Q4 2023 Borr Drilling Ltd Earnings Call
Magnus Fahler: So Q4 2023 was a very good quarter financially, with quarter on quarter increases in revenues of 15% and adjusted EBITDA increasing by 20%. We continue the sequential increase that we've had now for eight quarters, as you can see in the graphs. And this trend of increases actually goes back even further, reflecting both that we have been putting more rigs to work and an improvement in day rigs. Operating revenues for the quarter were $220.6 million, an increase of $29.1 million compared to the third quarter.
Magnus Fahler: This is split in an increase in day rate revenues of $24.4 million, primarily due to two more rigs starting up in the quarter, and an increase in bearable income from our Mexico joint ventures of $4.7 million, mainly related to higher economic and Rick and the release of an operational call. The rig operating and maintenance expenses increased by $12.7 million, or 15%, an increase that follows naturally from the increase in the number of rigs increasing by 2 for the quarter. In addition, we had an increase in amortization of deferred costs of 3.8 million in the past year. The operating income increase quarter on quarter was 26%. Below the operating income line, the numbers were driven by a total financial expenses net of $59.1 million, which was impacted largely by one-off expenses of $8.9 million recorded related to our refinancing and repayment of all. The income tax expense for the fourth quarter was a credit of 9.3 million, impacted by a 16.5 million release of a valuation allowance on deferred tax assets, as well as a 9.3 million release of an uncertain tax provision.
Magnus Fahler: That gives us a net income for the fourth quarter of $28.4 million, an increase of $28.1 million compared to the third quarter, and an adjusted EBITDA for the fourth quarter of $105.9 million, yielding a 48% EBITDA margin. Our free cash position at the end of Q4 was $102.5 million. In addition, we had an undisclosed RCF facility of $150 million. So, in total, we have approximately $250 million of available equipment. The cash in the quarter increased by 8.1 million, and this was affected by cash used in operating activities for 79.6%. This number includes 99.2 million related to interest paid and approximately 10 million related to income taxes.
Magnus Fahler: And this includes both cash interest incurred during the quarter and the repayment of capitalized interest on our legacy. In addition, the number was impacted by cash costs related to our financing and timing differences in working capital. Net cash used in investing activities was $35.5 million, primarily consisting of $34 million used on jack-up additions, which is the activation cost for Hilton Arabia 3, and also some CapEx additions over the fleet as well, and 1.3 million used on the new build edition. The net cash provided by financing activities was 123.2 million, primarily as a result of the net proceeds of the issuance of the senior secured notes and the net proceeds from our private placement, offset by repayment of the debt.
Magnus Fahler: Next slide, please. Our 2023 full-year EBITDA came in at $350.5 million, and our 2024 EBITDA guidance remains in the range of $500 to $550 million. At the midpoint of this range, this shows an increase of approximately 50% from 2020. We're also very pleased to have completed our refinancing of all the company's secured debt in November 2023. And we now have all our debt maturities in 2028 and 2030. The delivery installments for our two remaining new builds in 2024 are largely funded by a commitment of delivery financing by the seller in the size of 130 million per rig. Additionally, we have secured a 180 million senior secured facility, which includes 150 million RCF and a 30 million guarantee. The refinancing provides a stable foundation for the company going forward with a fixed amortization profile that allows us to de-lever our debt. In addition, it also provides us with the possibility of distributions to shareholders, as evidenced by our implementation of a regular quarterly dividend, which we have declared for two consecutive quarters of five. With this, I would like to turn the word over to Bruno.
Bruno Moran: Thanks, Magnus. Now, I'd like to provide a brief update on the jacket market and our most recent contracting and fleet development. Jackup utilization levels have continued to increase since our last report. In particular, market utilization for modern rigs has now exceeded 95%, in line with our earlier projections. It is noteworthy that utilization levels have continued to improve while the market absorbed a few additional new build rates. Currently, the Sheepyard Order Book consists of 15 rigs, one of each of which has a future contract, and two are owned by Borr Drilling. The total order book represents less than 4% of the global jacket fleet, a record low level.
