Borr Drilling Limited

Good morning, good afternoon, and thank you for participating in the Board Drilling Fourth Quarter 2023 Earnings Call. I'm Patrick Schorn, and with me here today is Bruno Moran, our Chief Commercial Officer, and Magnus Fahler, our Chief Financial Officer. Next slide. 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. Our fourth quarter performance has been strong, and we have closed the year having achieved several major milestones. In the fourth quarter, revenue increased by 15% to $220 million, and our adjusted EBITDA increased to $105 million, which is 20% over previous quarter, resulting in a 48% adjusted EBITDA margin. Full year 2023, adjusted EBITDA reached $350 million. Our backlog has grown and improved significantly in quality during 2023, where we added $728 million to our revenue at an implied average day rate of $161 per day. On the operational front, we have finished the year with excellent technical utilization for the quarter at 98.7%, and a total recordable injury frequency of 0.65. the latter being well below the industry average. Both these numbers reflect the professionalism of our operational team who have activated RICS continuously for the last three years and who have successfully commenced operations in numerous new countries. This performance has also resulted in external recognition that is dear to us. And just to name two, our rig Saga has been awarded by Shell as Global Jacob Rig of the Year. Also, we have received the award for the Best Recordable Incident Rig for our rig Skalt and Board Drilling as a Company from the IADC Southeast Asia chapter. On the right hand side, you see that we maintain operations in four main hubs. namely Mexico, West Africa, the Middle East and Asia. This allows us to benefit from economies of scale while remaining diversified enough to provide a stable activity level. There's been significant focus on the announcement by Saudi Aramco regarding their production targets for 2027. On this, I can only comment from a board drilling perspective and based on some of the discussions we had in Saudi a week ago. First, we have three rigs out of our fleet of 24 rigs working in the kingdom, all three of which are on multi-year contracts. Second, maintaining a production capacity of 12 million barrels per day versus 13 million barrels per day still requires a world leading activity level and an operation second to none in size. Oil just doesn't come out of the ground by itself, not even in Saudi. And as such, large volumes of activity will continue to be required. And in order to remain most relevant to our customer, we continue focusing on the things we can control, which is the relentless pursuit of safety and operational excellence in order to deliver value to our customers. We continue to have a very tight jack-up market. Supply has dried up and can only increase once we start to see new build orders coming in. And even then, the impact will be several years out as it takes multiple years to get units built and into the market. On the demand side, Bruno will share some additional information in a minute, but also demand remains solid for the next two years plus. So based on our view of the business environment and a strong contracted fleet coverage, we maintain our estimate of adjusted EBITDA for the full year 2024 to be between $500 to $550 million. We also announced that the board approved for Q4 as well, a dividend payment of 5 cents per share. Magnus will now step you through the financial details of the fourth quarter.

Thank you, Patrick. So Q4 2023 was a very good quarter financially, with quarter-on-quarter increases in revenues of 15% and adjusted EBITDA increasing by 20%. We continue the sequential increase that we've had now for eight quarters, as you can see in the graphs. And this trend of increases actually goes back even further, reflecting both that we have been putting more rigs to work and an improvement in day rates. The operating revenues for the quarter was 220.6 million, an increase of 29.1 million compared to the third quarter. This is split in an increase of day rate revenues of 24.4 million increase primarily due to two more rigs starting up in the quarter and an increase of bare boat income from our mexico joint ventures of 4.7 million mainly related to higher economic utilization for one rig and the release of an operational cost provision the rig operating and maintenance expenses increased by 12.7 million or 15 percent An increase that follows naturally from the increase in number of rigs increasing by two for the quarter. In addition, we had an increase of amortization of deferred costs of 3.8 million in the quarter. The operating income increase quarter on quarter was 26%. Below the operating income line, the numbers were driven by total financial expenses net of 59.1 million which was impacted largely by one-off expenses of 8.9 million recorded related to our refinancing and repayment of all debts. The income tax expense for the fourth quarter was a credit of 9.3 million, impacted by a 16.5 million release of a valuation allowance on deferred tax assets, as well as a 9.3 million release of an uncertain tax provision. That gives us a net income for the fourth quarter of 28.4 million, an increase of 28.1 million compared to the third quarter, and an adjusted EBITDA for the fourth quarter of 105.9 million, yielding 48% EBITDA margin. Our free cash position at the end of Q4 was 102.5 million. In addition, we had undrawn RCF facility of 150 million. So in total, we have approximately 250 million of available liquidity. The cash in the quarter increased by 8.1 million, and this was affected by cash used in operating activities of 79.6 million. This number includes 99.2 million related to interest paid, and approximately 10 million of income taxes paid. And this includes both cash interest incurred during the quarter and the repayment of capitalized interest on our legacy debt. In addition, the number was impacted by cash costs related to our financing and timing differences of working capital movements. Net cash used in investing activities were 35.5 million, primarily consisting of 34 million used on Jacob additions which is the activation cost for HIL in Arabia 3, and also some CapEx additions over the fleet as such. And 1.3 million used on new build additions. The net cash provided by financing activities was 123.2 million, primarily as a result from the net proceeds of the issuance of the senior secured notes and the net proceeds from our private placement offset by repayment of the debts. Next slide, please. Our 2023 full-year EBITDA came in at 350.5 million, and our 2024 EBITDA guidance remains in the range 500 to 550 million. At the midpoint of this range, this shows an increase of approximately 50 percent from 2023. We're also very pleased to have completed our refinancing of all the company's secured debt in November 2023, and we now have all our debt maturities in 2028 and 2030. The delivery installments for our two remaining new builds in 2024 are largely funded by a commitment of delivery financing by the seller in the size of 130 million per rig. And additionally, we have secured 180 million senior secured facility, which includes 150 million RCF and a 30 million guarantee facility. The refinancing provides a stable foundation for the company going forward with a fixed amortization profile that allows us to delever our debts. In addition, it also provides us the possibility of distributions to shareholders as evidenced by our implementation of a regular quarterly dividend which we now have declared for two consecutive quarters of five cents. With this, I would like to turn the word over to Bruno.

