Borr Drilling Limited

Good day and thank you for standing by. Welcome to the Board Trailing Limited Q1 2023 results presentation webcast and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw the question, please press star 11 again. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link anytime during the conference. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Patrick Sean, CEO. Please go ahead, sir.

Thank you.

Good morning, and thank you for participating in the Board Drilling First Quarter 2023 Earnings Call. I'm Patrick Schorn, talking to you from Hamilton, Bermuda, and with me here today is Magnus Fahler, our CFO, and Bruno Morant, our Vice President Commercial. Next slide. First, I would like to cover 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 of 2023 continued the positive trend experienced over the last several quarters with an increase of revenue of 16% quarter on quarter and a further increase in adjusted EBITDA of 31% to 72.4 million. Q1 2023 is also the first quarter where we generated positive income before tax. We reaffirm our previously communicated guidance of adjusted EBITDA of 360 to 400 million for 2023 And while we expect a similar performance in the second quarter to the first quarter of 2023, we expect further increases in the third and fourth quarters of 2023 as our two remaining stacked rigs are being activated and will commence their respective contracts in the Middle East and Mexico. the first quarter has evidenced our continued ability to add backlog at market-leading rates, confirming the tight supply of Jacob drilling rigs in the market. At the same time, we see positive prospects for continuing work for our rigs that are finishing their contracts at the end of this year, both with current customers as well as in new geographies with new clients. In February 2023, we completed the issuance of our 250 million unsecured convertible bonds maturing in 2028, and our 150 million senior secured bonds maturing in 2026, enabling us to fully repay our 350 million convertible bonds due in May 2023. This marks the final step of refinancing our debt that was due to mature in 2023. and we now have no significant debt maturities prior to 2025. We expect the improving market coupled with the positive prospect of access to the debt market at attractive rates will enable a global refinancing of the company and ultimately accommodate dividend distributions to shareholders. Magnus will now step you through the financial details of the first quarter.

Thank you, Patrick. Q1 2023 revenues were 172 million in the quarter, an increase of 23.4 million, or 16% compared to the fourth quarter. This was split between 141.7 million of day rate revenues and 30.3 million of related party revenues, which were bare boat earnings from our Mexico joint ventures. The increase in revenues was a result of more rig operating days in the quarter, now with 20 rigs working. Rig operating and maintenance expenses for Q1 were 85.5 million, an increase of 2.1 million from Q4. This increase was also due to the increase in activity and operating days. Total financial expenses net were 40.5 million for the quarter, a decrease of 8.9 million, mainly as a result of a 3.2 million decrease in financing fees in connection with the prior quarter refinancing activities, a 2 million decrease in interest expense, and a 1.7 million increase in interest income. Income before income taxes was 7.9 million, an increase of 26.4 million compared to the fourth quarter, and first time ever with a profit before taxes for the company. Net loss was 7.4 million, a decrease in loss of 13.9 million compared to the fourth quarter. And the adjusted EBITDA was 72.4 million, an increase of 17.3 million, 31% compared to the fourth quarter. Our free cash position at the end of Q1 was 90.3 million. Our cash movements in the quarter were primarily driven by 8.2 million cash used in operations, which includes 29.5 million cash interest and 10 million cash taxes paid. 29 million cash was used in investment activities, primarily rig activation costs, and 177.4 million net cash provided by financing activities consisting of the February bond issuances offset by repayment of debt, including parts of our convertible bonds due in May 2023. After quarter end, we have upsized our bank loan facility by 25 million, in addition to establishing a guarantee facility, which allows us to issue guarantees and letter of credits in the amount up to 25 million without toasting cash collateral. We have 10 million restricted cash related to guarantees at the end of Q1. So in total, these two facilities provide 35 million of additional liquidity in Q2. Moving to the next slide, please. These graphs show the significant quarterly progression in both revenue and adjusted EBITDA we have made since the beginning of 2022. Our EBITDA in Q1 increased to 72.4 million and we expect that the second quarter EBITDA would have a similar performance to the first quarter due to the same number of rigs working. Then we expect further increases in the third and fourth quarter of 2023. as we have our two remaining factories activated and commencing their respective contracts in the Middle East and Mexico. Now, with this, I would like to pass the word over to Bruno.

