Borr Drilling Limited (NYSE:BORR) Q3 2022 Earnings Conference Call November 17, 2022 9:00 AM ET
Company Participants
Patrick Schorn – Chief Executive Officer
Magnus Vaaler – Chief Financial Officer
Conference Call Participants
Fredrik Stene – Clarksons Platou Securities
Gregory Lewis – BTIG
Patrick Schorn
Good morning, and thank you for participating in the Borr Drilling Third Quarter 2022 Earnings Call. I’m Patrick Schorn talking to you from Bermuda, and with me here today is Magnus Vaaler, our CFO.
Next slide. First, covering the required disclaimers. Here we go. 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. I therefore refer you to our latest public filings.
Next slide. I am pleased with our performance this quarter with continued operational success, we have further optimized 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 other 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 has gone through some adjustments after the sell-off of four units related to our recent refinance, resulting 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.
Magnus Vaaler
Thanks, Patrick. We are now on the slide, key financials Q3 2022. The Q3 2022 revenue came in at $107.9 million in the quarter, an increase of $2.6 million or 2.5% compared to Q2 2022. This was split in $90.5 million in day rate revenues for our rigs on regular contracts and $17.4 million in related party revenue, which is bareboat earnings in our Mexico joint ventures.
Rig operating and maintenance expenses for Q3 was $60.4 million, a decrease of $5.1 million from Q2. The decrease is mainly due to a decrease in amortization of deferred costs. Impairment of non-current assets for the third quarter was $7.3 million, a decrease of $117.1 million compared to the second quarter. The impairment recognized in the quarter relates to the rig Gyme as the rig was 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 sell.
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 a financing fee, a $4.3 million increase in interest expenses, $3.1 million decrease in interest income and $2.2 million increase in FX losses. The net loss for the quarter was $54.9 million, a decrease of $110.4 million from Q2. Excluding impairment, our net loss increased by $6.7 million.
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 was high, $279 million, and our restricted cash was $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 $7.5 million financing fee. Cash used in fixed asset additions of $20.4 million, mainly driven by activations of three rigs and $260.4 million of net proceeds from our August 2022 equity offering.
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. 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%. And 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 thus far, we currently estimate to generate adjusted EBITDA in excess of the upper limit of that range, i.e., above $140 million.
Moving to the next slide. The current delivered fleet consists of 22 modern jack-up 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 2022. Since the second quarter 2022 report, we have secured new contracts, extensions and LOAs for 10 of our active rigs, maintaining the company’s contracted and committed fleet at 20 units.
This includes long-term contracts for five of our premium jack-up rigs in Mexico, now contracted until the end of 2025 and the Prospector 5 contracts awarded by ENI in Congo. Year-to-date, the company has been awarded 22 new contracts extensions, exercise options, LOAs and LOIs, representing 31 years and $1.36 billion of potential backlog. During the same period, our operating rigs have consumed approximately 14 years of backlog so we are maintaining a backlog replenishment ratio at a multiple of two. It’s also worth noting that these calculations include the contracts through our Mexico JVs on a 100% basis in addition to annual mobilization compensation in the contract.
With that, I will pass the word back to Patrick again.
Patrick Schorn
Thank you, Magnus. The following graphs highlight some of the benefits of shallow water resources. Firstly, on the left, it can be seen that it is highly cost efficient with only Middle East land 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 diligent with the fastest-growing activity.
Next slide. Since the second quarter 2022 report, the market continues to experience increased contracting activity and fleet utilization, particularly among modern rigs. Utilization levels for modern rigs has now reached 95%, a level not seen since 2014, while 28 newbuilds have entered the market. Since the beginning of 2020, demand continues to outpace supply increases.
Currently, only a limited number of newbuilds 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 $50,000 to $60,000 that we have seen previously to recent fixtures that are consistently reaching and exceeding the $120,000 to $130,000 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 company’s strategic approach to secure additional rig capacity in a scarce market.
Three-year forward utilization levels have returned to previous year peak levels with fewer assets rolling off contracts in the future, this also leads to a longer-term market that is tight for a long time going forward. While several multi-rig, multiyear tenders have concluded, the demand pipeline, as measured by the number of open demand days from customers has remained on a strong upward trend and roughly doubled the levels experienced in the recent trough in 2020.
Next slide. 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 continue to show clear preference for modern assets, we anticipate this segment to be undersupplied in the future. The record low order book at shipyards for newbuilds is unlikely to give [indiscernible] while the newbuild prices are increasing quite rapidly with limited capacity at the yards available. In summary, customer demands remain strong. Oil and gas prices although volatile remain at a range attractive for further investments amidst declining production levels resulting from years of lower E&P investment.
With these fundamentals locked in place, we are already experiencing significant and accelerating increases in day rates, in some cases, more than double for the rigs. 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 bond will be addressed by early next year and we have various options on how to deal with this. The asset utilization in the market continues to increase, which has a positive impact on day rates.
Based on our performance thus far and the outlook for Q4, the revenue and adjusted EBITDA for 2022 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 enter the market is 30 to 36 months, the earliest and newbuild pricings are rumor 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 our prepared remarks, and we can go to the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The next question is from Fredrik Stene from Clarksons.
Fredrik Stene
Hey, guys. I wanted to touch a bit more on the convertible here. I think the report and your performance this quarter was better than at least what I expected. So all in all in a good report operationally. But at least initially today, I think the stocks are a bit downwards pressure. And I’m not asking you to speculate in your own stock price. I just thought it could be because parts of the investor community may have expected some more color on this CD refinancing. So I was wondering, have you – are we able to – you have to call it, 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 other than the maturities.
Patrick Schorn
Absolutely, Fredrik. Let me ask Magnus to comment on this.
