Borr Drilling Limited (NYSE:BORR) Q1 2024 Earnings Conference Call May 23, 2024 9:00 AM ET
Company Participants
Patrick Schorn – Chief Executive Officer
Magnus Vaaler – Chief Financial Officer
Bruno Morand – Chief Commercial Officer
Conference Call Participants
Nikhil Bhat – J.P. Morgan
Operator
Good day and thank you for standing by. Welcome to the Borr Drilling Limited First Quarter 2024 Results Presentation Webcast and Conference. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference has been recorded.
I would now like to hand the conference over to our first speaker today, Mr. Patrick Schorn, CEO, please go ahead.
Patrick Schorn
Thank you. Good morning and thank you for participating in the Borr Drilling First Quarter 2024 Earnings Call. I’m Patrick Schorn and with me here today is Bruno Morand, our Chief Commercial Officer, and Magnus Vaaler, our Chief Financial Officer.
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 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. The first quarter results have been strong, driven by solid operational performance with technical utilization coming in at 99% and economic utilization at 98.6%. We operate currently a fleet of 22 rigs and have two new builds joined the fleet later this year. The adjusted EBITDA margin increased this quarter to 47.2%, keeping us right on track to meet our annual plan. We finished the first quarter with all 22 delivered rigs operating, however, after the close of the quarter, one rig in Saudi Arabia has been suspended.
We expect this rig to be re-contracted in a different region by the end of Q3 based on current customer discussions. On the contracting front, we continue to deliver strong results, securing $318 million in revenue backlog year to date, translating to an average day rate of approximately $183,000 per day.
Notably, in the second quarter, we achieved our first-ever contract exceeding $200,000 per day on a clean-day rate basis. This milestone not only underscores the premium quality and operational excellence of our fleet, but it is a positive confirmation of our views of a well-balanced market despite the recent developments in Saudi Arabia.
Given the high utilization of our rigs and limited near-term availability, we expect that the newbuild rig Vali, which is to be delivered from the shipyard by the end of 2024, will immediately join the operational fleet to cover the newly contracted work scope.
On the back of the strong operational performance and the positive market outlook, the Board has approved an increase of quarterly dividend to $0.10 per share. This doubling of the dividend versus the previous quarter is in line with our stated ambition of progressively increase the dividend in line with our earnings projections.
Lastly, we also reiterate our full-year adjusted EBITDA guidance for 2024 to be in the range of $500 million to $550 million.
Magnus will now step you through the financial details of the first quarter.
Magnus Vaaler
Thank you, Patrick. Q1 2024 results continue the sequential increases that we have experienced over the previous eight quarters with increases in revenue of 6% and adjusted EBITDA of 5% quarter-on-quarter. The Q1 2024 operating revenues were $234 million, an increase of $13.4 million compared to the fourth quarter.
The increase is largely due to an increase in day rate revenues, primarily due to more operating days for the rigs Gerd and Hild than in the previous quarter. Rig operating and maintenance expenses increased by $5.5 million to $104 million, a natural increase resulting from the increase in number of operating days.
Net income for Q1 2024 was $14.4 million, a decrease of $14 million from Q4. The decrease is mainly explained by positive one-offs in income tax expense in the fourth quarter of 2023 of approximately $25 million. The same did not occur in Q1 2024.
Adjusted EBITDA for the quarter was $116.8 million, an increase of $5.3 million, or 5% compared to the previous quarter. Our free cash position at end of Q1 was $282.7 million.
In addition, we had the undrawn RCF facility of $150 million, so in total the company has approximately $432 million of available liquidity. The cash in the quarter increased by $180.2 million and taking a closer look at the cash flows, we can see that the net cash provided by operating activities was $23.9 million, which includes $6.3 million of cash interest paid and $12.8 million of income taxes paid.
Cash provided by operating activities in the quarter was impacted by working capital buildup due to some late invoicing for certain contracts, including invoicing for a mobilization fee at the start of our contract and that led to an increase in accrued revenues.
Net cash used in investing activities was $18.7 million. This includes $15.2 million used in jack-up additions consisting of activation costs incurred in 2023 but with cash payments this year. Cost for special periodic surveys and fleet spares in addition to $3.3 million used for new building additions for activation costs or to newbuilds.
Net cash provided by financing activities was $175.2 million, primarily as a result from the net proceeds of issuance of additional senior secured notes due in 2028 of $208.3 million. This was offset by $23.8 million used for the payment of cash distributions to shareholders and $10.6 million used for the repurchase of our convertible bonds.
With this, I will pass the word over to Bruno.
Bruno Morand
Thanks, Magnus. 2024 has been a robust year for Borr Drilling on the commercial front. So far this year we’ve secured 11 new commitments adding over four years and $318 million in backlog at marketing leading rates.
As Patrick mentioned, his newly secured backlog includes our first contract with a clean-day rate above $200,000 a day. This milestone confirms the positive data trend and strength of the market despite any concerns arising from the recently announced Aramco suspensions.
