Borr Drilling Limited

Thank you. Good morning, and thank you for participating in the Board Drilling Third Quarter 2023 Earnings Call. I'm Patrick Schorn, talking to you from Bermuda, and with me here today is Magnus Fahler, our Chief Financial Officer, and Bruno Morand, our Chief Commercial 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, please. The third quarter was characterized by strong operational performance with technical utilization for the quarter above 99%, revenue increasing by 2%, and our adjusted EBITDA increasing to 88.2 million, which is 5% over the second quarter's results. Our backlog quality continues to improve. Year-to-date, we have secured 12 new commitments, adding $728 million to our revenue backlog at an implied average day rate of $161,000 per day. We continue to experience positive developments in utilization in the global jack-of-market, particularly for modern rigs, where marketed utilization stands at approximately 94%. Day rates have continued to appreciate as demonstrated by our latest previously announced fixtures for the Prospector 5, the Nat and the Iden. In addition, we are pleased to announce a 15-month extension for the Sculpt at a daily rate of $165,000 per day. DERAN and HILT have recently commenced their new contracts bringing the operating fleet to 21 rigs. We expect GERT to commence its new contract in early December 2023 at which point all of our 22 delivered rigs will be operating. I'm also pleased with the conclusion of our refinancing and the issuance of 1.54 billion of secured nodes with maturities in 2028 and 2030. This completes the refinancing of all our secured debt and provides the company with a solid long-term capital structure. We've also announced that the board intends to implement a regular quarterly dividend starting at 5 cents per share, which is subject to required approvals in a special general meeting to be held the 22nd of December, 2023. For 2024, we maintain our estimated range of adjusted EBITDA for full year 24 to be between $500 to $550 million. Magnus will now step you through the financial details of the third quarter. Thank you, Patrick.

We're now on the slide key financial Q3. The Q3 2023 revenues were 191.5 million, an increase of 4 million or 2% from the second quarter. The 4 million increase comprised of an increase in day rate revenues of 5.3 million, offset by a decrease in bare boat income from Mexico joint ventures of 1.3 million. So the overall increase in the revenues were primarily due to higher day rates for our rigs. Rig operating and maintenance expenses were 85.8 million for the third quarter, a decrease of 3.7 million compared to the second quarter. The decrease is primarily a result of a decrease in amortization of deferred costs. The total financial expenses net were 50 million for the quarter, which is in line with the previous quarter. and the net income for the quarter was 0.3 million. Our adjusted EBITDA was 88.2 million, an increase of 4.2 million, or 5% compared to Q2. Our free cash position at the end of Q3 was 94.4 million. Cash increased by 10.6 million in comparison to the prior quarter and is primarily a result of 34.5 million cash provided in operating activities, 9.6 million net proceeds from the sale of shares under our ATM program, 10.3 million repayment of debt, and 23.4 million cash costs for additions to Jacob rigs, which is primarily activation costs for our rigs HILD and Arabia 3. Then moving into the next slide. As Patrick said, we're very pleased to have completed our refinancing for all the company's secured debt now in November 2023 by the issuance of a total of 1.54 billion secured notes with a duration of five and seven years. Following this, our main debt maturities are in 2028 and 2030. The refinancing provides a stable foundation for the company going forward and increased flexibility from an operational point of view and provides the possibility for distributions to our shareholders. Additionally, we have secured a 180 million senior secured facility, which includes 150 million revolving credit facility and a 30 million guarantee facility. Lastly, The delivery installment for our two remaining new bills, VAL and VAR, in 2024, are largely funded by a commitment from the shipyard of 130 million of debt per week. With this, I would like to turn the word over to Bruno Morand, our Chief Commercial Officer.

