Borr Drilling Ltd

NYSE:BORR

Earnings Call Transcript 2022-Q4

[Patrick Arnold Schorn, executive]

Good afternoon, and thank you for participating in the Borr Drilling Fourth Quarter 2022 Earnings Call. I'm Patrick Schorn, talking to you from London. And with me here today is Magnus Vaaler, our CFO. Next slide, please. First, covering the required disclaimers. 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, please. During the fourth quarter, we have successfully started operation with 2 rigs namely the Arabia I and II in Saudi, almost a full quarter of operation with Ran in Mexico and Thor fully operational fourth quarter in Malaysia. These efficiently executed activity increases with economic utilization levels over 98.5% resulted in our top line increasing 38% sequentially. With [ fleet ] -- currently being prepared for our operation in the Middle East, where [indiscernible] will start operation at the Arabia III in Q3 of this year. We're also activating our last rig the Hild to be ready to commence operations in a similar time frame.

This would result in all 22 delivered rigs in our fleet to be contracted and active. The earlier mentioned 38% top line increase resulted in an adjusted EBITDA of $55.1 million for the quarter, which means that for the full year 2022, our revenue was $447 million with $157 million of adjusted EBITDA. A result that I'm particularly pleased with and one that confirms the revenue and earnings trajectory that we have been signaling to the market earlier, which is an adjusted EBITDA of $360 million to $400 million for 2023 and a $580 million to $600 million, adjusted EBITDA level for 2024. Magnus will now step you through the details of the fourth quarter. Magnus. Go ahead.

[Magnus Vaaler, executive]

Thanks, Patrick. We're now on the slide key financial Q4 2022. Q4 2022 revenues were $148.6 million in the quarter, an increase of $40.7 million or 38% compared to Q3 2022. This will split between $117.2 million of day rate revenues for our rigs on regular contracts and $31.4 million of related party revenues, which was bareboat earnings from our Mexico joint ventures.

Rig operating and maintenance expenses for Q4 were $83.4 million, an increase of $23 million from Q3. The increase was mainly due to an increase in activity and operating days and a $7.3 million increase in amortization of deferred mobilization and contract preparation costs.

Total financial expenses net were $49.4 million for the fourth quarter, a decrease of $4.7 million, mainly as a result of a $4.3 million decrease in financing fees, a $3.4 million decrease in foreign exchange losses, and a $2.3 million decrease in yard cost cover as a result of the sale of Tivar, and this was offset by a $5.9 million loss on extinguishment of debt.

Net loss for the quarter was $21.3 million, a decrease in loss of $33.6 million from Q3. Adjusted EBITDA for the fourth quarter was $55.1 million, an increase of $11.2 million or 26% compared to the third quarter.

Our free cash position at the end of Q4 was $108 million, and our restricted cash was $10.5 million. Our cash movements in the quarter were primarily driven by cash generated from operating activities of $77.5 million, cash used on fixed asset additions, such as CapEx and activations of $38.7 million, and this was mainly driven by the activation of the Arabia I and II, starting their operations in Saudi and in Norve. And finally, cash used to repay debt of $355.5 million offset by cash proceeds of $150 million from the new DNB bank loan facility.

Also, total cash received from Mexico in the quarter were $76.3 million. Turning to the next slide. These graphs show the significant quarterly progression in both revenue and adjusted EBITDA we have made since the beginning of 2021. The revenue in Q4 2022 is triple that's seen in the first quarter of 2021. Full year revenue has increased by 80% from 2021 and EBITDA by approximately 300%.

As Patrick mentioned, we have updated our guidance for 2023, where we expect revenue to be in the region of $740 million to $780 million and adjusted EBITDA between $360 million and $400 million.

Turning to the next slide. We are also pleased to report that in January, we completed the final step of our refinancing of our 2023 debt maturities by raising $400 million through 2 bond issuances in order to repay our convertible bonds due in May 2023. This was done through a $150 million senior secured bond with maturity in 2026 and a coupon of 9.5% and a $250 million convertible bond with a 5% coupon due in 2028.

Turning to the next slide. Our current delivery fleet consists of 22 modern jack-up rigs, all built after 2010, of which 21 rigs or 95% are contracted. We have additional 2 rigs under construction at Keppel FELS with contractual delivery in 2025. In 2022, the company was awarded 24 new contracts extensions, exercise options, LOAs and LOIs, representing more than 13,000 days or 36 years and $1.67 billion of potential revenue backlog.

