Q4 2022 Borr Drilling Ltd Earnings Call
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I'd now like to hand over to your first speaker today, Mr. Patrick Schoen CEO . Please go ahead Sir.
Good afternoon, and thank you for participating in the board drilling fourth quarter 2022 earnings call.
Patrick Schorn talking to you from London and with me here today is Magnus <unk> our CFO .
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 medicines are all 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.
During the fourth quarter, we have successfully started operations with two rigs, namely the Arabia, one and two in Saudi.
Almost a full quarter of operation with the wrong in Mexico.
And therefore fully operational for the quarter and Malaysia.
These efficiently executed activity increases with economic utilization levels over 98, 5% resulted in our top line, increasing 38% sequentially.
Yes.
With Fig currently being prepared for our operation in the Middle East, where she will start operation as the Arabia three in Q3 of this year. We're also accelerating our last rig the hills to be ready to commence operations in a similar timeframe.
This would result in all 22 delivered rigs in our fleet to be contracted and active.
The earlier mentioned, 38% topline increase resulted in an adjusted EBITDA of $55 1 million for the quarter, which means that for the full year 2022, our revenue was $447 million.
With $157 million of adjusted EBITDA.
A result that I'm, particularly pleased with.
And one that confirms the revenue and earnings trajectory that we have been sick linked to the market earlier.
Which is an adjusted EBITDA of $360 million to $400 million for 2023.
And a $580 million to $600 million adjust.
Adjusted EBITDA level for 2024.
Magnus will now step you through the details of the fourth quarter.
Go ahead.
Thanks, Patrick.
We are now on the slide key financial Q4 2022.
Q4, 2022 revenues were $148 6 million in the quarter, an increase of $40 7 million or 38% compared to Q3 2022.
This was split between $117 2 million of day rate revenue for our rates on regular contract and $31 4 million our related party revenues, which was favorable to earnings from our Mexico Joint ventures.
Rig operating and maintenance expenses for Q4 were $83 4 million, an increase of 23 million from Q3.
The increase was mainly due to an increase in activity and operating days.
$7 3 million, an increase in amortization of deferred mobilization and contract preparation costs.
Total financial expenses net were $49 4 million for the fourth quarter, a decrease of $4 7 million, mainly as a result of a $4 3 million decrease in financing fees of $3 4 million decrease in foreign exchange losses, and a $2 3 million.
In the article.
<unk> cost cover as a result of the sale of <unk> and.
This was offset by a $5 9 million loss on extinguishment of debt.
The net loss for the quarter was 21 3 million a decrease in loss of $33 6 million from Q3.
Adjusted EBITDA for the fourth quarter was $55 1 million, an increase of $11 2 million or 26% compared to the third quarter.
Our free cash position at the end of Q4 was $108 million and our restricted cash was $10 5 million.
Our cash movements in the quarter, primarily driven by.
Cash generated from operating activities of $77 5 million.
Cashiers on fixed asset additions, such as Capex and activation of $38 7 million.
And this was mainly driven by the activation of the Arabia, one and two are starting their operations.
And in Norway.
And finally cashiers to repay debt of $355 5 million offset by cash proceeds of $150 million from the new Dnb Bank loan facility.
Also total cash received from Mexico in the quarter reflected this expert team of it.
Turning to the next slide.
These graphs show the significant quarterly progression in both revenue and adjusted EBITDA, We have made since the beginning of 2021.
Our revenue in Q4 2022.
Triple that in the first quarter, our total for anyone.
Full year revenue increased by 80% from 2021 and EBITDA by approximately 300%.
As Patrick mentioned, we have updated our guidance for 2023.
<unk>, where we expect revenues to be in the region of $740 million to $780 million and adjusted EBITDA between 360 and $400 million.
Turning to the next slide we're also pleased to report that in January we completed the final step of our refinancing of our 2023 debt maturities by raising $400 million.
Bond issuances in order to repay our convertible bonds due in May 2023.
This was done through a $150 million senior secured bonds with maturity in 2026 at a coupon of nine.
5% and a 250 million convertible bond with a 5% coupon.
2028.
Turning to the next slide.
Our current delivered fleet consists of 22 modern Jackup rig all built after 2010 of which 21 rigs are 95% are contracted.
We have additional two rigs under construction of capital. So we have contractual delivery in 2025.
<unk> 20th ready to play with awarded 24, new contract extension exercise options.
Lives, representing more than 13000 days or 30 to 60 years, and one 6% to $7 billion of potential revenue backlog.
