Borr Drilling Q1 Earnings: Demand for Modern Jackups Expected to Exceed Supply – Buy (BORR)
To note: I covered Borr Drilling (NYSE: BORR) previously, so investors should consider this as an update to my previous articles on the society.
On Tuesday, Borr Drilling (“Borr”), a modern jack-up rig pure play, announced its first quarter financial results largely in in line with expectations and confirmed full-year guidance of revenue between $375 million and $400 million and adjusted EBITDA between $115 million and $140 million.
For 2023, management expects revenue to double and adjusted EBITDA of “more than doubleof the 2022 forecast.
Backlog reached a new all-time high of $853.3 million with 20 of 23 rigs currently under contract and the remainder expected to secure work through the end of the year.
Strong contracting activity in the Middle East has reshaped the jackup market in recent months, with management now anticipating demand”exceed the available supply in the next quarters“.
Given the positive near-term outlook, it’s no surprise that the company is looking to take delivery of other new constructions of Singapore-based Keppel FELS Limited (“Keppel”), particularly after the shipyard lined up potential third-party buyers for two of the rigs:
On April 28, 2022, the Company received notice from Keppel FELS Limited (“Keppel”) indicating Keppel’s intention to sell two of the new jack-up rigs under construction (“Huldra” and “Heidrun”) at a price of 100 millions of dollars. per platform to a third-party buyer. The Company has the right to take delivery of the platforms at the conditions and prices for which Keppel has received offers, or to take delivery at the current contractual conditions, including shipyard financing, but with the delivery date brought forward to the delivery date proposed in the notice of intention to sell. The agreement requires the company to formally accept delivery of the rigs and to include reasonable evidence of its ability to finance the new builds and, assuming it utilizes the shipyard financing provided by Keppel, to refinance that debt. within 180 days of delivery. The remaining purchase price is $86.5 million per rig, of which the shipyard’s existing financing agreements cover $73.2 million, plus a return fee of $4.5 million, payable on the date of repayment of the delivery financing. The company has sent a notice of acceptance to Keppel in which it has informed it of its intention to take delivery of the platforms under the current contractual conditions (including construction financing) and believes that it has provided reasonable evidence of its ability finance the platforms and refinance the shipyard. funding in the form of letters from financial institutions. The Company expects the delivery of the rigs in the first half of 2023; however, clarification is sought from Keppel on specific delivery dates. Considering the strong improvement in the market and the limited availability of modern devices, the advancement of the delivery schedule of these two devices can be considered attractive.
Given the significant amount of vendor financing involved, the total cash payments required of $26.6 million appear to be manageable for Borr Drilling.
But with the requirement to refinance the shipyard loans in just six months, Borr’s management must be fairly confident in its ability to successfully close ongoing negotiations for a full debt refinancing through the end of the second trimester :
Our refinancing process is underway and we are in discussions with our lenders with a view to finalizing the refinancing before the end of the second quarter. Given the strong market fundamentals, several options are currently on the table to meet the maturity profile of our debt and provide a long-term financing solution. Some of these options include direct debt solutions, while others involve the sale of certain assets, of which our fleet is attracting strong interest at attractive prices. We are currently working to improve all refinancing conditions as the market is moving rapidly and positively, and believe a solution is achievable in the coming weeks.
With the company now looking to take delivery of two additional newbuilds at short notice, selling all or part of the three remaining rigs currently under construction to Keppel would be a somewhat odd move, especially given the business environment. dramatically improved operation.
At least in my opinion, Borr should try to avoid asset sales at this point and instead push for a “direct debt solution” to realize the full cash flow potential of the fleet over time:
With demand for modern jack-up rigs at multi-year highs, I strongly expect Borr Drilling to be successful in its efforts to refinance its legacy debt obligations by June 30.
After a number of very difficult years, the stars finally seem to be aligning for Borr Drilling with demand for modern jack-up rigs likely to outstrip available supply in the not too distant future.
Given the increase in daily rates and asset values, I strongly expect the company to successfully complete a full refinancing of its legacy debt obligations in the coming weeks.
Investors seeking exposure to the modern jack-up rig market should consider an investment in Borr Drilling given the company’s proprietary focus and strong medium-term cash generation potential.
That said, from a net asset value perspective, Borr looks expensive compared to its biggest competitor Valaris (VAL), which also has a very strong presence in the Middle East, albeit mainly through its unconsolidated joint venture ARO Drilling with Saudi Aramco. Also, Valaris is not a pure play jack-up like Borr Drilling.