|Shares Out. (in M):||78||P/E||0||26|
|Market Cap (in $M):||275||P/FCF||0||18|
|Net Debt (in $M):||-25||EBIT||0||13|
Background: BORR Drilling is a newly established drilling company focusing on strategic acquisitions of high-end rigs at all-time low asset values. The company recently acquired two 2013-built high-spec harsh-environment (HS/HE) KFELS Super A Class jack-ups from Hercules Offshore at all-in cost of $130mm ($65mm per rig). In relation to this, BORR completed a $155mm private placement to finance this acquisition. While the company is currently unlevered and small (2 rigs), it has clearly stated its intention to grow, taking advantage of historically low asset values in the private market. BORR trades OTC in Norway, and volume is very limited, though the company has indicated they will be listing on an exchange sometime this year.
BORR is led by Tor Olav Troim, who owns approximately 20% of the company through his vehicle the Magni group according to public reports. Sell side reports also indicate that Magni Group has received about 9.7m warrants that may be used to subscribe for one new share at par. The warrants are exercisable at different share price (1/5 at $2.40, 1/5 at $2.80, 1/5 at $3.20, 1/5 at $3.60 and 1/5 at $4.00). Tor Olav led SDRL through their aggressive expansion. The company’s management also includes former Seadrill CFO, Rune Magnus Lundetræ, who is now Borr CEO. The company’s COO, Svend Anton Maier, also worked for Seadrill from 2007 until 2016.
There’s been an awful lot written on this board about the offshore drilling market (I counted 10 write-ups since 2014) and I’m not sure I have anything to add to those. My own macro view is that 1) the offshore market remains extremely depressed in terms of activity and day-rates by any historical measure and 2) I cannot predict when the ultimate recovery will take place, could be 2 years could be 10, and that obviously impacts your IRR. With that context, here’s why I like BORR:
The balance sheet is clean, and capex costs are low, giving a long runway. Company has $25MM in net cash (155 private placement less 130 for the rig acquisition) and no newbuild capex commitments. Additionally, maint capex should be low on these assets as they are new (LSD $MM’s per year), giving the company an exceptionally long runway to put them to work.
The assets are new, and likely to actually participate in a recovery. One of the problems with the book value analysis for many of the current drillers is that some of the older assets will simply not make it to the other side of the cycle. This is true even if the recovery happened tomorrow. If a recovery takes an extra 5 years, there will be additional marginal rigs which are pushed out from ever returning to the market. These rigs were built only 2 years ago, and at a cost of 2x their current implied value, giving both significant upside and a sufficiently long runway to see it. For what it's worth the general consensus is that the jackup market will recover before the UDW market.
Low operating costs mean rigs are reasonably likely to find work, generating decent FCF even here in the downturn. I estimate all in cash operating costs of 58k/day. Current fixture rates are in the 100k/day range for similar harsh environment high specification jackups in North Sea ex Norway. Last two datapoints we have dayrates for are a Paragon jackup in the Netherlands at 113k/day (11/24/16) and an Ensco jackup for Ithaca in the UK for 100k/day (12/7/16). There are also a number of fixtures we don’t have dayrates for I have assumed the BORR rigs are contracted over the course of the year at 90k/day, generating 15-16MM in FCF by 2018, a 6% yield at this point in the cycle. The “average” day rate for similar rigs has been ~170k/day over the last 15 years, but there are good reasons, mainly lower costs why those day rates are likely to be above normal. I have assumed a normalized dayrate of 145k/day which triangulates to a 7-8% ROI off the construction/replacement cost of $285MM /rig. In reality as rates go higher costs are likely to inch up as well but the margin is what matters.
You get an option on a future growth story with significant upside. The company’s strategy is to quickly contract these rigs at prevailing rates, and lever up to do more distressed deals to the extent they are available.
