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Borr Drilling Limited (NYSE:BORR)
Q4 2019 Earnings Call
Feb 28, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Borr Drilling Limited fourth-quarter 2019 results call. [Operator instructions] I must advise that this conference is being recorded today. And I would now like to turn the conference over to your first speaker today, Magnus Vaaler. Please go ahead, sir.

Svend Anton Maier -- Chief Executive Officer

Thank you, Magnus, and welcome to the Q4 earnings call. Here's a summary of the main happenings in the fourth quarter. In Q4, we had a total operating revenue of $92.9 million, net loss of $69.3 million and adjusted EBITDA of $1.8 million. For the entire year, the total operating revenues were $334.1 million, net loss of $308.1 million and adjusted EBITDA minus $2.6 million.

The net loss for the quarter included $16.4 million accounting loss in equity method investments. This relates to our Mexican JV providing integrated well services. On one of the wells, we have an unplanned geological event, which means that we have to change the original drilling program, resulting in additional cost that we had to recognize in the fourth quarter. However, we affirm and believe that the cost will be compensated by the client according to contractual provisions.

In the fourth quarter, we sold marketable securities, improving the liquidity position by $27.1 million. In December, we agreed amendments in the bank loan covenants, improving our liquidity position. And subsequent to the quarter end, we established a $100 million financing for the newbuild Tivar, and made amendments to our newbuild delivery schedule, extending the delivery of the two rigs until 2022. With this, I would like to turn over the call to our company's newly appointed chief financial officer, Francis Millet, who will go more into the details around the financials.

Francis Millet -- Chief Financial Officer

Thank you, Svend, for the introduction. Good morning, and good afternoon, everybody. I will now guide you through the main financial items of the quarter. Total operating revenue were $92.9 million in the quarter.

The quarterly revenue was down from prior quarter, mainly due to a scheduled gap for the Odin after completing its contract in October 2019. Over the year, we have continued to bring additional rigs into profitable contract related to being the Idun in November. Total operating revenue for the full year was $334 million, which represents an increase of more than 100% compared to the previous year. Rig operating and maintenance expenses were $81.6 million in the quarter, including costs for both operating and stacked rigs.

Total opex for the operating rigs was approximately $75 million. This includes mobilization cost amortization of $5.8 million, over reimbursable expenses of $5.3 million and reactivation cost of $4.2 million. The adjusted EBITDA for the quarter was positive of $1.8 million. The deviation from previous quarter was mainly due to the scheduled gap for Odin and one-off G&A expenses.

Depreciation for the quarter was $27.1 million, an increase of $1.3 million from previous quarter due to depreciation of Hermod, which was delivered in October 2019. G&A was $15.4 million in the fourth quarter. The increase from previous quarter pertain to higher legal and professional fees, mainly one-off items relating to various projects, which are now completed. Loss from equity method investment was $16.4 million in the fourth quarter and is related to our integrated well services joint venture in Mexico.

This joint venture provides integrated well services with two rigs to Pemex under an 18-month contract. Total financial expenses net were $18 million for the quarter. This includes interest expenses of $23.6 million and other financial income of $5.2 million. During the fourth quarter, we realized our Oro Negro security resulted in an incremental loss of $3.4 million in the quarter with net proceeds of $27.1 million.

The net loss for the quarter was $69.3 million, and the loss per share, $0.63. Turning to the balance sheet. Total assets increased by $80.5 million, mainly due to delivery of the Hermod from Keppel in October 2019, offset by the depreciation. Total liability increased by $146.3 million, mainly due to the long-term debt for the delivery of the Hermod, $30 million drawdown from bank loan facilities and $12.7 million liability from equity method investment.

The total available free liquidity was $94.1 million, including $35 million available under revolving credit facilities. In Q4 2019, we managed to amend our bank facility covenants, adjusting the minimum book equity ratio from 40% to 33%, and the minimum free liquidity from 4% to 3% of net interest-bearing debt. Subsequent to year end, we entered into a new $100 million facility for the newbuild jack-up Tivar, maturing in December 31, 2021. The rig is now scheduled to be delivered in July 2020.

As part of this agreement, the delivery of the jack-up rigs Vale and Var is postponed from 2020 to Q1 2022, and has reduced our unfunded delivery capex for 2020 by $85 million. With this, I would like to turn the call back to Svend.

Svend Anton Maier -- Chief Executive Officer

Thank you, Francis. From the beginning of the fourth quarter, up until today, we have secured nine additional contracts and extensions. The complete overview is shown on Slide No. 6.

