Pounding The Table On Borr Drilling
Why Now Is A Good Time To Be Buying Shares Of This Jackup Pure Play
Summary
Borr Drilling has a high quality fleet of jackups with an average age of 6 years. I think shares are trading for pennies on the dollar today.
The refinancing of their debt extended maturities to 2028 and 2030, and the recent additional borrowing should allow them to pay for the two new builds by the end of 2024.
We recently had a sizable insider purchase, with Borr’s chairman adding 200,000 shares to his holdings for $1.2M.
Borr has authorized $100M of buybacks and a $0.05 quarterly dividend (3% yield). It sounds like management is focused on the dividend for now, but I think the future capital returns could be massive.
The cornerstone of the bullish thesis on Borr is built on increasing day rates. I’m expecting we will see $200,000 jackup day rates in the next couple years, and Borr’s contract book leaves them well positioned to capitalize on that increase.
On Monday, I thought I would be writing about a new stock today. Over the weekend I was doing some digging into a couple of opportunities and I thought I would be buying shares this week. I was looking at Ecopetrol EC 0.00%↑ (even after the selloff induced by a mediocre Morgan Stanley analyst note) as less attractive as options outside the portfolio, but wasn’t thinking a lot about stocks that are already in the portfolio. I was thinking about it on Monday at the gym, and I had a mid-workout epiphany. I do some of my best thinking at the gym (leg day in particular), out on a walk, or when I’m skiing. Basically any physical activity that gets the blood flowing and the mind can wander.
Anyway, I decided to go another direction. Both of the stocks I was looking at are still attractive, but like I have said before, it comes down to opportunity cost. I said the other day that if I were adding to offshore, I would be adding to my position in Borr Drilling BORR 0.00%↑. That’s what I was doing yesterday, and Borr is now my largest position in the offshore sector. I think the company is poised to turn into a cash cow over the next couple years, and I’m positioned accordingly.
In my first post on the company, I laid out a couple catalysts that I expected by the end of 2024. I was expecting a refinancing which would extend their debt maturities (at the time they had a large chunk of debt coming due in 2025) and the start of a capital returns program in the form of buybacks and dividends. Several months later, Borr has refinanced their debt, extending the maturities to 2028 and 2030. They have also announced a $100M buyback program and a $0.05 quarterly dividend, good for a 3% forward yield. Despite these positive changes, Borr shares are cheaper today.
Borr’s Fleet
Before I take a look at Borr’s financials and contracting position, I wanted to do some rough calculations on their fleet. Borr has 22 jackups, with 2 more expected for delivery by the end of the year. The average age of their fleet sits at 6 years, so they have a very young fleet of assets that could last decades. If you need any proof of that, Shelf Drilling recently got a two year contract extension for a jackup that is 42 years old.
Building a new jackup could cost $250-300 million for a 400 ft-rated rig, with a delivery time of up to 2 ½ years. Jackup owners would expect a 15% ROI for a newbuild with 90-95% utilization and a dayrate of $200-230,000/d over the rig’s 25-year lifespan.
Borr put in an investor presentation that they would expect new builds to cost $275m in construction cost and $20m to be ready-to-drill. So what is their fleet worth? We’re going to use the $250-300M range and include the two jackups set to deliver by year end. On replacement cost, that values Borr’s fleet in the range of $6B to $7.2B. They now have approximately $1.8B in debt on the balance sheet, so if you pull that out, we’re looking at $4.2B to $5.4B. Just as a reminder, Borr’s current market cap is $1.6B. Even if you want to put a discount on their fleet, I still think you can buy Borr for pennies on the dollar today.
I think we are years away from seeing significant new build activity for the offshore sector (this includes deepwater and OSVs, not just jackups), and the supply and demand picture has led to a significant increase in day rates over the last couple years. I think that trend is set to continue. One other thing worth mentioning is the potential for cost inflation. If you think the cost of everything is going up over the next decade, $300M for a jackup new build could be a lowball estimate. I’m not banking on it, and there is a wide margin of safety baked into Borr’s current share price anyway. I’m just pointing out that I wouldn’t be surprised to see new builds three to five years out cost more than $300M.
Financials & Contract Position
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