During the same period, our operating rigs have consumed approximately 57 years of backlog, resulting in a backlog replenishment ratio in 2022 at a multiple of two <unk>.
These calculations include contact Mexico joint ventures on a 100% basis.
In addition to adding over the face of compensation in the contract.
It is also worth noting that we have secured contracts for more than 90% of our available operating days in 2023.
In addition, we have around 50% available days in 2024, which has set the company nicely up to benefits from new contracts and the increasing day rate environment that we're currently experiencing.
And with that I would like to turn the word back to Patrick Please.
Thank you Magnus.
As Magnus has shown our capacity for full year 2023 is over 90% committed and for 2024, that's around 53%.
Both numbers clearly an indication of how tight the market for modern jackups.
In the graph on the left hand, you can see that the proportion of modern rigs has been continuously increasing and that the number of total contracted jackup rates has already reached a peak of 2020.
In the graph on the right hand side.
You see the historic order book for new rigs.
During several of the past cycles.
This order book was far in excess of 100 rigs under construction.
Currently when adjusted for already committed rates, there's about a handful of rigs entering the market.
Which is the lowest that we've seen in the last 25 years.
In the Middle graph you see every presentation of the available supply of modern Jackup rigs.
Well between the current available supply plus a new built at the shipyards and the current contracted rig there are possibly nine rigs available. While we are currently aware of demand that is at least double that and is increasing.
The fact that the market is very tight is clear and I often get the question regarding the longevity of the current cycle for the modern Jackups specifically.
And for that we should have a look at our customers.
Next slide please.
And the graph on the left you see the demand for the Jackup rigs by customer group.
We're 20 years ago. The Ifc's were proportionately some of the largest users of jackup rigs today that situation is very different.
Over the last years, the proportion of rigs employed by the NRC has grown tremendously to.
So currently about three quarters of all of the Jackup rigs worldwide being employed by NMFC.
In line with that the backlog for drilling a 75% directed towards <unk> as well.
<unk> are the largest and most strategic operators in the industry and as such as well developed long term production plans, which require a multiyear elevated levels of activity to achieve the required production goals.
As these plans are long term.
Contracting has become for the longer term as well as you can see in the graph on the right.
Which is understandable based on the long term activity plans of the NFC and makes even more sense, considering the finite asset pool of jackup rigs available to carry out these works.
The supply of Jackup rigs struggles.
To meet demand.
Which has immediate impact on the day rate and pricing. So a few words on that.
Next slide please.
On the graph on the left hand side, you see the utilization chart with a modern rates being at 95%, particularly when taking into account. The owner operated rig that are really not playing in the open market.
At these utilization levels looking at previous cycles as depicted in the right hand graph with inflation adjusted day rate.
The day rate increase as rapidly.
With the average being around $180000 per day.
However, what is different now versus the previous cycles is that there is no order book to speak off that could moderate long term pricing. So therefore, we expect further upward moving in day rate from the level of our recently awarded new contracts, which were.
In the 140 to $160000 per day range.
Next slide please.
In conclusion the.
The large refinance resulting in all maturities being pushed out to 2025 has been successfully concluded.
The asset pool is finite utilization ratios are high and customers focus on contracting assets for the long term.
We've given clear guidance for 2023, and 2024 earnings expectations.
Based on these at the end of 2024, our debt will be less than three times the adjusted EBITDA.
A very financeable ratio.
Secondly, we expect the value of our rates to steadily increase and towards the end of 2024, we anticipate having less than $60 million of desperate.
Again, a very financial situation.
Based on the outlook, thus far we expect to be in a position to distribute dividends to our shareholders immediately after the 2020 for refinance.
Our operational team continues to fully dedicate and manage itself to safe operations with high operational efficiency to create the maximum value for our customers.
I would like to end here are prepared remarks, and we can go into Q&A.
Thank you.
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We are now going to proceed with our first question.
The first question comes from the line of Frederic <unk> from Clarksons. Please ask your question. Your line is open.
Hey, Patrick I hope you're well.
Okay.
I have a question about your guidance.
You're talking.
The key thing.
Adjusted EBITDA range somewhere between three and 400.
And I think at least compared to my numbers before you that you published that quite a bit lower to around 330.
But even at that time, you had quite good contract coverage for 2023.
Even better.
And I was wondering if you could give us some color on.
How we end or what type of uncertainty.
Included in that number and also since you're activating the hills.
Hey.
It's fair to expect some sort of.
A long term contract.
That really gets rolled up Ken.