Bruno Moran: We highlight again that shallow water projects, on average, have some of the lowest break-even prices and continue to be a viable and attractive alternative for our customers at the current commodity price. Underlying that, and according to recent data by Reistat Energy, global investments in shallow water projects are expected to experience double-digit growth in 2024 compared to last year. These factors support our views that the jack-up drilling sector should continue to benefit from strong utilization and an improving economy. Looking forward, we see a market scenario whereby incremental demand should continue to outpace any potential supply group. From the supply side, based on a study conducted by Furnitures Offshore, it is anticipated that only 6 of the 15 rigs under construction could reasonably be brought into the market in the next 18 to 24 months. On the demand side, we anticipate demand for modern rigs to increase by 20 to 25 rigs in the next 24 months or so. Several of these programs are already in the tendering phase, while others are expected to be tender in the coming quarters.
Bruno Moran: In support of our views, data from S&P Global in their latest World Rate Forecast project that global jack-up demand will increase by 36 units by mid-2025. And based on recent market trends and customer preferences, we anticipate the lion's share of this incremental demand will be fulfilled by modern Britain. We maintain a constructive view on the Asian, Indian, and Middle Eastern markets, and let me provide you with some data points that support our view. In the Middle East, recent announcements by NOCs indicate the potential for several multi-year, multi-rig programs, particularly in Qatar, Kuwait, and the neutral zone between Saudi Arabia and Kuwait, where the large Aldora field development is expected to be tendered soon, and should alone require four additional high-specification In India, we note ONGC's stated plans to secure six new rigs as part of their fleet renewal strategy, noting that the average age of their current fleet is approximately 40 years old.
Bruno Moran: This requirement is over and above ONGC's open tenders and unfulfilled demand from prior tenders, including the recent HPHC requirement. Similar renewal ambitions have been recently indicated by ADNOC and FINALPAC. In Asia, Petronas' activity outlook indicates incremental demand of 2 to 3 rigs in Malaysia within the next 24 months. Similar activity levels are projected to increase in Vietnam and Indonesia.
Bruno Moran: Outside these areas, we see pockets of long-term activity developing in places such as Angola, Libya, America, and Australia, to name a few. The Demand Outlook, coupled with our customer discussions, supports our positive view of the strength, duration, and resilience of the cycle. In 2024 to date, we have received three new commitments, adding a total of $82 million in backlog to the company at an average of $166,000 per day. These commitments include contract extensions for the Norva with BWE in Gabon, contract extensions for the MIFT with Valley Rural in Thailand, and a binding letter of award for the tour with an undisclosed customer in Southeast Asia.
Bruno Moran: Following these awards, our fleet coverage for 2024 has further increased to 87%. Considering our prospects and based on ongoing discussions with our customers, we remain positive about our ability to secure follow-on work for our rigs rolling off contract during the year, with limited white spaces, if any. Our only rigs expected to roll off contract in the first half of the year are the Prospector 1 in the North Sea and the Gunlot in Asia.
Bruno Moran: We're currently in advanced discussions with customers about continued work for these rigs, and we'll provide further details in due course. In relation to our new built units, Vail and Var, we continue to make progress with the completion of their construction and commissioning, and remain on track to have these units delivered around the fourth quarter this year. These units are currently being offered for several opportunities and are attracting considerable interest from our customers. We remain positive about our ability to secure meaningful term work for these units ahead of their delivery. On this note, I'd like to hand the call back to you. Thank you, Bruno.
Patrick Shorn: So in conclusion, Bruno has walked you through the current utilisation, our view of the demand increase over the next 18 to 24 months, and the corroboration of these numbers by IHS and PGlobal. We are in a supply-constrained market, with continued demand increases, which is the basis for further day rate increases going forward. Our 2024 adjusted EBITDA remains unchanged at $500 to $550 million.
Patrick Shorn: This is underpinned by a strong contract portfolio, which is currently covered at 87%. The refinance of our 2025 debt maturities has been successfully completed with the issuance of 1.54 billion of secured notes with maturities in 2028 and 2030. This completes the refinancing of all of our secured debt and provides the company with a solid long-term capital structure. Lastly, we have delivered on the commitment to become a dividend-distributing company. The board also approved a dividend payment of 5 cents per share for Q4.