Thanks, Magnus. I'll now briefly cover some aspects relating to the markets where we operate. Based on the IEA's latest supply and demand outlook, oil markets are expected to experience an increasing supply deficit in the second half of 2023. reaching nearly 2 million barrels per day shortage in the fourth quarter. This deficit should continue to drive increased activity levels and will also result in higher commodity prices. This backdrop continues to support a very favorable outlook for shallow water drilling market. On to the next slide. Checkup utilization levels have continued to increase year to date. In particular, the market utilization for modern rigs currently stands at 93.3% and at a level not sustainably seen since 2014. At the same time, modern rigs continue to gain market share versus standard rigs, reflecting the customer's preference for assets with superior capabilities. As time progresses, we expect the tightness in the modern Jacob market to be exacerbated by the fact that over 30% of the current Jacob fleet is beyond retirement age. In a normal scenario, we would expect this attrition to be replaced by new views. However, looking at the next slide, it is evident that extremely low order book levels will be insufficient to offset any future fleet attrition. The combination of high fleet utilization and low order book will continue to drive higher day rates. On the right-hand side, we illustrate how improving market conditions and the increasing number of rigs under contract have driven our adjusted EBITDA figures in the last 12 months. We expect this trend to continue. Moving to the next slide. Following the previously announced contract for our premium jack-up yield, all of our 22 delivered rigs are now contracted, representing an important milestone in the history of the company. Year to date, we have secured eight new contracts, options, LOIs, and LOAs, including a contract for the run with an undisclosed customer in Americas at leading-edge rates. These awards have increased our contract coverage to 95% in 2023 and 59% in 2024. The strong contract coverage in 2023 provides visibility of revenues that support our guidance for the year. At the same time, the available days in 2024 and beyond should provide us with an opportunity to replace legacy contracts under continually improving market conditions. Next slide, please. Core drilling continues to build quality backlog. Our current contract revenue backlog stands at $1.69 billion, which represents a substantial increase year on year. The equivalent average day rate increase by nearly 30% during the same period. Year to date, we have continued to benefit from positive industry momentum to secure strong new contracts for our rigs. Looking at the four new commitments secured by the company year to date, they represent an addition of $177 million to our backlog at a healthy equivalent average rate of $164,000 per day. With all of our 22 rigs being contracted, We have no immediate availability, but continue to work closely with our customers to meet their needs in the future. I'll now hand the call over to Patrick.

Thank you, Bruno.

In conclusion, I would like to highlight some key aspects defining our performance and success going forward. Firstly, and what you have seen from the information discussed by Bruno, we continue to grow our backlog at day rates that are market leading and a true testament to the quality of our people and assets. Secondly, we have all delivered rigs in our fleet contracted at this moment. The demand for our rigs remains high. And since our rigs are predominantly deployed on development wells and therefore production related, where most of our customers have set ambitious goals, that can only be reached by keeping rig and well activity high, we are in general less impacted by short-term oil price volatility. Thirdly, our first quarter results have come in right on plan, and I'm very pleased with the efforts of our people around the world making this possible. With this performance, we fully intend to remain on the trajectory to deliver the earlier communicated targets for the year with our last two rigs starting operations in the second half of this year. Next, we have started the process of our refinancing our current debt due in 2025. It is our intention to conclude as soon as it's practical, but this process has started. Lastly, I would like to emphasize that our customer success and the value they can derive from our services is paramount to our success. And therefore, the whole team continues to focus on safe and efficient operations every day for every customer.

Thank you.

Thank you. And as a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 again. 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 in on the question box and click Submit. One moment, please. Our first question comes from the line of Greg Lewis with BTIG. Please proceed.

Yeah, thank you, and good afternoon. You know, Patrick, thanks for all the color you provided. I was hoping to kind of get your thoughts around, you know, realizing that we don't really have much we're pretty much contracted out here for the next couple months, but I guess let's say as we look in the back half of this year, as we think about some of these rigs that are rolling off contract, and you mentioned the development work, I guess there's a two-part question here. One is, given the fact that it's development, should we more expect, I guess, whether we want to call them extensions or continuations of this work, and to that point, you know, as we look across the fleet. Is the market tight enough where we shouldn't be thinking about basin-to-basin rig mobilizations at this point?

So, thanks, Greg. I think, firstly, on the development side, I think what it really means is that many of our customers, as you know, are predominantly national oil companies, and with the targets that they have set themselves and communicated, there is a very large volume of work that needs to be carried out to actually reach these targets. So any short-term oil price volatility, I think, is going to not immediately impact, because the targets that are set, the contracts that we have that are related to this, are all long-term, some in excess of five years. So therefore, I think that as it is really the lifeline to keep the production going on the shallow water drilling and based on the customer profile that we have, I fully expect that to continue. Now, your second question on whether or not it is time to maybe move some rigs from certain regions to others. I think it is true to say that we early on in this process have already started reallocate rigs from certain areas and for us that was predominantly the North Sea to other areas where we saw better rates and better volumes of work and we did that quite early on so today we're not effective that much I think you'll see still some changes geography wise but not that many so I would think that all of the basins are going to have additional demand. And I think that also the overall price that we see is fairly uniform around the world. So I wouldn't say that there's many weak pockets that you see shifting into pockets where more money can be made, except maybe that the North Sea continues to be an area of weaker performance. I probably want to leave it at that.

