Borr Drilling Limited (BORR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Borr Drilling Limited Q1 2025 Results Presentation Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Patrick Schorn, CEO. Please go ahead.

Thank you. Good morning, and thank you for participating in the Borr Drilling first quarter earnings call. I'm Patrick Schorn, and with me here today in London are Bruno Morand, our Chief Commercial Officer; and Magnus Vaaler, our Chief Financial Officer. 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. Our first quarter results were largely as expected, reflecting the impact of temporary rig suspensions and preparatory work for upcoming contracts. Total operating revenue declined by $46.5 million quarter-over-quarter, resulting in adjusted EBITDA of $96.1 million for the period. During the quarter, we averaged 16 active rigs out of our 24 rig fleet. Despite the lower activity level, operational performance remained robust with technical utilization at 99.2% and economic utilization at 97.9% for our active rigs, a reflection of the continued strength and efficiency of our operations. On the safety front, I'm pleased to report that several of our rigs received industry and customer recognition for outstanding safety performance. Notably, the Groa was awarded Qatar Energy's HSE Award for 2024. and the Prospector 1 received the 2024 Best Safety Performance Award from the IADC North Sea Chapter. In Thailand, Borr Drilling received PTTEP's CEO Safety Excellence Award for the second consecutive year. These achievements are a statement to the commitment and professionalism of our crews, and I congratulate and thank the entire team for their efforts on safety. Looking at the second quarter, we are seeing a meaningful ramp-up of activity. Three suspended rigs in Mexico have resumed operations, while the Vali and Arabia I have both commenced their contracts. In addition, the Thor and Ran have secured new contracts starting this quarter. As a result, our operating rig count has now increased to 22, laying the foundation for stronger financial performance in the quarters ahead. Our liquidity position improved during the quarter, supported by the collection of approximately $120 million in outstanding receivables from Mexico and $10 million in mobilization fees for the Vali. Following the quarter end, we received an additional $35 million in mobilization fees related to Vali and the Arabia I. While we continue to pursue several opportunities in 2025, our commercial efforts are now increasingly focused on 2026. Our rigs in Mexico represent a significant portion of our available days in 2026 and beyond. The combination of increased activity in Q2 and the advancement of private investment projects in Mexico are positive for future rig demand and extensions across our fleet in-country. In light of uncertain market conditions, the Board has decided to suspend the dividend to further reinforce the balance sheet and enhance long-term value creation. While we are not issuing specific EBITDA, adjusted EBITDA guidance for 2025, we are, however, confirming to be comfortable with the current Bloomberg consensus estimate of approximately $460 million. I'll pass the call now to Magnus for the first quarter financial commentary.

Thank you, Patrick. The results for the first quarter were highly impacted by temporary rig suspensions and mobilization of rigs to commence contracts, which led to us only having 16 out of our 24 rigs working on average during the quarter. The total operating revenues were $216.6 million, a decrease of $46.5 million compared to the fourth quarter. Day rate revenues decreased by $22.6 million, primarily due to a decrease in the number of operating days for Arabia II, Ran and Thor, partially offset by an increase in operating days for Gerd, Gunnlod and Vali. The overall decrease in day rate revenue also includes an $11.5 million decrease in deferred mobilization revenue related to Arabia II due to the recognition of accelerated amortization of deferred mobilization revenue in the prior quarter linked to its contract termination in Saudi Arabia in Q4. Bareboat charter revenue decreased by $17.9 million as a result of the temporary suspension of the rigs Galar, Grid and Gersemi in Mexico, who were suspended effective January 8. And management contract revenue decreased by $6 million due to the suspension of the Galar. Total operating expenses for Q1 were $156.8 million, a decrease of $5.1 million compared to Q4. This is primarily due to $4.2 million decrease in rig OpEx and $1.1 million decrease in G&A. The decrease in rig OpEx consists of $10.2 million of lower expenses due to the decrease in operating days, partially offset by a $5.2 million increase in costs associated with Grid and Gersemi as a result of the company assuming their operating expenses and stacking costs during their temporary suspension period. Prior to the temporary suspension and during operations, these costs are borne by the JV. Net loss for the first quarter was $16.9 million, a decrease of $43.2 million compared to the net income in the fourth quarter and adjusted EBITDA was $96.1 million, a decrease of $40.6 million from the previous quarter. Now moving into our cash. Our free cash position at the end of Q1 was $170 million. In addition, we had $150 million undrawn under our RCF facility, resulting in total available liquidity of $320 million. Cash increased by $108.4 million in the quarter in comparison to the previous quarter. Net cash from operating activities was $138.7 million, which included approximately $120 million in settlement of outstanding receivables from customer in Mexico and $10 million of mobilization fees received for the Vali. We paid $6.1 million of cash interest and $16.9 million of cash taxes. Net cash used in investing activities was $25.1 million, of which $25 million related to cash used on jack-up additions, primarily as a result of activation costs for the Vali and long-term maintenance costs. Net cash used in financing activities was $4.9 million and can be explained mainly by the $4.7 million payment of cash distribution to shareholders. And subsequent to quarter-end, we have received approximately $35 million in mobilization fees following commencement of the contract for the Arabia I and the Vali. With this, I will pass the word on to Bruno.