While the company has failed to include the descending half of “mount seadrill” to the right of the chart, the fact is that once these rigs are contracted, Tor Olav is likely to continue buying distressed assets. He will face competition from his old partner from SDRL who has started a similar vehicle, which is actually called Sandbox, but limited competition from the established drilling players who are for the most part in “deleveraging mode”. While it’s silly to model values for new deals, given the unlevered balance sheet and low cost of new incremental debt post contracting, it’s easy to see an earnings growth story develop even as the market stays in its current depressed state.
Public vs Private market valuation – current prices imply $125MM per jackup, which is almost double what they paid for these assets 2 months ago. The auction itself was conducted a few months ago and oil has rallied a bit, but it’s still a wide gap. $125MM is also, however, less than ½ of newbuild cost and a little under what the implied value of other publicly traded drillers trade at, so this is hedgeable if you think prices will converge down to this deal rather than up to normalized values.
Contracting Risk- it could take longer than I expect for these rigs to get contracts and/or the ultimate contract rate could be lower than I expect. There’s good reason to think, given their stated rig costs are lower than those of competitors that BORR will be aggressive in bidding for work.
Bad deals- while the current assets are new/solid and were acquired at huge discounts to replacement costs, future deals are likely to be worse if the market recovers and eventually may be actively “bad”
Contracting of rigs
Listing on exchange/ more reporting and disclosure
New accretive acquisitions
|Subject||Thanks - have you looked at SDSD NO?|
|Entry||02/20/2017 08:19 AM|
Thanks for an interesting write-up. I am of the (probably still minority) opinion that the bottom is in for oil services and that the vast capex cuts of the last couple of years will come home to roost in a year or two.
The problem with a lot of the oil service companies is that they are so full of debt still that it makes them uninvestable for me. So I think stuff like Borr is interesting because of the clean capital structure.
Have you looked at SDSD (Standard Drilling)? It is a story reminiscent of Borr in that
1. It is majority owned and controlled by a very successful investor (Oystein Spetalen) with heaps of experience in the sector
2. Debt free and investing aggressively at (what I believe to be) the bottom of the cycle
3. Exposed to a market with little incremental supply over the next couple of years with dayrates at historical lows - could investors be too focused on near term demand and not focusing enough on long term supply? It wouldn't be the first time.
4. Even a partial return to historical averages or newbuild parity should provide good returns for investors (in a scenario with a return to historical average dayrates in 4-5 years, the stock could easily triple or more).
It is different in that it is exposed to offshore supply and not drilling, supply probably being the only market that looks worse than drilling at the moment :)
Anyway, worth a look. After the recent capital raises, it is also quite liquid. Due to an overhang from the mentioned raises, the share price has come back quite a bit as well, in the first two raises very few long term investors seem to have participated.
PS: congrats on the returns on both BRSS and The Cross Harbour Holdings Ltd - impressive.
|Entry||02/21/2017 05:35 PM|
Thanks for the write-up.
My concern is the overhang of newbuilds without contract will push dayrates very close to operating costs. There are 534 rigs (excludes cold stacked, warm stacked included) in the world-wide jackup fleet as of January 2017 with another 103 newbuilds in the order book, the vast majority of which are uncontracted. Peak demand in 2014 was 450 rigs and demand is now likely sub 300... so there's an overhang that could get materially worse as newbuilds emerge. Most of those newbuilds are on shipyard downpayments of 10% (China shipyards) or 20% (Singapore & S. Korea), so those owners will be incented to take contacts even at no or very low profit just to arrange the shipyard exit financing and save their shipyard deposits. Probably half the newbuilds will be walked away from, but the yards have major investments in their construction so may become active market participants seeking to recover whatever they can which will further pressure dayrates.
BORR mgmt is solid and I like the new rigs at 65m valuation. I just worry that the overhang is going to make this a no profit environ for a long time to come.
|Subject||Day rate / Revenue calculation|
|Entry||12/28/2017 12:30 PM|
hi - appreciate this is an old post but could you walk me through the calculation to get from $90k day rate to $31.2m revenue?