Borr Drilling Ltd

NYSE:BORR

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Borr Drilling Limited Third Quarter 2018 Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Magnus Vaaler. Please go ahead, sir.

[Magnus Vaaler]

Thank you, and welcome to Borr Drilling Limited Third Quarter 2018 Results Presentation. The speakers on the call today will be the company's CEO, Svend Anton Maier; and Rune Magnus Lundetrae, the Deputy CFO and Chief Financial Officer of Borr Drilling Limited. Please remember that our discussions and comments today may include forward-looking statements. These involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. Please be referred to our earnings release that define forward-looking statements and our annual report of 2017 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 this forward-looking information. Today's call will consist of a company presentation followed by a Q&A session. And with this, I'll turn the call over to our CEO, Svend Anton Maier.

[Svend Anton Maier, Chief Executive Officer]

Thank you, and welcome, everyone, to Borr Drilling Limited Third Quarter 2018 Results Presentation. Today we will give you a summary of the results for the third quarter, an update of our rig and operations and lastly, an overview of the market outlook. Firstly, I will go into the highlights of the quarter and subsequent events. The operating revenues in the third quarter was $49.7 million. EBITDA was negative $10.3 million, and the net loss was $39.1 million. Since last reporting date, we have secured 6 new contracts, including 3 newbuilds, which add 88 months to our backlog. As of today, our backlog amounts to around $350 million. In addition to the new contracts entered into, 3 rigs have commenced its contracts since the second quarter report. We have realized total gains of $25 million from sale of forward contracts in a listed company in Q3 and Q4 2018 combined. We completed the sale of the standard jack-up, L1112, in October 2018, and the rig has been retired from the international jack-up fleet. We took delivery of 3 newbuilds from PPL Shipyard in July, September and October, and we have announced activation of 7 newbuilds and reactivation of 1 premium jack-up year-to-date. With this, I would like to turn the call over to Rune Magnus, who will guide us through the financial results of the quarter.

[Rune Magnus Lundetrae, Deputy CEO & CFO]

Thank you very much, Svend. And thanks for dialing in, everyone. Borr Drilling generated EBITDA of negative $10.3 million and a net loss of $39 million for the third quarter 2019. Operating revenues were $49.7 million in the third quarter. On average, 8.6 rigs were operating in the last quarter. We're also pleased to report a technical utilization for the operating rigs of 99.2%. This is an increase of 0.2% from the second quarter this year. Rig operating and maintenance expenses were $45.7 million in the third quarter. This includes both operating and stacked rigs. OpEx for the operating rigs only was $36.9 million. This includes $1.4 million in amortized mobilization costs. Ordinary depreciation for the quarter was $21.5 million. Amortization of contract backlog of $9.7 million relates to the contract backlog acquired as part of the Paragon acquisition. A total of $15.7 million of noncash amortization have been charged to the statement of operation year-to-date. An additional $28.7 million will be charged over the remaining contract period for the Paragon rigs. G&A was $9.7 million in the third quarter and includes $1.9 million in noncash option costs. Restructuring cost was $4.6 million in the third quarter. As part of the integration of Paragon into Borr, we have dedicated office space with remaining lease obligations. Accounting standard say when you do this, you take the charge for the remaining lease straightaway instead of over the rest of the lease term. Net financial items were positive with $4.5 million. The financial items relate mainly to the following: gain on forward contracts of $12.7 million in total, where $9.2 million was realized in the quarter and the remaining $3.5 million unrealized; interest expense, net of capitalized interest, was $5.2 million; negative fair value adjustment of $1.7 million on the call spread derivative related to the convertible bonds. Finally, there were other financial expenses of $1.4 million. Turning over to the balance sheet. Total assets increased by $138.3 million compared to June 30, primarily as a result of the delivery of the 2 newbuildings from PPL Shipyard in the quarter. Total liabilities were $1,138,500,000 from end of September and consist mainly of $174 million increase in long-term debt related to the delivery financing for the same newbuildings. At the end of the third quarter, the company had $210.6 million of available liquidity. This compares to $224 million at the end of the second quarter, which gives a cash burn rate of only $14 million in the quarter. In addition, the company have unencumbered assets comprising 8 premium rigs and 6 standard rigs, whereof 5 rigs are on contract. With that, I would like to turn the call back to Svend.

