Borr Drilling Ltd

NYSE:BORR

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Borr Drilling Limited Third (sic) [ Fourth ] Quarter 2018 Results Conference Call. [Operator Instructions] I must advise you the call is recorded today on Thursday, 28th of February, 2019. And I would now like to hand over to your first speaker today, Mr. Magnus Vaaler. Please go ahead.

[Magnus Vaaler]

Hello, and welcome to Borr Drilling Limited's Fourth Quarter 2018 Results Presentation. The speakers on the call today will be Svend Anton Maier, CEO; and Rune Magnus Lundetrae, CFO and Deputy CEO of Borr Drilling Limited.Please remember that our discussion and comments today may include forward-looking statements that 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 these forward-looking information. Today's call will consist of some highlights from the quarter, financials, market views and company outlook. We will then open up for participants to ask questions in a 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, to Borr Drilling Limited's Fourth Quarter 2018 Results Presentation. Today, we will give you a summary of the results for the fourth quarter and updates about our rigs and operations, and lastly, our view on the market and outlook.Firstly, I will go through the highlights of the quarter and subsequent events. The operating revenues in the fourth quarter were $53.5 million. EBITDA was negative with $18.7 million, and net loss was $110.7 million. For the full 12 months of the year, operating revenues were $164.9 million, EBITDA was negative, with $65.8 million and net loss was $190.9 million. In the fourth quarter, we had a backlog of 108 months, which has a total estimated revenue of $257 million. We were very pleased to report a technical utilization as high as 99.6% in the fourth quarter. In October 2018, we took delivery of the 8th newbuild from PPL, the Natt. In the quarter, we realized $16.1 million in cash proceeds from sale of forward contracts in listed offshore drilling companies. We entered into a new position in [ Rowan and Ensco ], and due to negative developments in the share price, we had to record a mark-to-market loss on the position of $32.2 million in the fourth quarter. The market value of securities portfolio has increased by $24 million since the balance sheet date. Lastly, we also secured a new combined revolving credit and guarantee facility with 2 international banks in the amount of $160 million in the first quarter 2019.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. So in the fourth quarter, Borr Drilling generated EBITDA of a negative $18.7 million and a net loss of $110.7 million for the fourth quarter of 2018. Operating revenues were $53.5 million in the quarter and $164.9 million for the year. On average, 8.6 rigs were operating in the fourth quarter. The Mist and the Prospector 1 entered into operation in the quarter, while L1112 was sold at the end of the third quarter and had no trading days during the fourth quarter. Gain on disposals in the fourth quarter of $1.3 million relates to the sale of the standard jack-up, L1112. Rig operating and maintenance expenses were $59.5 million in the fourth quarter and $180.1 million for the year. This includes both operating and stacked rigs. OpEx for the operating rigs only was $25 million. The increase from previous -- from the previous quarter relates to certain one-offs, such as $4.6 million in PIT tax accrual that we did in Q3, which was not repeated in the fourth quarter of 2018; some incremental costs related to software licenses of $2.2 million; and higher operating expenses related to the contract preparation, mobilization and startup of operations for the Mist in the fourth quarter 2018. Ordinary depreciation for the quarter was $23.8 million, and the increase from the third quarter is mainly related to the delivery of the newbuild rigs, Natt from PPL. Amortization of contract backlog of $8.5 million relates to the contract backlog acquired as part of the Paragon acquisition. A total of $24.2 million of noncash amortization have been charged to the statement of operation in 2018. The remaining $20 million will be charged over the remaining contract period for the Paragon rigs in 2019. G&A was $10.8 million in the fourth quarter and includes $1.4 million of noncash share option costs. Restructuring costs was $3.2 million in the third -- sorry, in the fourth quarter. As part of the integration of Paragon into Borr, we have vacated office space with remaining lease obligations. Accounting standards say when you do this, you take the charge for the remaining lease straightaway instead of over the rest of the lease term. The company does not expect any further charges related -- relating to the Paragon offices. Net financial items were negative with $59.2 million. These relate mainly to mark-to-market loss on forward contracts of $32.2 million, mark-to-market loss on the call spread derivative related to the convertible bond of $16.9 million, and lastly, gross interest expenses of $14.8 million, offset by capitalized interest of $6.3 million. Based on signed contracts, the company expects to have a positive cash from operations from the end of the second quarter of 2019. Moving over to the balance sheet. Total assets increased by $123.2 million compared to September 30, 2018, primarily as a result of the delivery of 1 new building from PPL shipyard in the quarter, in addition to CapEx on activations and reactivations for 4 rigs. Total liabilities were $1,380,200,000 for end of December 2018.[Audio Gap]financing for the new building, Natt; $100 million drawdown on the revolving credit facility with DNB; $35.1 million liability related to unrealized loss on forward contracts; increase in accrued expenses and other current liabilities. At the end of the fourth quarter, the company had $97.9 million of available liquidity, which includes $70 million under its revolving credit facility. This company has, subsequent to the quarter end, entered into a combined revolving credit facility and guarantee facility in a total amount of $160 million. The company also has received an indicative term sheet for long-term financing in the amount of $500 million, which we expect to enter into within the year and will replace the 2 RCFs that is currently in place. The company expects this $500 million facility, in addition to its already secured yard financing, to secure the remaining payments on newbuild deliveries and planned activations for its newbuild rigs. With that, I bring -- I turn over to Svend for the rest of it.