Operator: Ending on what, for Borr Drilling, our customers, is the most important performance indicator, which is delivering operational excellence safely. This will continue to have our utmost attention going forward. Ladies and gentlemen, I would like to end our prepared remarks here, and we can go to Q&A. Thank you. As a reminder, to ask a question, you will need to press star 1 and then 1 on your telephone and wait for your name to be announced. To answer your question, please press star 1, 1 again.
Operator: Please kindly ask one question and possibly a follow-up question at a 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 click Submit.
Patrick Shorn: We will now take the first question. Coming from the line of Fredericks and from Clarkson Securities, please go ahead. Hey Patrick, Magnus Bruno, hope all is well and thank you for taking our question. I wanted to start with 2024 guidance. EBTA reiterated between 500 and 550 based on the contracts you announced earlier this month. You have reached 87% of fleet coverage, as you say.
Patrick Shorn: So I was wondering, can you give some color on how we would end up on either side of that range, with 87% would we still see 500 minimum, or what's the moving parts here? All right, so Frederick, thanks for your questions. At the end of the day, we are still in February, so I think that the range that we have is appropriate. What it depends on is whether we fill the 87%, as we expect. The more we fill it, the more we will be towards the upper range. The more we are with day rates over $150,000 per day, the more we will be at the upper range of that, right? So I think that those are the moving pieces. So it is really filling up the 87% further to 100. And, as Bruno mentioned to you, we have many discussions ongoing, and we expect to be able to manage any white spaces very well, and we expect minimal for the year.
Patrick Shorn: And secondly, you've seen from the day rates that for the contracts that we have announced so far, we are at the higher range of what we would normally have considered when making this type of forecast. So the more you see us announce higher day rates of the 170 plus, the more that is going to make us end up in the upper range of our guidance. But that's probably all I can say this early in the year.
Patrick Shorn: Thank you, Patrick. Just on the rig sector, you mentioned Prospector 1 and Gunda, the two rigs coming off contract now, in the first half of this year. Prospector, that's the only rig you have in the North Sea currently. Is it fair to assume that it will remain in the North Sea, or are those discussions for elsewhere? I don't want to give you our commercial envelope fully at the moment, but we've always said that the North Sea is not a key market for us. However, there are interesting bits of work, and if we can tie enough of that together, you could have a scenario where we would remain around the North Sea, so to say. And there are other scenarios as well, but I would say that we intend to be announcing the outlook for the P1 for the rest of the year relatively soon. And on the gun law that you were asking, I think that Bruno, you want to say a few things about the gun law.
Bruno Moran: Yeah, sure, Patrick. And I think the gun lot is a rig that has been performing very well in the region where it's located. It's one that has unique features and certainly one that I think our customers would like to keep in the region. We obviously acknowledge that moving rigs across regions comes with certain efficiencies, and we remain positive that the rig will remain operating in Asia. Perfect, thank you.
Patrick Shorn: And then just finally, you're declaring dividends, five cents this quarter. You also have a share repurchase program in place for 100 million, but you haven't really used it, I think it's less than a million, if my math goes correctly. On that, can you give any color on how you would, you know, think about the trade-off between higher dividends or more share purchases, initially, since, at least on my numbers, the real kicker on cash flow is coming, you know, 2025 and beyond. So it would be interesting to hear what you're thinking now for 2024, if higher dividends or more cash allocated to share purchases make the most sense for you. Oh, so I think firstly that you are right that, clearly, larger amounts of cash are going to be available in 2025.
Patrick Shorn: But it's also clear from the way that we see the year shaping up that there are opportunities to continue to distribute to the shareholders in 2024. You know that we are focused on deleveraging and that, at the same time, we want to make sure that there is a return for the shareholders as well. At this moment, I can tell you that the board wanted to have both instruments available, meaning a share buyback, as well as a different distribution, which is currently in place.