[Svend Anton Maier, Chief Executive Officer]

Thank you, Rune. Let me start by providing a short update on Borr's fleet development since our last call and our contracting success during the very active quarter. From there, I will guide you through some of the industry fundamentals, which have continued to improve during the quarter, providing further assurance that recovery continues to play out. Before we discuss our contracting developments, I wanted to take the opportunity to recognize the hard work of our onshore and offshore teams. During the third quarter, we have achieved a very strong technical utilization on our operating rigs, reaching 99.2%. In the fourth quarter so far, the figures are exceeding 99.5%, bringing our technical utilization since the acquisition of Paragon to 99.2%. It is worth to point out, during the third quarter, rigs C20051 and Prospector 5 commenced a contract with Perenco and Exxon, respectively. Through strong operational planning and execution, these rigs have complemented their maiden contracts with high technical utilization. This is a strong testament to the capabilities of Borr's organization and important to pave the way towards future contracts. Moving into the contracts. We are pleased to announce that we secured a total of 6 new contracts since our previous earnings report. Together, these new contracts represent an incremental backlog of approximately 88 months or slightly over 7 years. Starting in West Africa and specifically in Nigeria, newbuilds Gerd and Groa have secured 2-year contracts plus options each with ExxonMobil. These contracts are expected to commence between March and April 2019, and the activation of these units are well underway. Newbuild Natt has secured a 2-year-plus option with First E&P. This contract is expected to commence in April 2019. The Gerd, the Groa and the Natt are all Baker Marine 400 design. Once they commence operations in Nigeria, we are confident that our fleet size and standardization will provide the great efficiency, both in terms of cost and our ability to deliver top performance to our customers. Still in West Africa, the Norve has secured a 1-well contract with RoyalGate Energy. This contract will start in direct continuation to the rig's ongoing contract with Perenco and is anticipated to take 45 to 60 days. Further, in November, we have signed a 10-month contract with an undisclosed customer for operations in West Africa, which has previously been disclosed by Borr as an LOI. With these 2 firm contracts, the Norve should be effectively utilized in 2019 into 2020. In the North Sea, the Ran has secured an 11-month contract with Spirit Energy for work in the U.K. sector. This contract is expected to commence in April 2019, following the completion of the rig's reactivation. And last, in Southeast Asia, the Mist has secured a 5-well term plus 1-well option program with Kris Energy in Thailand. This contract has already commenced in early November, following the handover of the rig from Transocean to Borr and the short yard visits. Further details about these contracts are provided in the next 2 slides and Borr's fleet status report issued on our website today. These contracts rectify the decision taken by the board in the second quarter to start the activation of 3 newbuilds and the reactivation of the Ran. In anticipation of an increasing market demand, this early decision has allowed Borr to perform these activations in an effective manner. Following our success in securing firm contracts for these units, we have recently announced plans to commence the activation of 4 additional newbuilds, bringing it to total 8 rigs year-to-date. We strongly believe these contracts attest to Borr's ability to meet the stringent operational and safety requirements for some of the world's leading oil companies like Exxon. In the case of Spirit Energy, the contract for the Ran represents an expansion of our portfolio with this important customer.The B391 has been operating successfully with Spirit Energy since Q1 2018. We currently have 9 rigs operating and another 5 units with future contracts. In October, the rig L1112 completed its contract with ONGC and has since been divested. The net proceeds from the sale is approximately $2.2 million, resulting in a gain of $1.1 million. This is the 27th rig of divested and retired from international jack-up fleet by Borr and Paragon combined since beginning of the year. This brings Borr's total fleet to 1 semi and 35 jack-ups, out of which 29 rigs are premium. Our strong operational performance to date, modern fleet and future contract asset will continue to serve as the basis to support our vision of being the leading offshore drilling contractor. The 2 next slides are extracts from our updated fleet status report, which is available on our website from today. Jack-up utilization levels have continued to improve during the quarter and stood at 75% at the end of September and currently at 76%. This increase has been driven by increased utilization of modern jack-up fleet as it currently stands at 79%. This represents an increase of 2% points quarter-on-quarter and 10% since the bottom of the cycle. The continued increase in utilization levels support our view that a recovery is underway and particularly for the modern units. In the standard jack-up space, utilization has retracted slightly during the quarter, evidence operator prefers modern units and the increasing complexity of certain project that benefits rig with superior capabilities. We maintain our view that these trends should result in many of the approximate 100 uncontracted oil units to remain uncompetitive and never return to active fleet. Moving into Slide 10 and focusing in the most prominent jack-up regions. Utilization levels for modern rigs have now reached critical level in several regions such as the North Sea, Middle East and West Africa. Borr is currently present in all these 3 regions and in a good position to compete for current and future opportunities. We see that several of the international and regional competitors have sold out their fleet, and irrational behavior in terms of dayrates levels have all but vanished. High utilization in several market continue to improve drilling contracts pricing power. In the North Sea, all modern units, except one, are either operating or have future contracts. In this healthy environment, we see rates recovering an accelerated pace from previously lows in the 60s to recent fixtures, approaching and exceeding the 100 mark. We anticipate that this region may experience a seasonal slowdown over the winter, followed by a strong acceleration in contracting activities in Q2 2019. We remain optimistic about securing continued work for our premium rigs, the Prospector 1 and the Prospector 5, which are anticipated to become available between first and second quarter 2019. In West Africa, all 8 marketed modern rigs are contracted. This should result in an inflow of additional rigs into the region, as evidenced by Borr's contract on the Gerd, Groa and the Natt discussed earlier. We continue to see upside potential in the region with incremental multiyear tenders from major oil companies in Nigeria and short-term work in countries such as Gabon, Congo and Cameroon. Regarding the Frigg, we remain confident that our customer will exercise its option and maintain the rig occupied