[Svend Anton Maier, Chief Executive Officer]

Thank you, Rune. I would like to start by providing a short update on Borr's fleet and contracting development since our last call. From there, I will guide you through some of the industry fundamentals which have continued to improve during the quarter, confirming our view that the recovery continues to play out in the jack-up market. I would like to start by providing an update on our operational performance. During the fourth quarter, our operating fleet has achieved a strong technical utilization of 99.6%. This continues the trend on yet another improvement in utilization quarter-on-quarter. To note some of the operational achievements in the quarter, I would like to refer to the Prospector 5, which has successfully delivered a challenging high-pressure, high-temperature well [ with Nexen ] in the U.K. In the mature basins, like the North Sea, consistent and strong operational performance are key aspects to ensure our customers can deliver wells in an economical manner. In Southeast Asia, I would like to highlight the campaign performed by the Mist and its crew in Thailand. In the fourth quarter, the rig was awarded a contract with Kris Energy for a multiwell program offshore Thailand. Following the hand off of the rig from its previous owner and a short shipyard visit, the contract commenced in November 2018. In terms of contracts, the fourth quarter was very active for Borr. In total, all secured 6 new contracts and 5 extensions, adding an incremental backlog of approximately 108 months and $257 million in dayrate revenues. This number is excluding mobilization revenues. Among these contracts are included, the Gerd and the Groa contracted with ExxonMobil in Nigeria; the Natt, contracted with First E&P in Nigeria; the Mist, contracted with Kris Energy in Thailand; and the Norve, contracted with BW Energy in Gabon.Details of these contracts have been provided previously in our third quarter report and subsequent events. Furthermore, during the fourth quarter, the following additional contract and extension were signed. In the North Sea, the standard jack-up, C20051, had 2 offshore wells exercised by Total. With this additional program, the rig is now expected to conclude its contracts in early March 2019. Borr remains in active discussions with customers regarding future work for the rig. However, due to the potential delays to some of these prospects, we continue to evaluate alternatives for the unit, which may include divestments in line with the company's strategy and focus on modern assets.The semisubmersible MSS1 has secured an extension with TAQA for 4 workable wells, anticipates to take approximately 60 days. This extension was secured at an increased rate and is expected to keep the MSS1 contracted until late 2019. The MSS1 contract includes optional wells, and we remain in active discussions with the customers about further work. Additionally, we continue to experience high demand on this rig class in the North Sea and remain positive about future employment opportunities at increased rates. In addition to these extension, the Prospector 5 has now received an LOI for approximately a 6-month program in the North Sea. We expect this LOI to be converted into a firm contract in the coming weeks and further details will be provided at certain points.In West Africa, the Frigg had its contract extended for an additional period of approximately 10 months. The rig will continue to operate with Total until April 2019, and subsequently, will operate for Shell under an assignment that should maintain the rig contract until October 2019. The Frigg contract with Total was one of the very first contracts Borr signed in 2017, and we are very pleased to see that this extension materializing with super-majors such as Total and Shell.On the Norve, subsequent to the year end, Borr has terminated a 60-day contract with RoyalGate Energy, which was announced in the third quarter 2018 report. However, Borr and RoyalGate remains in dialogue for future contracts should conditions allow the customer to proceed with its program in the future. Following the completion of its current contract with Perenco, estimated during April, the rig will remain available until the commencement of its subsequent contract with BW Energy in June 2019. In Mexico, the Odin has secured approximately a 9-month contract with PanAmerican. In connection with this contract, the activation of the rig has been successfully completed in January and the rig is currently in transit to Mexico. And we expect the contract to commence in March. This contract was secured at attractive rates and includes a mobilization fee anticipated to offset our mobilization cost in full. This contract is an important milestone, and it represents Borr's first entrant into the Mexican market, where we remain positive of near-future growth opportunities. Further details about these contracts are provided in the next 2 slides and Borr's fleet status report issued earlier today. With these new contracts and LOI, Borr currently has a total of 14 units contracted and an active footprint in Southeast Asia, the Middle East, West Africa, the North Sea and in Mexico. Currently, 5 premium jack-ups are in the final stages of activation and mobilization ahead of their respective contracts. We see upside potential to our contract rig count as we progress into 2019 and continue to experience increased jack-ups tendering activities. We are particularly encouraged by strong demand for modern rigs, a segment that is already experiencing utilization levels above the 80% mark. Jack-up utilization levels have continued to improve