Positive impact.
We can entertain numbers.
Any color you can share would be greatly appreciated.
Sure Frederic.
It is too I mean, we have to try to we've tried to guide as much as we can without <unk>.
Flooding the commercial kind of the back so to say so if you talk about the uncertainty for 'twenty three with $94, 95% coverage is obviously not very high but if you want to talk about what are the things that are uncertainties than you could say there is.
To start with the exact start updates from for instance, the Arabia three or the hill.
There is.
Some contract extension that we have towards the end of the year. If you would have a week more or less of downtime you would have some uncertainty there, but quite frankly, it is very little uncertainty.
If we are able to keep everything running the way we are now with a very good technical uptime and economic Uptime then.
I think that there is little uncertainties. The contract coverage is there as you say.
And there is there is not many unknown so we need to execute as we have been doing and then these numbers should be the result end of that.
Perfect. Thank you and just a follow up.
Thinking about 24 versus <unk> 23.
Approximately half of your fleet.
Covered in.
20, Corey you seem to be.
Positive when it comes to the directional Dayrates are you, having any particular type of asset.
<unk> when it comes to.
Contracting the rigs for 2024 are you going to kind of.
Wait until rates are higher or do you think during the vacation already now too.
Perfect.
Okay term at the higher rates.
So farha.
Yes. So if you look at the last few announcements we have made these are all contracts within the 142 to $1 60.
Per day range.
I would expect that to continue and increase.
In the second half of this year I would think that we are going to see contracts that are going to be at the $1 75 range.
And when you look at the 24 guidance, we have given that is actually.
Expecting pricing to continue where we are now with only very slight increases to actually achieve those kind of numbers.
So I think that where you are right. There is about half of the contracts that roll off in 2024 and.
If we are.
Re contracting at.
The current pricing that we are seeing and then we will be totally fine in delivering that type of guidance as well. So I don't think we're looking for extraordinary things to happen, but I do feel that based on the tightness in the market that pricing will increase a bit further from where we are now and like I said, the last four or five contracts that we have.
<unk> announced were in the 140 to 160 I would expect that to continue going up during the year two to $1 75.
Alright, thank you so much.
Thank you Amy.
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We are now going to take the next question from the phone lines.
And our question comes from the line of Greg <unk> from <unk>. Please ask your question. Your line is open.
And good afternoon, everybody and thanks for taking my question.
I did want to talk a little bit about the market and the fleet.
Clearly you guys have done a great job and the market has cooperated and your ability to push pricing.
As we kind of look globally at the fleet.
Clearly theres a lot of you have most of your exposure in Asia.
Given some of the strength that we've seen in <unk>.
Other basins do you see the potential.
Chile moves some of those jackups that are that have open days in Asia on into and other base and maybe where you can get get.
They basically make more money.
Yes, Greg I think it's a good question and I think that if you maybe look traditionally it used to be true that the day rates in Asia were a little bit lower your opex was a little bit lower so the option to make money <unk> was good but the day rates were a bit suppressed I think what we have seen now is that on a worldwide basis over there.
Different regions. The day rates are actually very uniform, it's too easy to move a rig around and therefore, if you want to be participating as an operator and get a rig to work for you basically have to kind of work with this worldwide average debt that was earlier mentioning so the raise in the last the last call.
Tracks that we have also in Asia are in that same.
Bracket and the monies that we make out of that are.
Equally good as we as we make elsewhere. So even though there are opportunities to move assets from Asia lets say elsewhere, we have.
Very long customer relationships are very important relationships to us. So we are fully committed to that market and we will continue to serve the customers they're everywhere else and obviously you are right to say that assets will go eventually where most money is made but I think that today. It is very.
Fairly distributed over the different basins in the world.
Okay, Great and then just realizing that.
It's interesting to think about now.
Talking about rig scarcity.
Realizing that hey, it's the cycles get just getting going and there is still a lot of work to do.
On everybody's end, but.
As we think about it.
The new builds and realizing those are we have a couple of years.
Before we need to take delivery of those.
At what point could we start to see the company actively bid those rigs.
And to the market just given.
Some of the pricing and the longer term contracts that looked like they are starting to pop into the market.
Yes, no. That's a fair question and in our case, we only have two rigs left under construction.
Based on the refinancing that we have done.
Or to take delivery of those in 2025.
However, the markets today is that strong that we are in discussions with the various stakeholders to see how we can actually bring that forward, we're quite interested to put them in the market.
As soon as possible, which still I mean.