We have gone from zero rigs in operation in the end of 2017 to 19 rigs operating at the end of the first quarter 2020. This provides critical mass in all four regions we operate. The technical utilization for 2019 was at a solid 99%, and our 2020 year-to-date technical utilization continues well above 99%. In the drilling market, the trend we have shown on the last quarter is continuing.

Shallow water is fast payback resource and has the lowest breakeven cost. Jack-up rig count is increasing further by 27% since 2018. On the other side, U.S. onshore rig count is declining and floater rig count is stalling.

More than 70% of the jack-up demand is in the world, infill drilling and workover drilling. Times to first oil in these investments are generally less than a year and is a big driver for jack-up demand. Fast payback and low cash breakeven driving demand for shallow water developments. The graph on the right shows more than 70% of the contracted jack-ups in the world is with NOCs.

The companies are not subject to the same capital constraints as ROCs are currently facing. As a result, NOCs in the Middle East are increasing their drilling activity significantly compared to 2014 when oil price was $100 a barrel. This trend is expected to continue. We continue to see more modern units being contracted.

Market utilization for modern rigs have now reached 91%, up 3% from September. Since 2014, the number of modern units working is up by 49% versus standard rigs that are down 49%. The tendering activity remains at a high level. Currently, we see demand for such as 300 rig years going forward.

In the left graph, we see an incremental demand of more than 40 rigs in the next 12 months. On top of this, the current activity in China, which is a closed market, but very important to drive global utilization. Rig count in China has doubled over the last two years and they have now 52 jack-ups working. Spending plans from Chinese NOCs shows that the trend is expected to continue.

On the same slide, in the graph to the right, activity in the Chinese yards have been very significant. COSL has been very active, securing rig capacity, and we expect this to go into the Chinese market. We now estimate that there are only 15 stranded units left in Singapore and China that are not committed. We are encouraged that the market has been able to absorb this great influx of new capacity.

As available supply from shipyard is quickly diminishing, the outlook is further strengthening of day rates. The current jack-up contracting pace has surpassed the previous 2013 record. Over the last 12 months, 420 rigs have been contracted in the jack-up segment, beating the 2013 peak. The average length of the jack-up contract is now approximately 500 days, up 77% from the 282 days during the trough, and higher than the 213 peak.

Forward utilization now is back at the levels of the beginning of last upturn in 2012. It is worth to note that day rates for premium jack-ups then was at $150,000 per day. So to sum up. We see the jack-up market approaching inflection point by utilization and day rate.

Borr is very well positioned in all key operating regions. So in 2020, we will focus on strengthening the balance sheet and cash flow, building on the fact: Activity have reached critical mass in operating regions, strengthened rig activation criterias have been established, tight cost control and cost working capital, and strategic asset sales for modern rigs in key areas to strengthen business opportunities and opportunistic asset disposal of all the rigs. Based on the above, we are aiming for positive operating income and operating cash flow for 2020. With this, I would like to hand over the call to our chairman, Paal Kibsgaard.

Paal Kibsgaard -- Chairman

Thank you, Svend. Before we open up for questions, I would like to provide some additional comments on our operations in Mexico. First of all, Borr continues to believe in the integrated well services model for the shallow water market, and the potential this has to lower drilling costs for our customers. We have already proven this on two of the first wells we have drilled in Mexico, which are drilled at costs that are below the established market baseline.

Clearly, integrated drilling services has a higher risk profile than providing stand-alone rig services on a day rate contract. This risk can be managed, but requires significantly more attention and management bandwidth, and it also requires higher working capital than our core business. Borr is a relatively small company with limited resources, where we, from time to time, need to prioritize how we use and how we focus our resources. Therefore, with the liquidity challenges we are facing as a company, and with the broad opportunity set we see from the tightening global jack-up market, the Board, together with the management team, believe that lowering the risk profile in Mexico is the best course of action at this time.

Reducing our risk profile in Mexico means that we are pursuing ways to reduce our ownership in the integrated well services JV. I do not have any further comments or details at this stage on how we will do that, but this is our clear intention. We are at present engaged in such discussions, and we will inform the market when we have concluded this process. With that, we will open up for questions.

Questions & Answers:


Operator

Thank you, sir. [Operator instructions] And your first question comes from the line of Greg Lewis of BTIG. Please go ahead. Your line is open.

Greg Lewis -- BTIG -- Analyst

Yes. Thank you. Good afternoon. I wanted to kind of follow-up on some of those prepared remarks around strategic asset sales, realizing that the company was pretty successful in buying rigs during the bottom of the down cycle.

