Borr Drilling - Earnings Call - Q4 2020

Transcript

Speaker 0

Good morning, and thank you for participating in the Q4 earnings call of Borg Drilling. I'm Patrick Schorn, the CEO, and on the call with me today is Magnus Fowler, our CFO.

Speaker 1

Next slide.

Speaker 0

For good order, I would like to remind all participants that some of the statements will be forward looking. These matters involve risks and uncertainties that could cause actual results to differ materially from those projected in these statements. I, therefore, refer you to our latest public filings.

Speaker 1

Next slide.

Speaker 0

For the quarter, our results were as follows: total operating revenues of $60,200,000 with a net loss of $46,700,000 and an adjusted EBITDA of $6,600,000 for the fourth quarter. We have raised $27,500,000 in an equity raise in October, followed by a subsequent offering of $5,300,000 We have divested of three of our older non core rigs for a total proceeds of $17,500,000 In January, we have completed with our creditors a previously announced liquidity improvement plan, which included a further equity raise of €46,000,000 also in January. Since the start of the fourth quarter to the date of this report, we have been progressing with our customers on four new projects and have also received contract extensions on another four rigs. Let me hand it over to Magnus, who will discuss the financials.

Speaker 2

Thank you very much, Patrick. Turning to Slide four. The fourth quarter revenues were $60200000.0.1000000 dollars increase from Q3 twenty twenty. The full year revenues were $3.00 7,000,000 and were impacted by decreasing number of rigs operating in the 2020. COVID-nineteen led to contract cancellations and a downturn in the market with fewer new contracts available to our rigs compared to the 2019.

Gain on disposals in the quarter was $5,900,000 and relates to the sale of the coal stack rig, ATNA. Rig operating and maintenance expenses for Q4 decreased by $9,500,000 from the previous quarter and G and A was down $2,200,000 from Q3 to Q4. G and A for the full year versus 2019 was flat. However, the underlying normalized run rate for admin expenses is lower in 2020 than in 2019. 2020 was highly impacted by one off costs associated with the creditor negotiations we had to extend our liquidity runway throughout the year.

At the flat revenue quarter on quarter, we have managed cost well and improved our margins. Total operating expenses has improved quarter on quarter and is down around 12% from Q3 with similar revenue. Also on an annualized basis, the operating margin has improved for 2020 due to strict control on costs even in a year where we have incurred significant COVID related costs and other one offs. Net loss for the quarter ended at $46,700,000 which is $15,200,000 improvement from the third quarter. Adjusted EBITDA for the quarter was $6,600,000 also improving from the third quarter by 17,500,000.0 For the full year, the adjusted EBITDA was $20,000,000 versus a loss of $2,600,000 in 2019.

Our cash position at year end was $19,200,000 This increased from the third quarter by $6,700,000 and was mainly driven by new equity of $32,800,000 and sale of assets and other investing activities of 13,700,000.0 This was partly offset by cash used in operations of $38,100,000 Cash used in operations in the quarter were impacted by movements in working capital and in particular for the start up of three rigs in the quarter. The rigs have costs associated with mobilization and OpEx from day one. However, revenues paid in arrears after work has been carried out and in accordance with contractual invoicing terms. Now turning to Slide five. During 2020 and in January 2021, we have shown the ability to reach agreements with strong support from most of our creditors.

As shown in this slide, the amendments to the agreements we reached have included extension of maturities and amortization of debt until 2023 or later, deferrals of CapEx and legal commitments until 2023, significant deferral of cash interest payments until 2023 and using our covenants. In return for these amendments, we have raised new equity in three steps totaling just above $100,000,000 Combined, these raises have contributed to improvements in our agreements to an estimate of more than $1,000,000,000 until 2023. With this, I'll turn the call back over to Patrick.