Thanks, Magnus. I'd like to provide a brief update on the jacket market in our most recent contracting and fleet developments. Checkup utilization levels have continued to increase since our last report. In particular, the market utilization for modern rigs has now reached 94%, with the total number of contracted rigs climbing to 300. Modern rigs availability continues to tighten and is now in high single-digit territory, excluding rigidly stranded and sanctioned tinted assets. Amidst this tight market, we continue to experience a marked recovery in day rate levels for modern jet cops. I'll later provide some commentary about our most recent fixtures that illustrate that. Based on the current tenders and discussions with our customers about their future requirements, we see strong indications of an undersupplied market condition developing in the second half of 2024 and into 2025. Incremental demand is visible across most regions and specifically strong in Southeast Asia, India, Middle East and West Africa. But we note as well some interesting pockets of activity developing in the Mediterranean. In line with the views we have shared in our earlier presentations, shipyard order books remain at record low levels and unlikely to provide any relief to the supply and demand imbalance. The remaining competitive new units in China are largely expected to be absorbed by the domestic market. We believe these conditions will continue to support an increasing day rate environment, particularly for young and high-performing rigs, placing board drilling in a unique position to benefit from these developments. Year-to-date, we have secured 12 new mutual contracts, LOIs and LOAs, adding $728 million in total revenues and 12.3 re-years to our backlog. This represents a weighted average day rate of $161,000 per day, which continues to be industry-leading. In addition to the long-term commitments previously disclosed for the rigs Prospector 5 and 9 in Congo, Tor in Indonesia, and Aydin in Thailand, I would like to highlight new commitments recently secured for our rigs Gunlot and Scald. The Gunlot, which is due to complete its current contract in January 24, has now secured a binding LOA for a 120-day program in Malaysia with an undisclosed customer. This new commitment will start in direct continuation to this current contract and should maintain the rate contracted until May 2024. We have ongoing discussions with customers in the region and anticipate further commitment for the gun laws in the near future. The Scalp has secured a 15-month extension with PTTP in Thailand at a rate of $165,000 per day. This extension will maintain the rate firm contracted until September 2025. I highlight that the IDEM and Scald are both modern rigs with extensive offline capabilities, which combined with our experienced crews, enable our customers to materially reduce their weld times and costs. The recent awards by PTTEP for these rigs and market-leading rigs are a strong testament of the superior performance and value creation enabled by our modern rig fleet. Beyond these recent awards, I would like to note that the rigs Arabia III, Hewes, and Ron have recently commenced new contracts, increasing our operating rig count to 21. The GERD is in final stages of contract preparation and is expected to commence its new contract in early December. At each point, all of our delivered rigs will be operating and generating revenues for the company. For further information about our fleet, I'll refer you to the latest fleet status report made available on our company's website. The company's total revenue backlog currently stands at approximately $1.9 billion and an equivalent rate of $137,000 per day. The recent contract awards secured by the company contribute to improve our backlog, both in total volume and quality. In terms of future fleet coverage, our firm contract and price options cover approximately 84% of our available days in 2024, providing strong revenue visibility for the year. With a positive demand outlook for our rigs and continue to improve rig environment, our near-term revenue feasibility and long-term operating leverage places Board Drilling in a unique position to benefit from this market dynamic and create significant value for our shareholders. On this note, I'd like to hand the call back over to Patrick. Thank you, Bruno.

So in conclusion, We finished Q3 with continued strong earnings and operational performance. The average day rate of our backlog and therefore the long term quality of our revenue is increasing by adding contracts at market leading rates. Our 22 delivered rigs are contracted with all of them operating before year end. The supply of jackups to the market will remain constrained as no new build orders are placed. The industry is depending on a finite fleet where our rigs are the youngest with excellent operational capabilities. This absence of new builds is likely to keep the utilization in the mid 90% with day rates continue to increase. The refinance of our 2025 debt maturity 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 our secured debt and provides the company with a solid long-term capital structure. Lastly, we are delivering on the commitment to become a dividend distributing company with the board intending to implement a regular quarterly dividend starting at 5 cents per share, subject to required approvals in a special general meeting to be held 22nd of December, 2023. In closing, I'm very pleased with the results of the third quarter. The team has delivered on every front. Strong operational performance, an excellent effort on the refinance, preparing the company for the long term. This all combined with a business environment that looks bright, for the offshore shallow water drilling business rest mean nothing else but to sincerely thank our employees customers and partners for the milestones achieved this quarter and we will do our best to continue to deliver at the highest standard ladies and gentlemen i would like to end here our prepared remarks and we can go to q a

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star 11 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 into the question box and click Submit.

Now we're going to take our first question.

And the question comes to the line of Frederik Steen from Clark Securities AS. Your line is open. Please ask your question.

