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    Borr Drilling Ltd (BORR)

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    Business Description

    Borr Drilling Limited is an international offshore drilling contractor specializing in shallow-water drilling services for the oil and gas industry. The company owns and operates a modern fleet of jack-up drilling rigs designed for exploration, development, and maintenance of oil and gas wells in shallow-water areas. Borr Drilling primarily generates revenue through its dayrate model, offering rig charters and ancillary services to a diverse range of clients, including integrated oil companies, national oil companies, and independent oil and gas producers.

    1. Dayrate Model - Provides rig charters and associated services for shallow-water drilling operations, including exploration, development, and workover activities. This segment encompasses all revenue-generating activities of the company.

    Q2 2024 Summary

    Initial Price$6.65April 1, 2024
    Final Price$6.26July 1, 2024
    Price Change$-0.39
    % Change-5.86%

    What went well

    • BORR expects to generate over $200 million in additional cash flow in 2025, due to reduced capital expenditures and higher day rates, which can be used for increased shareholder returns through dividends, share buybacks, or debt reduction.
    • BORR has secured contracts increasing average day rates from $135,000 in 2024 to $148,000 in 2025, indicating strong pricing power and demand for their rigs. Currently, 70% of their capacity is contracted for 2025, providing strong revenue visibility.
    • BORR's modern fleet with unique capabilities allows them to secure contracts at higher day rates, including recent fixtures breaking the $200,000 per day mark, and gives them a competitive advantage in the market.

    What went wrong

    • Business volatility due to unexpected rig suspensions: The company acknowledges that sudden changes, such as rig suspensions in Saudi Arabia, can quickly alter the income profile, making it difficult to narrow guidance ranges. Management stated, "These things can happen fast and do change your income profile... It is a very volatile business from time to time." ,
    • Increased competition in certain markets affecting day rates: In regions like Asia, there's a tighter competitive landscape with competitors exhibiting stronger competitive behavior due to lower barriers to entry. This could pressure day rates and make it challenging to secure favorable contracts. Management mentioned, "We've seen realistically a stronger competitor behavior of some of our competitors... I think Asia, particularly is one of those markets." , ,
    • Operational challenges and risks in new markets like Brazil: Entering markets such as Brazil presents significant complexities, including import acceptance issues and the necessity of local partnerships, which could lead to increased costs and operational risks. Management admitted, "Acceptance in Brazil can be complicated... it became clear that without a local partner for us, it wouldn't be the right market."

    Q&A Summary

    1. Use of Free Cash Flow
      Q: How will you use increased free cash flow in 2025?
      A: Management expects over $200 million in increased cash flow year-over-year in 2025 due to reduced capex from newbuilds, fewer special periodic services, and higher average day rates rising from $135,000 in 2024 to $148,000 in 2025. This cash can be used for dividends, share buybacks, or debt repayment. They have a quarterly dividend established at $0.10, annual bond amortization of around $125 million, and an authorized $100 million share buyback program.

    2. Day Rates and Market Outlook
      Q: Can you maintain high day rates despite market pressures?
      A: Management is confident in maintaining high day rates, noting limited availability and unique value provided. In Q2, they had a fixture breaking the $200,000 per day mark. They see strong demand in markets outside Asia, requiring expertise in areas like the Americas, Mexico, and Africa, allowing them to sustain pricing.

    3. Saudi Arabia Suspensions Risk
      Q: Is there risk of further Saudi Arabia rig suspensions?
      A: Management doesn't know if further suspensions will occur but was surprised by the magnitude of previous ones. They believe offshore fields are still crucial for Saudi Arabia's future plans, and suspended work is delayed rather than canceled. More adjustments are possible, but they aren't aware of any at this time.

    4. Guidance Range Confidence
      Q: What factors affect meeting your $500-550 million guidance?
      A: Despite being 92% covered, management cites volatility in the business, such as unexpected suspensions, as reasons for maintaining the guidance range. They are confident in delivering within that bracket if everything unfolds as expected but won't narrow the range due to potential unforeseen events.

    5. Prospects for Thor and Ran Rigs
      Q: What are the prospects for Thor and Ran after contracts end?
      A: For Ran, they see opportunities in Mexico with new operational models involving Pemex and other companies, which could open interesting opportunities. They also consider work with IOCs and in regions like Surinam and Trinidad. For Thor in Asia, numerous tenders are open, and their rigs are sought after due to unique capabilities. They are confident both rigs will secure continued programs.

    6. Newbuild Orders and Shipyard Capacity
      Q: Any changes suggesting newbuild orders could be made?
      A: Shipyards may accept small orders, but they're extremely busy, so deliveries wouldn't be quick. Newbuild costs are in the high $200 million to over $300 million range. Management believes the industry will build rigs again as the fleet ages and demand increases, but it will be driven by economics and day rates.

    7. Brazilian Contract Challenges
      Q: How will you handle operational challenges in Brazil?
      A: Acknowledging Brazil's complexities, they've partnered with a local company for expertise. They forecast the rig will be on contract in the first quarter of 2025 and are preparing thoroughly. The Petrobras contract includes substantial mobilization fees, and the work focuses on relatively simple P&A and intervention operations.

    8. Newbuild Var's Potential Contracts
      Q: Any updates on contracts for the Var rig?
      A: Management is confident they have sufficient opportunities to have work lined up for the Var when it becomes available. While keeping details under wraps, they indicate strong potential in various markets, leveraging their global footprint and expertise.