Speaker 0

Thank you, Magnus. Over the last months, we have worked closely with our customers to increase the number of active rigs and increase our market share from the low Q3 numbers. As mentioned previously, we have been successful between contracts, letters of intent, letters of awards and extension in increasing the backlog by a total of eight additional work scopes. Rapidly, you can see this best on our fleet chart where we show the rigs versus time. In May 2020, much impacted by the uncertainties of the COVID pandemic, we had little visibility into 2021 and beyond.

Moving to show you the current fleet chart, next slide please, you see here the results of the marketing efforts and customer engagements through which we have been able to add significant volumes of work and even start to see options reaching into 2023. We will continue to increase our market share and we have an overall positive view on the activity backed by an oil price currently in the $60 to $65 range. Next slide. In particular, we are building on the strength of our asset fleet, which is the largest fleet of new assets in the industry. These modern units bring a variety of benefits and capabilities that increase the operational efficiency of the modern rigs versus the older ones.

As a result, we have witnessed over the last few years modern rigs being increasingly preferentially deployed, as you can see on the graph on the left hand side. Considering the overall supply demand picture, there will be a significant larger number of rigs that will need to be scrapped for reasons of excessive costs to reactivate and capabilities that don't meet market demand any longer. Considering that approximately 90 rigs are in excess of 20 old, of which many cold stack, we could see the market coming back into balance relatively soon, even with modest activity increases. Apart from the supply demand driving day rates and in turn our top line, we've also worked to optimize our cost structure and financial obligations, with as a result that we have a tremendous untapped cash flow opportunity once we have all rigs activated at normalized rate.

Speaker 1

Magnus, please go ahead.

Speaker 2

Thank you, Patrick. We're now on Slide nine. Following the amendments we have recently completed with our creditors, the company has an attractive cash cost structure. This illustrative slide shows the various net cash flow levels in various scenarios of dayrates, given various number of rigs operating. We currently have 14 rigs on contract or to commence contracts within the 2021.

The run rate once these rigs are fully operating shows the cash breakeven day rate level between 70,080 thousand dollars per day. This is taking into account the anticipated cash costs for the company in the year. Most importantly, this slide shows that the operation that we currently have requires minimum to no additional cash at those levels and also show the upside potential of various various levels. Turning back to Patrick.

Speaker 0

Thank you, Magnus. A different way you might look at the same, which is one of the most valuable aspects of bore drilling, is the ability to start generating large amounts of cash once we get all of our fleet working. In the graph, you see that at $100,000 per day, a rig will generate around $17,000,000 of EBITDA per year, which jumps immediately to $30,000,000 per year at the fifteen year historic average rate of $140,000 per day. Clearly, this type of potential is quite exciting in combination with the way we see the market developing itself at the moment. Next slide.

In conclusion, I would like to remind you of the key attributes of Boer Drilling. Equity raises in 2020 and earlier this year have been the catalyst for liquidity improvements in excess of $1,000,000,000 until 2023. The current oil price in excess of $60 per barrel is driving activity with the resulting increased utilization impacting day rates positively going forward. The market preference for modern units is getting stronger. And secondly, the stacking and reactivation of all the units is becoming uneconomical, both of these being a positive for our fleet.

We will continue to focus on increasing our market share with contracts providing our investors with the appropriate return. And lastly, I hope you agree that the current market environment in combination with a strong operational team and modern assets provides us with an exciting opportunity going forward. Ladies and gentlemen, thank you very much. We will now go to the Q

Speaker 3

star followed by one on your telephone keypad now. If you're dialing in online, you can register a question with the flag icon. We'll ask people to limit themselves to one question each. Our first question comes from Frederic Steen of Clarkson Plateau Securities. Frederic, please go ahead.

Speaker 4

Hey, Patrick. Magnus. And and first of all, congratulations on on the on the deal with with with all stakeholders here earlier this this year. My question is is is the following. I see in your report today that you you mentioned that you think in in 2021 that there are further possibilities to improve your your capital structure and and liquidity.

And and the way I read it is at least that what's happening in Mexico and potentially also this factoring agreement that you've entered into will be a part of that. So I was wondering if you could maybe give some more color if there is other possibilities to improve the liquidity and also on the magnitude that you think these measures can kind of help you with in the end? Thanks.

