Q3 2022 Borr Drilling Ltd Earnings Call
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Good day and thank you for standing by when it comes to the Bar drilling Ltd, Q3, 2022 Russell's presentation webcast and conference call.
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I'd like to turn the conference what was your first speaker today, Mr. Patty Shaw seal. Please go ahead Sir.
Good morning, and thank you for participating in the board drilling third quarter 2022 earnings call I'm, Patrick Schorn talking to you from Bermuda and with me here today is Mac must file our CFO .
Next slide.
First covering the required disclaimers here, we go I would like to remind participants that some of the statements will be forward. Looking these medicines are all risks and uncertainties, which could cause actual results to differ materially from those projected in these statements I. Therefore refer you to our latest public filings.
Next slide.
I am pleased with our performance this quarter with continued operational success. We are further optimizing our cost lines, leading to an improved adjusted EBITDA, while our revenues were up only slightly.
Apart from executing on the current operations in the field. The technical team also completed the activation of several of our rigs that have started operation in the fourth quarter with the extra capacity coming online we expect the fourth quarter revenue to be at least 25% higher than what we have generated in the third quarter.
Our fleet of 24 rigs as gone through some adjustments after the sell off of four units related to our recent refinance.
<unk> in a delivered fleet of 22 units of which 20 are currently contracted apart from these 22, we have two further units in the shipyard to be delivered in 2025.
Our cash position at the end of the quarter was high during the equity raise that was completed in relation to our recent finance as well.
Magnus will now step you through some of the details of the third quarter.
Thanks, Patrick.
We're now on the slide key financials Q3 2022.
The Q3 translated to revenue came in at $107 9 million in the quarter, an increase of $2 6 million or two 5% compared to Q2 2022.
This was flipped and 90 and a half million in day rate revenues for our rigs on regular contracts at $17 4 million in related party revenue, which has been about the earnings in our Mexico Joint ventures.
Rig operating and maintenance expenses for Q3 was 65 4 million a decrease of $5 1 million from Q2 to.
The decrease is mainly due to a decrease in amortization of deferred costs.
Impairment of non current assets for the third quarter was $77 3 million.
A decrease of $117 1 million compared to the second quarter.
The impairment recognized in the quarter relates to the rate give me after English classified as held for sale in Q3.
The impairment in the second quarter related to the three newbuild rigs at Keppel, which we have agreed to salt.
Yeah.
Total financial expenses net was $54 1 million in the third quarter, an increase of $17 2 million.
The increase is primarily a result of a $7 5 million one off costs related to financing fee at $4 3 million increase in interest expenses.
$3 $1 million decrease in interest income and $2 2 million increase in FX losses.
Okay.
The net loss for the quarter was $54 9 million a decrease of $110 4 million from Q2.
Excluding impairments, our net loss increased by $6 7 million.
Okay.
The adjusted EBITDA for the quarter was $43 9 million, which is an increase of $6 9 million or 19% from the second quarter of 2022.
As Patrick mentioned, our free cash position at the end of the quarter with high $279 million.
On a restricted cash of $7 million.
Our free cash increased by $249 3 million in comparison to the prior quarter and is primarily driven by.
The cash proceeds generated from operating activities of $9 3 million, which includes the impact of $9 9 million cash interest paid and the payment of <unk>.
$7 5 million financing fee.
Cashiers and fixed asset additions of $20 4 million, mainly driven by activations of three rigs.
And $264 million of net proceeds from our August 2022 equity offerings.
Okay.
Moving to the next slide.
These graphs shows the significant quarterly progression in both revenue and adjusted EBITDA, We have made since the beginning of 2021.
The revenue in Q3 2022 is nearly double that seen in the first quarter of 2021.
Year to date revenue has increased 68%.
Compared to the year to date revenue in 2021, and EBITDA almost 600%.
We have previously guided our adjusted EBITDA for the full year 2022 to be between $115 million and $140 million.
However, based on our 2022 performance this far.
Currently estimates to generate adjusted EBITDA in excess of the upper limit of that range I E above $140 million.
Okay.
Moving to the next slide.
The current delivered fleet consists of 22 modern jackup rigs all built after 2010.
And we have additional two rigs under construction at Keppel.
This follows the anticipated completion of the sale of four rigs in the fourth quarter of 2022.
Since the second quarter 2020 to report, we have secured new contract extensions and analyze it on ice for 10 of our active rigs maintaining the companys contracted and committed fleets at 20 units.