during the quarter and stood at 78% at the end of December and currently at 79%. Consistent with the trend we have noted previously, this increase has been driven primarily by increased utilization of the modern jack-up fleet that stood at 81% at the end of the quarter and currently at 82%. This represents an increase of 3 percent points quarter-on-quarter and 13 since trough levels. The continued increase in utilization levels supports our view that the recovery is well underway, particularly for modern jack-ups. In the standard jack-up space, utilization level retracted 0.5 percentage points in the fourth quarter and has increased slightly in 2019 year to date. However, we would like to point out that this increase has mainly been driven by retirement of units, the competitive fleets. This is a trend we expect to continue, considering the large number of all the units currently stacked and the high cost of bringing them back to the active fleet.Operators continue to demonstrate their preference for modern rigs, and several of the ongoing tenders Borr is participating, our customers have introduced age restrictions that limits the ability of drilling contractor to offer older units. In other cases, while there may not be an explicit age restriction, certain technical requirements of the customers results in a similar effect. These requirements may include, for example, hook loads, cantilever reach, BOP specification or recommendation size and standards. Strong tendering levels and customers' preference for modern rigs continue to point towards tightening market in this segment. We will cover this topic in more details in the coming slides. Utilization level for modern rigs have approached or exceeded the 90% mark in several key jack-up regions, such as North Sea, Middle East and West Africa. Broadly, the increase in utilization levels continue to improve drilling contract pricing power, a trend that should continue during 2019. Particularly in the modern jack-up segment, we anticipate several multiyear and multi-rig tenders to be concluded in the coming months. This includes tenders in Mexico, Qatar, Kuwait, Malaysia and Thailand. That together should result in an incremental jack-up demand of over 40 rigs. We note that several of these tenders include a restrictive age band, which effectively blocks units before 2010 from participating. Additionally, requirements of BOP capabilities, cantilever reach, crane capacity, water depth, further limits the availability of suitable units. Moving into a brief regional summary. In the North Sea, all modern units except one are either operating or have further contracts. In this healthy environment, we continue to see contractors' pricing power increase. As anticipated during our last quarterly call, contracting activities have experienced a seasonal slowdown over the winter. However, the number of outstanding and anticipated tenders for Q2 2019 and onwards continue to point towards strong utilization and increasing rates for 2019. On another positive note, I would like to highlight that we have recently secured an LOI for the Prospector 5 which should be returning to work in April. This scope is expected to maintain the rig contracted until around October 2019, leaving it well positioned to compete for further work at attractive rates. In West Africa, all 10 marketed modern rigs are contracted. This quarter-on-quarter increase in the rig count is a result of the mobilization of the Gerd and the Natt into the region ahead of their respective multiyear contract with Exxon and First E&P. In March, the premium jack-up, Groa, which started mobilization from Singapore to Nigeria, increasing the count for 1 additional rig. We anticipate rig demand to stay relatively steady in West Africa during 2019, with upside potential in Nigeria and other short-term work in countries such as Gabon, Congo, and Cameroon. In the Middle East, contracting activities were very strong in the fourth quarter, led by multiple awards from Aramco and ADNOC. Several tenders in the region remain outstanding and should be nearing conclusion in the coming months. That includes preliminary requirements in Qatar, Kuwait and Saudi Arabia. On the back these tenders, we anticipate that contract activities in the region will remain strong in 2019. In Qatar, Qatar Gas continues to evaluate offers received under the tender launched in 2018 for up to 9 rigs. As indicated in several industry reports, this program includes some technical challenging wells, requiring modern and highly capable units. Our fleet's capabilities are of great match to the customer requirements, and we remain optimistic about these prospects. In Kuwait, KOC continues to progress its tender for 2 heavy-duty jack-ups for exploration work under an IPM model. Latest update suggests that this tender should be nearing conclusion. The unique technical requirements of the customer and the limited availability of capable rigs is expected to result in a commercial, favorable award. In Saudi, Aramco has awarded several contracts in the fourth quarter, representing preliminary, primarily extensions of incumbent rigs. Contracted rig count has remained steady. However, we continue to see potential for increase in 2019, particularly related to the exploration efforts in the Red Sea. In Southeast Asia, tendering activity remains at healthy levels, and we anticipate that the pace of awards to accelerate in 2019, particularly driven by Malaysia. Malaysia remains as the most promising spot in the region, indication from Petronas and other IOCs points towards an increase to contract fleet up to 9 rigs in 2019. As regional drilling