COLUMN | Christmas turkey: Borr Drilling [Offshore Accounts]

Another Christmas Eve, another frantic effort from a struggling Norwegian offshore contractor to cobble together a deal with its creditors before the end of the year. A year ago, it was DOF. This time it is Borr Drilling, which issued a press release (here) declaring it had made progress to, “extend its runway,” on December 24th, a few hours before everyone in Oslo sat down for their traditional Christmas dinners of pork ribs and boiled potatoes (here).

The reference to the runway refers to the length of time Borr has to avoid paying back its debts, rather than an ill-advised expansion into aviation.

Cut and paste from Christmas 2019

Being a lazy journalist and it being the holidays, a cut and paste of the article we wrote about DOF here with a few modifications in bold is the quickest and simplest way to summarise the Borr situation as well;

“DOF Borr proposed on December 5 24 that it would raise new equity in January 2020 2021 with expected gross proceeds of between NOK200 million and NOK500 million (US$22 million to US$55 million) US$40 million. You don’t need a PhD in advanced finance to wonder whether such a small equity raising is sufficient for a company with debts that ran to over NOK24 billion (US$2.7 billion dollars) US$1.9 billion according to the third quarter report (here).

“The new refinancing proposal is centred on the time-honoured Norwegian refinancing traditions of deny, delay and defer, more Scandinavian than a Christmas tree, with all DOF Borr bank facilities to be extended merged into one new US$680 million facility with maturity in December January 2023, and the company’s US$350 million convertible bonds to remain with a maturity in May 2023 extended to the end of 2023 and 2024.”

Borr still has newbuild rigs to deliver

See, not much difference there, and good to see a longstanding Nordic tradition being maintained, even in these unsettling times of change and Covid-19. Of course, Borr’s situation is more complex than DOF’s, since Borr has five more, brand new, jackup drilling rigs scheduled for delivery in 2022, even though a dozen of its existing units from its fleet of twenty-four sit idle.

Borr also has a mix of usurious loans from private equity and shipyard vendor financing, on top of its bank facilities and bonds, which complicates the picture, but these lenders have also come to the runway lengthening party.

Keppel and PPL help deny, delay and defer

Hayfin Capital deferred the maturity of its US$195 million loan to Borr from June 2022 to January 2023, whilst the two Singapore shipyards from whom Borr has bought its fleet of shiny but under-utilised rigs also kicked the repayments down the road to help out the heavily indebted company. PPL extended its US$760 million loan out to May 2023, and deferred the related interest payment of US$107 million to March 2023. Keppel was “supportive” of Borr to defer US$272 million of interest to May 2023, and the US$620 million of newbuilding commitments to June 2023.

Since Borr owes Keppel over a billion Singapore dollars, and has five out of the eleven newbuildings it ordered still under construction there, did the Singaporean yard really have much choice? Keppel is already the not-so-proud owner of the nearly finished DP drillship Can Do, and can really do without Borr’s newbuilds being dumped into its hands, were its customer to default.

On December 24, Borr had bought itself time, if the changes are approved by the lenders, but, like DOF, there will be an almighty reckoning in 2023 when these loans all become due for refinancing in a short period.

CFO leaves at short notice – again

Then, things got worse for Borr, when the company suddenly announced its third CFO (here) in just two months on the Sunday after Christmas, December 27. And this third CFO, Magnus Vaaler, was appointed to start his new job the very next day, Monday December 28, replacing Christoph Bausch, who himself had only been in the job for eight weeks, since he replaced Francis Millet with effect from November 1, 2020.

It’s not normal for companies to replace the CFO with a day’s notice over the Christmas weekend, nor for the tenure of a CFO to be about the same length as the lifecycle of a cabbage white butterfly.

CEO Schorn provides well-worn excuse

“This succession plan provides continuity and stability in this period where we are working with key stakeholders to complete our financial restructuring and strengthening our liquidity profile,” Patrick Schorn, Borr’s chief executive officer, naturally commented. “I also want to thank Christoph for his strong contribution to Borr Drilling during this critical time and wish him well in pursuing his other interests.”

I credit the PR team for putting this one out with a straight face. Pursuing his other interests, most definitely. Indeed, Patrick Schorn has only been in the top job at Borr since September 8, when his predecessor, Svend Anton Maier, also went to pursue other interests at short notice.