During the same period, our operating rigs have consumed approximately 15.7 years of backlog resulting in a backlog replenishment ratio in 2022 at a multiple of 2. These calculations include contracts through our Mexico joint ventures on a 100% basis, in addition to any mobilization compensation in the contract. It is also worth noting that we have secured contracts for more than 90% of our available operating base in 2023.

In addition, we have around 50% available days in 2024, which has set the company nicely up to benefit from new contracts in the increasing day rate environments that we are currently experiencing. And with that, I would like to turn it over back to Patrick, please.

[Patrick Arnold Schorn, executive]

Thank you, Magnus. As Magnus has shown, our capacity for full year 2023, is over 90% committed. And for 2024, that's around 53%. Both numbers clearly an indication of how tight the market for more than jack-up says. In the graph on the left-hand you can see that the proportion of modern rigs has been continuously increasing and that the number of total contracted jack-up rigs has already reached the peak of 2020. In the graph on the right-hand side, you see the historic order book for new rigs. During several of the past cycles, this order book was far in excess of 100 rigs under construction. Currently, when adjusted for already committed rigs, there's about a handful of rigs entering the market, which is the lowest that we have seen in the last 25 years.

In the middle graph, you see a representation of the available supply of modern jack-up rigs where between the current available supply plus the new builds at the shipyards and the current contracted rigs, there are possibly 9 rigs available. While we are currently aware of demand that is at least double that and is increasing. The fact that the market is very tight, is clear, and I often get the question regarding the longevity of the current cycle for the modern jack-up specifically. And for that, we should have a look at the customers. Next slide, please.

In the graph on the left, you see the demand for the jack-up rigs by customer group, where 20 years ago, the IOCs were proportionally some of the largest users of jack-up rigs. Today, the situation is very different. Over the last years, the proportion of rigs employed by the NOCs has grown tremendously to currently about 3/4 of all of the jack-up rigs worldwide being employed by NOCs. In line with that, the backlog for Borr Drilling is 75% directed towards NOCs as well. The NOCs are the largest and most strategic operators in the industry, and as such, has well-developed long-term production plans, which require multiyear elevated levels of activity to achieve the required production goals.

As these plans are long term, the contracting has become for the longer term as well, as you can see in the graph on the right, which is understandable based on the long-term activity plans of the NOCs and makes even more sense considering the [ finite asset pool ] of jack-up rigs available to carry out these works. The supply of jack-up rigs struggles to meet demand, which has an immediate impact on the day rate and pricing. So a few words on that.

Next slide, please. On the graph on the left-hand side, you see the utilization chart with the modern rigs being at 95%, particularly when taking into account the owner operated rigs that are really not playing in the open market. At these utilization levels, looking at the previous cycles as depicted in the right-hand graph with inflation-adjusted day rate, the day rate increases rapidly with the average being around $180,000 per day. However, what is different now versus the previous cycles is that there is no order book to speak of that could moderate long-term pricing.

So therefore, we expect further upward moving in day rate from the level of our recent awarded new contracts, which were in the $140,000 to $160,000 per day range. Next slide, please.

In conclusion, the large refinance resulting in all maturities being pushed out to 2025 has been successfully concluded. The asset pool is finite, utilization ratios are high and customers focus on contracting assets for the long term. We've given clear guidance for 2023 and 2024 earnings expectations. Based on these at the end of 2024, our debt will be less than 3x the adjusted EBITDA, a very financeable ratio. Secondly, we expect the value of our rigs to steadily increase. And towards the end of 2024, we anticipate having less than $60 million of debt per rig. Again, a very financial situation. Based on the outlook thus far, we expect to be in a position to distribute dividends to our shareholders immediately after the 2024 refinance.

Our operational team continues to fully dedicate and manage itself to safe operations with high operational efficiency to create the maximum value for our customers. I would like to end here our prepared remarks, and we can go to the Q&A.

[Operator]

[Operator Instructions]

The first question comes from the line of Fredrik Stene from Clarksons.

[Fredrik Stene, analyst]

Patrick, Magnus. I have a question about your guidance. You're talking about hitting on an adjusted EBITDA range somewhere between $360 million and $400 million, and I think at least compared to my numbers before you published that guidance, I was a bit lower around $330 million. But even at that time, you had quite good contract coverage for 2023. Now it's even better. And I was wondering if you could give us some color on how or what type of uncertainty is included in that number? And also since you're activating the Hild, if it's fair to expect some sort of long-term contracts from that rig as well that can positively impact 2023 numbers? Any color you can share would be greatly appreciated.