Thanks, Magnus. Now, I'd like to provide a brief update on the jack-up market and our most recent contracting and fleet developments. jack-up utilization levels have continued to increase since our last report. In particular, the market utilization for modern rigs has now exceeded 95% in line with our earlier projections. It is noteworthy that utilization levels have continued to improve while the market absorbed a few additional new-build rigs. Currently, the shipyard order book stands at 15 rigs. One of each has a future contract and two are owned by Board Drilling. The total order book represents less than 4% of the global jacket fleet, a record low level. We highlight again, the shallow water projects on average have some of the lowest breakeven prices and continue to be a viable and attractive alternative for our customers at the current commodity prices. Underlying that, and according to recent data by Reichstadt Energy, global investments in shallow water projects are expected to experience double-digit growth in 2024 compared to last year. These factors support our views that the jack-up drilling sector should continue to benefit from strong utilization and improving economics. Looking forward, we see a market scenario whereby incremental demand should continue to outpace any potential supply growth. From a supply side, based on a study conducted by Fernies Offshore, it is anticipated that only six of the 15 rigs under construction could reasonably be brought into the market in the next 18 to 24 months. On the demand side, we anticipate demand for modern rigs to increase by 20 to 25 rigs in the next 24 months or so. Several of these programs are already in tendering phase, while others are expected to be tender in the coming quarters. In support of our views, data from S&P Global in their latest World Rig Forecast projects that global jack-up demand will increase by 36 units by mid-2025. And based on the recent market trends and customer preferences, we anticipate the lion's share of this incremental demand will be fulfilled by modern rigs. We maintain a constructive view on the Asian, Indian, and Middle-Eastern markets, and let me provide you some data points that support our views. In the Middle East, recent announcements by NOCs indicate the potential for several multi-year, multi-rig programs, particularly in Qatar, Kuwait, and the neutral zone between Saudi and Kuwait, where the large Aldora fuel development is expected to be tender soon and should alone require four additional high-specification jackups. In India, we note ONGC's stated plans of securing six new rigs as part of their fleet renewal strategy, noting that the average age of their current fleet is approximately 40 years old. This requirement is over and above ONGC's open tenders and unfulfilled demand from prior tenders, including the recent HPHD requirement. Similar fleet renewal ambitions have been recently indicated by ADNOC and Sinopec. In Asia, Petronas Activity Outlook indicates incremental demand of two to three rigs in Malaysia within the next 24 months. Similar activity levels are projected to increase in Vietnam and Indonesia. Outside these areas, we see pockets of long-term activity developing in places such Angola, Libya, Americas, and Australia, to name a few. The Demand Outlook coupled our customer discussions support our positive view of the strength, duration, and resilience of the cycle. In 2024 to date, we have received three new commitments, adding a total of $82 million in backlog to the company at an average of $166,000 per day. These commitments include contract extensions for the Norva with BWE in Gabon, contract extension for the Mist with Valiura in Thailand, and a binding letter of award for the Tor with Anandi Schools customer in Southeast Asia. Following these awards, our fleet coverage for 2024 has further increased to 87%. Considering our prospects and based on ongoing discussions with our customers, we remain positive about our ability to secure follow-on work for our rigs rolling off contract during the year with limited white spaces, if any. Our only rigs expected to roll off contract in the first half of the year are the Prospector 1 in the North Sea and the Gunlot in Asia. We're currently in advanced discussions with customers about continued work for these rigs and will provide further details in due course. In relation to our new built units, Vail and VAR, we continue to make progress with the completion of their construction and commissioning and remain on track to have these units delivered around the fourth quarter this year. These units are currently being offered for several opportunities and are attracting considerable interest from our customers. We remain positive about our ability to secure meaningful term work for these units ahead of their delivery. On this note, I'd like to hand the call back to Patrick. Thank you, Bruno.

