of an idea of how we see the top line and the cost kind of develop here over the next 4, 5 quarters.

[Vidar Torsøe]

Great Patrick, and I appreciate that and comment on cost front as well. On the concentration at possible solution will be to acquire some older rigs and with your put back to on to your model mix just a suggestion from my side.

[Operator]

Our next question today comes from Fredrik Stene from Clarksons Platou Securities.

[Fredrik Stene, Research Analyst]

Fredrik here. Congrats on the new quarter. I wanted to follow up on one of Vidar's question here around your contracting and ambitions. And having 23 rigs working by 2022. If that happens, that would be great, and it seems like there is a solid pipeline to work here also in regions that you're not necessarily present in at this moment. But these rigs, I guess, would have some CapEx tied to them to really activate them properly. So I was wondering how you're thinking about your liquidity through -- from now until 2022. And then I guess, Pemex receivables and all that, that's a part of that question. We can do that separately afterwards. But in terms of contract structures and how these discussions are with your -- or the clients that you have -- are talking to at this point, do you think lump sum upfront payments, things like that, would be possible to help you manage your liquidity position over the next year, if this comes through with the rigs working?

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Yes. So Fredrik, I think it's a very easy question. Clearly, what we have is, and this was mentioned by Magnus already, there is 5 rigs that we can put to work with relatively low amount of CapEx that we don't see much issue there. These are rigs that have been previously activated. So from that, it would be very relatively easy and cost effective to do that. To do 5 more than that, so really the ones that we would be working with come next year, is something that would require more of an activation as these are, in general, new builds that will come from the shipyards where their first job is going to be some of the contracts that we are bidding them on right now. So there is indeed a requirement to activate, which has a certain cost that is certainly more than the activation of a warm-stacked rig. But at the same time, I would say, keep also in mind that, that activation is in practically every case, significantly less than one, what it would cost to some of our competition to take a rig that has been cold-stacked for several years, either back to operation. So even though there is a cost element in it, I think we're still, from a competitive point of view, extremely well placed in that particular aspect. The other point on that is that clearly, in order to properly start looking at the activation itself, we need to make that part of some of the commercial proposal that we make to our customers. How we do that, I'll leave in the middle for obvious reasons. But there are structures, as you were mentioning, in which you could say that you could have a larger mobilization fleet that allows you to more -- from a more effective point of view, particularly when it comes to cash, to activate rigs that are coming from the yard. And I think that the other thing that maybe you have to keep in mind, that there are opportunities for us to maybe in areas as well represent as maybe others that we could be very well partnering with some of the players in the market to be doing some of the activation mobilization, future operation together, in which way we are really taking the best of both worlds, taking the best of new very purpose-built assets and others that might have a very good client relationship or local knowledge or a significant local content advantage that we might not have. It certainly doesn't exclude us from those markets. It is actually a very extremely competitive advantage for us to have the equipment and being able to work with others is the ultimate customer, which is what we want to do. So I hope that gives you a bit of an idea how we see the funding of it that we have 5 that are relatively easy to put in the market. We have 5 that are requiring an activation that is, in general, significantly less than bringing a cold-stacked rig back. And I think with that, we have a fairly decent plan. How we, from a commercial aspect, dealing with our partners and customers, how we can do that without being a complete drain of the cash reserves that we have.

[Fredrik Stene, Research Analyst]

That's very helpful, Patrick. And on your cash reserves when I was trying to untangle the report here earlier, you finished the structure -- or not restructuring, but the new setup of the JVs now in August and you got the payment related to that of $6.5 million, I think, net and then you had some $30-ish outstanding from those JVs at quarter end. So I was just -- can you help me just get an idea of exactly what's outstanding at this point now that, that transaction is done.

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Yes. So maybe, Fredrik, let me pass this to Magnus. I mean, first, just to kind of -- on your comment of trying to untangle the report, you are right that the Mexican organization and the way that, that impacts our cash has been a bit complex, and that's why we're quite happy to, going forward, have that separate and taken out from our operation, where we only have a very clean 2 joint ventures left. But to build a bridge to have let Magnus give you a few comments regarding the cash on Mexico specific.

[Magnus Vaaler, Chief Financial Officer]

Fredrik, I guess, what you see on the balance sheet today, on our balance sheet, is approximately $30 million of related party receivables, which is basically as some of their boat revenues that we have recorded in the past and also other prepayments that we have done. So some of that balance will go down after Q3 or after this settlement because part of the $26.5 million were related to that balance. But the exact amount you will see in the next report that we send out. So going forward, what you can expect from Mexico will be more related to the general bareboat settlements from the drilling JVs to Borr. And without any on our side to having to integrated well services JV, which is the main reason why we wanted to streamline or to simplify the Mexico operations. So our operations will be only linked to providing the drilling services. And for that, we should receive bareboat revenues from the JVs going forward.

