Borr Drilling Limited (BORR) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Borr Drilling Limted webcast presentation. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Patrick Schorn, CEO of Borr Drilling to begin. Patrick, please go ahead.

Thank you. And welcome to this Borr Drilling Q&A session. It's not often that we get to talk to you twice in 1 week. As we have recently released our Q2 earnings, we trust you are familiar with that information. So prior to this Q&A session, we will refer to only some of the highlights out of that report. Next slide, please. Covering the basics, 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. So the key takeaways that we had from the meeting are really centered around the market. And I'll just highlight some of the key points in that. So modern rig utilization is 92%, and it's moving towards 95% after the award of some of the larger contracts in the Middle East. At debt utilization number, there is significant dayrate expansion. And as there are limited available rigs still stranded at yards currently only 20 or so that can come into the market, it means that this utilization number will remain high. And it will take day rates in excess of approximately $175,000, coupled with a long-term contract before any new builds could actually be considered. Now if you combine that with limited yard capacity going forward, it is very clear that all these points are leading to a sustained, very tight supply. And in result, this type of a tight supply is leading to higher day rates. And let me remind you that the peak rate in the previous cycle was around $240,000 per day and that the average rate between 2006 and 2014, was around $175,000 a day. So I'll leave this as the discussion of some of the day rates. I'll come back to that later. But before that, Magnus will make a few comments on our refinance after which I will make some closing points.

Thank you, Patrick. So in our Q2 report and presentation, we provided you with details and plans on the refinancing and you can go to -- go into this more detail overview of that through those reports. Since the report, we also announced the pricing of a $250 million equity raise on 10th of August, which is still subject to closing conditions. Therefore, on this call today, I would like to summarize the agreement in principle that we have reached with most of our secured debt maturities to be extended to at least 2025, and our remaining new build rig repurchase obligations to be excluded to 2025. So for the Hayfin facility, we have an agreement in principle to extend the loans to January 2025 and returns for $30 million down payment principal before the extension. The PPL loans, we have an agreement in principle to extend to May 2025. We have entered into an LOI to sell [ $3 million ] from Keppel and the delivery date for the 2 remaining new rigs from Keppel will be postponed from 2023 to 2025. The existing capital loan facilities for 3 rigs that have been delivered remains with maturities in 2025 and 2026. And we furthermore expect to repay the current senior secured credit facility of $311 million currently secured by 8 rigs and replaced it with a new facility of $150 million, taking about 5 rigs. So this will give us 3 rigs unencumbered, increasing the company's financial flexibility going forward. It can be used as a tool to address the refinancing of our $350 million convertible bond due in May 2023. We have also been shown indications on a term sheet for a new convertible bond in the amount of $250 million, which can play a part of the refinancing in addition to potential sale of certain assets. These agreements in principle are subject to conditions, including completion of our recently announced equity rates and entering into binding and long-form documentation with creditors. Once we have met these conditions and agree documentation, these agreements will improve the company's financial position by reducing debt and capital commitments by approximately $520 million and extend most maturities to 2025. And I'll turn the call back to Patrick, please.

Thank you, Magnus. So as mentioned before, jack-up supply is very tight. And the peak rate previous cycle being $240,000 per day, average rate between 2006 to 2014, $175,000 per day, that obviously leads to the question, well, what is happening in the market right now? So the leading day rates standard today are in the $130,000 to $150,000 per day with our last announced awarded contract in Africa also being in that range. Clearly, that leads to a cash-generating ability that we have going forward based on the current contract and day rate outlook. That if we were to take a day rate of $130,000 per day over our full fleet, it would generate around $600 million in adjusted EBITDA and at $175,000, this would be just short of $1 billion. These clearly are large numbers, and it will take some time until we have moved all our contracts in those rates. However, we have previously reported that for 2023, we expect to generate $290 million to $330 million of adjusted EBITDA and that we intend to double that in 2024, where at that time, we generate cash at rates that would also enable us to return cash to shareholders. So with this, we'll just try to show you what is the current utilization? What have historic rates been? Where is the market today? And what kind of a cash generation could we expect if we were to take today's rates going forward? And what we then would be able to do with that. And that's clearly leads us to a very positive and bullish view on this market. And we wanted to take the opportunity to give you the answer to ask some questions. So we will open up for that now. And as you know, there is a variety of ways to do this. Maybe operator, you can go one more time through this to make sure it's clear to everybody how we can get the questions to us.