[Patrick Arnold Schorn, executive]

Sure, Fredrik. And it is true of me, we have to try to -- we've tried to guide as much as we can without letting the commercial cat out of the bag, so to say. So if you talk about the uncertainty for '23 with 94%, 95% coverage, it's obviously not very high. But if you want to talk about what are the things that are uncertainties then you could say there is the start -- the exact start-up dates from, for instance, the Arabia III or the Hild, there is some contract extensions that we have towards the end of the year, if you would have a week more or less of downtime, you would have some uncertainty there. But quite frankly, it is very little uncertainty.

If we are able to keep everything running the way we are now with a very good technical uptime and economic uptime, then I think that there is little uncertainties. The contract coverage is there, as you say. And there is not many unknowns. So we need to execute as we have been doing, and then these numbers should be the resultant of that?

[Fredrik Stene, analyst]

Perfect. And just a follow-up on the thinking about '24 versus '23. You have approximately half your fleet covered in '24. You seem to be positive when it comes to the direction of day rates. Are you having any particular type of strategy when it comes to contracting the rigs for 2024. Are you going to kind of wait until rates are higher? Or do you think you're in a position already now to fix okay term at the higher rates so far ahead?

[Patrick Arnold Schorn, executive]

Yes. So if you look at the last few announcements we have made, these are all contracts within the $140,000 to the $160,000 per day range. I would expect that to continue and increase in the second half of this year. I would think that we are going to see contracts that are going to be at the [ $175,000 per day ] range. And when you look at the '24 guidance we have given, that is actually expecting pricing to continue where we are now with only very slight increases to actually achieve those kind of numbers. So I think that you are right, there is about half of the contracts that roll off in 2024. And if we are recontracting at the current pricing that we are seeing then we will be totally fine in delivering that type of guidance as well.

So I don't think we're looking for extraordinary things to happen, but I do feel that based on the tightness in the market, that pricing will increase a bit further from where we are now. And like I said, our last 4 or 5 contracts that we have announced, we're in the [ 140 to 160 ]. I would expect that to continue going up during the year to the [ 175 ].

[Operator]

[Operator Instructions] The question come from the line of Greg Lewis from BITG.

[Gregory Lewis, analyst]

I did want to talk a little bit about the market and the fleet. Clearly, you guys have done a great job and the market has cooperated in your ability to push pricing, as we kind of look globally at the fleet, clearly, there's a lot of -- you have most of your exposure in Asia. Given some of the strength that we've seen in other basins. Do you see the potential to potentially move some of those jack-up that have open days in Asia on into another basin, maybe where you can get -- basically make more money?

[Patrick Arnold Schorn, executive]

Yes, Greg, I think it's a good question. And I think that if you maybe look traditionally, it used to be true that the day rates in Asia were a little bit lower. Your OpEx was a little bit lower. So the option to make money that was good, but the day rates were a bit suppressed. I think what we have seen now is that on a worldwide basis, over the different regions the day rates are actually very uniform. It's too easy to move a rig around and therefore, if you want to be participating as an operator and get a rig to work for you, you basically have to kind of work with this worldwide average that I was earlier mentioning.

So the rate in the last contract that we have also in Asia are in that same bracket and the monies that we make out of that are equally good as we make elsewhere. So even though there are opportunities to move assets from Asia, let's say, elsewhere, we have very long customer relationship and very important relationships to us. So we are fully committed to that market, and we'll continue to serve the customers there as everywhere else. And obviously, you are right to say that assets will go eventually where most money is made. But I think that today, it is very fairly distributed over the different basins in the world.

[Gregory Lewis, analyst]

Okay. Great. And then just realizing that it's interesting to think that now we're talking about rig scarcity, realizing, hey, it's the cycle is just getting going, and there's still a lot of work to build on everybody's end. But as we think about the new builds and realizing those are -- we have a couple of years before we need to take delivery of those. At what point could we start to see the company actively bid those rigs into the market just given some of the pricing and the longer-term contracts that look like they're starting to pop into the market?

[Patrick Arnold Schorn, executive]

Yes. No, that's a fair question. In our case, we only have 2 rigs left under construction based on the refinancing that we have done, we are to take delivery of those in 2025. However, the market today is that strong that we are in discussions with the various stakeholders to see how we can actually bring that forward. We're quite interested to put them in the market as soon as possible, which still I mean, as everybody understands, these are units under construction. So it will take some time. But if I could get these units to be working as early as 2024, I'd be quite pleased. So based on the strength in the market, the demand that we see today, I'd be very keen to see that we pull that forward into 2024. But those are discussions ongoing, and we'll just have to see where we can land there.

