Borr Drilling: Generous Dividend Increase Is Strong Sign of Confidence – Hold (NYSE:BORR)

observe:

I lined Borr Drilling Restricted (NYSE: BORR) earlier, so buyers ought to view this as an replace to mine earlier articles to the corporate.

Final month, main offshore drilling firm Borr Drilling reported Q1 2024 outcomes barely under estimates on account of a mixture of barely decrease than anticipated revenues and better finance and tax prices:

Working money movement for the quarter was impacted by development in working capital on account of “late billing for some contracts“, as famous within the press launch. Nonetheless, the corporate nonetheless managed to squeeze out a small quantity of free money movement, however this was greater than offset by $23.8 million in dividends and $10.6 million used to purchase again convertible debt

Adjusted EBITDA margin of 49.9% reached new all-time highs and the corporate considerably outperformed its friends:

Nonetheless, Artwork the corporate stays extremely leveraged.

Borr Drilling ended the quarter with unrestricted money and money equivalents of $282.7 million and $1,979 million in debt, in comparison with $102.5 million and $1,790 million on the finish of final 12 months, boosted by the issuance of a further 2028 10% Senior Secured for $200 million. Notes in February.

Consequently, complete liquidity elevated to $432.7 million from $252.5 million on the finish of 4Q2023.

The backlog narrowed barely to $1.72 billion. Because the starting of the 12 months, the corporate has acquired eleven new contract commitments with a complete worth of $318 million and a median day by day price of $183,000.

In a press launch, Borr Drilling confirmed that the online drilling price is in extra of $200,000 for the just lately introduced obligatory letter of award:

Notably, within the second quarter we secured our first ever contract in extra of $200,000 per day on a internet day price foundation.

This milestone not solely underlines the prime quality and operational benefits of our fleet, however can also be a constructive affirmation of our view of a well-balanced market regardless of the latest occasions in Saudi Arabia.

Primarily based on the statements made within the earnings report and on the convention name, it appears honest to imagine that the brand new setup Vali which is scheduled for supply in October, shall be deployed beneath this contract.

Because of the newest awards, contract protection for 2024 (together with value choices) elevated to 93% (beforehand 87%) at a median day by day price of $134,000.

Contract protection for 2025 elevated from 64% to 71%, and the common day by day price elevated from $134,000 to $142,000:

Throughout the name, administration remained optimistic in regards to the jack-up rig market, regardless of potential near-term disruptions on account of Saudi Aramco’s (ARMCO) latest choice to droop 22 jack-up rigs, in together with Borr Drilling. Arabia I setup (emphasis added):

From a broader market perspective, utilization of recent rigs stays excessive at round 95%, unadjusted for Aramco’s suspension of twenty-two rigs, together with our Arabia I. We observe that some rigs have already been re-contracted elsewhere, in whereas others can’t be aggressive in worldwide markets on account of their legacy capabilities, lack of worldwide footprint of their present operators.

We anticipate about 13 of those rigs to doubtlessly be aggressive within the worldwide market, leading to utilization charges remaining at a wholesome stage above 90%. Nonetheless, we consider that using these fluctuations is non permanent as extra ranges of demand ought to offset and exceed the variety of rigs doubtlessly out there in Saudi Arabia. Primarily based on present tenders and discussions with our prospects, we proceed to forecast a rise in demand of 20 to 25 rigs over the following 12 to 18 months.

On that observe, we stay optimistic about our capability to re-contract Arabia I within the third quarter. Though in some areas we’ve got seen rivals bid under basic market charges, we anticipate this dynamic to be short-lived because the upside market stays basically well-balanced and tight.

The corporate reaffirmed full-year adjusted EBITDA expectations of $500 million to $550 million.

Maybe most significantly, the corporate doubled its quarterly money dividend to $0.10 per share and predicts additional will increase over time:

Lastly, the Board permitted a doubling of the quarterly dividend to $0.10 per share, reflecting the constructive outlook. We anticipate the dividend to proceed to extend over time according to our earnings forecasts.

Whereas I would prefer to see Borr Drilling focus extra on decreasing vital leverage, the beneficiant dividend improve ought to be seen as a robust signal of confidence within the firm’s prospects via 2025 and past.

On the present stage of share costs, the annual dividend yield is 6.5%.

After robust contracting exercise this 12 months, mixed with encouraging market administration feedback, I’ve elevated my estimates, however stay effectively under my unique estimates to account for the potential affect of Saudi Aramco:

Whereas the inventory’s industry-leading 6.5% dividend yield appears enticing, the restricted upside potential to my $7 goal value hike prevents me from upgrading the inventory right now.

Nonetheless, I might develop into extra bullish on Borr Drilling if the inventory falls under $5.80.

Traders looking for publicity to the offshore drilling {industry} ought to contemplate friends similar to Diamond Offshore Drilling ( DO ), Valaris ( VAL ), Noble Company ( NE ), and Seadrill ( SDRL ), which commerce at a lot decrease ahead valuations, whereas even have a lot better stability sheets.

Notice that offshore assist vessel supplier SEACOR Marine Holdings (SMHI) supplies much more development potential.

Backside line

Borr Drilling reported barely weaker-than-expected first-quarter outcomes and reiterated full-year steerage as administration remained bullish on rising market situations even in mild of potential near-term fallout from Saudi Aramco.

In latest months, the corporate managed to safe extra contracts at first rate charges, additional rising the visibility of earnings for the remainder of the 12 months and as much as 2025.

To replicate the constructive outlook, Borr Drilling determined to double its quarterly money dividend to $0.10.

Whereas administration’s feedback and dedication to return on fairness are encouraging, my upwardly revised score and value goal are inadequate to assist the inventory.

Consequently, I repeat my “Maintain on” score with an elevated value goal of $7 based mostly on an assigned a number of of 6x the corporate’s 2025 forecast EV/adjusted EBITDA.

Nonetheless, I might be extra bullish on Borr Drilling if the inventory falls under $5.80.