Founded to take advantage of crisis, now in crisis

Borr’s woes include a mix of self-inflicted injuries that go far beyond the usual industry malaise. Indeed, Borr was formed by John Fredriksen’s former right-hand man, Tor Olav Trøim, specifically to take advantage of the industry recession and low rig prices. Norwegian financial daily Finansavisen reported in 2017 that Schlumberger had just then paid US$220 million to buy a 20 per cent stake in Borr.

As founder, Mr Trøim retains just over four per cent of the shares in the Borr today, whilst Schlumberger now holds just under seven per cent. It has not been Schlumberger’s best investment.

Seadrill and Schlumberger superheroes

Trøim himself had served as CEO of Seadrill, which Fredriksen had turned into a drilling powerhouse before its first bankruptcy in 2018. Trøim brought a coterie of ex-Frontline and Seadrill colleagues to Borr, including former CEO Mr Maier, and several directors. Also along for the ride were a clique of former Schlumberger staffers, including Mr Schorn (the Borr CEO) and Borr’s chairman of the Board, Paal Kibsgaard, who is the former CEO of Schlumberger, who approved Schlumberger’s investment in Borr. The suddenly departed Borr CFO, Mr Bausch, also has a Schlumberger background.

The Schlumberger team brought the promise that Borr would do more with its rigs than simply drill holes for day rates. It could sell a complete package of other services. Having sold its own drilling contractor Sedco-Forex to Transocean in the late 1990s, Schlumberger wanted to use Borr’s high-specification rigs as a platform to deliver its own services as well, providing customers with integrated drilling services – a veritable one-stop shop.

A compelling Borr investor presentation

If you click on this 2018 investor presentation, when Borr announced a US$250 million private placement to acquire Paragon Drilling, the hubris is outstanding.

“Every crisis creates opportunities,” Borr boasted, advising investors that, “the jackup tender pipeline is exploding…” and that Borr would, “market rigs for profitable employment, add leverage against contract backlog, distribute excess cash flow to shareholders, [and] develop integrated drilling services”.

Taking a punt on Valaris incurs US$91 million loss

Instead, Borr listed in the US in 2019, piled up idle new rigs, and engaged in stock speculation. The company took an extremely ill-advised bet on 4.2 million shares in its competitor Valaris (ex-Ensco-Rowan). This resulted in an unfortunate US$31.5 million mark to market loss when the Valaris share price tanked, as Borr announced in its second quarter 2019 results.

By the time Borr exited all its forward contracts for shares in Valaris in May this year, Borr’s total realised losses amounted to US$91 million, and Valaris itself was weeks away from entering Chapter Eleven bankruptcy, which is where Borr itself may yet end up in 2021 or 2022.

Quite why Kibsgaard and the directors of Borr felt the company should be speculating in the shares of a competitor, rather than using their own time and money to do so, is not clear.

Integrated services issues in Mexico

So far in 2020, Borr has lost more than US$250 million in the first nine months of the year, has been compelled to call upon its shareholders for extra funds, and is owed millions by Mexican state oil company, Pemex, for the much-vaunted integrated drilling projects.

“Borr will leverage its strategic collaboration with our partner and main shareholder, Schlumberger, to provide comprehensive oilfield services, and deliver an end-to-end well solution to our customer,” Borr said in a press release announcing the first contract with Pemex in 2019.

But rather than offering Borr higher margins and the ability to package services in a way that its competitors could not match, success at winning contracts in Mexico has simply meant that the company is providing working capital, free services, and cheap credit to the Mexican state oil company. Pemex, true to form, and true to the experience of dozens of foreign shipowners over the decades, has proved an extremely slow payer. This has caused Borr cashflow problems.

Pemex doesn’t pay quickly

Borr has just under half its operating fleet working for Pemex offshore Mexico, with the jackups Grid, Gersemi and Odin working in Cluster 2, and Galar and Njord in Cluster 3.  The units are 100 per cent owned by Borr, but are employed through joint ventures that Borr founded in 2019, in which Borr has a 49 per cent ownership. Two of the joint ventures hold the integrated services contracts with Pemex and contract the rigs on fixed day rates from Borr. When the oil price collapsed in 2020, Pemex fell behind on its payments.

“Strong assurances” from Mexico City

Borr had held a meeting in August, “with the full top management of Pemex.” The meeting resulted in, “strong assurances and commitments about future payments,” from Pemex and an agreed payment plan. Pemex did make some progress at clearing the backlog of payments, and paid off all the overdue balances outstanding at June 30, 2020. The Borr joint venture collected a total of US$109 million.