[Operator]

The next questions come from the line of Samantha Hoh from Evercore.

[Kay Hoh, analyst]

I guess I just wanted to dig in a little bit about the work that you're doing on the Arabia III. What type of contract prep that all entails bringing that rig over? And then if you could also just maybe provide some guidance on the CapEx line, obviously, a little elevated this last quarter, but just kind of wondering in terms of the ability for maybe bringing that down over the course of the year?

[Patrick Arnold Schorn, executive]

Sure, Samantha. So the Arabia III is going to work on a contract in the Middle East under a 5-year contract where there's an option to extend that. We are in the process to fully activate it and get it contract ready. There are some specific requirements for the contract when it comes to the technical specifications of the rigs and its capabilities. So we're upgrading it to that, and we would expect that rig to be commencing operations somewhere in the third quarter of this year. So let's say, in another 6 months or so. So that is where we are. Magnus, do you want to give any further comment regarding CapEx in general.

[Magnus Vaaler, executive]

Yes. So CapEx, in general, not talking about this rig. You do have a 5-year -- every 5-year a special survey, which we estimate to be in ballpark, the $6 million per rig. So I think in general, CapEx, we normally recommend that you set aside approximately $1.2 million per year per rig to smooth that general CapEx out in the modelling...

[Kay Hoh, analyst]

Okay. And would we assume then that maybe the Hild will need similar type of upgrades for the type of work that it has, where I think CapEx should just drop off pretty dramatically for doing in the fourth quarter of '23?

[Patrick Arnold Schorn, executive]

So I think it is fair to say that the activation CapEx at that time for us will come to an end. There are no rigs to immediately activate any further. The Hild, at this moment is on a similar time frame as what we do with the Arabia III. So both are in the process of being prepared. And then it purely depends on which contracts the Hild will end up, whether there is some contract specific spend that we might need to do on it. But absent of that, we should see CapEx overall then come down, and then it will be purely related to more the periodic surveys that we need to be doing before we receive the last 2 rigs from the yard, which will be, as we have discussed in the previous question from '24 onwards and could be as late as '25.

[Magnus Vaaler, executive]

But just to add, on the Hild, that would be more of a standard newbuild activation that we've done 9 or 10 already, which we estimate typically to be costing around between $12 million to $15 million. So before you do that contract specific [indiscernible] like Patrick mentioned.

[Operator]

We have no further questions on the phone line. I will now hand back for any web questions that you may have.

[Magnus Vaaler, executive]

Yes, we have 1 question. What market conditions does Borr think are needed for someone to make a commitment to investing in the new build program and does Borr think new builds are acquired?

[Patrick Arnold Schorn, executive]

So I think that what you would need to see is day rates in excess of the [ 175 ]. And you need to have a situation where certain customers are willing to give the drilling contractor, contracts that are of 7 to 10 years in duration. I think we are a little bit away from that, although maybe not very far away from that. The question is, are we going to need that or not is a question where I think that if we see what we have still to be done in the shallow water when it comes to production potential over the next few decades, then I cannot believe that the current fleet is sufficient.

Over time, new assets will have to enter the market if nothing else to replace some of the very old units that are still working today. So I would say there is going to be a time in which we will see new builds. It is probably going to require day rates that are slightly higher than what we see now. And where the operator is willing to extend significant loan contracts that these investments can be justified because obviously, at the same time, as the requirements of these units might go up, the cost price is going up as well. So these are fairly large investments that I just think are going to take a while before people are going to make that step.

But clearly, in that environment and where there is no order book today, it is a very interesting environment for us to be having commercial discussions with customers around rigs that are of the quality and edge that we have. So it's an interesting environment. But I think that that's all that I would say regarding new builds. Do we have any other questions.

[Operator]

We have no further questions at this time. I would now like to hand the conference back to Mr. Patrick Schorn for closing remarks.

[Patrick Arnold Schorn, executive]

All right. I think that there is not much more to say than we have said. We have had, as part of the refinance here over the last few weeks, a very intense communication with all our different stakeholders and investors. So ladies and gentlemen, thank you very much for your attention. We look forward to talk to you soon again to further update you on the progress we're making with Borr Drilling. At the end of the day, these are very exciting times for our industry, and as a tremendous upward potential. So we're talking soon, and thank you very much.