Borr Drilling (BORR) has just provided its second-quarter report. Borr Drilling is one of the rare drillers that managed to avoid restructuring by reaching a deal with creditors that eliminated near-term liquidity concerns. Without further ado, let’s look at how Borr performed during the most challenging quarter in recent history.
Borr reported revenues of $84 million and a net loss of $109.6 million, or $0.83 per share. The biggest driver of the net loss was the $57.9 million impairment related to cold stacked rigs Atla and Balder. In the report, Borr mentioned that it was ready to divest Atla and Balder in case it received an attractive offer. On the cash flow side, Borr had a negative operating cash flow of $5.2 million. In the first half of this year, the company recorded a negative operating cash flow of $10.5 million which is a decent result given the current market environment.
In the second quarter, the company had to spend $92.5 million on the purchase of marketable securities, taking delivery of forward contracts for Valaris (VAL) shares. The company used all the restricted cash and some of the unrestricted cash on the balance sheet to cover the losses from the unfortunate investment. As per the report, Borr sold all of the 4.2 million shares of Valaris at an average price of $0.82 per share, eliminating its position before Valaris’ bankruptcy. As a result, Borr finished the second quarter with $34.6 million of cash on the balance sheet.
Importantly, Borr noted that Mexico’s Pemex had “communicated a regular monthly payment plan to OPEX, the JV providing Integrated Well Services, which should substantially improve the JV’s liquidity position, which in turn will benefit Borr“. This is positive news for the company since the condition of its Mexican business raised worries among investors.
Borr remains optimistic about the future supply/demand balance in the jack-up segment of the market. The company believes that many rigs that roll-off contracts will be scrapped, leading to material improvements:
Depending on when the recovery takes place, it is likely that the supply side will rationalize significantly from the current ~500 units (including new buildings) and potentially down towards 400 rigs […] Putting that into context of demand in early 2020 at more than 380 units and the average demand the last 15 years of ~365 units, the supply/demand balance going forward looks a lot more healthy“.
The idea that older rigs will start leaving the market in 2020-2022 was one of the key pillars of the pre-pandemic bullish thesis on Borr. The main uncertainty brought by the pandemic is the speed of the rebound in offshore drilling demand. While the jack-up market will recover faster than the floater market, the speed of its recovery is still uncertain given the slow rebound of oil prices and expected problems with demand from travel-oriented segments in the second half of this year and the next year. With the recent “mini-restructuring”, Borr bought time until the end of 2021, but it still needs a timely recovery in market conditions to deal with its debt.
Interestingly, Borr acknowledged that its restructured competitors may have an edge in the future:
The massive financial restructuring which currently takes place in the rig industry where significant amount of debt gets converted to equity through Chapter 11 restructurings will have material impact on the industry going forward […] The conversion of debt to equity will reduce financial cost and strengthen the companies’ relative competitive position versus Borr“.
Borr shares have stabilized near $1.00 and will likely manage to avoid a sell-off in the near term as the company’s operating cash flow burn is minimal while its exclusive exposure to the jack-up market segment provides hopes that Borr will be able to refinance its debt by the end of 2021.
That said, the company’s cash cushion remains minimal, and it needs a timely recovery in contracting activity and dayrates. Compared to another major driller that managed to avoid restructuring, Transocean (RIG), Borr has better chances to survive with the current capital structure as the jack-up market segment will recover faster than the floater segment, but its shares are still very speculative.
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