Patrick Shorn: I think that there is a second guidance where there is going to be focus on that with more surplus cash becoming available, I would expect the dividends to be increasing over time, and then I think on a quarterly basis. Based on where the share price might be, the board will make a determination on where we are going to go, whether on the share buyback side or more towards dividends. But I think you have seen that the current sentiment is very much towards dividends, being the second consecutive quarter in which the Board continues to focus on dividends. Apart from that, I would say follow us here in the quarters to come, and we'll be able to give you more info on that. Thank you very much, Patrick and team. That's all from me. Have a good day.
Operator: Thank you. We will now take the next question, from the line of Greg Lewis from BTIG. Please go ahead. Hey, thanks, and good afternoon, everybody.
Bruno Moran: And thanks for taking my questions. Um, yeah, Patrick, I was hoping you could provide a little bit more color around the new builds. It sounded like in your prepared remarks that these are looking at potentially going on term work, kind of, kind of curious about a couple things here, how you're kind of thinking about balancing these rigs into the market and the spot market versus term. And, and, and, and, and really, then I'll also ask is, is, is. Is there are we assuming any revenue contribution in 24 from maybe the rig that's supposed to be available later this year? No, that is fair, Greg.
Patrick Shorn: So let me say a few things, although I'll leave the lion's share of this for Bruno. So the way that it looks at this moment, one of the rigs will potentially be available for service in 2024. The second one is only going to be really available to drill, call it January 25. And I think that what we were talking about, seeing the additional demand for 24 to 25 rigs from our perspective, there is some interesting term work in that. And for us, it is really a matter that we want to see these rigs get on some interesting contracts that have a bit of longevity in them. So turning this around is important.
Bruno Moran: But Bruno, maybe you can talk a little bit more about what you're seeing and where we're focused on. And I guess that people are quite interested when we would be interested in committing to award any work to these. Thanks, Patrick. Yeah, Greg, and we mentioned a little bit in the last quarter, these rigs that are being delivered late in the year are probably some of the most capable rigs that we have in our fleet. And because of that, because of the prior track record success of the sister rigs operating in Asia, they have been attracting substantial interest from customers, particularly ones that are very performance-focused, and obviously taking a rig out of the yard and everything that We're looking, preferably, to find work that has volume and volume. I would say programs that are 18 months plus, ideally, to take them out of the yard.
Bruno Moran: We're not obviously concerned about them finding continued work, but I think it's obviously preferable if we can find a good balance between attractive day rates and a term that makes it easy for us to phase the rig into work. Okay, super helpful. Thanks. And then, and then I, you know, I guess just really given that, um, you know, you provided some great detail on, you know, the Indian market, realizing that's not a primary market for you guys, and just because it's timely around the..., you know, the decisions by Saudi Arabia last year in January around Raining and some cat back, You know, clearly Saudi Arabia is a huge market. You know, I can go and look at the 80 plus rigs there and look at different ages and quality of each rig.
Patrick Shorn: Do you have any sense for, maybe, you know, as we look at Saudi Arabia, you know, you know, how we think, you know, how we could see maybe some rigs kind of move out of there and where they could go? Or is it something where, you know, a lot of those rigs are kind of nearing their useful life, and maybe some of those rigs in Saudi Arabia probably won't be working in three to five years? No, I think, Greg, it is a question. Clearly, Saudi Arabia is a tremendously large market that does govern what happens in the rest of the world.
Patrick Shorn: So I mean, all I can tell you from the discussions that we had, and I think from everybody in the drilling department, it is quite clear that even with a non-pursuing 13 million barrels but staying at 12 million barrels, the amount of work and the amount of wells that need to be drilled, Drill Extraordinary Large, that requires a tremendous number of rigs on land as well as on water. So I think that that is the key thing here. Overall, I think that it is possible that some rigs, at a certain moment, roll off the contract and are possibly not getting their contracts renewed. It's absolutely possible, and it is clear that the decision criteria that Aramco, in general, uses are performance, safety, and cost.
