Borr Drilling Limited

Good morning, and thank you for participating in the Board Drilling First Quarter 2024 Earnings Call. I'm Patrick Schorn, and with me here today is Bruno Morant, our Chief Commercial Officer, and Magnus Fahler, 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 risk 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 join 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 new build 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 10 cents 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 to $550 million. Magnus will now step you through the financial details of the first quarter.

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 HILT 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 the end of Q1 was $282.7 million. In addition, we have the undrawn RCS 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, costs for special periodic service and fleet spares, in addition to 3.3 million used for new building additions for activation costs of our two new builds. 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.

Thanks, Magnus. 2024 has been a robust year for board drilling on the commercial front. So far this year, we've secured 11 new commitments, adding over four years and $318 million in backlog and marketing bidding rates. As Patrick mentioned, This newly secured backlog includes our first contract with a clean day rate above $200,000 a day. This milestone confirms the positive day-to-day 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 One has secured two new contracts in the UK and Netherlands, extending its firm commitments into 2025. In Southeast Asia, we secured new contracts for the gun lot and door. The gun lot 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 door has secured two new commitments that will start in direct continuation to its contract in Indonesia. These awards will keep the tour contracted until Q4 2024 when we see other prospective opportunities for it. In Africa, the Norva 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. These contracts exemplify the current state of the industry and board drilling's unique competitive position. We continue to see positive demand for the jackup 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 allocations, enabling us to meet our customer needs while maximizing our fleet utilization. For further information on 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 our recent fixtures. On a broader market perspective, utilization for modern jackups remains strong at approximately 95%, not adjusted for a suspension of the 22 rigs, including our Arabia 1. We note that some of the suspended rigs have already been recontracted 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 markets, 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 to 25 rigs within the next 12 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 these dynamics should be short-lived as fundamentally, the JCCP market remains well-balanced and tight. In the first phase of the JCCP rebound, selected NOCs, particularly Aramco, absorbed most of the available capacity. This rapid absorption had 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 IOCs and other NOCs are seizing the opportunity to secure capacity and accelerate programs amidst a favorable oil price environment. With that, I'll now hand the call back over to Patrick.

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 to $550 million for the full year 2024. Lastly, the Board approved a doubling of the quarterly dividend to $0.10 per share, reflecting our positive outlook. We would expect dividends 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.

Thank you. As a reminder, to ask a question, you need to press star 11 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star 11 again. Please currently ask one question and possible to follow up question at the 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 the question box and click submit.

Any calls on the audio line?

There are no questions at this moment on the audio lines.

Very good. Are we starting to see any questions on the web? We have one question. Patrick, why was the rig suspended in Saudi Arabia? 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.

Thank you, Patrick.

We have one more. Can you confirm the number of new rigs coming online in the next few years?

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.

Very good, Patrick. Yeah, as we mentioned in our prepared remarks, two of our new builds are scheduled to come out of the sheep yard by the back end of this year. One of each, we 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 to 20 rigs that are currently under construction, or allegedly under construction in the sheep yard. That said, we've looked at several of those units which are dubbed to be under construction and effectively they are not more than just constructions that were abandoned long ago and you 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 to 24 months. And we think that this is a quite low number of rigs that are likely to affect the general supply.

Thanks, Bruno.

Are you considering any acquisitions or M&A given the excess of liquidity available?

Andreas, any further question?

Yes. Are you considering any acquisitions?

Perhaps we might have lost Andreas, but we have another question that came in here. Can you talk about the review one regarding contracting by the Saudi Aramco by Q3 this year? 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 Durham. Worth to highlight that the Arabia One 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 us good confidence on their interest.

Any further questions?

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 flow operations, we had some buildup in accrued revenues over a quarter, which mainly related to some invoices going out a bit late on our side. um but these haven't been subsequently recorded and been and been collected so we are uh par with that again also there's normally a question about uh mexico collections we continued with collections in mexico in q1 of 15 million while in the 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 the new question on the contracting. Which of the RIGS TBD jobs is intended for your new-built valley?

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 rig we are going to use in every particular instance. um 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 one will be in the mix as the valley will be as well but i can't give you further color on the exact contract they will be deployed on

I think with this, we have a question on the phone line, so we can turn the call over to the operator, please.

Yes, of course. Thank you. And we have the question from Lan of from JP Morgan. Your line is open. Please ask your question.

Good afternoon. Thank you for taking my question.

I had a question on the- Any further on the website?

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 a significant discount to replacement value, a share repurchase would be accreted?

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 undervalued 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 dividends.

Then one more question on the marketing. Which regions do you see the highest incremental demand and the most robust pricing? And I can add on another one. Are you worried about lack of discipline and day rates from certain players regarding extra capacity?

All right, thank you. I think very much in line with our earlier reports, we have been monitoring very closely incremental demand 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 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 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 competitor peer groups should act differently. But speaking for ourselves, we have continued to experience very solid rates.

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 month and give you further update on our business. Thank you very much.