Okay, perfect. Thank you very much for taking my questions.

Thank you. Thank you. One moment, please. My next question comes from Frederick Steen with Clarkson Securities. Please proceed.

Hey, team. Hope you're well and happy to see all these high rates here on your second to last slide 164 average so far this year is definitely impressive so I wanted to dive a bit into that number or dynamics that you are facing right now I think kind of firstly are you experiencing any reluctance or pushback right now in a way obviously you're not since you're seeing these rates but How have client behavior changed as you started to move into the kind of upper end of the range here between 150 and 200k per day?

All right. Thanks, Frederik. Maybe I'll give Bruno the opportunity to give his view on this as he's dealing with it on day-to-day. Bruno.

Yeah. Thanks for the question, Frederik. Listen, we see... Around the globe, it's noticeable that we've been securing rates at the leading edge. And I think a lot of that has to do with the fact that we have premium assets equally that we pride ourselves for the living premium services to our customers. In a variety of geographies, we've seen our rigs delivering these wells much faster than operators being used to in the past. And that has converted to I think, a level of preferential treatment and certainly higher rates. There's no doubt that there is a new rate environment. The rates have been increasing. The customer is obviously adjusting to the new environment, and from time to time, we see pushbacks. But I think the fact that we've been consistently driving the rates up is a reflection of the premium rig that we have, the premium services that we've been delivering, and that is effectively reflecting on the rates that we've been securing.

Thanks. And as a follow-up to that, in your discussions with clients, are there any differences between the NLC discussions and the majors and ILCs that you're working for in terms of how fast they're turning around, willingness to pay, and just general T&Cs other than directs?

Well, I think the dynamics are very similar across the board, Frederick. Obviously, when it comes down to NOCs, the discussions in a lot of the regions come down to a tendering process that obviously takes its own course. But the variables that we're discussing at the moment, the conditions that we're discussing at the moment are very similar across the board.

Perfect. Thanks. And Patrick and Magnus, I'm sorry for doing a second question there, but I think it's important. The refi process that you have started to accelerate, as you say on the last slide here, are you able at this point to give any thoughts or pointers around how you think an optimized capital structure will look like? Is it an RCF? Is it one large bond, two large bonds? Any call you can give at this point would be super helpful.

Sure, Frederick. No, I mean, and you understand that we can't give you the full insight into everything that we are working in, but we want to make sure that we communicate appropriately what is clearly on the forefront for us for a long time to find a way to get ourselves into a situation where we can distribute cash in different ways, but maybe Magnus is better placed here than me to talk a little bit about what we can say currently about the refi process and some of the aspects around it.

Thanks, Patrick. I think we're very encouraged by seeing the recent transactions in the market on finance things, both with our own bonds in February and also other market participants coming to the market and doing refinancing recently at good levels. And we will obviously be ensuring that we are prepared to hit the market when the opportunity opens up and sooner rather than later. How that financing will look structure-wise, we are obviously looking into several different versions of that, and that is something we need to come back to. But as Patrick emphasizes, we are obviously looking for a structure which clearly creates a path to shareholder distributions, which we currently cannot do, but we will enable us to do that in a refi.

All right. Thank you so much, Roel. That's my questions for now. Have a good day. Thank you, Fredrik.

Thank you. One moment for our next question, please. Any comments from the line?

Just give it a second.

experiencing a technical difficulties with the next line if you do have a question please press star one one to get in the queue okay we have some questions from from the web so we can probably jump to that um there is a couple of questions around the recently announced uh contract for for iran at 162 000 per day implied uh the question is what is the day rate levels being negotiated as we speak.

I'll take that question, Patrick. At the moment, I think we've been consistently securing fixtures in the range of 150 to 160 and now crossing that border. It's fair to say that these are negotiations that are aged to some extent, and we see future negotiations going in the upward direction. We've talked about some numbers earlier. With all the activity level increase that we're anticipating and the projections, I think it's fair to say that as we come to the second quarter of the second half of the year, the range that we expect should be above the 175 range. I think that this is where we've been guiding so far or anticipating so far.

Thank you. If you can go back to the phone questions, please.

Thank you, sir. Let me bring to the stage. One second, please. It's coming from the line of Trolls Olsen with Fernley Securities. Please proceed.

Hi, guys. Thank you for taking my question. Hi, Patrick. Hi, Magnus. Hi, Bruno. Just asking quickly on the market and in terms of... Day rates going higher, which is great to see. What about the T&Cs in the contract? Are we able to improve those as we move along, or how is that part of the contract looking?