Hey, Patrick, Magnus, Bruno, and congratulations on completing the refi now in October. my first question relates to just what that refi enables and you touched upon it in the prepared remarks uh patrick uh dividends um you have uh or you say that the intention now is to implement a quarterly dividend starting at five cents i was wondering are are you at this stage able to give any more color on how that might look in the future is this called a baseline type of dividend do you intend to grow that dividend over time or will it just be at any point in time subject to whatever cash you have available for distribution any color would be greatly appreciated yeah frederick thanks for the question so firstly i would say that um

With the way that we have been communicating and setting up the company and the development we have seen in day rates and the outlook of the business, it is our full expectation to be generating increasing cash in the quarters and years going forward. So therefore, I think it is safe to assume that in that we have the opportunity to eventually increase the returns to shareholders. So clearly what we are discussing now is a start of that with a five cents per share. I fully expect that to be increasing at the appropriate time in the future. At the same time, you know that we also are focusing on deleveraging. So we are doing both things hand in hand. I want to make sure that both get the equal and appropriate attention. But with the way that we see the business today, it is the full expectation that the dividends would be progressively increasing over time. But I think we will discuss that at the time that we have generated those returns. That is what I would say at this moment is the most likely scenario, looking at the overall business environment and where we are with that.

Perfect. Thank you.

And I also wanted to touch upon the new builds. You're saying that they're now, or in line with previous communication, delivery looks to be in the second half of next year. And you also included the payback. of that initial capital debt in the maturity profile here. So I'm wondering, have you progressed on contracting those units out in any way? Just trying to figure out how much incremental cash flow can potentially come from the pair.

Yeah, so I think there is a few things, and Frederik, you'll understand that this is always a little bit of balance you're trying to strike to, on one side, make sure that you have a contract in hand when the rig is ready, which, actual speaking, from where we sit today, is still a year out. And on the other hand, also making sure that you don't too early commit to a contract that maybe is below market price at that time. So we're trying to balance that. We are having several discussions with customers at the moment. What we're trying to do is find the appropriate long-term contract where we can place these rigs and If you look at the fleet that we have, you're well aware that we are having some very specialized rigs with offline capabilities. I would say that these two new rigs that are coming are probably some of the best equipped rigs that we will have in the fleet. So therefore, we want to make sure that we spend the appropriate time to get them on the projects that also can benefit to the maximum of the capabilities of these rigs. So we are in discussions with customers, but I don't want to give you the intention that we're rushing towards contracting them. We want to make sure that we take our time and look at it properly with the customers that have the right opportunities.

All right, super.

I'll jump back in the queue, but thank you so much and congratulations again on completing the refi.

Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star 1 1 on your telephone keypad and wait for a name to be announced.

Alternatively, you can submit your questions via the webcast. Now I would like to hand over to any written questions at this moment.

Okay, we have one here. Why have you not provided an earnings update expectation for 2023? Very good.

That is a good question. We're getting towards the end of the year, and we have previously guided that for 2023, we expect to be ending the year between $330 and $360 million of adjusted EBITDA. And looking at the results that we have so far delivered in the first three quarters, plus the visibility we have on Q4, we are right on track to be delivering right in that bracket. So that's why we haven't further discussed that. We're right on track to deliver 23 as guided. And we hope to be discussing and presenting to you that early next year.

Thank you, and then we have another one. What was your weighted average number of operating rigs through Q3?

Yeah, that was just below 20, so rounded up 20 rigs operating in Q3. Then we have more rigs commencing now in Q4. One already commenced in Mexico with the HILT and then the RAHM last year starting operations and we will then have all 22 rigs operating by the end of the year.

Okay, thank you.

I think we can go back to the phone queue please.

Thank you so much. Now we're going to take our next question. Just give us a moment. And the question comes to the line of Frederik Steen from Clarkson Securities AS. Your line is open. Please ask your question.

Hey again, guys. I just wanted to pull a bit up on the market. Bruno, you seem to be very confident in that. In how things are developing and in terms of contracting strategy, broadly, as you show here on the chart, you've pretty much covered 2024, so you should be good confidence in the guided EBITDA range for that one. But just now over the past three months, or really in the second half of the year, I think on the floater side, one of the themes that have been recurring is white space in 2024 that matching availability with contract startups have caused some gaps in utilization. So my question, you know, is this something you're seeing in any way in the Jacob space or do you think that you'll be able to effectively keep your fleet contracted close to 100% for the foreseeable future?

Thanks, Frederick. Great question. Now, listen, I think we start now with a very strong coverage already in 2024. When I think about the rigs that are having some white spaces, The vast majority of that is in the second half, where we see a pretty strong demand for our rigs. And we see customers obviously increasing their sense of urgency in securing contracts for these rigs. We see very limited correlation between the dynamics of the deepwater market and the shallow water market. we see our customers still very much committed to securing capacity. I think if I look, for example, anecdotally to the skull, which is a rig that we extended now in Thailand, Traditionally, PTT would have run to a tender process to secure the rig. I think understanding the limited availability of rigs in the market, they decided to direct negotiate with us that award, which speaks for the understanding of our customers that we need to secure rigs rather fast before good capacity disappears. So I think the fundamentals are all very strong, and I see limited risk for us in terms of recontracted and wide spaces. Obviously, we mentioned before about our more muted view on the North Sea, so we're working to find alternative commitments for the P1. At the moment, the rig is contracted into Q1, potentially into Q2, subject to options. I think that's obviously something we're working hard towards, but in general, we remain very confident on our ability to maintain rigs utilized for 2024 with very, very limited open space.