Thank you, Magnus. Let me start with our recent commercial highlights before moving on to the market trends. Year-to-date, Borr Drilling has secured 9 new contract commitments, adding $221 million to our backlog at an average rate of $141,000 per day. We're pleased to see the continued execution of our commercial strategy. Since our last report, we secured high-quality contracts at attractive day rates backed by our strong operational reputation. In Asia, the Skald received a binding LOA from Medco in Thailand for a 170-day program starting in October following the completion of its current PTTEP contract. The Thor has been awarded a 75-day contract with Vietsovpetro in Vietnam, which has begun in late April. This allowed the rig to return to work earlier than previously expected, and the rig is now contracted into Q3, and we're pursuing active opportunities for work for the Thor into 2026. In Mexico, the rig Galar, Grid and Gersemi have been extended by a combined term of approximately 390 days. These extensions offset the suspension period experienced earlier this year and preserve our regional backlog. Further, the Ran has been awarded a 140-day contract with Eni in Mexico, which commenced in May. The contract includes options that could extend the rig into Q1 '26. In West Africa, the Norve has received a letter of award for an 11-month program expected to commence in the second half of '26. And finally, the Gerd has secured a 1-year contract with Foxtrot International in Ivory Coast expected to commence in Q4. These recent fleet developments, combined with the commencement of the contracts for the Vali and Arabia I has increased our operating rig count to 22 in May. Our 2025 fleet coverage now stands at 79% and an average day rate of $147,000. We're actively working with our customers on numerous opportunities. And based on advanced stage of negotiations, we expect the coverage to rise towards the 80% to 85% range in the coming months. Our 2026 coverage has also grown. We're now at 35%, an increase of 12 percentage points since our last report. In line with the normal tendering cycles for jack-ups, we see an increasing number of tenders being launched for work in '26, and our teams remain focused on firming up the coverage for the year. Additionally, several of our customers have expressed interest in discussing potential extensions to their existing contracts. We remain actively engaged with the customers and believe our strong operational track record, high-quality fleet and incumbent status will support further progress in building our 2026 coverage. This includes Mexico, where we believe the resumption of work on our 3 suspended rigs, including the private investment project, should create a favorable environment for potential renewals. Looking at the broader market, jack-up utilization has remained steady. Modern rig market utilization sits at 92%, relatively unchanged quarter-on-quarter. Adjusting for the net impact of the Aramco suspensions, modern utilization still sits just under 90%, which we see as a healthy level. Recent changes in trade policies and OPEC+ decision to unwind production cuts have introduced some uncertainty and price volatility in commodity markets. We're actively monitoring these developments and engaging with our customers to assess how these may affect future activity levels. Importantly, we continue to see shallow water project as resilient. The projects are primarily related to brownfields, offering attractive economics at the current oil price and faster cash flow cycles to our customers. Despite the recent market volatility, jack-up tenders and awards have remained largely on track as evidenced by our recent fixtures. On the rig supply side, this volatility continues to create a challenging environment for older jack-ups with reduced contracting opportunities as customer preference for modern rigs persist. We've seen a resumption in rig retirements in 2025 and expect this trend to continue. Conversely, with a limited number of new builds in the pipeline and no immediate prospects for further deliveries, we do not anticipate any future additions in the foreseeable future. Meanwhile, global demand outside of Middle East remains resilient. Regions like West Africa, Southeast Asia and Americas are gradually absorbing some of the excess capacity resulting from Aramco's recent fleet adjustments. At the same time, recent fixtures suggest that Aramco may be preparing to secure additional long-term jack-up capacity and create an optionality. Current jack-up activity levels in Saudi Arabia are in the mid-50s, a level consistent with 2019. Looking at Mexico, recent developments clearly show the link between rig activity and production. Since Q4 '24, Pemex's partial reduction in drilling activities led to nearly 10% drop in production in this period. We're pleased that our 3 rigs have now resumed operations in May and are again contributing to Mexico goal of restoring production to 1.85 million barrels per day. In short, while near-term volatility may continue, we remain confident in the long-term fundamentals of the jack-up market. We are consistently delivering our strategy, maximizing 2025 backlog and building 2026 coverage, whilst supporting our customers through the dynamic market. With that, I'll hand the call back to Patrick.