into 2019. With that, we expect to have 4 premium units operating simultaneously in Nigeria in 2019. Our presence places us in a strong position to contend for future work in country. In the Middle East, activity and tendering levels have remained robust with several multi-rig, multiyear opportunities across Saudi Arabia, Qatar, Kuwait and the UAE. In Saudi, Aramco continues to progress with the 8 outstanding tenders. In total, 22 rigs are due to roll off contract between 2018 and 2019, 14 of them being 30 years or older. We expect tenders to largely address renewal and replacement of these units. However, a few incremental requirements are expected, particularly related to the exploration efforts in the Red Sea. In the UAE, recent announcements indicate that ADNOC has concluded the 6-rig tender launched in 2017. Recent discussions indicate that ADNOC continues to evaluate additional awards under the same tender. We see these dayrates from this tender to reflecting on the depressed markets conditions from 2017 and the egress to distressed regional players to employ their assets. We do not believe such fixtures are representative of the current market and expect other outstanding requirements in the region to be awarded at considerably higher numbers. In Qatar, we are excited about the increased tendering activities, preliminarily driven by Qatar Gas. Qatar Gas aims to secure up to 9 rigs for long-term development programs in the North Dome. These are technically challenging wells requiring highly capable units, and we strongly believe our fleet of premium rigs are well positioned to contend. In Kuwait, KOC continues to progress its tender for 2 heavy-duty jack-ups for exploration work under the ITM model. We understand that KOC has accelerated its tender evaluation over the last couple of months, and an award could be expected by early 2019. In Southeast Asia, we have noted a significant increase in activities as measured through tenders, prequalification and now direct discussions with customers. Malaysia remains as the most promising spot in the near future, with several operators seeking to add rig capacity in 2019. As regional drilling contractors start to experience high utilization levels, we anticipate that this will generate opportunity for international contractors to enter such market but remain conservative in our future rate projections. In Thailand, the government enters now into final stages of evaluating the offers from Chevron and PTTEP for the renewal of their respective concession under the PSC regime. An award is expected by February 2019, at which point, we believe contracting activity in Thailand will accelerate. We'll watch Thailand closely as some of our units have unique features to meet the operator's needs. This includes the Mist that has recently started operations with Kris Energy in Thailand and should remain under contract until Q1 2019. Lastly, Mexico. We are optimistic about incremental rig requirements in 2019 and 2020. Currently, contracted jack-up rig count in Mexico stands at 19. This is the lowest level since 2002. As we will discuss details in the next slides, production levels and drilling activities have direct correlation. On the back of the recent public announcement made by the newly elected President regarding targets for production increase, we anticipate that 10 to 15 additional rigs will be required in the next 6 to 24 months. We will point out that 5 of the units were built to meet the specific requirements of Pemex belonging to Borr Drilling. As mentioned in our second quarter report, oil companies' free cash flow are at record high level. This is due to steady increase in oil price at the bottom and E&P oil price breakeven decreasing due to reduction in operating costs. Numbers from [ today's slide ] shows that 2018 free cash flow levels have not been higher since 1979 in real terms. At the same time, production is decreasing. So in order for oil companies to keep up their production and earnings, they need to increase CapEx spending. Also interesting to note, numbers from SEB E&P survey shows that during the last cycle in the beginning of 2000, oil companies constantly underestimated their actual spending growth. In 2005 and 2006, they spent more than 4x more that forecasted. The next slide is showing what is quite obvious. However, worth mentioning, if you don't drill, you don't get any oil. Saudi Arabia rig count is up more than 130% in 2010, and oil production is up nearly 50%. On the contrary, rig count in Mexico is down 63% in 2014, and oil production has collapsed, down 30%. In light of the indication from Mexico to increase their oil production by 600,000 barrels of oil in 2 years, this makes us very optimistic about the region. As pointed out in the regional update, 5 of the units were built to meet specific requirements of Pemex. I want to point out that tendering activity has seen a sharp increase since the second quarter. In November, according to the IHS Petrodata, there are approximately 120 rig years on offer and increased 106% compared to January 2018. Another positive data point is the increasing numbers of tenders aiming commencement date 12 months ahead and beyond. This indicates an increased sense of urgency from our customers to secure rig capacity. I would like to emphasize that most of these tenders are demands from NOCs or tenders initiated at a lower oil price environment. We do not believe that recent slippage in oil price will have significant impact on this demand. Out of the approximately 77 jack-up tenders outstanding, between 35 and 40 are understood to represent new rig demand. Considering a total delivered fleet of 467 jack-ups, these incremental requirements would represent up to 8% increase in global fleet utilization. As demonstrated by our recent contracting success, we are confident that Borr is well positioned to compete in several of these opportunities. We on numerous occasions mentioned that we will be patient in our contracting strategy and not take any, which will be loss-making or resulting in negative cash flow. We're very pleased with the levels we have achieved on our newly contracted rig and see that our strategy has paid off. We still have a strong balance sheet, a low acquisition cost, which means that we could continue to act rationally in our contracting going forward. Reflecting our confidence during Q3, we have announced our decision to commence the activation of additional 4 newbuilds. We also remain confident in our ability to secure firm contracts for these 4 units within the next 6 months at competitive rates. The confidence is a result of a strong fundamental we have outlined in this presentation and particularly, utilization levels for modern rigs approaching 80% and increasing customers' demand with currently over 70 outstanding tenders. Despite of the positive fundamentals reflected in our report, we anticipate the industry to continue to experience some volatility. This is a cyclic industry, and there will be some bumps on the way. We had a similar situation in early 2003 where oil price corrected sharply. This led to oil service stock falling 30% in a short period of time. If you had the stomach to sit through, you would have been handsomely rewarded with more than 300% return over the next 5 years. I'd like with this to turn the call back to the operator and open for questions.