contractors continue to experience high utilization levels, we anticipate that this will generate opportunities for international contractors. We note rig tenders in Malaysia are generally short-term work, and the high contract rollover rate in the region may result in a slower recovery in dayrates. In Thailand, the government concluded the award of a certain offshore concession to PTTEP. We believe this should provide both PTTEP and Chevron further clarity of their future requirements and allow them to proceed with their respective rig tenders. We continue to watch Thailand closely as some of those units have unique features to meet the operators' needs. Lastly, Mexico, where Pemex continued to surprise the market with its commitment to reverse the sharp decline in production over the last several years. Although some recent announcement of production increase goals by the government, Pemex have launched a set of tenders to cover their requirements to drill over 70 wells in the next 2 years. These tenders are expected to result in an incremental demand of 15 modern jack-ups. We are encouraged to see that Pemex remains committed to its plan and has progressed timely with awards under the first tender a few weeks ago. It is anticipated that an award for the second tender should be announced in the coming days. Our premium jack-up fleet includes 5 units built to meet the requirements of Pemex, and our fleet capabilities and strategic alliance places Borr in a unique position to compete for this work and meet the customer's requirements. Additionally, we note that the tightening of the market has led to lack of rig availability among incumbent drilling contractors. Some of these have approached Borr Drilling with offers, both bareboat structure and purchase options. Both bareboat and purchase option have been an attract -- at attractive levels, and the company is actively evaluating its options. This creates an opportunity to sell assets at a significant premium to cover Borr share price valuation and opportunistically use proceeds to redeem shares. Since the late part of December, Brent oil prices has increased from its low point of $51 per barrel to current levels of around $65 per barrel and has consistently remained above $60 per barrel during this period. Based on our discussions with the customers, we do not expect that this recent volatility will result in any meaningful revision of their 2019 shallow water programs and expenditures. According to studies by [ Vista Energy ], around 90% -- 96% of the world CapEx plan for shallow water projects in 2019 and 2020 relates to fields with a breakeven oil price of $60 per barrel or lower, with its vast majority at $48 per barrel and lower. Decreasing production levels, completed with the strong cash flow in 2018, has started to lead towards increasing CapEx projection for this year. Based on budgets by independent oil companies reported in Q4 and so far in 2019, offshore focus and E&P companies are guiding for an increase in CapEx for more than 10%. In addition, we expect national oil companies spending for us to continue to increase. These factors are likely to lead to a situation where 2019 will be the first year since 2013 with an increase of offshore spending. As in experienced previous upturns, operators have usually underestimated year-on-year CapEx growth. We see certain fundamentals indicating that history will repeat itself. During 2018, we have experienced a sharp increase in tendering activity. Currently, as reported by IHS, there are over 70 outstanding jack-up tenders equating to a total of 101 rig years or more. We note that these figures do not include the ongoing and future tenders by Pemex in 2019 discussed earlier. Currently, there are approximately 32 uncontracted jack-ups built in 2010 or after, out of which, we estimate only around 25 are being actively marketed. We note that 10 of the available units are owned by Borr. The successful conclusion of the ongoing tenders is expected to result in a very tight market for premium jack-ups built after 2010. Borr is participating most of these tenders, and we remain positive about our competitive position. Considering these requirements, projections by Fearnley indicate that the number of contracted premium rigs could be increased by over 40 units during 2019, leading into a tight market, particular for rigs built in 2010 and after. As utilization levels and pricing power are directly related, premium jack-up rate have been meaningful -- has seen meaningful appreciation in 2008 (sic) [ 2018 ] and experienced by Borr in our last fixture. We expect this trend to continue in 2019 and into 2020 globally, although at different pace and timing across the region. So to sum up, we remain very proud of the company's developments since its inception around 26 months ago. In this period, Borr has grown from 0 to 14 rigs contracted in 5 different continents. This is a strong testament to Borr's operational and safety culture and its position as a premium international drilling contractor. In addition, we are bidding on several existing tenders at the moment and we are optimistic that we will have a major part of our open market capacity contracted out at an attractive dayrate level before year end 2019. With the recent indication received from long-term financing of USD 500 million, coupled with our prediction of being cash flow positive from operations by the end of the second quarter this year, we strongly believe that we have a very solid base going into the year and continuing building our company. I would, with this, like to turn the call back to the operator and open up for questions.