so in conclusion bruno has walked you through the current utilization our view of the demand increase over the next 18 to 24 months and the corroboration of these numbers by ihs and p global we are in a supply constrained market with continued demand increases which is the basis for further day rate increases going forward Our 2024 adjusted EBITDA remains unchanged at $500 to $550 million. This is underpinned by a strong contract portfolio, which is covered currently at 87%. The refinance of our 2025 debt maturities 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 have delivered on the commitment to become a dividend distributing company The board approved for Q4 as well, a dividend payment of five cents per share. Ending on what for board drilling our customers is the most important performance indicator, which is delivering operational excellence safely. This will continue to have our utmost attention going forward. Ladies and gentlemen, I would like to end here our prepared remarks and we can go to Q&A.

Thank you. As a reminder, to ask a question, you will need to press star, one, and then one on your telephone and wait for your name to be announced. To answer your question, please press star, one, one again. Please kindly ask one question and possibly a follow-up question at a time to leave room for the 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. We will now take the first question. Coming from the line of Frederik Sten from Clarkson Securities, please go ahead.

Hey, Patrick. My name is Bruno. Hope all is well, and thank you for taking our question. I wanted to start with 2024 guidance. EBTA reiterated between 500 and 550. Based on the contracts you announced earlier this month, you have reached 87% of fleet coverage, as you say. So I was wondering, can you give some color on on how we would end up on either side of that range. With 87%, would we still see 500 minimum or what's the moving part here to kind of underperform or outperform versus the mid?

All right, so Frederik, thanks for your questions. I mean, at the end of the day, we are still in February. So I think that the range that we have is appropriate. What it depends on is that we fill the 87% as we expect. The more we fill it, the more we will be towards the upper range. The more we are with day rates over $150,000 per day, the more we will be at the upper range of that. So I think that those are the moving pieces. So it is really filling up the 87% further to 100%. Bruno mentioned to you we have many discussions ongoing and we expect to be able to manage any white spaces very well and we expect minimal for the year and secondly you've seen from the day rates that when the contracts that we have announced so far that we are at the higher range of what we would normally have considered when making this type of forecast so the more you see is announced higher day rates of the 170 plus, the more that is going to make us end up in the upper range of our guidance. But that's probably all I can say this early in the year.

Thank you, Patrick. And just on the rig sector, you mentioned Prospector 1 and the Gunda, the two rigs coming off contract now, the first half of this year. Prospector, that's the only rig you have in the North Sea currently. Is it fair to assume that it will remain in the North Sea, or are those discussions for elsewhere?

I don't want to give you fully our commercial envelope at the moment, but we've always said that the North Sea is not a key market for us. However, there is interesting bits of work, and if we can tie enough of that together, you could have a scenario in where we would remain around the North Sea, so to say. And there's other scenarios as well. But I would say that we intend to be announcing relatively soon the outlook for the P1 for the rest of the year. And on the gun load that you were asking, I think that Bruno, you want to say a few things about the gun load?

Yeah, sure, Patrick. And I think the gun load is a rig that has been performing very well in the region where it's located. It's one that has unique features and certainly one that I think our customers would like to maintain in the region. We obviously acknowledge that moving rigs across regions comes with certain efficiencies, and we remain positive that the rig will remain operating in Asia.