[Operator]

[Operator Instructions] We'll now take our first question from Peter Testa, One Investments.

[Peter Testa, Analyst]

It's sort of a -- one 2-part question. If you look at the rigs, which are coming in now and the ones we know contracts are getting, could you give some comments and thoughts as to the degree to which your activated rigs are covering their mobilization cost on first contract? And then related, as you bring the next 4 rigs in and you look at some of the areas in which you're tendering, I'm thinking Qatar, for example, do you need to have activated rigs now to get these contracts at attractive dayrates to cover mobilization costs?

[Rune Magnus Lundetrae, Deputy CEO & CFO]

Yes, this is Rune. I can take the first part of the question, and Svend can finish off the second. I think on at least 2 -- no, 3 of the 5 contracts we announced lately, we will cover the activation in the first contracts.

[Peter Testa, Analyst]

I presume the 2 shorter ones are the exceptions?

[Rune Magnus Lundetrae, Deputy CEO & CFO]

Exactly, yes.

[Peter Testa, Analyst]

Yes, yes. And then the rest of the question on the -- yes, no, just on the second part, it was now as you've taken the decision to bring in 4 new rigs, I'm trying to think about to continue to get attractive contracts and be able to cover activation cost and get yourself into markets in which you want to be, the degree to which you really need to have these rigs activated for some of these contracts, I was thinking, for example, Qatar for the tender, would -- do the rigs need to be activated to be successful in that tender of those rates? Or to a degree to which you feel that you can start activating without having a specific contract area in mind.