[Operator Instructions] And our first question on the phone line comes from Saeed Omair Ahmed of Arctic Securities.

Patrick and Magnus, I have a few questions actually. Let's start off with -- on day rates. So you mentioned that the leading day rates are at $130,000, $150,000 a day. What do you think the day rates will be immediately after the Saudi tender is fulfilled?

Actually, it's a good question. I think maybe it is easier to answer that in line with the utilization and I think that with the utilization now reaching 95-plus percent, clearly, our forecasted day rates have been continuously be adjusted. And at this moment, if you were to think about exit rates in this year, I think you would have to think in the $150,000 to $175,000. We have been moving up faster than what we anticipated. We see that markets are tight, and we see that the discussion with our customers have been changing significantly. Of course, the economics of day rates are always going to be important to our customers. But what equally has become important and maybe more important at this moment is the access to equipment and the insurance that equipment is there when they require it. So I think that based on that and therefore, based of the immediate tenders coming out, I would expect that we are solidly in the $150,000 plus range for the second half of this year, particularly with our view that there is very few rigs that are readily available to come into the market or pick up any additional work. So that would be my answer to that. I understood you had another question possibly.

Yes, sure. I have a few more, if I may, please. So what is -- on yard capacity, what is the status of yards globally? And if you think that the market is undersupplied already. How will the market go on and to build anywhere between 30, 40 or 50 units given that we are reaching close to 100% utilization already? And how much time do you think that will take? That's the first follow-up question. And the second one is a completely different topic, but I think it's quite relevant because one sees that ADNOC drilling is listed, and the entire jack-up value for ADNOC drilling is above $300 million per jack-up. Do you think Middle Eastern listing is possible for Borr Drilling?

All right. Let me first go back to the question regarding the new builds. I think it is clear that with many of the national oil companies going to develop quite significantly, the resources that are currently in shallow water and the cost attractiveness of that resource, I expect that we are going to see a sustained activity increase in the shallow water. With the rig count that we have there now and some of the players increasing as much as they do, I think it is very difficult that we have sufficient rigs for all opportunities, which basically means that we have to prioritize. At a certain moment in time, that will likely lead to people still and even in our industry, considering again to start looking at new builds. I think, and we have said that before, I think before anybody would be able to do that, you would have to have a significantly long-term type of contract at rates of about $175,000 per day before you could justify that type of an investment. So I think that, that is what it's going to take. Now coming to the point of if the market environment is such that is justified, then you get to the point of trying to find a yard, which will be quite difficult. So I think that for smaller amounts of jackups, you could probably find something, you'd be paying $200 million, you'd probably be looking at significantly larger down payments than what we have ever seen in our industry before, before you actually start. And it'd probably be maybe 2 years for the first few, maybe longer for the rigs coming after that. And it means 3-year plus. So I think that it is a very tight supply. It is not the easiest equipment around. So I think that this is a problem we have to deal with, with quite -- for quite a long period of time, which, therefore, will mean increased day rates, I think, for quite a bit of time. So that would be my answer to new builds and how long we think that it would take. Now you were mentioning listing in the Middle East. I think that in general, it is fair to say that the gravity of our business and the activity increases are very, very concentrated in the Middle East. So therefore, it is likely to think that people would look at how many more ties you can have into the Middle East, increasing footprints, closer partnerships and as such, also a closer relation to possibly some of the investors in the region. So I wouldn't rule it out. I think it is certainly possible and based on the concentration of the work going forward and the activity today in the Middle East, you could make many reasons why this would make sense. So it is certainly something that our Board is going to look at as time progresses. Saeed, I will leave it at this to give some other people also an opportunity to ask some questions. Thank you.