Speaker 1

All right. So let me first give you some answer to that, and then we can have Magnus jump in at the end of that. So you're absolutely right. Clearly, cash is of the utmost importance for us continuing in 2021 as well. And we are indeed pursuing a variety of options in improving our financing structure.

Mexico is part of that solution, and there's clearly things that we intend to do to that respect. But it's not the only thing. There are some other actions that we intend to take. As you have seen, we have been engaging with our creditors extensively in the fourth quarter and also during January. And we believe that there is some additional things that we can do that is going to be beneficial to our creditors as well as to the company.

So we will pursue that. But in combination with that, it will be also be strongly supported from the improvements in Mexico that we would be expecting from the opportunities to properly factor it. Magnus, would you would you want to add anything to that?

Speaker 2

No. I think it's, like you said, the factoring, possibilities we're looking into in in Mexico and also have agreed terms on, on the the factoring agreement. We'll definitely have the potential, to release, more funds coming out from from the the JVs. And I mean, we're I've been open to, look at selling assets as we've seen. We have now sold all the noncore assets, standardized assets or standard assets in in our fleet.

So so anything to kind of give more cushion or or better liquidity, we we can look into several, opportunities there.

Speaker 4

Thanks. I'll I'll get back in queue.

Speaker 3

Our next question comes from Dom Nagli of Fidera.

Speaker 2

Could you please us could you please give us

Speaker 4

a bit of color on the day rates that you are seeing in the tenders in which you are participating as well as growth day rates context for fixtures like the most recent longer term contract in Thailand? Thank you.

Speaker 1

Sure, Dom. I can give you a little bit of color. Obviously, there's quite a bit of commercial sensitivity in that, so I'll try to speak a little bit in generalities. It is clear that the market has been quite a bit under pressure from the lower utilization, and that is something that you see. And don't forget that a lot of the contracts that we are discussing now with customers have also been tended quite a while ago.

So I would say that those are some of those are at more suppressed levels. What we do see now and where there is a significant change is that work that we tender right now, we are definitely looking to increase price. We see that there is a lot of appetite of customers to conclude deals at this moment, which we are, I must say, very careful that we pick the ones that make sense for us from a strategic perspective or a particular area in which we feel that we need to be present or have a larger operating footprint than what we currently have. But I would say that in the fourth quarter, rates were not great. But I would certainly say that with the discussions that we have now with customers going forward is one of more elevated rates.

And we certainly see that people are kind of trying to conclude deals as they are still having somewhat an access to suppressed rates. I think that clearly that is driven by the oil price that we see now. I think more and more people are getting convinced that the reactivation of some of the coal stacked and older equipment actually is much more expensive than anticipated and therefore holding back some of the assets that were previously thought to come into the market. So I would say that the environment is definitely getting better going forward than what we already see in our tenders that we are submitting at this moment. But it is fair to say that the trough was probably somewhere at the end of Q3, Q4.

So that's really all that I would want to say directionally around the day rates. I think that anymore is probably giving away too much of where commercially we are going to be heading here over the next few months. But I can tell you that we are going to be looking actively to continuing to increase our market share on profitable contracts. And for what we see at this moment, there is plenty opportunity to do that going forward.

Speaker 3

Our next question comes from Mike Choi, a private investor. Mike, please go ahead.

Speaker 5

Thank you. Thank you, Patrick. It was pretty good presentation for us to watch. And okay. There is there there are two questions from me.

And the first one is, as you as you know, like, there is a tension. There's news coming today that there's a tension between United States and Middle East. And and and what was it? Sorry. And, also, like, it is not stable.

Like, the price of oil in America is not stable about the leaks as well. So is there any best solution as is there any best solution of course breakthrough in this situation? And the other one is I work in Jakarta, Indonesia. And the reality is, like, oil the the need of oil is increasing right now, like, So you have, like, a five sing five more Singapore leagues in Singapore available. So is there any upcoming plan for that one?