Thank you, Bruno. So in conclusion, in 2025, we've made solid progress expanding our contract coverage through a series of awards, and we now expect to reach 80% to 85% coverage for the full year. While we're still actively pursuing near-term opportunities, our commercial focus is now shifting towards 2026. Our operating rig count has grown to 22, up from 16 in the first quarter, giving us a solid foundation for earnings growth in the quarters ahead. In Mexico, all of our rigs are currently active, including one under a private investment contract supporting Pemex's production initiatives. This return to full operation positions us well for contract renewal discussions with Mexico, representing a meaningful share of our available rig base for 2026 and beyond. And while we continue to navigate some short-term uncertainty, the business we have built is resilient. The long-term fundamentals of the market remain strong and Borr with its premium rig fleet is well positioned to capture future growth. Finally, in light of uncertain market conditions, the Board has decided not to pay a dividend to reinforce the balance sheet and enhance long-term value creation. And with regards to adjusted EBITDA, we're on track to deliver 2025 consensus of approximately $460 million. Thank you. And ladies and gentlemen, we are now ready to go to Q&A.

[Operator Instructions] We will now take the first question from the line of Eddie Kim from Barclays.

I wanted to start off in Mexico. I think many were surprised that your 3 suspended rigs have now resumed operations, especially given the challenges in that market. Is this a sign that Pemex is finally getting their act together or does it speak more to the quality of your rigs specifically? And separately, you have 2 of your Pemex jack-ups coming off contract by year-end this year. What's the likelihood you think that those will be extended beyond that period?

Eddie, so I think it is maybe a combination of a few aspects here. I think, firstly, I think there's a very strong realization in Mexico that with very low or no activity production takes a very strong drop to that. And there is a lot of work going on to make sure that activity plans are drawn up to make sure that additional production is created going forward, which means putting rigs back to work. Now clearly, where we benefit is on one side, on the quality of the rigs, but more importantly, the well construction work that we are involved in, in Mexico has, over the last few years, demonstrated that we can generate some of the lowest cost barrels, drill very efficient wells and have done this approximately just short of 100 wells offshore at the moment. So I think that the concept work, I think that we have a fairly long history of performing well in the environment and being very cost efficient. And therefore, I think we are benefiting from being some of the, let's say, first rigs to go back. So I think that, that certainly has helped us. Now as to your question regarding the contract extension, I think that, that is something that we will be discussing with our customer and Pemex here over the following months. I certainly expect that we have good contract extension opportunities in Mexico. The exact size of that is difficult to estimate at this moment, but I'm sure that we get more clarity in that towards the later part of this year. And clearly, based on the performance that we have had over the last 3 years in this contract, I would expect that we do reasonably well in that. But I'm very happy to kind of keep you up-to-date as soon as we have more information on that.