[Fredrik Stene, Research Analyst]

Okay. And just a super quick question before I get back in the queue. Will -- since you're now owning 51%, will they be fully consolidated and you adjusted for it on the minority side? Or will it be associated?

[Magnus Vaaler, Chief Financial Officer]

That's something we have to work with our auditors to decide whether we can consolidate. They're not ongoing at the moment.

[Operator]

[Operator Instructions] We have a follow-up from Fredrik. Your line has been reopened.

[Fredrik Stene, Research Analyst]

Yes. Again, I'm taking final chance here on your comments about your debt discussions. Do you have any color that you can share at this point? Is it extensions or in any way help us understand more than what you've written and/or commented during the conference, too early to say or share at this point?

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Yes, Fredrik, this is obviously and I fully agree with you that this is a discussion to have and where I'd love to share information with you at this moment, just to have an idea where we are at it. From a management point of view, it has been very much of getting the company cleaned up around Mexico, getting our rigs to work and getting our full focus on the marketing side and operations, what we have today. In the next few months, we will increasingly work with the creditors to sort out the debt's part of the equation as well. Clearly, with the debt that we have and the first maturities in the first quarter of '23 that requires a solution. And we are, at this moment, discussing with some of the creditors that we have, we best do that. We have a variety of creditors, some secured, some unsecured. And clearly, that requires a careful management of each of the constituents. Everybody is slightly different and requires a slightly different treatment. At the same time, what we're also trying to be very careful with, that we are not doing anything that is resulting in an unnecessary dilution of our shareholders. So we are trying to address all the stakeholders. I think that there are some ideas around how we resolved that. And I think that as this further is materializing, we will update you as we fully agree with you. It is the most important question to give you more information on. But quite frankly, at this moment, we are in the midst of discussions and the contents of working out the concept on how we do it. There are some good ideas on the table. And once we have the buy-in from the creditors and the full support of the whole creditor group, we will be communicating that with you. But trust assured that it is having the full management attention at this moment. And that's probably all that I can tell you.

[Fredrik Stene, Research Analyst]

Yes, I didn't expect too much, Patrick, in situation like this, but I appreciate the comment, nonetheless.

[Operator]

We have also received a follow-up from Vidar from SB1.

[Vidar Torsøe]

Just want to do a last follow-up here on the Frigg's. The reactivation for that contract activation CapEx is it too big? Or could you say you will be able to recover the reactivation spend on that contract? Or if you will -- if you will require more follow-up work to be done.

[Magnus Vaaler, Chief Financial Officer]

On the fee income, I would say, we counted on in the reactivation is spanning between $2 million to $4 million, where free goods maybe at the same level. So I would say that with this 1-year contract, it will definitely be paying back the activation in cost alone.

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Yes. And maybe this is a good point to give a little bit of comment on just contracts in general and the ones that we would be accepting. What we see at this moment is that particularly on some of the longer-term contracts that we are talking about, of 1 year or 1-year plus, is absolutely the day rates as such that we would want to be able to burn back the effective, particularly of warm-stacked rigs. It would not be a very interesting to be working on them if we were not able or have signed a fuller work that would be really part of the same release, so to say. So I think that the approach has been very clear. We're looking for work that is accretive. And I think on the contracts that we have mentioned to you today, certainly that would be in the cards to do that and earn it all back within the contract. And obviously, we work now to continue to create follow-up work for these rigs as they become available again. And as we -- as the market firms up further, I would hope that, that is going to be at ever increasing day rates. That would probably all that we would want to say on the Friggs specifically. Hanna, do we have any more questions?

[Operator]

We do not have any further questions. So I'll hand back to you both for any final remarks.

[Patrick Arnold Henk Schorn, Chief Executive Officer]

Very good. Then I would like to thank everybody for their attention. Clearly, it is a very exciting time to be working in this market. If you think about the times where Borr Drilling was really started, Borr really started for times in the industry that we are seeing coming back now, where clearly, there is a good demand for our equipment, ,day rates are going up, additional activity is being created. So it is very exciting. And as we go forward and we have information to share with you, which we clearly understand, there is an interest to be kept very much abreast of how we fare, we will do that at the earliest possible moment. And we'll stay in close touch to share with you the contract wins as they come along. So thank you very much for your attention, and we'll speak soon.

[Operator]

Thank you all for joining today's call. The conference is now completed and you may now disconnect your lines.