Thank you.

Speaker 1

All right, Mike. Let me try to address those questions. So I think that the first of your question is more around the general supply and demand. And I think that, in general, what we see is that maybe not so much of tension, but because of the investment reductions in North America, we do indeed expect that the production coming out of North America is of a lesser impact into supplydemand on a worldwide basis, therefore, creating a very interesting environment for many of the larger players, national oil companies in particular, to increase again their activities to deal with the increase in demand that is most likely to come also as a result of the world being able to deal better with COVID. So I would say that the activity going forward and the increases in it, we see is are going to be at the low cost producers and people that are having significant opportunities on the shallow offshore.

So therefore, we feel that we are very well placed and certainly expect the current upturn in the market to be particularly beneficial to companies like us. So that's to your first question. Secondly, it is true that we have some rigs that are at the moment nonactive, and some of them are nonactive and completed. And we have some rigs that are in the shipyard, as you mentioned. We see this as probably some of our biggest value that we have.

Currently, if you think about what we do is having active only half of our rigs with the rates coming up and the opportunity of striking extra contracts at a more preferential rate, clearly, there's a tremendous opportunity of generating significant amounts of cash. And that is what we very closely try to balance. So we're trying to make sure that we're placed at the right markets, where the right rates are going to be for us going forward, knowing that we have a large volume of multi utilized rigs at this moment that provide us a fantastic upside. So from that perspective, we are looking at the opportunities in Indonesia, as you were mentioning, you were there. And there are clearly opportunities there going forward.

And I think it is true that, particularly in Asia, there is a continued increase in demand for hydrocarbons. And we certainly hope that because of that, there will be additional activity in the region that we can play a role in. So I hope that that helps.

Speaker 3

Our next question comes from Frederic Stein of Clarksons Plateau Securities. Frederic, please go ahead.

Speaker 4

Hey. Hey, again, guys. Frederick here. Two follow ups. Firstly, just from a modeling perspective, is it fair to assume that that what you've done now with the with Pemex is kind of similar in economic nature as what has been been the case before and and also on the market in in general.

And I know you talked a bit about it. But in addition to Southeast Asia, which at least to me seem to be quite an active region right now with with many of the NOCs actually, you know, keeping their budgets pretty much unchanged from pre COVID levels, are there any other regions where you that that lags or have been boosted now just recently, maybe in particular in relation to to the oil price? Sorry, for example, seeing West Africa waking up again or or any other region that they would like to to highlight that's that's often coming.

Speaker 1

Yes. So let me first talk a little bit about some of the opportunity. And then regarding the economics in Mexico, we'll address that secondly. So clearly, there has been some additional work for us coming out of the North Sea, and we see continued interest to start projects there. Africa, I would say, particularly West Africa, been muted.

Nigeria has gone down somewhat in activity, and I think the region has been quite stale, although we see interest to change that around and actually towards the second half and later on see additional activity. So we do see opportunities in Africa again coming. For us, there is going to the East. In The Middle East, there are opportunities. There is a variety of opportunities.

One thing that we haven't spoken about is the potential to sell rigs, and there have been in the regions historically opportunities, which even though there's some sales of rigs have happened in the area, there is still more to be sold. And therefore, we see that there is still some opportunity there, but we're also very actively tendering. I think in particular, there is some work coming up where we have our rigs very well placed to at least to a certain portion of that work scope. So I would say even though The Middle East might not be a tremendous increase, but if you see overall things that are happening in Qatar, clearly, is impacting all of us, and therefore, there's opportunities plenty there. Asia for us has been good.

And as you say, that even though budgets are flat, a lot of customers are looking to get the right fleet of equipment available to them. And what we are able to provide in Asia with some of our offline capabilities is creating a benefit and efficiency that is today appreciated by many of the operators. So that is a little bit, call it, the world in a snapshot. And coming to Mexico, on the economics, it is fair to say that it is, by and large, along the same lines. Clearly, there is, in Mexico, what is of key importance and which should also be understood, it's not only the day rate in which you are which is affecting your profitability.