Maybe to add to that a little bit, Frederik, I think that what you see in the deep water is based on a completely different set of customers than what we see in the shallow water. In the shallow water we see that there's a very big scarcity of modern rigs and that continues to be there. We see very strategic long playing customers and let's not forget we're on the short cycle barrel. We can produce much faster from the moment that we start drilling versus any type of a deep water development. So the barrier to start anything deep water versus continuing to develop the production in shallow water is very different, and I think that that is a market that probably going forward will continue to diverge, and I'm very pleased that we are only playing in the jack-of-market, so to say.

All right. Thank you so much, the both of you. That's all I have. Have a good day. Thank you.

Thank you. Now we're going to take our next question. Just give us a moment.

And the question comes to the line of Richard Ahmed from EMSO Asset Management. Your line is open. Please ask a question.

Hi there. Just wanted to ask about the exposure to Pemex. So in terms of the receivables that you've got, is this 90.3 million of receivables the full amount of receivables from Pemex? I mean, how much of this is past due? How has that dynamic been playing out? Is this a concern in terms of working capital use and getting paid on time? So, yeah, I would just appreciate your thoughts on that. Thank you.

Thank you. Magnus, could you take this question? Yes, I can, sure. So we have currently five out of our seven rings in Mexico is operating through our joint venture and an integrated service provider where the ultimate customer is Pemex. And you are correct on the balance sheet. Our current receivable from the JV is 90 million, which is ultimately a Pemex paying. We have over the past quarters, say in years, received consistent payments from Pemex and have received them regularly. There is obviously some buildup in the balance, which is a combination of more activity that we have on the rigs and also that the contract rates for the rigs actually went up from last year into this year. But just all in all, we have received very consistent payments and don't see that as a very immediate threat. We also have, through our JV and through the integrated service provider, in the event that there is a payment delay or payment holdup. We also have a clause to receive regular payments from the integrated service provider to be sufficient to keep our rigs operating and to cover the operating costs so that there's no funding needed from BOR into the JV to continue to operate the rigs. Thank you.

Yes, no, that's very helpful. And just in terms of from an accounting perspective, are these JV results consolidated into yours? So do the EBITDA numbers, for example, include 50% of the JV results or how does that work?

No, so we bare boat our rigs, the five rigs, into the JV. So what you will see in our financial statement is the line below the day rate revenue. It's the bare boat charges that we do into the JV. So they're not consolidated, but we are bare boating the rigs on a sort of bare boat rate into the JV.

Thank you.

Thank you. Now we're going to take our next question. And the next question comes through the line of Charles Olsen from Fernley Securities. Your line is open. Please ask your question.

Thank you. Hi, guys. Well done on the quarter and on the refinancing. I echo Fredrik on that one. Just a couple of questions, Bruno, starting with you. In terms of on the market, I mean, day rates continue to move higher. What are you seeing in terms of quality improvements on the TNCs? I mean, are we seeing any big changes or small changes there? And also adding... What do you see in terms of contract durations moving outside of the Middle East where most of the activity seems to be the case for now? Is it changing given the tightening market dynamics?

Hi, Trost. Thanks for the question. Bruno here. Listen, for sure, terms and conditions go hand in hand with our pricing power. We have been looking at the contract term that we have with our customers and improving and bringing back to terms that we had closer in 2014 and the moment we had more pricing power. That goes into every component of the contract from payment terms to reduced rates in contracts, allowances, and so on and so forth, markups and so on and so forth. So obviously, that is part of what we've been doing with the customer. We expect that to start actually reflecting in the number of dollars dropping to the bottom line positively. Everything is being looked after very carefully. It's all part of a larger economical view of the contracts. Now, in terms of the second part of your questions and duration of contracts, You're right in saying that when you look at Aramco and a lot of contracts in five years and five years plus, that seems to be kind of a strong benchmark for what a long-term contract looks like. That said, I wouldn't say that in other parts of the world that contracts are short-term in nature. We see in Asia, for example, a variety of our customers coming out with tender sports. two years plus contracts. We've seen a few recent vendors across West Africa and the Med as well for a multi-year contract. So we see clearly that contract duration is increasing. We mentioned in an earlier conference call as well that one of the trends that we have seen, particularly across the NOCs, is that they seem to be moving from project hiring to portfolio hiring. So instead of looking for rigs, to deliver a particular project. They're looking for rates that add capacity to the portfolio and give them some flexibility on deployment, and obviously that causes the general contract duration to go longer. So I think it is true that the Middle East was the first one to come in a meaningful way in terms of duration, but I do see all of other regions following kind of the same footsteps, considering the tightening market and limited rig availability.

