Borr Drilling Limited — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019, prepared under U.S. GAAP in U.S. dollars. The filing is an annual report rather than a standalone Q4 filing; the source provides full-year results and does not provide a separate Q4 income statement.
Business context
Borr Drilling is a Bermuda-based offshore shallow-water drilling contractor focused primarily on owning, contracting and operating jack-up rigs for oil and gas customers worldwide. Operations span the Middle East, Europe, West Africa, Mexico and Southeast Asia. The company operated as one global segment.
- Fleet at December 31, 2019: 28 jack-up rigs, including nine warm-stacked and three cold-stacked units, plus one semi-submersible rig.
- Seven additional jack-up rigs were under construction or otherwise not yet delivered; total contract backlog was $308.5 million, down from $377.5 million in 2018.
- Sixteen rigs were on contract at year-end, compared with 10 at year-end 2018. Weighted-average operating rigs increased to 11.9 from 7.0.
- Technical utilization was 99.0% and economic utilization was 95.9%; these measures apply to operating rigs and are not fleet-wide utilization measures.
Financial performance and metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $334.1 million | $164.9 million | +$169.2 million |
| Operating loss | $(150.8) million | $(131.4) million | Wider loss |
| Net loss | $(299.1) million | $(190.9) million | Wider loss |
| Net loss per share | $(2.78) | $(1.85) | Worse |
| Adjusted EBITDA | $(2.6) million | $(55.3) million | Improved by $52.7 million |
| Operating cash flow | $(89.0) million | $(135.2) million | Improved by $46.2 million |
| Investing cash flow | $(271.1) million | $(560.1) million | Lower outflow |
| Financing cash flow | $397.3 million | $583.5 million | Lower inflow |
Revenue growth primarily reflected more rigs entering contracts, including dayrate contracts for Odin, Gerd, Groa, Ran, Natt and Idun, and bareboat contracts for Grid and Gersemi. Mexico contributed $50.0 million of revenue, including reimbursable logistics and management services.
- Rig operating and maintenance expense increased to $307.9 million from $180.1 million as the operating fleet expanded.
- Depreciation increased to $101.4 million from $79.5 million. A $11.4 million impairment related to the held-for-sale rig Eir was recorded in 2019.
- General and administrative expense increased to $50.4 million from $38.7 million. Restructuring expense fell to zero from $30.7 million in 2018.
- Financial expense, net, increased to $128.1 million from $57.0 million, including $70.4 million of net interest expense, $29.2 million of losses on forward contracts and $15.4 million of realized losses on marketable securities.
- Adjusted EBITDA remained negative despite improving substantially. This non-GAAP measure excludes, among other items, depreciation, interest, certain financial instrument losses, mobilization costs and taxes, and does not represent cash available for debt service or capital expenditure.
Balance sheet, debt and liquidity
| Balance-sheet metric | December 31, 2019 | December 31, 2018 |
|---|---|---|
| Cash and cash equivalents | $59.1 million | $27.9 million |
| Restricted cash | $69.4 million | $63.4 million |
| Total assets | $3.280 billion | $2.914 billion |
| Long-term debt, including current portion | $1.710 billion carrying value | $1.175 billion |
| Principal debt, excluding back-end fees | $1.680 billion | Not clearly provided on the same basis |
| Total equity | $1.294 billion | $1.534 billion |
| Free liquidity | $94.1 million | Not clearly provided on the same basis |
- Principal debt consisted primarily of $195.0 million under the Hayfin facility, $270.0 million under the syndicated facility, $25.0 million under the New Bridge facility, $350.0 million of convertible bonds and $839.7 million of shipyard delivery financing.
- Debt increased materially because of new financing and delivery financing for rigs. Most facilities bear floating rates based on LIBOR plus a margin; a 100-basis-point increase in rates was estimated to reduce 2019 financial income and pre-tax results by approximately $10.2 million.
- Capital expenditures and deferred newbuild costs were $302.0 million in 2019, compared with $971.4 million in 2018. Delivery-installment commitments totaled $793.8 million, plus $18.0 million of back-end fees, at year-end.