[Svend Anton Maier, Chief Executive Officer]

Yes, I think we have started the reactivation on these rigs based on the market we see in general, and that goes for Africa, Qatar and any other place. But of course, with the commencement of these contracts, starting the reactivation in a controlled manner now is of course more efficient, both for getting it done properly and also for cost-wise. So it's a combination of things here, but the first rigs will commence early -- or late 2019, we believe. So there's still way -- lots of time left to be ready.

[Operator]

[Operator Instructions] We will now take our next question from Lukas Daul from ABG.

[Lukas Daul, Analyst]

Svend, I was wondering, obviously, in some of the markets, you talked about utilization going up and allowing you for maybe being a little bit more aggressive on the pricing or a little more demanding on the pricing. And I was wondering from your experience, do you think that is sort of a thing that will continue? Or is that improved pricing going to attract some additional competition, maybe from rigs that have been idle or that have been elsewhere? How do you see that playing out?

[Svend Anton Maier, Chief Executive Officer]

I think that if you look at what I've said about the utilization, I'm talking about modern and new fleet. That fleet is not that large, and therefore, I believe that these rigs will be specifically for the modern assets. Of course, there's a lot of stacked capacity, but I don't think any of that stacked capacity will be suitable for the jobs that we have been talking about here. So I think that market will tighten, and I think it's going to improve as we go forward.

[Lukas Daul, Analyst]

Okay. And on that note, when you look for contracts for the rigs that you are reactivating, how are you thinking in terms of duration? Is there a specific sort of duration you are targeting? Or is it just sort of a variation or a combination of duration just to get the rigs out and have them ready and positioned for the next job?

[Svend Anton Maier, Chief Executive Officer]

I think, Lukas, there's a combination. Of course, with these tenders that we're working on now, there is term and there is something in the back of it, of course, as well with options. If there are opportunities in certain areas that would make sense to reactivate a rig, if we can see clearly follow-up work, then we will make a decision to go or no go based on that.

[Operator]

[Operator Instructions] We'll take our next question from Peter Testa, One Investments.

[Peter Testa, Analyst]

I'm also wondering, as you bring the rigs out into the market, I'm thinking about your views on clustering and follow-up contracts. I mean if you look at Slide 7, you clearly got good, say, follow-up availability now in the North Sea. You've got good clustering in Nigeria, and you made the point as to the benefits. You've got one rig only in Southeast Asia. Thailand, you talked about potentially following up. Can you just talk a bit about how you also you think you can set up good clustering of available largely interchangeable units with staggered termination points of contracts so you can basically not only set yourself up being attributed into the market, but also set yourself up to be for repeat contracts and market positions that you can create? Whereas previously, I think they've been more just getting more activated, now it seems to be going into some sort of strategic activation. I was wondering if you could explain a bit more on that.

[Svend Anton Maier, Chief Executive Officer]

I mean look, if you take Qatar, it's very -- that's very strategic. That's an area where we believe we can have a proper clustering of identical assets to get to synergies of the identical asset sharing equipment, sharing personnel. So of course that's a very strategic place in the world. We believe that there's room for more in Nigeria in West Africa to do the same. And of course like you said, in Asia, at the moment, we have one rig, a shorter-term contract, which we strongly believe that we can do the same. We know that there is a need. I think we just need to find out when they conclude their production-sharing agreement in Asia, and you will see the same clustering of rigs in that part of the world. Now one part of the world I think is going to be looking very good if we -- it happens what we think and what we see and what's been said is that Mexico is also a tip, a part of the world where there's a rig need -- what we said, high rig need. And that's another area where we could cluster rigs and get the benefits of having a decent setup. So of course, that's very attractive to us, to cluster rigs in areas. Standalone operations are always a bit more expensive.

[Peter Testa, Analyst]

Right. But you've got, what, 8 more rigs that are warm-stacked and you've got 2 delivered next year. Do you think that, that flow can then follow into those named areas to really build out what would be essentially 5 clusters with good market -- is it marketable rig capacity? Is that what you expect to do? And do you expect to spread it more widely than that?

[Svend Anton Maier, Chief Executive Officer]

No, I think there will be one-offs, but we are very confident that we will definitely cluster rigs in the areas we mentioned going forward.

[Operator]

It appears there are no further questions at this time. I would like to turn it back to Magnus for any closing or additional remarks. Thank you.

[Magnus Vaaler]

I would like to thank everyone for dialing in. Goodbye.

[Operator]

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