Perfect, thank you. And then just finally, you're declaring dividends, five cents this quarter. You also have a share repurchase program in place for 100 million, but you haven't really used, I think it's less than a million, if my math was correctly on that. Can you give any color on how you would think about the trade-off between higher dividends or more shared purchases initially, since at least on my numbers, the real kicker on cash flow is coming in 2025 and beyond. So it would be interesting to hear what you're thinking now for 2024, if higher dividends or more cash allocated to shared purchases would make the most sense for you.

So I think firstly you are right that clearly the larger amounts of cash are going to be available in 2025. But it's also clear from the way that we see the year shape up that there is opportunities to also in 2024 continue to distribute to the shareholders. You know that we are focused on deleveraging and that at the same time we want to make sure that there is a return for the shareholders as well. At this moment, I can tell you that the board wanted to have both instruments available, meaning end share buyback, as well as a diffident distribution, which is currently in place. I think that there is a second guidance where there is going to be focus on that with more surplus cash becoming available, I would expect the dividends to be increasing over time. And then I think on a quarterly basis, based on where the share price might be, the board will make a determination on where we are going to go, whether on the share buyback side or more towards dividend. But I think you have seen that the current sentiment is very much towards dividend being the second consecutive quarter in which the board continues to focus on dividend. Apart from that, I would say follow us here in the quarters to come and we'll be able to give you more info on that.

Thank you very much Patrick and team and that's all from me. Have a good day. Thank you.

Thank you. We will now take the next question from the line of Greg Lewis from BTIG. Please go ahead.

Hey, thanks, and good afternoon, everybody, and thanks for taking my questions. Hey, Patrick, I was hoping you could provide a little bit more color around the new builds. It sounded like in your prepared remarks these are looking at potentially going on term work. Kind of curious, a couple things here. How you're kind of thinking about balancing these rigs into the market, in the spot market versus term, and really then I'll also ask, Are we assuming any revenue contribution in 24 from maybe the rig that's supposed to be available later this year?

No, that is fair, Greg. So let me say a few things, although I'll leave the lion's share of this for Bruno. So the way that it looks at this moment, one of the rigs will potentially two, maybe three months be available for service in 2024. The second one is only going to be really available to drill, call it January 25. And I think that what we were talking about, seeing the additional demand of 24 to 25 rigs from our perspective, there is some interesting term work in that. And for us, it is really a matter that we want to see that these rigs get on some interesting contracts that have a bit of longevity in them. So term in this is important. But Bruno, maybe you can talk a little bit more about what you're seeing and where we're focused on. And I guess that people are quite interested when we would be interested in committing to award any work to these.

Thanks, Patrick. Yeah, Greg, and we mentioned a little bit in the last quarter, these rigs that are being delivered late in the year are probably some of the most capable rigs that we have in our fleet. And because of that, because of the prior track record success of the sister rigs operating in Asia, they have been attracting a substantial interest from customers, particularly ones that are very performance-focused. Obviously, taking a rig out of the yard and everything that comes with it is not a small commitment. We're looking preferably to find work that has volume, and volume, I would say, programs that are 18 months plus. Ideally, to take them out of the yard. We're not concerned, obviously, about them finding continued work, but I think it's obviously preferable if we can find a good balance between attractive day rates in a term that makes it easy for us to phase the rigging into work.

Okay, super helpful, thanks. And then I guess just really given that you provided some great detail on the Indian market, realizing that's not a primary market for you guys, and just because it's timely around the... you know, the decisions by Saudi Arabia last year in January around, you know, raining in some capex. You know, clearly Saudi Arabia is a huge market. You know, I can go and look at the, you know, the 80-plus rigs there and look at different ages and quality of rig. Do you have any sense for – Maybe as we look at Saudi Arabia, how we could see maybe some rigs kind of move out of there and where they could go, or is it something where a lot of those rigs are kind of nearing their useful life and maybe some of those rigs in Saudi probably aren't working in three to five years?

