Q3 2023 Borr Drilling Ltd Earnings Call
[music].
Okay.
Okay.
Good day and thank you for standing by welcome to the board of drilling Limited's third quarter 2023 results presentation webcast and conference call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be the question and answer session.
To ask a question during this session you need to press star one one on the telephone keypad, you will not get an automatic message advising you had this race.
To withdraw your question. Please press star one again.
If you wish to ask a question via the webcast. Please use the Q&A box available on the webcast link at any time during the conference.
Please be advised that the best conference is being recorded.
I would now like to hand, the conference over to a first speaker today, Mr. Patrick Schorn feel please go ahead.
Thank you.
Good morning, and thank you for participating in the board drilling third quarter 2023 earnings call.
Patrick sure talking to you from Bermuda and with me here today is Mac is Fowler, our chief Financial Officer.
And Bruno Moron achieve.
Our chief commercial officer.
Next slide please.
First covering the required disclaimer 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.
Therefore refer you to our latest public filings.
Next slide please.
The third quarter was characterized by strong operational performance with technical utilization for the quarter above 99% revenue increasing by 2%.
Our adjusted EBITDA, increasing to $88 2 million, which is 5% over the second quarter's results.
Our backlog quality continues to improve year to date.
We have secured 12, new commitments, adding $728 million to our revenue backlog.
The implied average day rate of $161000 per day.
We continue to experience positive developments in utilization in the global Jackup market, particularly for modern rigs were marketed utilization stands at approximately 94%.
Day rates have continued to appreciate as demonstrated by our latest previously announced fixtures for the prospector five than that and the items.
In addition, we are pleased to announce a 15 month extension for the skull at a daily rate of $165000 per day.
The Iran and hills have recently commenced the new contracts, bringing the operating fleet to 21 rigs, we expect gert to commence to commence its new contract in early December 2023 at which point all of our 22 delivered rigs will be operating.
I'm also pleased with the conclusion of our refinancing and the issuance of 154 billion of secured notes with maturities in 2028 and 2030.
This completes the refinancing of all our secured debt and provides the company with a solid long term capital structure.
We've also announced that the board intends to implement a regular quarterly dividend starting at five per share.
Which is subject to required approvals and a special general meeting to be held 22nd of December 2023.
For 2024, we maintain our estimated range of adjusted EBITDA for full year 'twenty four to be between $500 million to $550 million.
Magnus will now step you through the financial details of the third quarter.
Yeah.
Thank you Patrick.
Now on the slide key financial Q3.
The Q3 2023 revenues were $191 5 million, an increase of $4 million or 2% from the second quarter.
The $4 million increase comprised of an increase in day rate revenues of $5 3 million offset by a decrease in bareboat income from Mexico joint ventures of $1 3 million.
So the overall increase in revenues were primarily due to higher day rates for our rigs.
Rig operating and maintenance expenses were $85 8 million for the third quarter, a decrease of $3 7 million compared to the second quarter.
The decrease is primarily a result of a decrease in amortization of deferred costs.
The total financial expenses net were $50 million FERC.
For the quarter, which is in line with the previous quarter.
And our net income for the quarter was <unk> 3 million.
Our adjusted EBITDA was $88 2 million, an increase of $4 2 million or 5% compared to Q2.
Yeah.
Yeah.
Our free cash position at the end of Q3 was $94 4 million.
Cash increased by $10 6 million in comparison to the prior quarter and is primarily a result of.
$34 5 million cash provided in operating activities nine.
$9 six.
Net proceeds from the sale of shares under our ATM program.
$10 3 million repayment of debt and $23 4 million cash.
<unk> costs for additions to Jackup rigs, which is primarily activation costs.
For our rigs held and Arabia III.
Then moving into the next slide.
As Patrick said, we're very pleased completed our refinancing for all the company secured debt now in November 2023 by the issuance of a total of $1 54 billion secured notes with a duration of five and seven years.
Following this our main debt maturities are in 2028 and 2013.
The refinancing provides a stable foundation for the company going forward and increased flexibility from an operational point of view and provides the possibility for distributions to our shareholders.
Additionally, we have secured a $180 million senior secured facility, which includes a $150 million revolving credit facility and a $30 million in guarantee facility.