- The company stated that it required additional financing to fund expected losses, existing capital commitments and potential contract-termination effects. The auditor reported substantial doubt about the company’s ability to continue as a going concern.
Material changes versus 2018
- Operating revenue more than doubled, but the operating loss widened because operating costs, depreciation and impairment grew with the larger fleet.
- Net loss increased by $108.2 million, primarily because of substantially higher interest expense and other financial losses. The 2018 bargain-purchase gain of $38.1 million did not recur.
- Adjusted EBITDA improved from $(55.3) million to $(2.6) million, approaching break-even but remaining negative.
- Operating cash outflow improved, while investing outflow declined as 2018 acquisition and newbuild spending normalized.
- Debt increased by approximately $535 million in principal terms, while total equity declined by approximately $239 million because of the annual loss.
- The company formed Mexican joint ventures with a 49% interest to provide integrated well services to Pemex. The investment generated a $9.0 million equity-method loss in 2019 and required $30.8 million of funding by year-end.
- Three rigs were sold or committed for sale in 2019, producing a $6.4 million gain overall; Eir was impaired to its agreed sale value.
Guidance, outlook, risks and unusual items
Management did not provide conventional quantified earnings guidance. Its stated strategy was to deploy premium rigs, expand integrated services, maintain cost-efficient operations and benefit from a potential recovery in shallow-water drilling. However, management expected continued volatility and insufficient demand if oil prices and rig supply remained unfavorable.
- COVID-19 and oil-price shock: Subsequent to year-end, COVID-19, travel restrictions, crew-change difficulties, customer suspensions and contract terminations materially affected operations. The filing reported a $16 million net reduction in backlog from early terminations, suspensions and new contracts as of April 2020; by June 5, 2020, operating and committed rigs had declined to 12.
- Going concern: The company required additional financing within the following 12 months. The financial statements contained no adjustments for the outcome of this uncertainty.
- Financing restructuring: In June 2020, lenders and shipyards agreed to defer certain interest and amortization payments, reduce or modify liquidity and equity-ratio requirements, and defer delivery of five newbuild rigs to 2022. The company also raised $30 million through an equity offering.
- Contract and customer concentration: The five largest customers represented 61% of 2019 revenue. Customers may suspend, terminate or renegotiate contracts, particularly during industry downturns.
- Asset risk: Jack-up rigs represented approximately 81.8% of total assets. Impairment estimates depend heavily on future utilization, dayrates and operating costs; further impairment could result if market conditions deteriorate.
- Internal controls: Management identified a material weakness in internal control over financial reporting related to insufficient qualified accounting and financial-reporting personnel. Disclosure controls and procedures were deemed ineffective as of December 31, 2019.
- Regulatory and related-party matters: Unapproved advances of approximately $0.5 million each to the CEO and CFO were identified as an inadvertent violation of Section 13(k) of the Exchange Act; the advances were repaid or offset against compensation.
- Unusual financial instruments: Forward contracts related to listed drilling-company shares had a $64.3 million unrealized loss at year-end and were collateralized by $65.0 million of restricted cash. All marketable securities were sold during 2019, producing a $15.4 million realized loss.
Most important facts for investors to verify
- Whether the June 2020 financing amendments, equity offering and newbuild delivery deferrals provide sufficient liquidity through 2022 and beyond.
- Actual post-year-end contract terminations, suspensions, backlog changes, dayrates and fleet utilization.
- Compliance with amended debt covenants, minimum-liquidity requirements, loan-to-value tests and maturity obligations.
- Potential impairment of jack-up rigs, the semi-submersible rig and equity-method investments under sustained low oil prices or weak utilization.
- Cash requirements and profitability of the Mexican joint ventures, including possible future shareholder cash calls and Pemex payment timing.
- Progress in remediating the material weakness in internal control over financial reporting.
- Customer concentration, contract cancellation rights and the collectability of receivables and contract assets.
- Exposure from $793.8 million of reported delivery-installment commitments, shipyard financing and other guarantees.