I think it's a very good question. One of the things that obviously we focus on is the overall day rate, but what is important to us are all the factors that influence our earnings. And as you well put out there, T's and C's are extremely important. So equally, as we are looking at the pay rates and the absolute number of that, we equally have efforts around all aspects of the T's and C's. You can imagine rates for mobilization, rates for contract-specific equipment, any type of repair times, any type of rig moving times and any of the commercial aspects related to that in the downturn we're probably more stacked against us and of course in today's environment are much more discussion that we also have again with customers so i would say the equal um interest that we have to move the the day rate up equally we are discussing with the customers changes to the T's and C's, and I would say it has equal importance and focus as the normal day rate discussions.

Yeah, okay. Thank you. So hopefully we're starting to see the grace periods coming back in and stuff like that, which is obviously helpful for your economic utilization. On the cost side, and clearly, I mean, a lot of rigs moving into the Middle East. What's the current status in terms of inflation? How does that impact the environment in that region, considering that the ADC and all those guys are trying to get rigged three yards and on contract? I mean, that's a pretty high pressure on any environment.

Yeah, no, I think it is fair to say that, I mean, the world, of course, experienced inflation in general. On top of that, we have an extremely hot market. It is something that we see reflected in pricing that we are getting from OEMs, so particularly the drilling technical equipment. What you see in certain geographies, some pressure on wages as well, and particularly in markets where you are more linked to a certain local content percentage or a certain local content value that you need to be delivering. So these are having costs, but I think that they, are staying in line with what we expected. It has not gone completely crazy yet. So we're actually quite pleased on how we've been able to manage that. Although I would have to say that if there are another 30 to 40 rigs that are coming in certain geographies to work, that obviously is going to put more pressure on the human aspect. And this is where we have been focusing a lot to make sure that we have the appropriate technical personnel on our rigs so that when we start, we also can start with the proper performance and having the technical uptime and economic uptime at very high levels as if these rigs were working for a long time instead of being recently activated. So I think that we feel that we're in a very decent position and we'll have to see how we manage the hot market going forward. but it has our attention, but it has not been something that has come to any levels where it creates unmanageable stress at this moment.

Okay, thank you. Just jumping to the refinancing, and perhaps Magnus is the right one for this one, but anyways, talking about accelerating the global refi, should we think about this as more a second half of 23 events rather than 24 by the looks of it, even perhaps... the third quarter, is that pushing it a bit?

I think, like we said, I think we are doing all we can to prepare ourselves for the best and optimal timing and use the windows as they arise. We've seen very positive movements in the financial markets or in the financing of our industry peers recently and seen the interest for the industry. So I think it's a good time for finding financing. So exactly what the timing of the financing will be is obviously difficult to say, but we will put in place the processes now to be ready as soon as we can.

Okay, thank you. And finally for me, if I may, though, just a quick one on consolidation. Obviously, a lot's been going on. There's still a few things to be done in that regard, perhaps. I don't know. What's your thought here, Patrick?

Yeah, no, I mean, I didn't expect that we would be passing this call with not a question about that. So I think that there is still opportunities out there. For us, it has been a few things have been absolutely key. We have a set of equipment that is working very well for us and allows us to perform at very high levels. So whatever we would do when you think about consolidation or any type of M&A type of work, we would want that to be safeguarded. So whatever we do needs to be with assets that are of, similar nature as ours, obviously to keep that performance on where it needs to be. Secondly, we've also been very clear that it is extremely important to us that we are continuing our focus on the refi and therefore the ability to return cash to shareholders. So if we would consider any of these type of activities, we would very well keep in mind that we safeguard as much as we can the dividend provision to the shareholders. So therefore, the structure that we would need to have on anything that would be looking like M&A, it would require to be in a position to really start generating cash on an extremely short basis, because otherwise, for us, it doesn't matter. And I think that What we are saying is that at 24 rigs, we have a great business of a great size. So there's only very specific types of M&A that for us would ever be a possibility. I think the value that is in M&A, if you want to look at it from that point of view, we are sold out. and we are able to really get a very good value for the rigs that we have. So from that perspective, obviously, we see that as a key capability that we would like to exploit as much as we can. But from that point, we are looking at things that could be possible, but like I said, We have a very strong commitment to the dividend distribution with a very short timeframe, and that's what we will stay true to.

Okay. Good. Thank you, guys, for taking my questions. Very good. Thank you, Charles.

Thank you. And I'm not showing any further questions, and we'll pass it back to our CEO, Mr. Sean, for his final remarks.

very good i think that we uh we are had a a very good round of questions um thank you very much for your attention and interest in board drilling and we look forward to speaking to you again soon thank you very much and with that ladies and gentlemen thank you for participating and you may now disconnect