Borr Drilling Limited (BORR) Earnings Call Transcript & Summary

Good afternoon all, and a warm welcome to the Borr Drilling Limited Investor Presentation with Patrick Schorn and Magnus Vaaler. My name is Louisa, and I'll be coordinating your call today. [Operator Instructions] I now have the pleasure of handing over to Patrick Schorn, CEO at Borr Drilling, to begin. Patrick, please go ahead.

Good morning, and thank you for participating in this investor update of Borr Drilling. I'm Patrick Schorn, the CEO, talking to you from London. And on the call with me today is Magnus Vaaler, our CFO, currently in Oslo. Next slide. 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. Next slide. In the next 15 minutes or so, we'll be addressing some of the key attributes of Borr Drilling and some of our achievements thus far. We have the largest fleet of 28 modern jack-up rigs, 13 of them being active. During the first half of the year, we have increased our backlog significantly by about $450 million at an average day rate of $85,000. Our operation with 13 rigs active is cash breakeven and provided collections remain on track. We have runway until our first debt maturity in 2023. This is enabled by a debt structure that has a low cash interest cost. So even though our overall debt is substantial, the cash cost associated is low, and therefore, the overall package very competitive. Next slide. We currently have operations in Mexico with 5 rigs, and we are in the North Sea, West Africa and in Asia. Apart from the 13 active rigs we have now, an additional 10 rigs are available plus a further 5 rigs yet to be delivered to us. Of the 10 rigs available today, we can put 5 back in operation at minimal cost as these have been fully activated in the past. Our customer base is diverse and has shifted more and more to become National Oil Company dominated. Next slide, market recovery will provide us with 2 opportunities. In the first place, it will allow us to raise price as the market becomes tighter and the utilization moving towards 85% to 90%. Secondly, it will allow us to gain market share as we are one of the few players with available capacity. When putting new rigs back to work, it is critical to do this efficiently from an operational point of view. And as you can see from the graph on the right-hand side, we have been able to activate new rigs while keeping the operational performance high. Next slide. The market and its drivers are different in this cycle. Where previously, the pace was often set by majors and super majors. This time around, the larger role is clearly for the national oil companies who also have the largest access to shallow water research. In the Middle East and China, the demand is already high with every expectation that this will further increase going forward. For several reasons, it is likely that in the current environment, the national oil companies will increase their market share in the supply of oil and gas. For this reason, we are quite pleased with the makeup of our customer base, which is biased towards national oil companies, as you can see in the graph in the middle. Next slide. The overall activity is underpinned by an improving oil macro with current Brent prices above $75 per barrel, at the same time -- which the activity in U.S. shale is only slowly recovering with the associated impact on U.S. production volumes. With the world slowly but surely dealing with the COVID pandemic, we have seen increased inventory growth that are expected to increase towards the end of the year, making increased production from the few national oil companies that can a necessity. Next slide. Now what does this mean for the supply and demand of jack-up rigs where the number of contracted rigs has already increased to currently 353 rigs? With the anticipated demand, in particular from national oil companies in the Middle East, we are likely to reach over 90% utilization at which time we expect to see dayrates well in excess of $100,000 per day. Let's have a look how the rig rates behave the last time around at the end of 2019 and early 2020 prior to COVID. Next slide. Looking at the increase in utilization between May 2019 and January 2020, you see that we were just short of 90% utilization in January 2020 at which time the standard rig rates were well in excess of $100,000 per day, which was at that time, supported by an oil price of about $64 Brent. Since the trough, we have currently increased to about 353 rigs and are on the way up, supported by an even stronger oil price. With our current projections, we anticipate seeing $100,000 per day rig rates back as early as the beginning of next year. Next slide. The work that has been awarded this year until the end of May 2021 has been equivalent to the total amount of work awarded in the full year 2020. On the right-hand side, you can see that Borr Drilling has won more than its fair share of the work, adding about $450 million to our backlog. Next slide. Normally, when a market gets tied, new assets will enter the market. However, that is highly unlikely in the current environment. Firstly, the yard capacity is strongly reduced. And given the lead time, any newbuilds would take several years before it hits the market. Currently, at the yards, there are about 36 to be delivered of old orders. Of these, there are only 20 that will be competitive and uncommitted going forward. While drilling has contracts on 5 of these 20 rigs, putting us in a position where we can deal with most client demand scenarios going forward. Next slide. As we have recently made announcements regarding Mexico, I wanted to highlight some of the key changes that we have accomplished. This is an operation where we, together with our Mexican partner, have been providing Pemex with integrated well services, meaning that we deliver completed and producing wells to them. This has been an efficient operation, which provided us with an avenue to generate additional equivalent dayrates based on operational efficiency. One of the downsides of this operation is a significant working capital requirement that this poses. We have, therefore, retracted ourselves from the contracting entity with Pemex, and we remain in the venture, providing rigs at a straight dayrate. In these Perfomex I & II ventures, we will be taking a majority position while limiting our future exposure to working capital demand and simultaneously releasing $28 million in gross proceeds. We are very pleased to continue our work for Pemex through our Mexican partner in this new construction. Now let me hand over to Magnus, who will discuss some of the financials.

