Tightening Jack-Up Market And Limited New Supply Will Support Stronger Future Earnings

Catalysts

About Borr Drilling

Borr Drilling operates a modern premium jack-up rig fleet focused on shallow water oil and gas drilling globally.

What are the underlying business or industry changes driving this perspective?

• Ongoing tightening of the modern jack-up market, with utilization already around 93% and Saudi Aramco calling suspended rigs back, supports higher day rates and better contract terms. This should lift revenue growth and EBITDA over the next several years.
• Reallocation of rigs into higher value basins such as West Africa and the U.S. Gulf, combined with accelerated campaigns like Shell Nigeria and new work in Angola and Congo, reduces idle time and improves fleet mix. This supports higher average margins and earnings quality.
• Improved Mexico contract structures, including fixed payment terms and reduced direct exposure to Pemex, should normalize collections and lower working capital needs. This increases free cash flow conversion and net income stability.
• Structural underinvestment in new jack-up builds and accelerating attrition of older, capital-intensive rigs constrain future supply. This enhances pricing power for Borr Drilling’s young fleet and supports sustained expansion in EBITDA margins and return on capital.
• Rising demand for economical, fast-to-market offshore barrels and gas developments, particularly in the Middle East and select gas-focused projects in Africa and Asia, positions Borr Drilling to capture long-duration programs at attractive day rates. This drives multi-year backlog, revenue visibility and deleveraging capacity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Borr Drilling's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 26.2% in 3 years time.
• Analysts expect earnings to reach $318.7 million (and earnings per share of $0.61) by about December 2028, up from $84.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $834.4 million in earnings, and the most bearish expecting $200.9 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, down from 10.5x today. This future PE is lower than the current PE for the NO Energy Services industry at 6.5x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.61%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent or renewed payment delays in Mexico, particularly if government support for Pemex weakens or the new contract structures do not fully prevent receivables build up, could tie up significant working capital and compress free cash flow and net income.
• International sanctions risk in key markets like Mexico, and any expansion of sanctions to additional counterparties or regions, could force further contract terminations, increase idle time and mobilization costs, and reduce revenue and EBITDA margins.
• If the anticipated long term tightening in the global jack up market does not materialize due to slower than expected inflection in Saudi Arabia, Mexico or Southeast Asia, Borr may face lower utilization and weaker day rates, limiting revenue growth and EBITDA expansion.
• Older jack up units remaining in service for longer than expected, or a resurgence of new build activity as the cycle improves, would dilute the supply discipline underpinning the premium for modern rigs and could cap pricing power, pressuring revenue per day and long run returns on capital.
• A weaker or more volatile long term oil and gas price environment than management assumes, including sustained mid 60s Brent drifting lower, could push customers to delay or cancel shallow water projects in key regions and reduce multi year backlog, impacting revenue visibility and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NOK65.29 for Borr Drilling based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $318.7 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of NOK40.56, the analyst price target of NOK65.29 is 37.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.