BORR - Borr Drilling: Impressive Results And Outlook - Buy

Summary

• Company releases very strong preliminary fourth quarter and full year 2022 guidance and provides 2023 guidance well above expectations.
• Not surprisingly, management is trying to capitalize on the momentum by addressing the company's last remaining near-term debt maturity.
• Discussing expectations for the new debt offerings to be met with strong demand.
• Stock lending program likely to ease potential share price impact from investors' hedging activities related to the proposed $250 million convertible note offering.
• Given ongoing, strong industry conditions and persistent geopolitical tailwinds, investors should use any potential weakness in the shares to initiate or add to existing positions.

Note: I have covered Borr Drilling Limited ( BORR ) previously, so investors should view this as an update to my earlier articles on the company.

After the close of Tuesday's session, leading shallow-water offshore driller Borr Drilling reported preliminary fourth quarter and full year 2022 results well ahead of previously stated expectations:

For 2022, Borr Drilling expects to record revenues of $435-$450 million and Adjusted EBITDA of $152-$162 million (previous guidance was revenue between $375-$400 million and Adjusted EBITDA of $115-140 million). This implies estimated Q4 2022 Revenues between $140 - $155 million, and Q4 2022 Adjusted EBITDA of between $50-$60 million.

In addition, the company provided strong 2023 top- and bottom line guidance:

For 2023, based on current contracts and projections for new contracts, the Company expects to generate revenues of $740 - $780 million and Adjusted EBITDA of $360-$400 million (previous guidance was Adjusted EBITDA of $290 - 330 million).

Please note that the four-analyst consensus calls for 2023 revenues of $719 million. Management expects industry conditions to remain favorable for the time being:

The outlook for the industry and our Company is continuing to improve, which is likely to lead to further increased utilisation and higher day-rates.

The company estimates a year-end cash position of $105 million, down from $279 million at the end of Q3 but the decrease appears to be solely the result of recent debt management actions :

In October 2022, the Company repaid the outstanding balance of its Syndicated Facility and New Bridge Facility with proceeds from a new $150 million bilateral facility fully drawn down provided by DNB Bank ASA, an existing lender in the previous facilities, and also using a portion of the proceeds from the equity offering in August 2022 in which the Company raised gross proceeds of $274.9 million. Also as part of our refinancing of our secured debt we have repaid $30 million principal of our loan to Hayfin (and are required to repay an additional $15 million principal amount of this loan in the fourth quarter) and repaid $14 million of amounts owed to our shipyard creditors.

In aggregate, Borr Drilling repaid $209 million in debt during the fourth quarter which puts quarterly free cash flow at $35 million.

Moreover, the company announced the eagerly awaited refinancing of its last remaining near-term debt maturity:

Borr Drilling Limited announces today an offering of up to USD 250 million senior unsecured convertible bonds with a five-year tenor. The Joint Bookrunners have received significant interest from investors for the Convertible Bonds. Concurrently, the company announces that it will hold a series of fixed income meetings for a contemplated USD 150 million three-years senior secured 1 ^st lien bond subject to, inter alia, market conditions (the “HighYieldBonds”).

The Convertible Bonds will, in accordance with their terms, be convertible into shares of the Company. The Conversion Price for the Convertible Bonds will be determined by the average VWAP on Oslo Børs on each of 25 and 26 January 2023.

The proceeds from the Convertible Bonds will be used to refinance the outstanding USD 350 million of convertible bonds due 23 May 2023 and for general corporate purposes. The Convertible Bonds are subject customary third-party approvals, including but not limited to shareholder approval to increase the authorised capital of the Company and creditor consents.

Given the strong outlook provided by management, I expect both bond offerings to be met with very strong demand, which should help keeping interest rates in check and might actually result in the company upsizing the amount of debt issued.

Even better, the company and its largest shareholder Drew Holdings will support the convertible bond offering with a stock lending program " for the purposes of facilitating investors’ hedging activities ".

In layman's terms: The majority of convertible noteholders looking to employ delta-neutral convertible arbitrage strategies won't be required to hedge their bets by shorting common shares in the open market thus likely avoiding most of the selling pressure experienced by market leader Transocean ( RIG ) four months ago after the company surprisingly announced the issuance of $300 million in new convertible debt including warrant sweeteners.

From the September 13 announcement until the closing of the transaction on September 30, Transocean's shares tumbled by more than 30% on heavy volume. Over the same period, the number of shares shorted soared by more than 60% likely as a result of convertible noteholders hedging their bets.

That said, Transocean's shares quickly recovered from the ill-advised deal and recently rallied to new multi-year highs after the company successfully managed to increase liquidity and refinance a number of near-term debt maturities in two well-received secured debt offerings.

With Borr Drilling's convertible debt offering supported by strong guidance and, more importantly, the above-discussed stock lending program, I would expect the offering to put only minor near-term pressure on the company's shares even when considering the conversion price being determined by the average VWAP of Wednesday's and Thursday's trading sessions on the Oslo Stock Exchange.

Bottom Line

Borr Drilling finished 2022 on a very strong note and issued impressive guidance for this year with revenues expected to increase by more than 70% and Adjusted EBITDA soaring by almost 150% at the mid-point of the provided ranges.

Not surprisingly, management is trying to capitalize on the momentum to address the company's last remaining near-term debt maturity while hopefully minimizing potential share price impact from convertible arbitrage.

Even when assuming further recovery in the jackup market to be muted, Borr Drilling is likely to generate very substantial amounts of free cash flow next year, which bodes well for management's stated intent to initiate a dividend by that time.

At this point, I remain positive on the entire industry, including leading U.S. exchange-listed players Transocean, Seadrill ( SDRL ), Valaris ( VAL ), Noble Corp. ( NE ), Diamond Offshore Drilling ( DO ), Helix Energy Solutions ( HLX ) and offshore drilling support providers like Tidewater ( TDW ) and SEACOR Marine Holdings ( SMHI ).

Given expectations for persistent geopolitical tailwinds to result in further strengthening industry conditions, investors should use any potential weakness in the shares to initiate or add to existing positions.

Similar to Transocean in recent weeks, I would expect Borr Drilling's shares to advance to new multi-year highs subsequent to the close of the offerings.

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