As everybody understands these are units under construction. So it will take some time, but if I could get these units to be working as early as 2024 would be quite pleased so based on the strength in the market the demand that we see today.
I'd be very keen to see that we pulled it forward into 2024, but those are discussions ongoing and we will just have to see where we can land.
Okay perfect Hey, Thank you very much for the time, everybody have a great day.
We are now going to proceed with the next question.
The next question comes from the line of Simon Soho from Evercore. Please ask your question.
Hey, guys. Thanks for taking my question I guess I just wanted to dig in a little bit about the work that youre doing on the maybe Anthony.
What type of contract prep it all entails.
Bringing.
That bank over.
And then if you could also maybe provide some guidance on the Capex line.
Obviously, a little elevated this last quarter, but just.
Kind of wondering sometimes intentionally for maybe bringing that down over the course of the year.
So Samantha so.
<unk>.
The Arabia, Sri is going to work on a contract.
In the middle East under five year contracts, where there is an option to extend that.
We are in the process too.
Fully activated and get his contract ready there are some specific requirements for the contract.
When it comes to the technical specifications of the rigs and its capabilities. So we're upgrading its to that and we would expect that rig to be commencing operations somewhere in the third quarter of this year. So let's say in another six months or so so that is where we are.
Magnus do you want to give any further comments regarding capex in general.
Yes.
Capex in general not talking about this this rig.
You do have a five year every five year Special survey, which we estimate to be in.
Ballpark.
Six 6 million per rig so I think in general Capex.
Normally recommend that you set aside approximately.
One 2 million.
Per year per rig to smooth.
General Capex.
Out in the model.
Okay.
Would we assume then that maybe the hill or similar type of.
Upgrades.
The types of work that it has worked.
I think capex should just drop off pretty quickly.
Then in the fourth quarter 'twenty.
I think it is fair to say that the reactivation capex at that time for us will come to an end there are no rigs to immediately activate any further details at this moment is on a similar timeframe as what we do with the Arabia. Three so both are in the process of being pre.
Baird.
Then it purely depends on which contracts the hilde will end up where today some contract specific spends that we might need to do on it.
But absent of that we should see Capex. Overall, then come down and then it will be purely related to more the periodic survey that we need to be doing before we received the last two rigs from the yard which will be as we have discussed in the previous question from 'twenty four onwards and could be.
Latest 25.
But as to either on the hills that would be more of a standard <unk> activation that we've done.
910 on already.
We estimate.
Typically to be costing round.
$12 million to $15 million.
So.
Before you do that contract because it caused by Patrick mentioned.
No that's super helpful. Thanks, So much guys.
Thank you.
We have no further questions from our phone line I will now hand back for any questions that you may have.
Yes, we have one question.
Market conditions does board think immediate.
Someone to make a commitment to investing in our Newbuild program.
And the board think new boats are required.
So I think that you would need to see is day rates in excess of the 175 and you need to have a situation where certain customers are willing to give the drilling contractor contracts that are of seven to 10 year.
In duration.
I think we are a little bit away from that although maybe not very far away from that.
The question is are we going to need that or not is a question, where I think that if we see what we have still to be done in the shallow water. When it comes to production potential over the next few decades, then I cannot believe that the current fleet is sufficient.
Over time.
New assets will have to enter the market if nothing else to replace some of the very old units that are still working today.
So I would say there is going to be a time in which we will see new builds.
It is probably going to require a day rates that are slightly higher than what we see now and.
We're the operator is willing to extend significant long contracts that these investments can be justified because obviously at the same time.
As the.
The requirements of these units might go up the cost prices going up as well. So these are fairly large investments that I. Just think are going to take a while before people are going to make that step, let's clearly in that environment and where there is no order book today. It is a very interesting environment.
For us to be.
Having commercial discussions with customers around rigs.
That are of the quality and.
H that we have so it's an interesting environment.
But I think that Thats OLED I would say regarding.
New builds.
Do we have any other questions.
We have no further questions at this time I would now like to hand, the conference back to Mr. Patrick Schoen for closing remarks.
Alright, I think that.
There is not much more to say than we have said.
We have had as part of the refinance here over the last few weeks are very intense communication with all our different stakeholders and investors. So ladies and gentlemen, thank you very much for your attention. We look forward to talk to you soon again to further update you on the progress we are.
Making with board drilling.
At the end of the day. These are very exciting times for our industry and there is a tremendous upward potential. So we talking soon and thank you very much.
Okay.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect your lines. Thank you.
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