Understood. My follow-up is just on the uncertain market conditions you highlighted as the reason for suspension of the dividend. Could you just expand on this a bit more for us? Are you seeing customers in certain regions getting increasingly more cautious about the outlook in your conversations with them and perhaps pushing back drilling programs? Or does it reflect more of your expectations for further oil price declines due to OPEC or maybe a combination of both? If you could just expand on that comment for us.

Yes, Eddie, I think it's a little bit more a macro situation where I think that we have all tried to get a good understanding of what the latest macro developments really are going to mean to the market. I mean, we have clearly had a lot of discussions around tariffs and what that might do to global GDP and as a result, to oil demand. Counter that, we have seen that demand has remained actually quite strong. Overall, we see a lot of customers that do relative short contracts. So from that, I can see that they are certainly keeping a little bit their finger on the trigger, which I think is understandable as there is just quite a few items on the uncertainty list. Now what we also see is that when it coming to '26 and beyond, there are some larger packages of work. I think when we start to see that being tendered and actively negotiated, and ultimately being awarded, I think we start to all have a much better feel for it. So I think it is purely a question of trying to be cautious, making sure that we have options on what to do with the cash as obviously, dividend is not the only option that we have, but also working on the debt is, at the moment, quite attractive. So I think we want to make sure that we have all options open while remaining cautious for as long as the uncertainty persists.

We will now take the next question from the line of Doug Becker from Capital One.

Patrick, your commentary around Mexico sounds encouraging. Do you have any visibility on the option for the run to be exercised then outside of Mexico, the Prospector?

Yes, I'll turn that to Bruno, and thanks, Doug. I mean we have indeed options there.

Indeed, Doug, it's early days. The rig just basically just gone to work about a week ago. So we're still monitoring that. Conversations with the customers so far are encouraging. But we do see opportunities outside of that customer as well for the rig in Mexico. There's some other work with IOCs that could potentially keep that rig occupied well into 2026. So we'll see. It's definitely was a good timing to get the rig back to work. As we get closer to end of '25 and early in '26, we do see an outlook that is more favorable to see that rig continue to work, but I'll probably leave it at that. Early days, the rig just went to work. We're pretty happy with that.

Fair enough. Are there -- are you able to provide any color on which rigs are expected to increase the contract coverage to 80%, 85%? Are there 1 or 2 rigs or is it kind of a risk opportunity set?

Yes. No, we were looking at the moment, about 3 of our rigs representing that gap at the moment, Doug. And we're encouraged. We're quoting that number out of the team there. We do have very active conversations with the customers at the moment, including some nonbinding LOIs that we're working to progress. I wouldn't want to share more details at this time, but I'm pretty convinced that in the next couple of weeks, we'll be able to say something more about it.

We will now take the next question from the line of Fredrik Stene from Clarksons Securities.

So I want to touch a bit upon liquidity in general because at least from the discussions that I've had with clients recently, I think it's very, very thematic. And some of this ties to Mexico, Pemex and the lack of just payment visibility from them. And the second comes to 2026 coverage and beyond. And you've obviously given kind of good commentary on that already. But I was hoping that you could potentially provide a bit more color on how you see your own liquidity situation going forward? And by extension of that, if you -- or how you feel you're kind of positioned to, call it, weather a short-to-medium term storm? And also if you envision to touch the RCF either this year or next year in some of the, call it, more adverse scenarios that you might be running within your own sensitivity analysis?

Very good. I'll ask Magnus to comment on that.

Yes. Fredrik, I think we're in a good position going into this year with almost 80% of our days covered at just below $150,000 per day. So it's a very solid day rate as sort of the fundament of our liquidity going into the year. And also, as you see, Bruno here is now starting to fill up the beginning of 2026 also with backlog at rates that are above our cash breakeven rate, which are derisking, I think, our liquidity -- any liquidity issues for us. We have received $120 million payment from Mexico so far this year, which is about 1 year of receivables or earnings. So that's obviously also very, very positive and fills up our bank account. We do expect that Pemex should go back to regular payments now throughout in 2025. Invoicing seems to be progressing as planned. And the signals that we are seeing is that Mexico should come back to their regular payments that they have shown over the past few years up until mid last year, I would say. So all-in-all, I think the base case looks very solid. I do not foresee any reasons for drawing on the RCF as long as collections come in with the forecast that that we are currently seeing. That being said, in scenarios where there are delays in payments from our customers or that we have experienced before from Mexico, we have the RCF of $150 million, which provides us with additional comfort there. I would also maybe lastly add that when you saw the regular payments stopped from Pemex last year, we were also able to find alternative ways of getting paid with this financing or factoring agreement, which released almost 75% of our receivables on the balance sheet from Pemex. So I think we have a lot of lot of opportunities to also to monetize on the receivables should not the base case go through.