It is very much on how effective you can manage the time in between wells. And clearly, that is not something that we fully have in our own hands. There is also a role for the operator to play, and there is more benefits to be had. And these type of benefits, at the end of the day, don't cost anybody any money. This type of efficiency gain would help us as well as ultimately Pemex.

So we're very much focusing on that and trying to further optimize what we can get out of Mexico inefficiency, but they're going to give you a general idea of where those rates are and where the activity is on a worldwide basis.

Speaker 4

Thank you. Just a final follow-up on Panex there. You've extended three rigs until the end of the year. The discussion that you've had at the moment. Have those been isolated to those three rigs, or do you think that there's still possibilities to to keep the the kind of the full fleet of rigs that you have there rolling into 2022 as well.

And I totally see that, you know, the the February contracts were most severe in a way to be fixed. But do you have any, call it, impression from from Pemex as to what they would like to do in a in a more longer term?

Speaker 1

Well, I I think that if you look longer term, are rigs gonna be required in Mexico? Absolutely. Is this type of a contracting of providing integrated well services working well in Mexico? I would say absolutely. Definitely working very well.

In order for us working to look at what longer term our engagement in Mexico is, it is something that is going to go hand in hand with the ability to extract cash out of the business. So I would say there is needs. There is definitely good business results that are being made and production results that are generated. What we need to make sure is that it's for all parties remains equitable. And for us, what is becomes key is having a stronger handle on the ability to take cash out of Mexico.

So anything that we would be doing going forward and the interest and likelihood to take large volumes of work would be related to debt. But I think that from a if you look at the success that Pemex has had and the requirement to continue through a fairly intensive drilling program, increased production, I think that remains the same.

Speaker 4

Our

Speaker 3

next question comes from Greg Lewis of BTIG. Greg, please go ahead.

Speaker 6

Yes. Thank you. Thank you, and good afternoon. I just had a kind of a a more general question. You know, clearly, you know, Patrick, you've been around, seen lots of cycles.

It it it you know, the the the market seems to be starting to gain a little bit of momentum. Things are falling. We've seen some, you know, IOCs and and n o c well, yeah, some IOCs and some of the larger oil companies starting to kinda sell off sell off acreage, and and it looks like now we're starting to see, you know, the small companies kind of start to plant their flags and and and get on the start to buy. And so when we think about that, is there any way to think about the timing of of, you know, when the post these transactions, when these companies start to get to work and and fire rigs to go? Is there any kind of time frame as we're kind of tracking these transactions to see when that actually turns into incremental demand?

Speaker 1

No, that's a fair question. I think in general, whenever we see certain transactions take place and assets change hands, normally, it results in some type of a delay in activity. I think what is very different in this case is that the changing of hands of assets is not necessarily happening in a downturn market. It actually happens in a upturn market. So we see that certain assets don't fit with certain companies anymore.

And therefore, the ones that are taking on the assets are actually more motivated to do something with the asset than maybe the previous owner. So I actually think that it is a bit of a catalyst and an incentive to quicker pickup activity and start projects sooner. And we have discussions with some of the smaller and newer companies in this space that are trying to do this relatively quickly, but also are interested to do this with more interesting business models. And here you could think particularly about the things that we are doing in Mexico, where there is indeed an opportunity for a rig owner to be somewhat benefiting from an increase in efficiency that you can generate. So I would say that I think that some of the assets that are being handed over from the bigger players that maybe did not necessarily have a plan with that asset now to smaller ones that are keen to do something where, in many cases, it's their only asset, I actually think is a very positive.

And all of this, obviously, is driven by an oil price. So as long as we have the oil price strengthening a little bit further than where we are now, then I think we are in for a a very positive environment when it comes to jackup grilling.

Speaker 6

Perfect. We agree. Thank you very much for the time. Have a great day.