Let me give you some context on some of these new fixtures. Firstly, the Prospector 1 has secured two new contracts in the U.K. and Netherlands, extending its firm commitments into 2025. In Southeast Asia, we secured new contracts for the Gunnlod and Thor. The Gunnlod has secured and subsequently commenced a new 90-day contract with an undisclosed operator in Malaysia. We are currently in advanced discussions with other customers in the region and remain confident that the rig will be continuously contracted through to 2025.
The Thor has secured two new commitments that will start in direct continuation to its current contract in Indonesia. These awards will keep the Thor contracted until Q4 2024 when we see other prospective opportunities for it. In Africa, the Norve has secured two new commitments. The first is a further extension with BWE in Gabon, which will keep the rig contracted until mid-October 2024. The second is a 120-day contract with an undisclosed customer starting in February 2025.
Additionally, I’m pleased to report that we have received two letters of award for a combined term of 660 days at leading-edge rates. The first program, which we previously announced is expected to commence in Q1 2025 and has a total duration of 480 days. The second program, just awarded this week, is expected to commence in Q4 and has a total duration of 180 days. This contract exemplified the current state of the industry and Borr Drilling’s unique competitive position. We continue to see positive demand for the jack-up services with many of our customers accelerating programs backed by strong oil prices.
As customers seek to secure near-term rig capacity, we leverage high-quality uniformity of our fleet to provide flexibility in rig locations, enabling us to meet our customer needs, while maximizing our fleet utilization. For further information of our fleet and contracts, I’ll refer you to the latest fleet status report published by the company on our website.
With these 11 new contracts, our contract coverage has now reached 93% for 2024 and 71% for 2025, including firm contract and price options. We believe these levels provide a healthy balance between revenue visibility at market-leading rates and operational leverage amidst a favorable rate environment as demonstrated by recent fixtures.
On a broader market perspective, utilization for modern jack-ups remains strong at approximately 95%, not adjusted for Aramco suspension of the 22 rigs, including our Arabia I. We note that some of the suspended rigs have already been re-contracted elsewhere, while others may not be competitive international markets due to their vintage capability, lack of international footprint of their current operators.
We anticipate that around 13 of these rigs are potentially competitive international market, which would result in utilization remaining at healthy levels above 90%. However, we see this fluctuation utilization to be temporary as incremental demand levels should offset and surpass the number of rigs potentially available in Saudi. Based on the current tenders and discussion with our customers, we continue to project incremental demand of 20 rigs to 25 rigs within the next 12 months to 18 months.
On that note, we remain optimistic about our ability to re-contract the Arabia I during the third quarter. While we have witnessed some competitor fixtures below general market rates in certain geographies, we expect this dynamic should be short-lived as fundamentally the jack-up market remains well-balanced and tight.
In the first phase of the jack-up rebound, selected NOCs, particularly Aramco, absorbed most of the available capacity. This rapid absorption has left several customers with limited choices for high-quality assets to fulfill their programs. We now appear to be entering a second phase of the rebound whereby ONGCs and other NOCs are seizing the opportunity to secure capacity and accelerate programs amidst the favorable oil price environment.
With that, I’ll now hand the call back over to Patrick.
Patrick Schorn
Thank you, Bruno. So in conclusion, there are three main messages I would like to leave you with. Firstly, our ability to add backlog at market-leading rates remains intact and is strengthening our future earnings.
Secondly, our adjusted EBITDA guidance is $500 million to $550 million for the full-year 2024. Lastly, the Board approved a doubling of the quarterly dividend to $0.10 per share, reflecting a positive outlook. We would expect dividend to continue increasing over time in line with our earnings outlook.
Ladies and gentlemen, I would like to end our prepared remarks here and we can go to Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
Patrick Schorn
Any calls on the audio line?
Operator
There are no questions at this moment on the audio lines.
Patrick Schorn
Very good. Are we starting to see any questions on the web?
Magnus Vaaler
We have one question, Patrick. Why was the rig suspended in Saudi Arabia?
Patrick Schorn
Very good. So what we had seen earlier this year is that there has been a change in strategy in Saudi Arabia in which a large number of rigs have been suspended. In the order of 20 rigs have been suspended as their focus has changed from certain developments offshore to more developments onshore, which has caused them to have an oversupply after the very large influx of rigs that they have seen over the last two years.
So this has been the reason for the suspension under which we had one rig affected by that. We have a total of three rigs. The other two rigs remain operating normally, but so one of the 22 rigs suspended was ours.
Magnus Vaaler
Thank you, Patrick. We have one more. Can you confirm the number of new rigs coming online in the next few years?
Patrick Schorn
We can say a few things around it, and Bruno, maybe you can shed a bit of light on our rigs coming online, as well as what we believe to be coming into the market.
Bruno Morand
Very good, Patrick. Yes, as we mentioned in our prepared remarks, two of our new builds are scheduled to come out of the shipyard by the back end of this year. One of each will remain positive that the commitment that we currently have in the books will be an appropriate allocation for all of them, and we continue to work on finding a commitment for the second one. In the bigger picture, in the overall market, there is somewhere around 15 rigs to 20 rigs that are currently under construction or allegedly under construction in the shipyard.