[Operator]

[Operator Instructions] And your first question today comes from the line of Gregory Lewis from BTIG.

[Gregory Robert Lewis, Managing Director]

Clearly, there's been some positive developments in jack-up with tendering, you did a great job of presenting that. But so just as we look at 2019, the contracted fleet or the active fleet you're marketing, there's definitely some white space out there. How should we think about, as some of these rigs rolling off contract in '19, should we be thinking that there's going to be continuations as they roll off? Or should we be thinking maybe there's going to be maybe a quarter of down time in between new work?

[Svend Anton Maier, Chief Executive Officer]

I see -- as I said in my presentation, with the tightening markets, I believe that warm rigs rolling off contract are extremely attractive. So I'm very optimistic that these will roll over indirectly continuation with new contracts going forward.

[Gregory Robert Lewis, Managing Director]

Okay, okay, great. And then just, I wanted to touch on -- you mentioned the potential for asset sales and bareboat -- or bareboats. I mean, how should we think about this? Is this something where we're going to see maybe, like, some sale and leasebacks, where the rigs are sold with purchase options? Or are these sort of outright sales? Or maybe the company will just then operate the vessel as a manager?

[Rune Magnus Lundetrae, Deputy CEO & CFO]

I think there have been a few instances where we have been approached by the companies who lack rigs but want to compete for the contracts. And we've asked them what kind of level are we talking about in terms of what they would be willing to pay. And our observation and what we have experienced then, is that they are willing to pay significantly above our latest rig purchases, which was the capital lead from May last year. And also then, it's significantly above what the implied value is of our rigs in the share price today. So I think it's just, for us, another sign of this market turnaround actually happening and asset prices are also moving up from the level we have seen in the previous few years.

[Operator]

Your next question comes from the line of Lukas Daul, ABG.

[Lukas Daul, Analyst]

You mentioned the mobilization fee being included in some of your contracts. And I was wondering, with regard to the new one that you are bidding on, is that a standard feature that you are sort of introducing in the bids that you are handing in? Or is that just the portion of contracts that you are bidding on, where you have the opportunity to be that, I would say, demanding?