    Executive Team

    NamePositionStart DateShort Bio
    Tor Olav TrøimChairman of the Board of Directors and Director2016Tor Olav Trøim has served as a Director since Borr's incorporation in 2016. He was Chairman from August 2017 to September 2019 and reappointed in February 2022. He is the founder of Magni Partners and has over 30 years of experience in energy-related industries.
    Kate BlankenshipDirector, Audit Committee Chairperson, Compensation Committee ChairpersonFebruary 26, 2019Kate Blankenship has been a Director and Chair of the Audit Committee since February 26, 2019. She is also Chair of the Compensation Committee and has extensive board experience with various companies.
    Jeffrey R. CurrieDirector, Nominating and Governance Committee MemberOctober 16, 2023Jeffrey R. Currie has been a Director since October 16, 2023, and is a member of the Nominating and Governance Committee. He retired from Goldman Sachs after a 27-year career and is now the Chief Strategy Officer of Energy Pathways at The Carlyle Group.
    Neil GlassDirector, Audit Committee Member, Chair of Nominating and Governance CommitteeDecember 2019Neil Glass has been a Director since December 2019. He is an Audit Committee Member and Chair of the Nominating and Governance Committee, with over 20 years of experience as an executive and non-executive director.
    Dan RabunDirector, Compensation Committee MemberApril 2023Dan Rabun has been a Director since April 2023 and is a member of the Compensation Committee. He has extensive corporate governance experience and has served on the boards of several companies.
    Mi Hong YoonDirector and Company SecretaryMarch 1, 2022Mi Hong Yoon has been a Director and Company Secretary since March 1, 2022. She is also the Managing Director of Golar Management (Bermuda) Limited and has a background in legal, regulatory, and compliance roles.
    Patrick SchornDirector and Chief Executive Officer, Borr Drilling Management UKSeptember 2020Patrick Schorn has been the CEO since September 2020 and a Director since January 2018. He previously held various management roles at Schlumberger Limited.
    Magnus VaalerChief Financial Officer, Borr Drilling Management ASDecember 2020Magnus Vaaler became CFO in December 2020. He has been with Borr since January 2018, focusing on Treasury, Finance, and Investor Relations, and has extensive experience in the finance, oil, and offshore industry.

    Questions to Ask Management

    1. Given the unexpected suspensions by Aramco and the potential for further disruptions, how confident are you in achieving your 2024 adjusted EBITDA guidance of $500 million to $550 million, and what specific measures have you implemented to mitigate the impact of such suspensions on your financial performance?
    2. With your contracted coverage for 2025 currently at 70% and open capacity primarily in the second half of the year, what is your strategy to secure contracts for these periods at favorable day rates amidst increasing competition, particularly in regions like Asia where competitive pressures have intensified?
    3. Anticipating significant free cash flow in 2025 due to reduced CapEx and higher day rates, can you provide more detailed insights into your capital allocation plans between debt reduction, shareholder returns through dividends and buybacks, and potential investments, and what factors will influence these decisions?
    4. Regarding your entry into the Brazilian market with the Arabia I, which involves regulatory and operational complexities, what are the key risks you foresee, and how are you preparing to address potential cost overruns or delays associated with importation and acceptance of rigs?
    5. Considering the aging global jack-up fleet and the absence of newbuild orders over the past decade, how does Borr Drilling plan to meet future demand, and are you contemplating investing in newbuild orders despite high construction costs and extended shipyard delivery times?

    Past Guidance

    Here is the guidance provided by Borr Drilling in the last four earnings calls, including the issued period, guided period, and the exhaustive list of metrics guided for:

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EBITDA Guidance for Full Year 2024: $500 million to $550 million.
      2. Quarterly Dividend: $0.10 per share, resulting in an annualized dividend payment of $100 million.
      3. Contracted Capacity for 2025: Approximately 73% of capacity contracted as of the time of the call.
      4. Average Day Rate for 2024: Around $135,000 per day.
      5. Average Day Rate for 2025 (so far): Around $148,000 per day, reflecting an increase of $13,000 per day compared to 2024.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EBITDA Guidance for Full Year 2024: $500 million to $550 million.
      2. Quarterly Dividend: The Board approved a doubling of the quarterly dividend to $0.10 per share, with an expectation for dividends to continue increasing over time in line with earnings projections.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EBITDA for 2024: $500 million to $550 million.
      2. Fleet Coverage for 2024: 87% of its fleet coverage for 2024 has already been secured, with ongoing discussions to fill the remaining capacity.
      3. Newbuild Deliveries: The two remaining newbuild rigs, Vale and Var, are expected to be delivered around Q4 2024. These rigs are being marketed for long-term contracts.
      4. Dividend Guidance: $0.05 per share dividend for Q4 2023, with expectations for dividends to increase over time as surplus cash becomes available.
      5. Debt Refinancing: Refinancing of all secured debt completed, with maturities extended to 2028 and 2030, providing a stable long-term capital structure.

    Q3 2023 Earnings Call

    • Issued Period: Q3 2023
    • Guided Period: FY 2024 and FY 2023
    • Guidance:
      1. Adjusted EBITDA for 2023: Expected to end the year with adjusted EBITDA between $330 million and $360 million.
      2. Adjusted EBITDA for 2024: Estimated range of adjusted EBITDA for FY 2024 to be between $500 million and $550 million.
      3. Operating Rigs by Year-End 2023: All 22 delivered rigs are expected to be operating by the end of 2023. As of Q3, 21 rigs were operating, with the final rig, Gerd, expected to commence its contract in early December 2023.
      4. Fleet Coverage for 2024: Approximately 84% of available days in 2024 are covered by firm contracts and price options.
      5. Quarterly Dividend: The Board intends to implement a regular quarterly dividend starting at $0.05 per share, subject to required approvals in a special general meeting held on December 22, 2023.