Yes. Maybe I can add a few things because, Fredrik, of course, it starts all with proper quality of revenue. And I think we have shown that we can generate that in '24, where we ended up with $500 million of adjusted EBITDA. We are indicating a number now that is along the lines of Bloomberg consensus for '25 of $460 million, where you also see that we are still in an environment where it's very competitive and where jobs are not easy to find. We're able to continue to fill up the coverage for '25 as well up to what we have indicated, the 80% to 85% we have no different intention to do with '26. So you see that we have 35% at a very decent day rate. If you think about what Mexico represents on top of that, it's about 20%. So you could say that with that, you're already starting to talk getting to the 55% to 60% of coverage. And we intend to continue to fill that throughout the year and try to be getting the right balance as we get this year between pricing and utilization. And I think as long as we can continue to be very focused on starting off with the right quality of revenue and keeping the costs under control, then I think with the efforts on collections, we can do a good job on liquidity as well. At least that's what we've been doing so far, and we intend to approach it no different for '26.

That's very good color. And I think, Patrick, you kind of started to touch upon my follow-up here because as you're building either the rest of 2025 and also through 2026, and maybe this one goes to Bruno. First part of that would be the discussions with your clients, are you still able and confident that you can secure premium rates or rates with a premium above market for your high-spec capabilities or are you in the current market getting pushback on that? I guess what you've signed so far proves that you can, but interested to hear how is that looking forward? And maybe for Magnus on the cost side also in the context of liquidity here, if you're faced with idle time on some of these rigs, and that pertains to Arabia II and Vali for that matter. How quickly are you able to ramp costs down and up if there's open capacity in between contracts?

All right, Fredrik. So in terms of your question, and probably difficult to provide a single answer to that and whether we can get a premium on every job going forward. I think it depends a lot on the specifics of the projects. We're obviously very well aware of the value that we bring to the customers with our high-end rigs, offline capabilities and features like that. And to the tune that we know we create value for our customers, we think it's fair that we continue to claim a bit of a premium for those rigs and have been doing so for a while now. That all said, as we've been repeating for the last couple of quarters, at the moment, coverage is obviously just as important, if not more important than the premium. So we keep an eye. When we deliver value for the customer because of project specifics, we certainly are very keen and driving to get that, and I think we have continued to do so. Maybe a bit more on projects that are a bit more cookie-cutter where we don't necessarily add an immense amount of value to the customer. We compete with the market trend. So we're comfortable with that. I think what is important is that the quality of our fleet still means that a lot of our customers default back to us and look at us as kind of the preferred alternatives, and that should give us a chance to fuel up that coverage better than our peers or at a faster pace than our peers. And that's really the focus that we have at the moment.

Yes. Then was your question on cost side of things when we have our rigs stacked. We currently have our rigs warm stacked. So they are relatively easy to get back to work as you saw from the rigs that we have suspended in Mexico and Ran, we keep warm enough that there will not be a lot of cost to bring the rigs out. And I would say a typical stacking cost for those rigs are in the mid-$20,000 per day approximately. The exception is obviously the Var, which is a new build coming out of the shipyard where we can actually have a lower cost while it's sitting idle, and that's more in the area of $15,000 per day. So if we look at stacking periods of up to more than 1 year, you will probably go into a cold stacking mode where you need to do more preservation, but you could also have a lower per day cost while stacked, but we have not gone to those stages yet as we are very optimistic that we actually will get work for them in less than 1 year.

We will now take the next question from the line of Craig Rossi from Bank of America.