Lastly, the delivery installments for our two remaining Newbuild viola and bar in 2024 are largely funded by a commitment from the shipyard.
$130 million of deaths Eric.
With this I would like to turn the word over to bring them around our chief commercial officer.
Thanks Margaret.
I would like to provide a brief update on the jackup market and our most recent contract and fleet developments.
Jack up utilization levels have continued to increase since our last report.
In particular in market utilization for modern rigs have now reached 94% with a total number of contracted rigs climbing to 300.
Modern rig availability continue to tighten and is now in high single digit territory excluded excluding release trended and sanctions in the assets.
Amidst this tight market, we continued to experience a marked record a mark recovering day rate levels for modern Jackups are lean.
To provide some commentary about our most recent fixtures that illustrate that.
Based on the current vendors and discussions with our customers about their future requirements, we see strong indications of and under supplied market conditions developing in the second half of 2024 and in to 2025.
Incremental demand is visible across most regions.
And specifically strong in Southeast Asia, India, Middle East and West Africa.
But we know as well some interest in pockets of activity developing in the next Iranian.
Your line reviews, we have shared in our earlier presentations shipyard order books remain at record low levels and unlikely to provide any relief the supply demand imbalance.
The remaining competitive new units in China are largely expected to be absorbed by the domestic market.
We believe these conditions will continue to support an increasing day rate environment, particularly for young and high performing rigs, placing more drilling in unique position to benefit from these developments.
Year to date, we have secured 12, new mutual contract LOI that outweighs any $728 million in total revenues and $12 three rig years to our backlog.
This represents a weighted average day rate of $161000 per day, which continues to be industry leading.
In addition to the long term commitments previously disclosed for the brakes perspective fiber mountain Congo door in Indonesia, and items in Thailand, I would like to highlight new commitments, we can be secured for a rig gambled in scout.
The gun law, which is due to complete its current contract in January 24 has now secured a binding alloy for 120 days program in Malaysia with the undisclosed customer.
The new commitment will start in direct continuation to the strict contra and should maintain the rig contracted until May 2024.
We have ongoing discussions with customers in their region and anticipate further commission further got lost in the near future.
The scope has secured a 15 month expansion with PTT, Thailand at a rate of $165000 per day. This extension will maintain the rig firm contracted until September 2025.
I highlight that either in scope or both modern rigs with expensive offline capabilities, which combined with our experienced crews enable our customers to materially reduce their well costs.
The recent award by PTP for these rates at market, leading rates are strong Testament of our superior performance and value creation enabled by a more than retreat.
Beyond These recent awards I would like to note that the rig Arabia, three cube and Ron have recently commenced new contracts and treating our operating rig count to 21.
The girl is in final stages of contract preparation and is expected to commence its new contract in early December at which point all of our deliberate grace will be operating and generating revenues for the company.
For further information about our fleet I'll refer you to the latest fleet status report made available on our company's website.
The company's total revenue backlog currently stands at approximately $1 9 billion and an equivalent rates of $137000 per day.
The recent contract awards secured by the company contributes improve our backlog both in total volume and quality.
In terms of future fleet coverage.
Our first contract in priced options cover approximately 84% of our available days in 2020 for providing strong revenue visibility for the year.
With the positive demand outlook for rates and continue to improved rate environment, our near term revenue visibility and long term operating leverage places board really in a unique position to benefit from this market dynamic and create significant value for our shareholders.
On this note I'd like to hand, the call back over to Patrick.
Thank you Bruno.
So in conclusion.
We finished Q3 with continued strong earnings and operational performance.
The average day rates of our backlog and therefore, the long term quality of our revenue is increasing by adding contracts at market leading rates are.
R 22 delivered rigs are contracted with all of them operating before year end.
The supply of Jackups to the market will remain constrained as no new build orders are placed the industry is depending on a finite fleet, where our rigs are the youngest.
With excellent operational capabilities.
This absence of new builds is likely to keep the utilization in the mid 90%.
With day rates continue to increase.
The refinance of our 2025 debt maturity has been successfully completed with the issuance of 154 billion of secured notes with maturities in 2028, and 2030 is complete the refinancing of all our secured debt and provides the company with a solid.