This includes long term contracts for five of our premium Jackup rigs in Mexico now contracted until the end of 2025 and the prospect of five contract awarded by Eni and Congo.
Year to date the company has been awarded 22, new contracts extensions exercise options at Ace and otherwise, representing 31 years and $1 $36 billion of potential backlog.
During the same period, our operating rigs are consumed approximately 14 years of backlog. So we are maintaining our backlog replenishment ratio at a multiple of <unk>.
Okay.
It is also worth noting that these calculations includes the contracts throughout Mexico JV is on 100% basis. In addition to any mobilization compensation into context.
With that I will.
<unk> back to Patrick again.
Thank you Magnus.
The following graphs highlight some of the benefits of shallow water resources.
Firstly on the left it can be seen.
It is that it is highly cost efficient with only middle East <unk> production with a lower breakeven cost.
Secondly, it continues to be a very large resource base that is largely in the hands of national oil companies that will be producing these strategic resources for a long time into the future.
Thirdly on the right hand side. It shows the increasing portion of total offshore production that will be produced in the middle East, which is currently the region with the fastest growing activity.
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Since the second quarter 2022 reports the market continued to experience increased contracting activity and fleet utilization, particularly among modern rigs utilized.
Utilization level for modern rigs has now reached 95% a level not seen since 2014.
While 28, new builds have entered the market.
Since the beginning of 2020 demand continues to outpace supply increases.
Currently only a limited number of new builds remain in the yards with an order book that is next to empty.
High utilization levels and limited availability of high quality assets have resulted in a sharp inflection on day rate levels for modern rigs.
The recovery in day rates has been quite steep from the lows of 2000.
50% to $60000 that we have seen previously two recent fixtures that are consistently reaching and exceeding the 120 to $130000 per day level a trend that we expect to continue as asset availability becomes further restricted.
Next slide.
In the last quarters and more pronounced in the middle East several customers have taken active steps to secure incremental capacity under long term contracts, leading to an increase in the forward utilization of the fleet.
This implies high confidence in the outlook for oil and gas demand and the national oil companies strategic approach to secure additional rig capacity and a gas market.
Okay.
Three year forward utilization levels have returned to previous year peak levels with fewer assets rolling off contracts in the future is also leads to a longer term market that is tight for a long time going forward.
While several multi rig multi year tenders have concluded the demand pipeline as measured by the number of open demand days.
Some customers as remains on a strong upward trend and roughly doubled the levels experienced in the recent trough in 2020.
Next slide.
Okay.
This slide gives three data points per region, firstly, the number of contracted rigs.
The number of rigs still available and in the small fund.
It shows the number of rigs that is the difference between the peak rig count in a specific region versus what is contracted today.
All of these data points, leading to the fact that very few rigs are still available and the demand has not yet reached the peak in every region yet.
Next slide.
Availability of modern rigs at low levels and adjusted capacity continues in the single digits as customers continued to show clear preference for modern assets. We anticipate this segment to be under supplied in the new future.
The record low order book at shipyards for new builds is unlikely to give reprieve, while the newbuild prices are increasing quite rapidly with limited capacity at the yards available.
In summary.
Customer demand remained strong oil and gas prices, although volatile remain at the rates attracted for further investments.
Amidst declining production levels, resulting from years of lower E&P investment.
With these fundamentals locks in place we are already experiencing significant and accelerating increases in day rates in some cases more than double <unk>.
<unk>.
We are increasingly confident that this trend will continue for a longer period as limited incremental supply is available in the foreseeable future to offset the fast increasing demand for rigs.
Next slide.
So in conclusion.
We have completed the large refinance of the secured creditors successfully.
As communicated previously the convertible bonds will be addressed by early next year.
And we have various options on how to deal with this.
The utilization in the market continues to increase which is a positive impact on day rates.
Based on our performance, thus far and the outlook for Q4, the revenue and adjusted EBITDA for 2022.
We will be closing above the guidance previously given.
High utilization with a positive market outlook will eventually lead to new capacity coming to the market. However, with the order books at the shipyards being next to empty any new assets ordered today will only entered the market is 30 to 36 months the earliest.
Our newbuild pricings are rumored to approach $300 million per unit.
Our technical team has been fully dedicated getting the new rigs to our customers on time and in the best possible condition.
This while the operational team continues to have an extreme focus on safe operations at high efficiency to create the maximum value for our customers.
I would like to end here are prepared remarks, and we can go to the Q&A.
