- Company reports disappointing Q4 results with both revenues and EBITDA down sequentially. Free cash flow remained negative.
- Mexican integrated well service joint venture encountered severe problems, company in negotiations to reduce its stake.
- Management now looking to sell some of the company's modern assets to address ongoing liquidity challenges.
- Story is showing more cracks virtually each quarter with a seemingly ever increasing number of executional missteps in addition to ill-advised speculative bets on competitors.
- The stock could still offer substantial upside from current levels as management guided for positive operating income and substantially improved cash flow in 2020. That said, given management's abysmal track record, investors should take these projections with a grain of salt.
Borr Drilling remains a newcomer in the offshore drilling industry, established by former Seadrill (SDRL) executive Tor Olav Trøim to take advantage of the major industry downturn that started in the second half of 2014.
Since its foundation, the company has acquired a host of assets from other industry players as well as a mini-armada of stranded newbuild rigs from some of the world's leading shipyards.
Photo: High-specification jack-up rig "Norve" - Source: Company Website
Currently, Borr Drilling owns 24 premium jack-up rigs, four standard jack-up rigs, and one vintage semi-submersible rig. In addition, the company has contracts for delivery of six newbuild premium jack-up rigs over the next couple of quarters.
Source: Q4 Earnings Report
The Company currently has 16 rigs in operation: four in the North Sea, two in the Middle East, five in West Africa, three in South East Asia and two in Mexico.
In its early stages, the company solely relied on equity funding but has started to take on substantial amounts of debt over the past couple of quarters.
As of the end of Q4, Borr Drilling had amassed more than $1.7 billion in debt but does not face any maturities until June 2022. Remaining capex commitments for newbuilds amount to $707 million of which $620 million has been financed already. In 2020, the company will have to raise another $53 million in conjunction with the scheduled delivery of the premium jackup rig "Tivar".
That said, the slower-than-expected industry recovery and two ill-advised, speculative bets on securities of industry peers required the company to approach lenders for covenant relief as well as shipyard Keppel FELS for additional seller financing and a less-aggressive delivery schedule with regards to the remaining rigs.
On Friday, Borr Drilling reported just another disappointing quarter with ongoing, negative free cash flow and revenues and EBITDA down sequentially.
Adding insult to injury, the company experienced some major problems at its integrated well service joint venture in Mexico:
During the fourth quarter of 2019, our Mexican Joint Venture for Integrated Well Services, OPEX Perforadora S.A. de C.V (“OPEX”), of which we own 49%, encountered an unplanned geological event in the drilling operations in one of the wells. As of the end of the fourth quarter of 2019, OPEX’s costs on that specific well were in excess of the originally agreed revenue for that well, excluding the unplanned event. As such, the whole contract loss was taken during the fourth quarter, in accordance with US GAAP. Based on contractual provisions, we expect to be compensated for the additional costs associated with this change after completion of the well.
In layman's terms:
The joint venture provides integrated drilling services on a fixed price basis as opposed to the industry dayrate standard which means the risk of delays and other unforeseen events has moved from the customer to the service provider. During the quarter, the joint venture failed to complete a well on time and on budget, resulting in substantial cost overruns.
While Borr Drilling expects to be compensated, I wouldn't bet the farm on this statement as there would be very little sense for the customer signing a fixed-price contract while still being required to pay for potential cost overruns.
In fact, the underwhelming start to its integrated well service endeavour has already caused the company to reassess its approach:
Lastly, we are also actively pursuing options to reduce our risk profile in Mexico by lowering our participation in the integrated well services joint venture, and instead focus our attention on the core rig operations in the country. This will also allow the company to focus even more on the execution of our global, core business, as the jackup market continues to tighten in the coming year. We intend to continue to operate five rigs in Mexico in close cooperation with our partner, and we remain committed to serving the sizable Mexican shallow water market going forward.
Remember, the option to offer integrated well services originally attracted Schlumberger's (SLB) $220 million investment in the company in March 2017 with former CEO Paal Kibsgaard just recently having been appointed as Borr Drilling's new chairman. Over the past three years, the value of Schlumberger's stake in the company has decreased by approximately 90%.
To address the company's ongoing liquidity challenges, Borr Drilling is now looking to sell some of its modern rigs in addition to certain non-core assets:
In addition, we are in discussions to sell a limited number of our modern rigs, as part of creating a long term business relationship in a key operating region, which will free up additional cash.
Clearly, things have not gone according to management's aggressive plans and Borr Drilling's shareholders are now paying the price for a number of executional missteps and an ill-advised bet on peer Valaris (NYSE:VAL).
That said, should the company indeed manage to address its ongoing liquidity challenges, the shares could have lots of upside from current levels given projections for positive operating income and significantly improved cash flow this year. Unfortunately, management's credibility has taken a severe hit in recent quarters so investors should likely take these projections with a grain of salt.
Borr Drilling's story is showing more cracks virtually each quarter with the problems encountered by its just recently established integrated well service joint venture clearly the negative standout in Q4.
The company needs to raise additional capital to take delivery of an additional jackup rig in July and finance ongoing negative free cash flow.
As a result, management is now looking to sell some of its modern assets "as part of creating a long term business relationship in a key operating region" whatever this solution might look like. Without knowing the terms of the contemplated transaction, it is basically impossible to further assess the move at this time.
That said, with the premium jackup market still in rather good shape and first debt maturities more than two years in the future, Borr Drilling's shares might offer substantial upside from current levels should the company manage to address its current liquidity challenges.
This article was written by
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