Long term capital structure lastly.
We are delivering on our commitment to become a dividend distributing company.
The board intending to implement a regular quarterly dividend starting at <unk> <unk> per share subject to required approvals in a special general meeting to be held 20 <unk> of December 2023.
In closing.
I'm very pleased with the results of the third quarter.
The team has delivered on every front.
Strong operational performance.
And excellent effort on the refinance.
Preparing the company for the long term.
This all combined with a business environment that looks bright for the offshore shallow water drilling business.
Resume nothing else, but to sincerely, thank our employees customers and partners for the milestones achieved this quarter and we will do our best to continue to deliver at the highest standard.
Ladies and gentlemen, I would like to end here are prepared remarks, and we can go to Q&A.
Thank you Dear participants as a reminder, if you wish to ask a question. Please press star one on your telephone keypad and wait for your name to be announced to withdraw. Your question. Please press star. One again. Please ask one question and possibly a follow up question at the time to leave room for other participants.
If you do have any further questions you can please rejoin the queue.
If you wish to ask a question via the webcast. Please type it into the question box and <unk>.
The cabinets.
Now I will go and take our first question.
And the question comes from the line of Frederic <unk> from <unk> Securities.
Your line is open please ask your question.
Hey, Patrick minus Bruno.
Congratulations on completing the.
Refi.
In October.
Yeah.
My first question relates to just refi.
Re Fi.
Enables.
You touched upon that.
In the prepared remarks.
Like dividends.
Do you have.
You paid up.
Intention to always be implemented quickly.
<unk> talking about partisan.
I was wondering are you at this stage able to give.
Any more color on how that might look in the future as this quarter.
The baseline type of dividends do you intend to grow that dividend over time or will it just be at any point in time subject to whatever.
You have.
For more distribution or any color would be greatly appreciated.
Yes, Fredric thanks for the question, so firstly I would say that.
With the way that we have been communicating in setting up the company and the development, we have seen in day rates and the outlook of the business. It is our full expectation to be generating increasing cash in the quarters and years going forward. So therefore, I think it is safe to.
Assume that in that we have the opportunity to eventually increase the returns to shareholders. So clearly what we are discussing now is a start of that with a <unk> <unk> per share.
I fully expect that to be increasing SD appropriate time in the future at the same time you know that we also are focusing on deleveraging. So we are doing both things hand in hand, I want to make sure that both get the equal and appropriate attention, but with the way that we see the business today.
The full expectation that the dividends would be progressively increasing over time, but I think we will discuss that at the time that we have generates.
Those returns, but that is what I would say at this moment is the most likely scenario looking at the overall business environment, and where we are with that.
Okay perfect.
Perfect. Thank you.
Wanted to touch.
<unk> touched upon the new builds.
Youre, saying that Theyre now alright.
In line with previous communication delivery looks to be in the second half.
Next year and do you also include the the payback.
After that initial capital debt.
The maturity profile here.
I'm wondering are you of your program.
On constructing <unk> units.
Open in any way.
Just trying to figure out how much incremental cash flow, Kevin chemical tends to come from there.
Yes. So I think there is a few things and then I think you'll understand that this is always a little bit of balance you're trying to strike to one side make sure that you have a contract in hand, when the rig is ready which.
Actual speaking from where we sit today is still a year out.
And on the other hand also making sure that you don't too early commits to a contract that maybe days below market price at that time. So we're trying to balance that we are having several discussions with customers at the moment. What we're trying to do is find the appropriate long term contracts that we can place each basin.
You look at the fleets that we have you are well aware that we are having some very specialized rates with offline capabilities I would say that these two new rigs that are coming are probably some of the best equipped to rates that we will have in the fleet. So therefore, we want to make sure that we spend the appropriate time to get them on the.
Projects that also can benefit to the maximum of the capabilities of these rigs. So we are in discussions with customers, but I don't want to give you. The intention that we're rushing towards contracting that we want to make sure that we take our time and look at it properly with the customers that thats the right opportunities.
Alright Super.
Ill jump back in the queue, but thank you so much and congratulations again on thank you.
Yes.
<unk>.
Thank you.