But then, guess what? Borr experienced another slowdown in payments from Pemex. In its third quarter results announcement issued on November 30, Borr said it has had, “several interactions with Pemex regarding collections and the need for more timely payments.” Who hasn’t?

November sees ballooning receivables

During the July to September quarter, Borr reported that its rigs worked on a total of eight wells for Pemex, of which three wells had been completed and were producing oil and gas. As of September 30, Borr’s integrated well services joint ventures had an outstanding overdue receivables balance with Pemex of US$41 million, which had still not been paid when the company reported the results a month ago.

Worse, Borr’s joint ventures had unbilled receivables, representing work performed for Pemex but that had not yet been invoiced to the customer, probably due to the well not being completed or in production, the documentation not being correctly submitted, signed and approved, or some other fiendishly arcane excuse, amounting to US$133 million.

These may be the smartest guys in the room, but they are now organising an equity raising from some of the richest men in Norway to pay for funds that should have been collected from the state oil company of Mexico. US$133 million is not even due payment by Pemex, because no invoices have been issued. Ouch!

ADNOC and Shelf’s good news

Just before Christmas, Borr’s jackup-owning rival, Shelf Drilling, announced some good news. It had sold the jackup Shelf Drilling Journey to the state oil company of the UAE, ADNOC. Hurray!

According to Shelf, ADNOC will pay US$77.6 million for the Gusto CJ-46 design rig, which was delivered by China Merchants in 2019. Shelf Drilling Journey will be delivered to its Emirati buyer in the next three months.

Shelf bought the rig and a sister unit from China Merchants for US$87 million apiece in February 2019. Shelf’s timing wasn’t great. The other unit Shelf Drilling Achiever won a three-year contract with Saudi Aramco in December 2019, but Journey sat idle in Bahrain through 2019 and all of 2020, until it was sold.

Shelf Drilling’s Journey is Borr’s road to Hell

What’s this got to do with Borr? Shelf’s single rig sale wouldn’t seem to matter to Borr and its investors, except that it does. The declining value of new and nearly new jackups completely undermines the business case for Borr. Borr exists to own cheap, new rigs, which it bought in the middle of the crisis, with a view that their values would rise and their earning power would increase.

They haven’t.

“Borr Drilling fleet acquired at ~US$115 million per rig stands out as one of the lowest entry points ever,” Borr told investors in 2018.

Now, ADNOC has bought a not dissimilar rig at 30 per cent less than the price Borr paid. The lowest entry point ever just got a whole lot lower.

Bankrupt competitors make the price of entry irrelevant

Borr’s competitors in the jackup segment, Noble, Diamond and Valaris all entered Chapter Eleven bankruptcy protection in 2020, and will emerge debt-free from the restructuring process. Seadrill will also likely enter bankruptcy protection for the second time in 2021 and, indeed, its affiliate Seadrill Partners did enter Chapter Eleven this year.

Seadrill will likely also emerge with its debts converted mainly into equity. At that point, Borr’s price of entry is completely irrelevant.

“Investing at the trough in historical cycles has generated significant returns,” Borr commented in its 2018 investor presentation. The company also highlighted a 1,400 per cent return to Ensco shareholders between 1986 and 1990, and a 2,000 per cent return to them from 1992 to 1997.

It’s now clear that 2016 and 2017 and 2018, when Borr went on its rig buying spree, were not the troughs of the current market cycle. That honour probably lies with 2020 or even 2021. Who knows?

Borr is a failed bet

Borr was a big, bold, bet. Unfortunately, the timing was wrong. Covid wrecked the nascent recovery in the offshore drilling market. Changing CEO, changing CFO, selling odd rigs to BW Energy (as we reported here) and kicking the can down the road doesn’t change the fundamental facts. Borr’s capital structure has too much debt, its rigs were bought too expensively, and its biggest customer is a basket case.

“Borr Drilling was able, as the only company in the drilling contractor space, to raise equity twice this year,” CEO Patrick Schorn bragged in the third quarter report.

Now it has to go, cap in hand, to shareholders again, a third time in twelve months.

It’s too late. Borr doesn’t need a longer runway, it needs new wings, and a much more favourable headwind from the drilling market.

Perhaps those who invest in some of the restructured drilling companies in 2021 will be buying at that magical low point, the nadir, rock bottom, which Borr was created to benefit from. We can hope.