Can you talk a little bit about the Saudi market? Just you mentioned on the long-term demand there, but we've been hearing what's been out in the press about rates potentially being dropped. Could you help us understand what you're seeing and how that may be affecting the Saudi market and just other adjacent markets? Sure, Bruno, could you take that Saudi question?

Sure. Bruno, could you take the Saudi question?

Looking at the Saudi market, and we -- I mentioned in the earlier remarks, we saw obviously over the cycle, Saudi going from about 50 rigs to 90 rigs. And then following the suspension, we're now back down to levels in the 50s. So activity level offshore is now back at same levels as 2019. As we understand, the land operation in Saudi has seen a significant reduction in activity as well. Clearly, the Kingdom at the moment is resolving for cash. They seem to think that there is production available at their fingertip. And I think optimizing that has been in the forefront. Now interestingly, in the last couple of quarters, there's a few things that would indicate that we could be at a trough and possibly working towards a reversal. On one of those indications has been the increased interest from Saudi about lumpsum turnkey projects offshore. They've been quite successful with that onshore over time, not so much offshore. And now they seem to be exploring those opportunities or wanting to discuss these opportunities with the service companies and consequently, the jack-up providers. So let's see how things mature over time. And then equally, they've been now securing long-term rigs for some of the rigs that -- long-term contracts with some of the rigs that had been previously suspended in the part of the kingdom, indicating that they're starting to build some long-term capacity or potentially optionality. So that's what we see at the moment. When Saudi is going to be back in the market, I think we will see. Certainly, we do feel that at the current activity level going back to same levels as 2019, meaningful reduction in activity are unlikely, and we start to see some signs of that potentially reversing going forward. But we'll see. Time will tell. I'll probably leave it at that. I guess we try to predict Aramco's steps in the past, and I think people have been proven wrong. So we will just monitor that going forward.

And I appreciate all the commentary on liquidity and the prudency of suspending the base dividend. How should we think about share buybacks? Is that a possibility in this environment or is that also off the table?

Clearly, I think that, that is something that at a certain moment is clearly attractive at where equity pricing is currently. I think that there is a variety of things that we can do. I think everything is on the table at the time that we have a good visibility on the cash coming out of the business, and that would include everything from buybacks, from retiring debt from straight dividends. I think that there is a whole slew of things you can think of that all will be appropriately evaluated and we looked at what would be the most appropriate at that moment in time. But yes, I think that there is nothing that is excluded. We will diligently work through it to make sure that we have the cash work in the best interest of the company.

We will now take the last question from the line of Fady Chammas from Triton Partners.

A quick question about the backlog. How does this backlog work? Do you have clauses for termination for [indiscernible]? Can the customers just stop the contracts? Are there any penalty payments? Yes, any color about that would be great.

Yes. No problem, Fady. And if you look at -- probably difficult to give you a single answer for all the contracts, but our contracts, in its vast majority, probably close to totality at the moment include -- if includes a clause for termination for convenience, it comes with a level of payout. That payout varies from contract-to-contract, but in general terms, it's equivalent to kind of the EBITDA backlog expectation of that -- of the remaining term. So if the customer decides to exercise that option, we do recover the profit expectation that we had for the contract. And that's the general terms for the contract. It varies a little bit from contract-to-contract, but they are fairly similar.

Okay. So just to double check, you'd say that the bulk of the backlog is standard protected, i.e., even if oil prices drop materially, you wouldn't expect customers just to cancel contracts and you guys wouldn't get anything?

That is correct, yes.

Okay. And then one quick follow-up is around the CapEx per rig. Like how do you guys think about it? And how should we think about it like average CapEx per rig per year? Can you also please give some guidance around that?

Yes, sure. As you know, we've now last year, finalized our newbuild program. So there's no further growth CapEx. And what we're left with then is maintenance CapEx, special periodic surveys, long-term maintenance. We have already indicated we expect around $50 million in 2025 on CapEx. which equates to around $2 million per rig. And I think that is a decent number to also use going forward for modeling purposes and into the next couple of years as well.

And I think, with this, we have come to the end of the Q&A session. Thank you very much for your attention.

This concludes today's conference call. Thank you for participating. You may now disconnect.