Yeah.
As a reminder, if you wish to ask a question over the phone. Please press star one one on the telephone keypad and wait for a name to be announced Alternatively, you could submit your questions via the webcast.
Now I would like to hand over to Andy I will take questions at economics.
Okay. We have one here why have you not provided in earnings update the expectation for 2023.
Very good.
A good question, we're getting towards the end of the year end.
We have previously guided to that.
For 2023, we expect to be ending the year between 330, <unk> hundred $60 million of adjusted EBITDA and looking at the results that we have so far delivered in the first three quarters plus the visibility we have on Q4.
We are right on track to be delivering right in that bracket.
So that's why we haven't sort of discussed that we're right on track to deliver 23 guidance.
And we hope to be discussing in presenting to you early next year.
Thank you and then we have another one what was your weighted average number operating rigs through Q3.
Yes.
Just below 20, so rounded up to 20 rigs operating in Q3.
Okay.
And then we have.
More rigs commencing now in Q4.
While already commenced.
In Mexico with the help and.
Then.
The wrong.
Lastly, a.
Starting operations and I remember that now.
All 22 rigs.
Operating by the end of the year.
Okay. Thank you I think we can go back to the phone queue. Please.
Thank you so much and I will go take a next question.
Give us some nymex.
Okay.
And the question comes from the line of Frederic Steel from Clarksons Securities. Your line is open. Please ask your question.
Okay.
Hey, Dan go ahead.
Just wanted to.
Hello.
On the <unk>.
Market.
So even though you seem to be very confident in that.
How things are developing and in terms of contracting strategy.
<unk> had a few show here on the chart you've pretty much covered.
24, so it could be good confidence in the guided EBITDA range.
But just now on the pulse.
Three months.
In the second half of the Rx income flow per side and one of the things that have been recurring is.
White space in 2020 for that.
Matching availability with contract startup costs.
Qualcomm some gaps in utilization.
So my question.
Is this something you're seeing in any way in the Jackup space.
That you will be able to effectively keep your contra.
Contracted close to 100%.
Foreseeable future.
Alright, Thanks, Richard Great question, No listen I think we start we start now with the very strong coverage already in 2024, when I think about the rigs that are having some white spaces.
In 2020 for the vast majority of that is in the second half, where we see a pretty strong.
<unk> for our rigs and we see customers almost the increase their sense of urgency in securing contracts for these rigs we see very limited correlation between the dynamics of the deepwater market and the shallow water market, we see our customers still very much committed to.
Securing capacity I think if I look for example, anecdotally through the skull, which is a rig that we extended now Thailand traditionally PTP would have run through a tender process to secure the rig I think understanding the limited availability of rigs in that market. They decided to direct negotiated without that award which speaks for.
<unk>.
The understanding of our customers that need to secure rigs.
<unk> fast before good capacity disappears. So I think the fundamentals are all very strong and I see limited Red Cross in terms of re contracted and white spaces. Obviously, we mentioned before about our more muted view on the North sea. So we're working to find.
Alternative commitments for for the P. One at the moment that <unk> contracted into Q1 potentially into Q2 subject to auctions.
That's obviously something we're working hard towards but in general we remain very confident on our ability to maintain rigs utilized for 2024 with very very limited.
Open space.
Maybe to add to that a little bit Fredrik I think that.
What you see in the deepwater.
Based on a completely different set of customers than what we see in the shallow water in the shallow water, we see that the there is a.
Very big.
Scarcity of modern rigs.
That continues to be there, we see very strategic long playing customers.
And let's not forget we're on the short cycle barrel, we can produce much faster from the moment that we start drilling versus any type of a deepwater development. So the barrier to start anything deepwater versus continuing to develop the production in shallow water is very different.
And I think that that is a market that's probably going forward will.
Continue to diverge and I'm very pleased that we are ultimately playing in the jackup market so to say.
Alright. Thank you so much both of you.
Well I have.
Thanks.
You.
Yeah.
Now I will go and take our next question.
Just give us some omics.
Okay.
And the question comes from the line of Richard Ahmed from <unk> asset management. Your line is open. Please ask your question.
Hi, there just wanted to ask about the exposure to Pemex. So.