Just kind of curious, as we think about that potential opportunity, clearly, there's some buyers in the Middle East that are looking to take on jack-up assets. How should we think about that in that sort of asset sales? Should we be thinking about it in terms of like maybe a joint venture? Or could it be outright sales? Just trying to understand the implications of that. And then if you could kind of maybe throw some rough numbers around, should we be expecting? How that's going to impact the balance sheet whether in terms of gains or impairments?

Paal Kibsgaard -- Chairman

OK. Thank you for the question. So I think if you look at how we are viewing asset sales going forward, there's really two categories. Clearly, we have some older assets, which are not really a core part of our asset base, and we have some opportunities to sell those.

They will generate some limited amount of cash, but that's a separate discussion from what we have labeled as selling of a limited number of modern assets. So on the modern assets, we will potentially sell those as part of establishing new business partnerships in key operating regions around the world. And we are not looking at selling more than, I would say, probably one or two when it comes to this. The assets that we would look to sell of the modern part of the fleet will be assets that we have relatively low debt on so we can free up cash.

And that will be part of how we address the ongoing liquidity situation. So we are engaged in such discussions. And we are not facing any impairments on this. This is actually to free up cash.

And again, we are talking here about a limited number of assets. I would put it in the category of one to two that we are talking about.

Greg Lewis -- BTIG -- Analyst

OK. Great. And then just a bigger question, Paal. Just given your experiences, clearly, there's a lot of uncertainty in the market, the oil price has come down.

We mentioned on the call, or you guys mentioned on the call earlier that jack-ups are more shorter cycle and sensitive to the oil. As we think about the market as it stands today and the jack-up activity continues to chug along, at what point should we be thinking about maybe seeing an impact from lower oil prices may be impacting a slowdown in the jack-up market? Really, what I'm trying to figure out is, if this is just a temporary gap down in oil prices, maybe the jack-up market can look through that. But I'm just trying to understand what's kind of the lead time between lower oil prices really impacting activity on the shelf?

Paal Kibsgaard -- Chairman

So it's a good question. And like you say, the short-term volatility we're seeing in oil prices at present, I mean, this is all driven by concerns around short-term demand. On the supply side, I think there's really no change in the fundamentals. We expect the growth in the U.S.

shale production to start to decelerate in 2020. So I think short-term oil prices, driven by short term demand, I think, we'll all look forward to what OPEC plans to do when they meet next week in Vienna. So so far, we have not seen any impact on the 2020 activity outlook for the markets that we're in. Generally, the growth in 2020 and also the baseline of activity we have is driven by players that has prime shallow water acreage.

They steward a resource base for the long term. So I think, if you look at the global rig activity, both land, deepwater and shallow water, I expect shallow water to be the most robust in terms of how it will be navigating through the short-term issues that we had and that we are facing. So at present, we are not overly worried about the activity outlook that we see in the shallow water market.

Greg Lewis -- BTIG -- Analyst

OK. Thank you very much.

Operator

Thank you. Your next question comes from the line of Sahar Islam of Goldman Sachs. Please go ahead. Your line is open.

Sahar Islam -- Goldman Sachs -- Analyst

Thank you for taking my questions. To start off with the rig disposals. Could you talk a bit about? You mentioned you think the implied valuation of the share price is under valuing those rigs. So what valuation do you think are more reasonable to get in the market? And also what you would do with the cash that you got from any disposals of the newer rigs?

Paal Kibsgaard -- Chairman

Well, I'm not going to go into the specific price that we will sell rigs at. These are discussions we're having with the potential buyers. What we have purchased the rigs for, I mean, is very clearly established. And I think we have done good purchases of modern, and we have a very good fleet.

Again, what we're planning to do here is to sell a limited number, one to two rigs as part of the modern fleet. That is partly to address the liquidity situation, but it's also part of forming long-term business relationships in some of the key operating regions in the world. And the plan on what to do with the cash is to handle the ongoing challenges we have on liquidity, and that's the goal.

Sahar Islam -- Goldman Sachs -- Analyst

Thank you. And then my second question was on activations. And how we should think about the number for this year? And you mentioned the new requirements for cash and profitability, and I appreciate you probably can't give us the exact metrics. But what are the sort of thresholds? And what you're looking for when you think about these activations for 2020?

Paal Kibsgaard -- Chairman

Svend, do you want to handle that?

Svend Anton Maier -- Chief Executive Officer

Yes. Well, we have set an internal strategy for when we will activate new rigs coming in 2020. They will have to be, of course, justified by cash flow and return on the project itself. We are handling this case by case as there could be also strategic reasons for bringing rigs out in the current operating areas.

Sahar Islam -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. And your next question comes from the line of [Inaudible] from One Investment. Please go ahead.