Thank you, Bruno. And then Patrick and Magnus, over to you guys. And switching gears over to the bond. On the excess cash flow sweep, when that comes into play in 2025, my understanding is that the bondholders can elect to utilize that function or not. If they don't, they like to use that the cash is essentially free to use by the company for other means, including dividends. Is that the correct understanding?

Yeah that's correct the cash sweep mechanism of the bond starts on the basis of the 2024 results so in 2025 when the annual report is out it's purely in the election of the bondholders to say yes or no to that and it's also obviously then based on the free cash flow that we were generating the year before. We are allowed to use the money for what we want, obviously, but there are dividend restrictions in the bond, which relates to the regular 50% of net income, which is very common. And then in addition, you have certain baskets, which is currently the starting basket of 75 million that you could pay out. plus the 50 million that was raised in equity also added to that 75 million basket. So starting up from now, we have 125 million, and then it grows with a net income that we generate in the company.

Yeah. Yeah. Okay. That's understood. Thank you. Thank you.

Thank you. Dear participants, just a quick reminder, if you wish to ask a question over the phone, please press star 11 on your telephone keypad.

Dear speakers, there are no further questions on the phone.

I would now like to hand the call over for any written questions.

We have another one here. How will the two new builds be financed?

I can answer that. The two new bills we have are scheduled to be delivered in August and November next year. We brought them forward by one year because of our outlook in the market and we see a good potential to put this rig to work. The delivery installment per rig is 160 million. We have financing committed on those new bills from the seller or the yard of 130 million each, which we also show in the graph that we have in our presentation. Very low amortizing in the two first years, only 15 million per year. So the remaining 30 million, which is cash to be paid at delivery,

we expect to be able to or we will handle from from our cash from from operation thank you and then another one with the refinancing complete will bore look to increase the size of their fleet via M&A so thank you clearly it is

is always a possibility. Our position in that is that we have a very unique fleet of 24 fairly uniform modern jackups which all are of a very similar vintage and are the youngest fleet in the industry. So for us to combine anything with that, we would want to make sure that we can appropriately combine it with our operating philosophy and that it is something that fits the fleet. So it could be that here and there a rig might be available that would fit our aspirations and where we could generate additional value from. On the other side, we are also very clear on the fact that with 24 rigs, if that all we were to have, we can run a very proper business and have a great cash generating capability. So I think the view that we currently have is maybe best described as we'll clearly grow some if there is value we can generate. but we don't have to grow so for the right opportunity we will evaluate and otherwise we'll continue to work with the assets that we have and that is as you well know a very specific fleet so i'll probably leave it at that thanks patrick i have another one here are you seeing a bit of a pause in jack up day rates

And what will be the impetus for rates to step up again into the 170s and beyond?

All right. Thanks. Let me tackle that. I think the answer is no. We've seen obviously significant recovery in the last few quarters and consistent fixtures now for our fleet and being in the 160 and even into the 170 territory. So that obviously is a meaningful increase. We see that on the back of that our customers have been rejuggling their portfolios, trying to bring things forward, readjusting their strategy to cope with the market. As I mentioned in my remarks, we do see a significant increase potential in activity for the second half of 2024 and into 2025. Some of it, probably a smaller part still, is out for tender. We expect a significant amount of new tenders to hit the market in the coming weeks and months. We think that obviously as soon as that is the case and that visibility is confirmed in the way of vendors, that should support further increase in market rates. So I am confident that as we progress into 2024, the rate levels will continue to improve. I don't think we have stopped. You know, we are in a supply constraint market. At the moment, we're still at rate levels that are far below previous peak and certainly still far below price parity with new builds. So that should provide us and the market in general a good opportunity to reconsider prices and push them higher as activity levels increase.

Thanks, Bruno. I think with that, we'll turn the word back to Patrick.

all right thank you very much and thank you all for the interest in board drilling we look forward to update you on further progress in the quarters to come and we will talk at that time thank you very much