Magnus Vaaler
Thanks, Fredrik. I think we have several options for the refinancing of the CB, the way we see it. In the connection with the August refinancing, we communicated that we would address the CB closer to maturity. As we expected asset values and day rate earnings to further increase. And this has materialized. So it’s improving our financing opportunities, the way we see it. So we still have three unencumbered rigs with capacity to put on further debt, and on this, we’re awaiting contracting status 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 put on these rigs, whether it’s around $50 million to $60 million per rig level or higher level depending on the contracts.
Additional to that, with a rising day rates and the asset values, we should have excess debt capacity on this five rigs that we have in the bank facility. These five rigs are only levered with $30 million each as of today. So if you just kind of have a calculation exercise $50 million to $60 million secured debt per rig for these eight rigs, this means that we can have additional debt capacity of $250 million to $330 million on this package. So – and I mean, in addition to that, we should have significant unsecured debt capacity also to cover any potential shortfall if we find that interesting.
Fredrik Stene
That’s super helpful. And do you think – just as a follow-up on that, do you think that with cash on hand on the equity raise from earlier, is there any other liquidity needs from the equity side as you see it given your visibility on the credit side to tackle the [indiscernible] in the CB?
Magnus Vaaler
I think – just as I said, I think you have very good space for what we have already in the assets and outlined the three unencumbered rigs and the other five rigs on the bank facility. So I think that’s kind of leaning to the answer on that question.
Fredrik Stene
Yes. No, that’s fine. Thank you so much. Super quick one to the – just on Mexico, super quick, the $47 million you’ve received so far in Q4, should they include the upfront payment of new contracts or not?
Magnus Vaaler
That includes the upfront payment, yes.
Fredrik Stene
Thanks. That’s all for me. Thank you, guys.
Patrick Schorn
Thank you.
Operator
Thank you for your question. We are now taking the next question from Greg Lewis from BTIG. Please go ahead.
Gregory Lewis
Yes. 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, there’s 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?
Patrick Schorn
So I think that at this moment, the way you need to see the options, first, there is a blend in the options, right? And we have options that are allowing the customer to continue on the existing contract rate, which clearly at the moment, makes a lot sense for 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 on market price. So some of them will be renegotiated even though they are seen as an option. So it is really a blend in that.
And I think that it is clear that the more unpriced 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 bed. 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 with the two remaining rigs that we have, we 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 have made so far. So I think that, that is the best way to look at it. But speaking specifically about the options, there is a blend of price and unpriced options in that.
Gregory Lewis
Okay. And then just – I can appreciate the two rigs that are in the market being marketed. Pricing has clearly inflected higher pretty rapidly. As we think about demand for these rigs, just given the – if I were to say 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, are we seeing durations or contract durations be ramped higher interest 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 the rigs on three-plus year contracts or something?
Patrick Schorn
Absolutely. I think that, that is the problem at the moment. I think that from a rig contractor perspective today, the longer contracts carry a significant risk of being priced too low regardless of what leading-edge price you put on today. So you’re absolutely right, that today the customers are looking very aggressively at longer-term contracts. The long was now being five plus two years. But we see it in many regions where contracts are fixed for much longer than we had seen before, clearly with the sentiment that asset availability in combination with better to lock in a price today that you know.
And then 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’ve seen some of the shipping newbuild prices go up. So clearly, those increases then drive the requirement for a much higher day rate before any of these maybe investment ideas carry any fruit. So I think that it is clearly the fact that we – in the discussions that we have with customers are having discussions about longer commitments and larger commitments than what we have seen in the past.
Gregory Lewis
Okay. Great. Good luck everybody.
Patrick Schorn
Thank you. We can go for the next question, if there is one.
Operator
We don’t have any further phone questions, but we have one online. What do you think is the leading edge day rate in the market today for a five-year contract and for a short-term contract?
Patrick Schorn
So there’s obviously a variety of things that we look at when we consider contracts. It is in which area of the world it is. It has to do with contract length, but it also has to do with specific equipment, we would have to put on it to get a rig ready to operate. Because it’s not only the investment you make in new equipment, obviously, associated with that is 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’s today, in all areas, we are seeing prices for fixing for that long period.
You would probably have to think about between the $130 million to $165 million would be the rates that are being tendered. We have been announcing contracts in just about every geography in excess of the 120, 130 already. So I think that it 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 in the 130 to 165 at this moment. But this is a continuously moving target. And as less rigs get available obviously, that is something that will continue to go up. Any other question online?
Operator
Yes, we have one more. What upfront payment are you asking to put the newbuild order for $300 million? And what day rates and contracts would lead to this?
Patrick Schorn
So I don’t want to be perceived as the experts of dealing with yards on newbuilds 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 that rapidly, it is increasing towards the $300 million. 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 payment. And if you think about rigs costing that kind of initial investment, you would have to think about day rates in excess of $200,000 to actually justify a rig in the high 200s, and you would probably have to have a contract in hand or something like seven years before somebody gets into it.
So I think from the speculative 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’s doing today, I don’t think people will do that, but it will require contracts of seven-year plus, and I would say day rates well over $200,000 per day for that 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 day rates. Any other questions on online.
Operator
Yes. There’s one more. Perhaps you’re earlier guiding to have the entire delivered fleet contracted by year-end 2022. Is this still the target and achievable?
Patrick Schorn
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 offer. But it is also a time where we want to make very sure that we don’t take a day rate that is not in line where we see the market or not in line with the investments that we have made 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’ll continue to pursue them until the end of this year, and if necessary, beyond that. I think that if I look at the demand that is there in the markets today, we can still place these units. Any other questions online?
Operator
No.
Patrick Schorn
All right. Then I would like to thank all participants for participating in this call. I’d like to thank the Borr team for fantastic work that’s been 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.
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