Unknown speaker

Thank you for taking my question. I have one on the contract rollovers. What kind of visibility do you have looking into 2020 on the contracts extension or option that you have next on the current rig? And what kind of terms do you expect to get from that? Are you expecting some improvement on that side?

Svend Anton Maier -- Chief Executive Officer

Like I said in my initial presentation, we see strong fundamentals for 2020. Like I also mentioned, we see approximately 300 rig years that is in the process of tendering and will be tendered. And like I said also in my presentation, that the utilization will go up, and a natural result of that will be increased day rates. What these day rates look like going forward, it's hard to predict.

But I'm positive that it's going in the right direction.

Unknown speaker

OK. And on the Mexican side, on the comment you made, are you expecting some release in terms of working capital from your side? And on the discussion, if you can just add, if you are talking to the partner or to existing partner in Mexico or with the partner of your operation in this case?

Paal Kibsgaard -- Chairman

Yes. So I'm not going to go into any more details or give comments around who we're talking to and what we're discussing. Other than that, in between the management team and the board, we have decided that the best course of action for the operations in Mexico is to try to derisk it. And we're going to achieve that by lowering our ownership in the well served integrated wealth services JV.

So how much working capital we will free up? I mean this will be a little bit over time. But given the fact that we are ramping up our activity in Mexico as well, it would, for sure, lower the capital, the working capital intensity of our future business in Mexico, which is the primary goal here.

Unknown speaker

Thank you.

Operator

Thank you. And your next question comes from the line of Lillian Starke of Morgan Stanley. Please go ahead. Your line is open.

Lillian Starke -- Morgan Stanley -- Analyst

Hi. Good afternoon. I was just wondering if you could provide a bit of color on whether you have seen a slowdown on the pace of awards? Or one has been the case that we have not seen maybe as awards kicking toward the latter part of 2019? And why do you think that could start to change a little bit more into 2020? And then the second question I had was, with regards to the negotiations you've had with the day yards. Is there any update there in terms of delayed delivery that you have discussed in the last conference call?

Svend Anton Maier -- Chief Executive Officer

Yes. I can comment on the market. Like I said, we have seen a significant uptick in tendering activity. If you look at what I said in my presentation, 300 years of activity in our key operating areas.

There's, of course, other parts of the world that there will be activity that we haven't taken into account. So we definitely see a steady increase going forward through 2020 and 2021.

Paal Kibsgaard -- Chairman

And Francis, do you want to take the other question?

Francis Millet -- Chief Financial Officer

Yes. The question is about the delivery of the new builds. So as I mentioned earlier, we have negotiated, as part of our agreement, to defer the delivery of two modern rigs, the Vale and the Var. And it's about two years' time from 2020 to Q1 2022.

Lillian Starke -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. And your next question comes from the line of Tobias Eckbo of Clarksons. Please go ahead.

Tobias Eckbo -- Clarksons Platou Advisors -- Analyst

Hey, guys. I was just curious to know as far as we can see at least, it seems like in the near term, you have a lot of rigs rolling off the contract in China, old rigs. And I was curious to know whether you have kind of any thoughts around what will happen to those rigs? Whether they will be recontracted? Or whether they will be scrapped? Or what to expect from that situation?

Svend Anton Maier -- Chief Executive Officer

Yes. Like you said, yes, we have contracts that are rolling off in 2020. We have taken some strategic decision when we activated these rigs specifically in Asia. And what we've seen is the Asian market is looking very solid.

And we are convinced and confident that these rigs will continue to be active in Asia. And there is a lot of demand in the area. So most of our rigs that are warm and will roll off contract, there's definitely a great demand because warm rigs have priority at the moment in the field. So yes, we are confident in that.

Tobias Eckbo -- Clarksons Platou Advisors -- Analyst

That's helpful. And then secondly, with regards to the estimated value of your noncore assets, has your view on that value changed from the previous quarter?

Svend Anton Maier -- Chief Executive Officer

No. It hasn't. It hasn't changed at all.

Tobias Eckbo -- Clarksons Platou Advisors -- Analyst

OK. Thanks.

Svend Anton Maier -- Chief Executive Officer

Thank you.

Operator

There are no further question at this time. I would like to turn the conference back to your speakers today.

Paal Kibsgaard -- Chairman

Well, thank you very much for dialing in. That concludes our call today.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Svend Anton Maier -- Chief Executive Officer

Francis Millet -- Chief Financial Officer

Paal Kibsgaard -- Chairman

Greg Lewis -- BTIG -- Analyst

Sahar Islam -- Goldman Sachs -- Analyst

Unknown speaker

Lillian Starke -- Morgan Stanley -- Analyst

Tobias Eckbo -- Clarksons Platou Advisors -- Analyst

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