[Svend Anton Maier, Chief Executive Officer]

At the moment, the answer to that is yes. We have done our first mobilization to Mexico, as I mentioned in there, where we have our mobilization covered at full. And the trend is definitely pointing in the direction that mobilizations are back on the table again. So that's -- it's very positive. So the answer to that is yes.

[Lukas Daul, Analyst]

Okay. And then when you talk about the outstanding tenders and the availability of young rigs, I mean, the math adds up to the fact that they are going to disappear within the course of the next 12 to 18 months. So my question really is, what do you think happens after that? Is the threshold for age going to be lowered? Are the oil companies stop tendering because the right assets won't be available? Obviously, they would need to have to pay up.

[Svend Anton Maier, Chief Executive Officer]

I think first of all, if the rigs are not available and we're sold out, then of course, we know that dayrates are going to be high and oil companies will then have to make their own decision of what is the way forward to secure capacity. It's hard for me to answer on their strategy when it come to that point, but at the moment, I still believe that once they are potentially -- we are sold out, or the new fleet is sold out, then they will have to definitely think differently and do something else.

[Lukas Daul, Analyst]

And in the context of that, are you sort of looking to put your whole fleet to work? Or do you maybe want to save some, I would say, dry gunpowder, to wait for the right -- to maybe move significantly up?

[Svend Anton Maier, Chief Executive Officer]

Like I said before, we are disciplined and we look at the best opportunities, so definitely a combination. We would like to be strategic and disciplined in our contracting.

[Operator]

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

[Lillian Starke, Research Associate]

I just had 2 questions. The first one is regarding on the supply side of jack-ups, we've seen some transactions taking place from jack-ups staying in the shipyards in China. I was wondering, what's your view on -- as demand starts to improve, and as you point out, tendering is improving, what's the risk that we will see more of these Chinese jack-ups hit the market? And whether there's a risk on your outlook on the back of that?

[Svend Anton Maier, Chief Executive Officer]

We have these Chinese jack-up, yes, they are available. But some of these rigs built in China will have to be taken to a shipyard and $20 million, $30 million have to be invested in them before they will be competitive. So I still think there's a long way for these to come out.

[Lillian Starke, Research Associate]

Okay. And then I just had a second question, if I may. You mentioned on your outlook that you expect to be cash flow -- operating cash flow positive by the second quarter. I was just wondering if this includes any additional contract that you think will be required. Or it's with the current contracts that you have in place, do you expect to reach this target?

[Rune Magnus Lundetrae, Deputy CEO & CFO]

It's with the firm contracts we have announced already. So it doesn't include any of the tendering processes we are involved in at the moment.

[Operator]

[Operator Instructions] Your next question comes from the line of [ Siki Medina ] from [ Saint Paul ].

[Unknown Analyst]

Can you please remind us about the rationale for investing in pure company equities? You mentioned some forward trades at the beginning of the call.

[Rune Magnus Lundetrae, Deputy CEO & CFO]

I mean, when we see -- when we think we see some deep value and some strategic opportunities, we have invested some in other securities. It's not more complicated than that. I think we've been reasonably successful so far with net realized cash proceeds of some $40 million since the inception of the company. Having said that, they will never will be the core of what we're about, of course. And it will not be anything very material to us. But I think it's something we may do also going forward, but of course, we also recognize that we were hit by the drop in the oil service stocks at the end of last year.

[Unknown Analyst]

Okay, so as the company grows, the percentage that this will have on the balance sheet is going to decline, is what you're suggesting, yes?

[Rune Magnus Lundetrae, Deputy CEO & CFO]

I think that's reasonable to expect, yes. I don't think that the percentage will grow with the rest of the company necessarily. I think that's a fair assumption.

[Operator]

Thank you we have no further questions. Sir, if you wish to continue.

[Magnus Vaaler]

All right. And that concludes the Fourth Quarter 2018 Earnings Call for Borr Drilling. And we would like to thank everyone for listening in. Have a good evening.

[Operator]

Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you all for participating. And you may now disconnect.