Patrick Shorn: So I think that all of these things are understood. It is possible that they will call some of these rigs, but I think that that is not going to be tremendous amounts and I think we should all take at least some information that there wasn't, after the announcement, a knee-jerk reaction or where rigs came falling out of the work and a lot of work was being stopped. So I think that we just need to let it work through the system. Whatever comes out of Saudi Arabia and if there are some rigs that are coming out from the description that Bruno gave of the market, these rigs are going to be absorbed quite easily, and, as you have stated, some of them could be significantly old, and operators might just decide not to further invest and maybe write some of them off. But I think we should just focus on what we can. We just want to keep performing as well as we can, and I don't think that there is an enormous amount of rigs coming out of Aramco that couldn't be absorbed in the market as we see the market developing. Perfect. Very helpful.
Patrick Shorn: Thank you very much. All right. Thank you. We will now take the next question, from the line of Michael Boehm from Sona Asset Management: please go ahead. No problem. Thank you. There are no further phone questions.
Bruno Moran: Starting the call over for webcast questions. Thank you. Hmm. Are you seeing any changes in the length of contracts being asked for by clients? All right, Bruno, do you want to take this question?
Bruno Moran: Sure. Really, we see, as I mentioned in my previous remarks, we do see an increasing number of long-term contracts either on the market or coming to the market soon. Certainly, in the jack-up space, you're always gonna have a substantial number of smaller programs; in places like Southeast Asia, for example, you will inevitably have programs that are short in nature. And I think the beauty of this market is really the combination of both things. We will focus on obviously having visibility of our backlog for the fleet but not ignoring that short-term opportunities provide as attractive opportunities to reprice in a tight market as we are. In the big scheme of things, we do see the contract durations of the holding. And in different regions, you have different profiles, obviously, and I think this is a bit of a feature of the particular geographies.
Patrick Shorn: But in general, we do see the contract durations holding and potentially elongating a little bit with the tenders coming up in the market. Thank you for joining us for now. What is the opportunity set looking like in terms of expansion of the fleet? What about the under construction rigs sinking buyers? What is Borr's view on this?
Patrick Shorn: We are very happy with the size of our fleet, as we have stated many times. So I don't see a scenario where we'd be interested in selling the two rigs that are under construction. As Bruno mentioned earlier, we have had very fruitful discussions with a variety of parties that are interested in contracting them. And that's really the business we're in, us being the drilling contractor and using our rigs. So I don't see selling as one of the preferred or likely avenues.
Patrick Shorn: When it comes to overall expansion of the fleet, I think that there are, as we have said in the past, always opportunities, and we will look at them carefully, but we will want to make sure that some of the key strengths that we have remain intact, meaning that we want to make sure that we continue to have a very solid financial footing, and any assets that would be added to the fleet are very similar in age and equipment as what we currently operate. If you just So I would say at this moment we focus very much on our own fleet, and as some opportunities come up, we will evaluate them, but they are not the main focus of management.
Patrick Shorn: Bleeding-edge day rates have been flat at around, Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com. When do you think we are seeing the next leg up, potentially hitting the 200k mark? Yeah, I think that that is a fair question that, obviously, I will hand over to Bruno, but I think that the flattening of the level is that we have been at a very high level and actually, we have been able to get these levels of contracts across the world in every region and I think that that is a major step forward what we have. Bruno, maybe you could comment a bit on what we are tendering today and the rates you are Sure, sure, Patrick.
Bruno Moran: And when we look at the market at the moment, and as I mentioned in my remarks, we do see a lot of opportunities now hitting the market, and more to come, right? And it goes without saying that if the market for utilization is a market about tightness, with these additional requirements, particularly multi-year requirements, potentially soaking some of the remaining capacity, then that is when we would expect day rates to accelerate further. I'll fall short of providing more details on our participant bidding rates, but it's fair to say that our offers continue to push on the upside and frequently are getting very close to the higher end of the hundreds and not too far shy of $200,000 a day. I think in the second half of the year, as a lot of these standards come to the market, that's when we expect a higher acceleration. But it continues to move in the right direction. I mean, as an average, we were at 161 during last year. At the beginning of the year, we are at 166. And as Patrick highlighted, this is not hanging on one fixture and neither is it hanging in one region. It's a development that is happening across the globe, which is very positive.
Operator: Okay, then, I understand that we have reached the end of our questions. So thank you very much for your attention, and we look forward to talking to you real soon with the next updates. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.