In terms of the receivables that you have got is this $93 million of receivables the full amount.
Receivables from Pemex, and I mean, how much of this is past due how has that been.
How does that dynamic been been playing out is this a concern in terms of working capital use in and getting.
Getting paid on time, so we are at or just appreciate your thoughts on that thank you.
Thank you Magnus could you take this question.
Okay.
We have currently five.
There are seven rigs in Mexico is operating.
Through our joint venture.
And an integrated service provider.
The customer is pemex so.
And you are correct on the balance sheet, our current receivable from.
From the JV is.
Dominion, which has ultimately.
It makes pain.
We have.
Over the past quarters.
Yes.
He is.
Consistent payments from Pemex.
And I have.
Sure.
We received them regularly.
There is always some buildup in the balance wishes.
A combination of.
More activity, but perhaps on the rates and also that the contract rates for the rigs actually went up from last year into <unk> into this year, but just all in all we have we have received.
Very consistent payments.
And don't see that as a very immediate.
We also have.
Through our JV and through the integrated service provider.
In the event that there is a payment delay our payment hold up we also have a class two to receive regular payments from the integrated service provider.
To be sufficient to keep our rigs.
Operating in to cover operating costs. So there is no funding needed from from bar into the JV to continue to two operated rigs.
Thank you Andrew.
Yes, no that's very helpful and just in terms of from an accounting perspective. These JV results consolidated into yours. So does the EBITDA numbers. For example include 50% of the JV results or how does that work.
So.
We bear both our rigs the five rigs into the JV. So what you will see in our financial statement as the line below the daily revenue.
The bareboat.
Sure.
Charges that we do into the JV, So theyre not consolidated but we are bareboat thing the rigs.
So the bandwidth right into the JV.
Okay.
Thank you.
Thank you.
Now I will go on to take over next question.
Okay.
The next question comes from the line of Charles Olson from Fearnley Securities. Your line is open. Please ask your question.
Thank you hi, guys.
Well done on the quarter and on the refinancing our eco and Frederick on that one.
Just a couple of questions Brunet, starting with you in terms of on the markets I mean day rates continue to move higher what are you seeing in terms of correlate improvements on the tncs I mean are you seeing any big changes or small changes there.
So adding.
What do you see in terms of contract durations are moving outside of the middle East where most of the activity seems to be the case for now.
Changing given the call it tightening market dynamics.
Hi, Charles Thanks for the question Brito here.
For sure the terms and conditions go hand in hand, with our pricing power we have been.
Looking at the core.
Contractor that we have with our customers and improve and bringing back too.
Terms that we have closer in 2014 in a moment that we have more pricing power that goes into every component of the contract from.
Payment terms to reduce rates and contract allowances and it's also for Mark ups and so forth. So obviously that is part of what we'll be doing with the customer we expect that to start actually reflecting in the number of dollars dropping to the bottom line positively everything is being is being looked after.
Very carefully and it's all part of a larger.
Economical view of the contracts.
Now in terms of the second part of your questions and duration of contracts.
Right in saying that when you look at our ronco and lot of contracts in five years and five years plus.
That seems to be kind of a strong base for what a long term contract looks like that said I wouldn't say that in other parts of the world that contracts are short term in nature, we see in Asia. For example, variety of our customers coming out with vendors for two years plus contracts.
A few recent tenders across West Africa in the med as well for a multiyear contract. So we see clearly that contract duration is increasing we mentioned.
The earlier conference call as well one of the trends that we have seen particularly across the nrc's is that they seem to be moving from project hiring two portfolio hiring so instead of being looking for rigs to deliver a particular project. They are looking for rigs that add capacity to the portfolio and given some flexibility on deployment.
And obviously that causes the general contract duration to to go longer so I think it is.
It is true that the middle East was the first one to come in a meaningful way in terms of duration, but I do see all of other regions. Following kind of same footsteps considered the tightening market in <unk>.
Okay. Thank.
Thank you Bruno and then Patrick and miners over to you guys on the.
And switching gears over to the bonds.
On the.
Excess cash flow sweep when that comes into play in 2025, and my understanding is that the bondholders, Ken and LEC.
To utilize that function or not.
If they don't they like to use the cash.
