Borr Drilling: Modernization on strong prospects and commitment to return on capital

Note:

We covered Borr Drilling Limited (NYSE:BORR) previously, so investors should see this as an update to mine previous articles on the company.

Last week, major offshore driller Borr Drilling reported Q2/2024 results. Adjusted for a one-time number items, revenue and profitability were largely in line with expectations.

While Adjusted EBITDA of $136.4 million and Adjusted EBITDA margin of 50.2% reached new all-time highs, cash generation was impacted by $91.9 million in semi-annual interest payments.

The company ended the quarter with $193.5 million in unrestricted cash and cash equivalents and $1.92 billion in debt. Total liquidity amounted to USD 343.5 million.

After the end of the quarter, Borr Drilling issued an additional $150 million of 2028 10% senior secured notes:

The proceeds from the offering are intended to be used for the acquisition and activation costs for the “Vali” new construction facility, in lieu of the previously secured site financing, which was for new construction, as the terms and pricing of the Additional Notes are more favorable and for general corporate purposes, including debt service.

The company took over “Valiant“Last week, the rig was probably assigned to a previously announced contract in the island of Africa.

Please note that the company expects to take delivery of the last remaining newbuild platform”Cousin” in Q4/2024. While there is committed financing for the shipyard, Borr Drilling may well consider issuing additional senior notes to avoid potentially restrictive covenants.

The remaining $1.76 billion was up slightly, both on a sequential and year-over-year basis.

So far this year, the company has achieved $651 million in gross additions in arrears at an average daily rate of $184,000, with only $250 million contributed by a surprise four-year deal for the platform. Arabia 1 with Petrobras (PBR) in Brazil. If Petrobras exercises its option for another four years, the rig would remain committed in Brazil until 2033.

Please note that the daily rate for this new contract will be substantially above the rate received from Saudi Aramco until the rig was suspended earlier this year.

Contract coverage for 2024 and 2025 increased to 92% and 73% respectively, with the average daily rate for 2025 currently up 10% over 2024:

On the conference call, management remained bullish on the outlook for the jack-up market as recent contract suspensions at Saudi Aramco ( ARMCO ) are expected to be offset by incremental demand in other regions:

Borr Drilling also declared a quarterly dividend of $0.10, unchanged from Q1/2024, which is expected to be paid on September 6th. On the call, management suggested additional increases next year:

Looking to 2025, with reduced CapEx spending and incremental daily rates on contracts already committed, then there is plenty of potential to significantly increase shareholder returns going forward.

During the question-and-answer session, management outlined expectations for cash generation to grow by more than $200 million next year.

Finally, Borr Drilling reiterated full-year guidance for adjusted EBITDA of $500 million to $550 million:

With the company performing well on the contract front and Saudi Aramco’s only suspended platform scheduled to start a new multi-year contract at a much higher rate in early 2025, I no longer expect the situation in Saudi Arabia to have a significant impact on the company. financial results.

Accordingly, I have increased my adjusted EBITDA estimates for both 2025 and 2026:

As a result, my price target for the stock increases from $7 to $8 based on an assigned valuation of 6x estimated adjusted EBITDA in 2025:

At prevailing prices, the company’s shares offer a dividend yield of 6.4%. As Borr Drilling remains committed to growing shareholder returns, I wouldn’t be surprised to see the quarterly dividend raised to $0.15 in early 2025.

Given a nearly 30% upside to current share price levels, I upgrade the company’s stock from “keep“to”Buy“.

Conclusion

Adjusted for a number of one-offs, Borr Drilling reported Q2/2024 largely in line with expectations and reiterated guidance for the full year.

The company continues to do well on the contracting side, with a new $250 million multi-year contract offshore Brazil being the highlight of the quarter.

With strong visibility for the rest of the year and decent contract coverage for 2025, I raised my adjusted EBITDA estimates for 2025 and 2026 and raised my price target from $7 to $8.

Given a nearly 30% upside from current levels, a juicy 6.4% dividend yield, and the company’s strong commitment to increasing shareholder returns, I upgrade Borr Drilling stock from “keep“to”Buy“.