Ladies and gentlemen.
Reminder.
Hey, Felicia to ask a question. Please press star one and one.
One on your telephone.
We are now taking the next question.
Please standby.
The next question from <unk> <unk>.
Hey, guys hopefully you can hear me okay.
Yes.
I wanted to.
To touch a bit more on the convertible here.
I think they are.
Report on your performance this quarter when it was better than what I expected. So all in all in a good report operationally, but at least initially today I think the stock so.
A bit downward pressure and I'm not asking you to speculate in your own stock price.
It could be because.
Parts of the Investor community May have expected some.
More color on the CB refinancing. So I was wondering have you are you able to I don't know yet.
According to the January deadline, but are you able to give a bit more color on what type of options you are exploring and maybe when we should expect to hear something in relation to this all that on the debt.
Debt maturities.
Yes.
Absolutely Fredrik let.
Let me ask him Magnus to comment on this.
Thanks, Patrick.
I think we have several options for refinancing the CB the way we see it.
And the connection with the <unk>.
<unk> refinancing we communicated that we would address the CV closer to maturity as we expected asset values and day rate earnings to FERC to increase.
And this has to materialize, so it's improving our financing opportunities the way we seats.
So we still have three unencumbered rigs with capacity to put on further debt.
And on these were awaiting contacting stages for some of these which are likely to get some clarity on in the near future. So once this is resolved this will dictate the amount of leverage that we can put on these rigs whether it's around 50 to 60 million.
For our rig level or a higher demo.
Depending on the contracts.
Additional to that when the right thing rising day rates and the asset values, we should have excess debt capacity on the five rigs that we're having the bank facility.
Is five rigs are only levered with $30 million each as of today.
Yes, it's kind of as a calculation exercise supply $50 million to $60 million secured debt per rig for these eight rigs. This means that we can have additional debt capacity.
260 to 330 million on this package.
In addition to that we should have significant unsecured debt capacity also to cover any potential shortfalls.
That's interesting.
Yes.
Let's.
That's super helpful and do you think just as a follow up on that do you think.
With the cash on hand on the equity rates from.
From earlier is there any orderly created the need from the from the equity side as you see it given your visibility on the credit side to tackle that the 350 here in Sydney.
I think yes.
As I said I think.
Very good.
<unk>.
Space or walk behind holiday than the assets.
Topline number three unencumbered rigs and the other five rigs on the bank facility.
I think thats.
Leaning too so the answer on that question.
Yes.
Thanks, Brian Thank you so much.
Super quick one thank you.
Yes, just on Mexico Super quick 46 $47 million you've received so far in Q4 did they include the upfront payment of new contracts or not.
That includes the upfront payment yes.
Thanks, that's all for me.
Thank you Ross.
Thank you for your question. Thank you.
We are now taking the next question.
Please standby.
The next question from Luis <unk>. Please go ahead, hey, Thank you. Thank you and good afternoon, everybody I did have a question.
Around the last comment around opportunities in the rig market and the ongoing financing.
As I look at your fleet status report clearly theres a lot of customer options.
On some of these rigs given when they were fixed I imagine that some of those customer options are.
Maybe below leading edge day rates does that.
Are those options viewed as backlog given the fact that they are in the money for the customer.
Do you think.
So I think that at this moment the way you need to see the auction first there is a blend in the options that we have options that are allowing the customer to continue on the on the existing contract rates.
Which clearly at the moment makes a lot of sense of where most of these customers. We would expect them to continue some of the options that we have and that our customers have are at mutual agreement of market price. So some of them will be renegotiated, even though they are seen as an option. So it is really a a blend in that and I think that it is clear.
Clear that.
More on price options that we have the better it is to have a discussion with the customers today, but I think that that goes similarly for any long term contract that you have out of the past these rates are likely to be lower than.
What you see in the market today also a reason for US that we are clearly very careful weighted two remaining rigs that we have we will absolutely want to make sure that they are having market representative rates when fixed and not that we are fixing them for the sake of fixing them at a rate that is not.
Optimal for the investments that we've made so far.
So I think that is best way to look at it but speaking specifically about the options. There is a blend off price and unpriced options in that.
Okay, and then just and then just.
I appreciate the two the two rigs that are.
In the market being marketed.
Okay.
Pricing has clearly inflected higher pretty rapidly.
As we think about.
Demand for these regs.
Just given the if I were to say Hey, we went from a spot market to a one to two year term market, maybe three depending on let's just think outside maybe the middle east where contracts are longer or are we seeing durations for our contract durations b ramp higher inter.