That said, we’ve looked at several of those units which are dubbed to be under construction, and effectively there are not more than just constructions that were abandoned long ago, and it would really struggle to come to the market. In general terms, we estimate that somewhere around five to six rigs could actually be coming to the market in the next 18 months to 24 months. And we think that this is a quite relative — quite low number of rigs that are likely to affect the general supply.
Magnus Vaaler
Thanks, Bruno. Are you considering any acquisitions or M&A, given the excess of liquidity available?
Patrick Schorn
[Andreas] (ph), any further questions?
Magnus Vaaler
Yes. Are you considering any acquisitions?
Patrick Schorn
Perhaps, we might have lost Andreas, but we have another question that came in here. Can you talk about the Arabia I regarding contracting by the Saudi Aramco by Q3 this year?
Bruno Morand
Sure. We obviously have been looking at a variety of prospects for the rig. The rig has finished its campaign now in May, so it’s effectively available now if we can find a commitment for it. We are looking for several contracts or options around the globe, potential deployment for the rigs. At the moment, we don’t have anything firm, but as I said, we do have a nice pipeline of opportunities that give us the confidence that the rig will be contracted near-term.
Worth highlighting that the Arabia I was a rig that came out of the shipyard and had a stellar operational performance since then, and obviously, at the moment, this is something that speaks very highly for our customers and gives a good confidence on their interest.
Patrick Schorn
Any further questions?
Magnus Vaaler
There are several questions. There’s one question. Can you talk about working capital? Have you collected on these receivables, and can you discuss the free cash flow in Q2 to Q4?
And I can address that. As we mentioned on our cash from operations, we had some buildup in crude revenues over the quarter, which mainly related to some invoices going out a bit late on our side, but these haven’t been subsequently to quarter end been collected, so we are par with that again.
Also, there’s normally a question about Mexico collections. We continued with collections in Mexico in Q1 of $15 million, while in a regular quarter we would expect around $30 million. However, just after Q1 ended, we collected these additional $15 million, which took us to a $30 million collection in Mexico during the quarter, which is in line with what we expect to receive there on a quarterly basis.
I can go back to a new question on the contracting. Which of the rigs TBD jobs is intended for your new build Vali?
Patrick Schorn
So let me talk a little bit about that because it is clear that we have on purpose done press releases regarding the new contracts twice in this year, and I think it needs to be understood that our commercial strategy by customer and region needs to be safeguarded and part of that is also the rig assignments that we do as such, and therefore, we have been not particularly clear regarding which particular customer and or region has, for instance, the $200,000 per-day day rate, nor which rigs we are going to use in every particular instance.
We take this purely from a commercial and a competitive point of view. We inform you of the contracts that we have, but these assignments at this moment are somewhat fluid and that’s why we have described it as we are. And all I can tell you is that the Arabia I will be in the mix as the Vali will be as well. But I can’t give you further color on the exact contract they will be deployed on.
Magnus Vaaler
I think with this we have a question on the phone line so we can turn the call over to the operator, please.
Operator
Yes, of course. Thank you. And we have a question from the line of Nikhil Bhat from J.P. Morgan. Your line is open. Please ask your question.
Nikhil Bhat
Good afternoon. Thank you for taking my question. I had a question on the…
Patrick Schorn
Any further on the website?
Magnus Vaaler
There is one question about capital distributions or several questions about capital distributions. So in addition to dividends, do you think that given the place the shares trade at the significant discount to replacement value, a share repurchase would be accretive?
Patrick Schorn
So clearly the Board has looked at both of the opportunities to return cash back to the shareholders. At this moment, it was deemed to be more attractive to start a proper dividend distribution with meaningful numbers before considering the buyback option. I think that it is however true that the Board as well as management feel that the share is quite under-valued at this moment. So these discussions do take place in the Board quite frequently. But at this moment, as you have seen in our prepared remarks, the decision has been to increase the dividend.
Magnus Vaaler
Then one more question on the marketing. Which regions do you see the highest incremental demand and their most robust pricing? And I can add on another one, are you worried about lack of discipline in day rates from certain players regarding extra capacity?
Bruno Morand
All right, thank you. I think very much in line with our earlier reports, we have been monitoring very closely incrementally and across regions, and obviously, West Africa has been one that has been providing some positive surprise. Southeast Asia has been quite robust as well and India is showing obviously demand — open demand at the moment that is unaddressed and I think that speaks for a large chunk of the incremental demand around the globe.
In terms of discipline, it’s hard for us to obviously comment on the actions and decisions by our competitors. What we see is a market that remains well balanced and a utilization level that should continue to support strong day rates and continue training improvement day rates. With this incremental capacity shortly absorbing some of the extra supply that could come from Saudi Arabia, we see no reason why the competitive peer group should act differently I think. But speaking for ourselves, we have continued to experience very solid rates.
Patrick Schorn
Very good. Then I would like to thank everybody for their participation in this call. We see the future to continue to be quite bright as you have seen from our presentation given and we look forward to talking to you again within the next months and give you further update on our business. Thank you very much.
Operator
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.