Essentially free to use by the company for four other means including dividends is that the correct understanding.
Yes.
That's correct the cash sweep mechanism on the bond starts on the basis of the 'twenty to 'twenty four.
This helps so.
<unk> five.
When the annual report is out.
Sure Dan.
Election of the bondholders to say yeah, yes.
Yes, or no to that.
And it's also obviously them based on on the free cash flow.
We're generating the year before.
Okay.
We do.
We aren't allowed to use the money for for what we want obviously, but.
There are dividend restrictions in the bump.
Which.
As it relates to the regular 50% of net income which is very common and then in addition, you have certain baskets.
It is currently.
Starting by Skip a 75.
A ticket payout plus the 50 million that was raised in equity also habit to that 75 million basket. So starting up where now we have 125.
And then.
Gross words with a net income that we generate in the company.
Yes, yes, okay.
Thank you.
Thank you.
Thank you.
Yeah participants just a quick reminder, if you wish to ask a question over the phone. Please press star one on your telephone keypad.
Speakers there are no further questions on the phone I would now like to hand, the call over for any retail question.
We have another one here.
Well the two new builds be financed.
I can answer that.
The two new builds we have are scheduled to be delivered in August and November.
<unk>, we brought them forward by one year because of our.
The outlook in the market and Mr against potential to <unk> these rigs to work.
The delivery installment per rig is $160 million.
We have financing committed on those new builds from the seller or they are a 130 million each which we also show in the graph.
We have in our presentation.
Very low amortizing and the two first areas on the 15 million per carrier so.
The remaining 30 million, which is cash to be paid app delivery.
We expect to be able to or we will handle from from our cash flow from operation.
Okay. Thank you and then another one with our refinancing complete well bore looks to increase the size of their fleet via M&A.
So thank you.
Clearly it is.
It's always a possibility our position and that is that we have a very unique fleet of 20 form fairly uniform modern jackups with which all are also very.
Similar vintage.
The youngest fleet in the industry so for us to combine anything with that we would want to make sure that we can appropriately combine that with our operating philosophy and that it is something that fits the fleet. So it could be that here and there a rig might be available that would fit.
Our explorations and where we could.
Generate additional value from on the other side. We are also very clear on the fact that with 24 rigs is that all we were to have we can run a very appropriate business.
And.
Have a great cash generating capability. So I think the view that we currently have is may be best described as.
We will clearly grow some if there is value we can generate.
But we don't have to grow so for the right opportunity, we will evaluate and otherwise we will continue to work with the assets that we have.
And that is as you well know a very.
Specific fleet, so probably leave it at that.
Thanks, Patrick.
I have another one here are you seeing a bit of a pause in jackup day rates and what will be the impetus for rates to step up again into the 100 Seventy's and beyond.
Alright. Thanks, So let me tackle that I think the answer is no. We've seen obviously significant recovery in the last two quarters consistent fixtures now for our fleet and being in that one.
<unk> and even into the 170 territory.
Is a meaningful increase.
We see that on the back of that our customers have been.
Reach of their portfolio trying to bring things forward readjusting their strategy to cope with the market as I mentioned in my remarks, we do see a significant increase potentially in activity for the second half of 2024 and into 2025 some of this.
Probably a smaller parks steel is up for tender and we expect a significant amount of new vendors to hit the market in the coming weeks and months, we think there'll be as soon as that is the case and confirmed that visibility to confirm in a way of vendors.
That should support further increase in market rates. So I am confident that as we progress into 2020 for the rate the rate levels will continue to improve I don't think we have stopped.
Worth mentioning that.
We are in a supply constrained market at the moment, we're still at rate levels that are far below previous peak and certainly still far below price parity with new builds so that should provide us and the marketing general and good opportunity to to reconsider prices pushing higher as activity levels.
<unk>.
Thanks Bruno.
Well I will turn the word back to Patrick.
Alright.
Thank you very much and thank you all 40 interest in board drilling we look forward to update you on further progress.
In the quarters to come and we will talk at that time. Thank you very much.
Okay.
That does conclude our conference for today. Thank you for participating you may now all disconnect have a nice day.
Okay.
[music].
Okay.
[music].