Thank you, Patrick. Turning to the next slide. We are of the opinion that the company has an attractive cost structure. This is mainly due to strict cost control on the operating side in addition to lower cash costs related to our banks. What we want to illustrate in this slide is the various net cash flow levels annualized in scenarios of different number of operating rigs at various dayrate levels. We have highlighted the column showing 13 rigs which is the same number as we currently have contracted. The run rate when these rigs are fully operating shows a cash breakeven dayrate level of around $80,000 per day. This number takes into account normalized cash cost for the company in 2021, including long-term maintenance and CapEx for operating rigs and stacking costs for the stacked rates. The table shows that the operations that we currently have requires minimum-to-no additional cash at this current stage and also shows the upside potential on various dayrate levels. Worth noting is a column with 18 rigs working. This includes the 5 rigs, which has previously been activated and is currently warm stacked. And these rigs are rigs that company can bring into the market again at relatively low cost. Turning to Slide 14. Throughout 2020, we showed through 2 major rounds of negotiations with our creditors. That capital structure has been flexible. Compared to May last year, we have extended all maturities for loans and newbuilding CapEx commitments to 2023 or later. In addition, when negotiated to defer the majority of interest payments to [indiscernible], who are our largest creditors to 2023. These amendments have given us more than $1 billion liquidity improvement in the period which we believe will get us through the trough of the cycle. Our ambition going forward is to further address the debt maturities to benefit all stakeholders. Moving to Slide 15. Here, we would like to bring the debt levels of the company a bit more into perspective. Using our Q1 2021 balance sheet numbers, we feel that the average long-term debt per delivered rig is approximately $85 million. When we include the undelivered rigs and its CapEx commitments, the number is approximately $93 million per rig. Our fleet age is only around 4 years on average. Taking into account the anticipated useful life for the jack-up being 30 years, we can calculate the average implied amortization cost per day per rig. This calculation shows the number between $9,000 and $10,000 per day. When adding on still interest expenses using a flat rate of 5% on the current outstanding loan balance, the implied debt cost per day is around $20,000 per rig. In the graph to the right, we've put this in context with an OpEx estimate of $50,000 per day and compare it to historic periods, though, and the company has recently achieved rates. We believe that this context shows an interesting perspective of the debt levels and that the interest cost of our debt is relatively low. Moving to the next slide. One of the most valuable aspects of Borr Drilling is our ability to start generating a large amount of cash once we get the majority of our rigs working. In the graph, you will see that, for instance, with $100,000 per day, our rig could generate an estimated $17 million of EBITDA per year. For realization purposes, we show that what this means if applied to all our 28 rigs if they were to earn the same rate. This potential is quite exciting in combination with the way that we see the market developing at the moment. And with this, I would like to turn it back to Patrick.

Thank you, Magnus. In conclusion, I would like to reemphasize some of the key topics we discussed. Firstly, we have a unique fleet of modern assets, the youngest fleet in the industry and a strong operational team running them. Our active fleet of 13 rigs is sufficient for the operational cash flow to be breakeven, while we have an additional 10 rigs that can enter the market, plus 5 more at the shipyard yet to be delivered. With current activity and collections remaining on track, we have a clear runway to first debt maturities in 2023. At this point, let me mention our ATM as well. As you will have seen, we announced yesterday the launch of an at-the-market program under which we may sell up to $40 million of our common shares. It needs to be understood that this facility is put in place for strategic purposes, such as additional growth over and above the current plans which includes additional rig activation opportunities for instance and for adjustments to our capital structure, including maturity extensions. The ATM is not required to fund our day-to-day operations. So again, this facility is only intended to meet strategic objectives. We have added substantially to our backlog and increased it with about $450 million as of May 2021. The increased demand we see from our key customers going forward provides opportunities that we are uniquely placed to capitalize on, based on our available rigs. Together with our creditors, we intend to work through the second half of this year, optimizing our capital structure, including extending maturities to generate a solution that brings value to all our stakeholders. And lastly, the improving market environment, in combination with our 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 Q&A.