No, I think, Greg, it is a question. Clearly, Saudi is a tremendously large market that does govern what happens in the rest of the world. So, I mean, all I can tell you from the discussions that we had, and I think from everybody in the drilling department, it is quite clear that even with a non-pursuing 13 million barrels but staying at 12 million barrels, the amount of work and the amount of wells that need to be drilled is still extraordinarily large that requires a tremendous amount of rigs on land as well as offshore. So I think that that is the key thing in it. Overall, I think that it is possible that some rigs at a certain moment roll off contract and are possibly not getting their contracts renewed. That's absolutely possible. It is clear that the decision criteria that Aramco in general uses are performance, safety and cost. So I think that all of these things are understood. It is possible that they call some of these rigs, but I think that that is not going to be tremendous amounts. And I think we should all take at least some information that there wasn't after the announcement a knee-jerk reaction or where rigs came falling out of the woodwork and a lot of works was being stopped. So I think that we just need to let it work through the system. Whatever comes out of Saudi and if there is some rigs that are coming out from the description that Bruno gave of the market, these rigs are going to be absorbed quite easily and as you have stated, Some of them could be significantly old and operators might just decide not to further invest and maybe write some of them off. But I think let's just, we focus on what we can. We just want to keep performing as well as we can. And I don't think that there is an enormous amount of rigs coming out of Aramco that couldn't be absorbed in the market as we see the market developing today.

Perfect. Super helpful. Thank you very much.

All right. Thank you. We will now take the next question from the line of Michael Boam from Sona Asset Management. Please go ahead.

Actually, all of my questions have been answered already. Thank you very much.

No problem. You're welcome. Thank you. There are no further phone questions. Turning the call over for webcast questions.

Thank you. Are you seeing any changes in the length of contracts being asked for by clients? All right, Bruno, do you want to take this question? Sure.

Really, we see, as I mentioned in my previous remarks, we do see now an increasing number of long-term tenders either on the market or coming to the market soon. Certainly, in the jack-up space, you're always going to have a substantial number of smaller programs in places like Southeast Asia, for example. You will inevitably have programs that are short in nature. And I think the beauty of this market is really the combination of both things. We will focus on obviously having visibility of our backlog for the fleet, but not ignoring that short-term opportunities provide as well attractive opportunities to reprice in a tight market as we are. In the big scheme of things, we do see the contract durations of the holding. And in different regions, you have different profiles, obviously, and I think this is a bit of a nature of the particular geographies. But in general, we do see the contract durations holding and potentially elongate a little bit with the tenders coming up in the market now.

Thanks, Bruno. What is the opportunity set looking like in terms of expansion of the fleet? And what about the under construction rigs seeking buyers? What is Boor's view on this opportunity?

So we are very happy with the size of our fleet as we have stated many times. So I don't see a scenario where we'd be interested in selling the two rigs that are under construction. As Bruna mentioned earlier, we have very fruitful discussion with a variety of parties that are interested to contract them. And that's really the business we're in, us being the drilling contractor and using our rigs. So I don't see selling as one of the preferred or likely avenues. When it comes to overall expansion of the fleet, I think that there is, as we have said in the past, there's always opportunities and we will look at them carefully, but we will want to make sure that some of the key strengths that we have remain intact. Meaning that we want to make sure that we continue to have a very solid financial footing, that any assets that would be added to the fleet are very similar in age and equipment as what we currently operate. which that if you decided that as your parameters the opportunity set actually becomes fairly small and might be a rig here or there so I would say at this moment we focus very much on our own fleet and as some opportunities come up we will evaluate them but they are not the main focus of the management team thanks Patrick

The leading-age day rates have been flat at around $165,000 to $170,000 a day for the last six months. When do you think we are seeing the next leg up potentially hitting the $200,000 mark?

Yeah, I think that that is a fair question that obviously I will hand over to Bruno. But I think that it is the flattening of the level if we have been at a very high level. And actually we have been able to get these level of contracts across the world in every region. And I think that that is a major step forward what we have. And Bruno, maybe you can comment a bit on what we are tendering today and the rates you are expecting and therefore when you think you'll be getting towards the $200,000.

Sure, Patrick. When we look at the market at the moment, and as I mentioned in my remarks, we do see a lot of opportunities now hitting the market and more to come. And it goes without saying that it is a market about utilization, it is a market about tightness. With these additional requirements, particularly multi-year requirements, potentially soaking some of the remaining capacity, then is when we would expect day rates to accelerate further. I'll fall short of providing more details on our particular bidding rates, but it's fair to say that our offers continue to push on the upside and frequently are getting very close to the higher end of the hundreds and not too far shy of the $200,000 a day. I think in the second half of the year, as a lot of these tenders come to the market, that's when we expect a higher acceleration. But it continues to move in the right direction. I mean, as an average, we were at 161 during last year. This beginning of the year, we are at 166. And as Patrick highlighted, this is not hanging on one fixture and neither hanging in one region. It's been a development that is happening across the globe, which is very positive to see.

okay then i understand that we have reached the end of our questions so thank you very much for your attention and we look forward again talking to you real soon with the next update thank you