[Operator Instructions] And our next question on the phone line comes from Fredrik Stene of Clarksons Securities.

Patrick and Magnus, congratulations on the deal. I think you're right that it's a transformative one for the capital structure. So I have few questions as well, just one briefly on the market to begin with. You seem to be quite optimistic on day rates going forward. And I think listening to literally every driller out there, there is definitely very optimistic outlook both for floaters and jackups. But when you come into these levels, $150,000, $175,000, do you think at that point, there will be or you'll get some pushback in terms of willingness to pay among these operators? Or are we at the point in time where the lack of supply to fulfill all demand will just have people pay up just to make sure that they're securing the capacity that they need. I guess that ties a bit to your comments about equipment as well, Patrick.

Fredrik. So I think it's a good question. But I think there are 2 sides to that story. So on one side, clearly, if you come from the low day rates that we have seen over the last few years, you might think that we go to exceptionally high levels, but we're actually not, right? I think that we are starting to approach average type of levels that the industry requires. The second thing that I think is important is when you think about what something is worth you always have to look at what kind of investments are made in these types of equipment. If you're looking at the $200 million piece of equipment, I don't think that day rates in the $150,000, $175,000 are high, as we have seen previously as well in the industry. And just -- I mean, I mentioned earlier, the peak rate, that was actually at an oil price of $60 to $80, right? So it was significantly of what we have today. So when looking at the economics for our customers, and clearly, there will always be a desire to keep their supply chain as cost efficient as they can. But I think that there is no problem from an economic point of view, coping with the day rates that we are charging today. You could come to those levels, but from the cost effectiveness of the barrel in the places where we drill today, I don't foresee that to become any problem at all. And let's face it. We are still a long way from what was previously peak rate. So I don't see it to be a problem. Even though I fully understand where the question comes from, but not an issue. We're far from that. I think that there is actually -- it makes a lot of sense for many of our customers to continue to build production capacity and the ability to produce more. It's good economics for them.

That's very helpful. And then second question, which would be in relation just to untangle a bit about your comments around the CB since that is not addressed directly in this -- in what you've done now with the secured creditors. So you mentioned that you're going to have, to my understanding, 3 rigs that are not collateralized. And I now was wondering if you had any initial thoughts around or whatever you can share on how you're going to use that to address that CB? Would it mean that you're planning to potentially use those rigs as collateral for the CB? Or do you think it will be more decline to sell them now that are uncollateralized and then pay down the CB? Would you think it needs to be a CB going forward? Or could it be more of a kind of a lab bond type of structure, potentially then collateralized, if you're not selling. So anything that relates to that would be helpful. And also, as a general question around your comments on dividends from 2024, is there any -- or what governance how much you can pay out from that point in time?

Yes. Okay. So I will ask Magnus to kind of go into some of the details around the CB. But I think by the way you asked the question, it's already clear that we indeed have many options on how to deal with it, and that is part of our desire. Apart from that, the reason of not dealing with the CB right now is because, obviously, we also look at what is the most cost-effective way of dealing with our capital and the CB at this moment is a very attractive piece of capital that we have to our disposal. But Magnus, maybe you can talk a little bit more about what our plans are and what optionality that we have.

Okay. And Fredrik, thanks for many good suggestions. So everything you mentioned there is actually something that could be alternatives to address this. And what Patrick is saying is that the coupon on this with debt is currently at [ 875 ] so a very low coupon on the debt. We have freed up 3 rigs now, which is there available to either take up more secured loans, you could -- if the price is right, we could consider a sale to free up the liquidity and thereby addressing the CB. So -- and I also think there will be markets there in the next 6 months to also have a more secured -- sorry, unsecured that replaced this unsecured debt with new one. We have also, as we mentioned, received terms for a potential $250 million CB. But I think currently, those terms, while it's obviously comforting to see that there is a market there today, if we could do something, we don't think it's optimal for the company to actually use that offer at the moment. We think that these terms are going to improve over the next couple of months when we see more data points on higher day rates, potential higher asset values as a result of that. And therefore, also improved debt market for us.