[Operator Instructions] Our first question comes from Fredrik Stene from Clarksons Platou Securities.

Fredrik here. Thanks for the update. I was -- I wanted to focus a bit on the ATM offering since that was -- well, obviously, you announced it, but that is only briefly mentioned here on the last slide. So Patrick, Magnus, in particular, to what you're saying about this being a strategic way or a way that you can strategically or accelerate your strategic ambitions. Could you elaborate a bit maybe around how you would think of that ATM program. For example, in relation to rig activations, are you still going to need some sort of contracts maybe in addition to this money? Or what type of flexibility on top of what you already have? Do you think this will kind of add to in that mix?

Okay. So Fredrik, thanks for the question. Indeed, the ATM program clearly is an important one. So I think, firstly, what we tried to emphasize was the fact that for running our normal day-to-day operation, we absolutely don't need it but we are sufficiently optimistic about the future that we want to place ourselves in a position that we can react on any further uptick in the market. And if that would require significant amount of cash to activate rigs over and above the plans that we have today, we want to have that ability to do that relatively easy. Secondly, there is clearly a desire to work with our creditors to see what we can do on the maturities and push them out further, which also will likely require some cash. So I'll ask Magnus to maybe go a little bit further into the details regarding the program. But to me, one of the key takeaways is that this is really related to growth and further opportunities versus running our day-to-day business for which we don't need it. Magnus, could you maybe add some color to this.

Yes. Sure, Patrick. And it is true what Patrick says. The ATM program is a possibility to issue shares. It's not the same as issuing the full amount, and it goes over a long period up to 3 years. So as Patrick has mentioned, we will use this as a tool in our strategic toolbox and currently at this stage with the current share price as stated in our press release. First of all, there's no intention to sell shares at the moment, at these levels. And secondly, there is no particular need for it when it comes to operations as we state with the 13 rigs that we have now currently operating. We should be breakeven in cash from operations and to have a runway until the debt maturities in 2023.

Just going back to the rig activations in particular, if you should use this program, would you -- or would you use it to reactivate any rigs on spec? Or do you think that you would still need to kind of tie it towards a contract, but you can do more rigs within a shorter period of time now that you have this in place.

Yes, Fredrik. So I think that at this moment, there is no need to do anything on spec. I think we are very cautious with our cash, and we will put it towards contracts and opportunities that are confirmed and signed. On the 10 rigs that we have available, we have 5 of them that are already activated. So with a very small amount of cash, we can put these back to work without any issue. If we need to do further activations on top of that, then we might require some additional cash. What we will only do so for dayrates that are accretive to what we currently have and this would be significantly over the current plan. So I think what we want to say is we want to be in every position to optimize and jump on opportunities that we see going forward, but we would not start to speculative activate more rigs than what we have currently in the plan.

I have one more question, if that's okay, relating to the market. Instead, I saw here on one of your slides, Slide #8, you were quite positive on the Middle East tier and the additional anticipated demand of 30 rigs in 2022 and 2023. Of course, Aramco, they have suspended -- or they did suspend quite a few rigs last year. Many of them have come back. Do you have any color on the progress there when we're going to see, call it, marginal demand out of Aramco. Is there anything firm in the works there? And if it is, are you positioning yourself either for Aramco or other NOCs in Middle East?

Yes. So you are correct that on Slide 8, we are talking about the Middle East. And I would just limit myself to talk about the Middle East in general. Our customers are the best placed to talk about their own activity and inform the market when they feel is right and with the information that they feel is correct. So it would be, for me, better to just talk about the Middle East. But clearly, we have sufficient information that we see quite a few opportunities come up and that we want to make sure that we appropriately price. So yes, we are touching base with all our customers in the region. And the big advantage that we have that we're one of the few players that has a fairly significant availability of new rigs. And therefore, we think we are having something to offer where few others can offer the same. So from that perspective, it is interesting. But clearly, the Middle East is going to be one of the areas that has quite a bit of untapped demand going forward. So yes, we are excited about the opportunities there. We are having our contacts and are working with all the players in the area. But I would refrain from wanting to talk for any of our individual customers.