Borr Drilling (NYSE:BORR) has just reported its fourth-quarter results, which are especially interesting giving the company's recent stock price dynamics - the shares have been hit very hard due to coronavirus-related panic.
Borr Drilling reported revenues of $92.9 million and net loss of $69.3 million. The operating cash flow was negative at -$9.5 million, but the pace of losing money has materially decreased. For the full year, the company had a negative operating cash flow of -$89 million, an improvement from -$135.2 million in 2018. Borr Drilling finished the year with $59.1 million of cash and $69.4 million of restricted cash on the balance sheet. Long-term debt stood at $1.7 billion. Here’s a list of scheduled maturities:
Source: Borr Drilling Q4 2019 report
This year, the company has made several moves on the financing front. At the beginning of 2020, Borr Drilling amended bank covenants to provide itself with more financial flexibility. Recently, the company announced that it entered into a new financing agreement for newbuild jack-up Tivar, which was scheduled to be delivered in July 2020. Given the company’s maturity schedule and continued access to financing, I see no liquidity problems in 2020 – 2021.
Borr Drilling’s net loss in the fourth quarter includes an $16.4 million loss in equity method investments related to a joint venture in Mexico. As per the report, an unplanned geological event led to a change of a drilling program. Borr Drilling stated that it expected to be compensated for the additional costs associated with this change.
Another loss came from the sale of marketable securities in Oro Negro ($15.4 million). The company continues to exit its ill-fortuned speculations. At this point, it has forward contracts in Valaris (VAL), which were valued at $27.9 million at the end of 2019. Given Valaris share price performance, these contracts will be a source of loss in the first quarter of this year.
Interestingly, Borr stated that it was in discussions to sell some modern rigs: “The company is also of the opinion that the value of its fleet is far above what is implicitly priced in its share price and is therefore pursuing strategic sales of a limited number of modern assets and opportunistic disposals of older assets”. The list of non-core rigs on sale is known: Atla (2003), Balder (2003), MSS1 (1979) and B391 (1981). The company gave the following comment about the potential sale of modern rigs: “[…] 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”.
Source: Borr Drilling Q4 2019
The company has 6 modern jack-ups which are warm stacked and 6 modern jack-ups under construction, so it certainly has the ability to sell some modern rigs. Such a sale should provide a material boost to the company’s cash position while preserving its cash-generation abilities since Borr has amassed a huge fleet of modern jack-ups. Interestingly, Borr looks very optimistic about the potential for future contracts: “the company estimates that only 14 modern units are warm stacked and are being actively marketed by international operators. Borr Drilling owns six of these units […] we currently see a demand for more than 40 modern jack-up rigs in various tenders across the world […] with a total of 381 rigs currently contracted, we expect the global jack-up rig count to significantly surpass 400 units in the next twelve months, which will push utilization to more than 95% for modern rigs”.
I maintain my positive outlook for modern jack-up market segment despite the coronavirus panic, although the developments on the virus front may lead to various delays in projects. Shallow water drilling is less sensitive to oil price changes than ultra-deepwater drilling as it employs less capital and has faster payback periods. At the same time, it is impossible to ignore the impact of the market panic on Borr Drilling shares. Regardless of fundamentals, the stock will remain under pressure if the situation with the coronavirus worsens and oil prices continue to drop.
Speaking about longer-term perspectives, I believe that Borr Drilling is adequately financed for 2020 and 2021, which provides it with sufficient time to build its contract base and be in a good position to refinance 2022-2023 maturities. In addition, the company has additional flexibility with asset sales, which will boost its cash position. Some current problems are self-inflicted due to ill-fortuned investments, but the company has previously stated that it will no longer engage in such endeavors so there’s no need to worry about this anymore. Since I think that Borr is positioned to survive with the current capital structure, I’m long-term bullish on Borr at current levels. Short-term, anything can happen, including additional downside, so size your bets properly and use other risk management techniques if you want to catch a falling knife at times of coronavirus panic.
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