BORR - Borr Drilling: Last Available Jackup Rig Finds Work At Decent Terms - Buy

2023-04-10 14:35:43 ET

Summary

• Leading offshore driller Borr Drilling Limited has announced an eagerly-awaited maiden contract for its last idle jackup rig "Hild."
• Adjusted for mobilization and demobilization fees, I would estimate a "clean" dayrate of between $150,000 and $160,000.
• While Borr Drilling Limited still needs to work through a number of lower-priced legacy contracts and customer extension options, adjusted EBITDA and cash flow generation should increase very substantially going forward.
• Based on management's expectations for additional near-term dayrate improvement, annualized EBITDA could approach $1 billion by the end of 2024, which should translate into annualized pre-tax free cash flow generation north of $650 million.
• Even after the recent rally to new multi-year highs, Borr shares are still trading at just 3.5x my 2025 EV/EBITDA estimate. With the company likely to initiate a sizeable dividend at some point next year, Borr Drilling Limited stock remains a buy.

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

On Monday, leading shallow-water offshore driller Borr Drilling announced the eagerly awaited maiden contract award for its premium jackup rig Hild. It has been sitting idle at the Keppel FELS shipyard in Singapore ever since the company was required to take delivery of the rig in April 2020 (emphasis added by author):

Borr Drilling Limited (...) is pleased to announce that its premium jack-up rig "Hild" has been awarded a contract from an undisclosed customer for work in Latin America. The contract duration covers a firm term of 725 days and is expected to commence in Q3 2023 , following the conclusion of the rig's ongoing activation. The estimated contract value is US$123 million, including mobilization and demobilization fees .

Following this award, all of the Company's 22 delivered units are now contracted or committed, with no open availability until late Q3 2023 . Amidst an improving market, the Company remains optimistic about recontracting opportunities for its premium fleet.

Adjusted for mobilization and demobilization fees, I would estimate the "clean" dayrate to be between $150,000 and $160,000, essentially in line with the recently announced long-term contract for the premium jackup rig Arabia III (formerly known as Frigg ) in the Middle East.

At these rates, the rigs are highly profitable and generate decent amounts of free cash flow.

Assuming Borr Drilling manages to secure follow-on work at similar terms for rigs scheduled to roll off contract over the next couple of quarters, I would estimate annualized Adjusted EBITDA to increase to approximately $725 million, up substantially from management's projected range of $360 million to $400 million for 2023.

Under this scenario and even when considering the company's substantial debt service obligations, annualized pre-tax free cash flow generation should exceed $400 million.

Even better, management projected contract terms to improve even further with expectations for premium jackup dayrates to increase to $175,000 in the second half of this year.

At this level and assuming the company succeeds in accelerating delivery of its remaining two newbuild rigs, annualized EBITDA might approach $1 billion by the end of 2024, which should translate into annualized pre-tax free cash flow generation north of $650 million.

That said, it will still take some time for Borr Drilling to work through lower-priced legacy contracts and customer extension options signed in previous years.

With the vast majority of available rig days for 2023 already contracted, there appears to be very little execution risk for this year, while the 2024 schedule provides some decent optionality for securing more work at improved rates going forward:

But the good news doesn't stop here.

On the Q4 conference call , Borr Drilling Limited management stated its intent to accelerate the refinancing of the company's 2025 debt maturities to enable the initiation of a dividend next year:

Please note that the company just recently completed a comprehensive refinancing of near-term debt maturities.

Bottom Line

Suffice to say, I am very happy with Borr Drilling Limited stock's performance since I advised investors to use any potential weakness related to the refinancing of a convertible bond in January to initiate or add to existing positions.

As expected by me, shares have rallied to new multi-year highs following the successful refinancing. They still trade at just 3.5x my 2025 EV/EBITDA estimate.

With the company likely to initiate a sizeable dividend at some point next year, Borr Drilling's shares remain a buy.

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

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