Just from customers just given the fact that pricing really continues to go up it seems like almost weekly.
I E. Do we think we could see rigs on three plus year contracts or something.
Absolutely I think that that is the problem at the moment I think that from an from a rig contractor perspective today the longer contract.
Carrying a significant risk of being priced too low regardless at leading.
Leading edge price you put on them today, so you're absolutely right. That's today the customers are looking very aggressively at longer term contracts.
The loan was now being five plus two years, but we see it in many regions where contracts are fixed for much longer than we.
We had seen before clearly with the sentiment that asset availability in combination with better to lock in a price today that you know they are in one that you don't know in the future is driving that that also is coupled with the fact that we see that.
The prices that people are looking at for Newbuild seem to be increasing as fast as you have seen some of the shipping newbuild prices go up so clearly that those increases then drive the requirement for a much higher day rate before any of these maybe investment ideas.
Gary any through it so I think that it is clearly the fact that we enter discussions that we have with customers are.
Or having discussions about longer commitments and larger commitments.
Then what we had seen in the past.
Okay, great. Good luck good luck everybody.
Thank you.
We can go for next question if there is long.
We don't have any further phone questions, but we have one online.
What do you think is the leading edge day rates in the market today for a five year contract and for our short term contracts.
So.
There's obviously a variety of things that we look at when we consider contracts it is and which area of the world. It is it has to do with contract length, but it also has to do what specific equipment, we would have to put on it to get a a.
Rig ready to operate.
Because it's not only the investment you make in new equipment, obviously associated with that as a certain downtime for the rig as well.
That needs to be calculated into the price.
However, if you want a general kind of number then I would say that today in all areas.
We are seeing prices for fixing for that long period, you would probably have to think about between the 130 to 165 would be the rates that are being tendered.
We have been announcing.
Contracts in just about every geography.
In excess of the 121 30 already so I think that that is clearly something that is.
That rates are going up and it is not just limited to one or two areas you see it across the board.
But I would say if I would have to make a comment around leading prices that people are putting on it would be anywhere from the $1 32 to 165 at this moment, but it is continuously moving target and as less rigs get available. Obviously that is something that will continue to go up.
Okay.
Any other questions online.
Yes, we have one more.
<unk> upfront payment our yards asking to part to Newbuild order for $300 million.
Day rates and contracts would lead to this.
So.
I don't want to be perceived as the experts of dealing with yards on new builds at this moment because as we have stated before we are not.
Anticipating to lean into this cycle and start building assets because we think there is other options for us however from what we understand the pricing to be is it rapidly it is increasing towards the city on group we understand that.
About 50% will have to be paid down.
Before start which is just in comparison of the past is very different which clearly then becomes of a large down payments and if you think about rigs costing desk kind of.
Initial investment you would have to think about day rates in excess of 200 million a $200000 to actually justify a rig in the high two hundreds and you would probably has to have a contract in hand or something like seven years before somebody gets into it so I think from the.
This behavior of our industry in the past where people would build rigs.
Without having contracts in hand, because the capital.
Intensity, increasing as much as it is doing today I don't think people will do that but it will require contracts are seven year, plus and I would say day rates well over $200000 per day for that has to make sense.
Once we reach that point, we'll have to see how the market behaves but that is what you would have to get before you would want to get in dose type of day rates.
Any other question on online.
Yes, just one more.
Perhaps your earlier guiding to have the entire delivered fleet contracted by year end 2022.
This still the target and achievable.
Yes, I will continue to keep it as the target for myself and the team.
Obviously, there is a.
Large variety of tenders that we have our two remaining rigs on an offer.
But it is also a time, where we want to make very sure that we don't.
Take a.
Day rates that is not in line, where we see the market or not in line with the investments that we estimate on the units.
So it is going to be a balance between making sure that we get the appropriate day rate for the units, but clearly the opportunities are still there and we will continue to pursue them.
Until the end of.
This year and if necessary beyond that but I think that if I look at the demand that is there in the markets today.
Still place these units.
And the other question online.
Okay.
Yeah.
Alright, then I would like to thank all participants.
For participating in this call I'd like to thank.
The <unk> team for the fantastic work Thats being done in the field for our customers and preparing all the equipment and we look forward to talking to you again.
At the end of the next quarter. Thank you very much.
That concludes our conference for today. Thank you for participating you may all disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Yes.
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Okay.