Rising Regulations Will Restrict Offshore Drilling And Margins May Recover

Key Takeaways

• Reliance on offshore drilling and specific regional markets exposes Borr Drilling to substantial risks from energy transition, regulatory shifts, and regional policy uncertainty.
  
• High leverage and ongoing refinancing needs could undermine earnings and deleveraging if capital access is disrupted or debt costs rise.
  
• Heavy reliance on volatile clients, regulatory challenges, and equity raises threatens Borr Drilling's liquidity, profitability, and long-term contract stability amid shifting energy trends.

Catalysts

Operates as an offshore shallow-water drilling contractor to the oil and gas industry in the United States, the Middle East, South East Asia, Europe, Latin America, and West Africa.

• Although Borr Drilling is positioned to benefit from persistent global energy demand growth and supply constraints in offshore oil production, the company's concentration in offshore drilling exposes it to considerable risk if the transition away from fossil fuels accelerates beyond current expectations, which could eventually reduce contract opportunities and revenue growth over the long term.
  
• While the gradual supply rebalancing in the jack-up market, combined with underinvestment in newbuilds and increased scrapping of older units, supports utilization and dayrate recovery for Borr's modern fleet, a sharp increase in regulatory pressure or carbon-cost initiatives could materially raise operational costs and dampen future net margins.
  
• Despite new contract wins and rising contract coverage into 2026, Borr Drilling remains heavily reliant on a few regions such as Mexico, where the pace and durability of government liquidity improvements and vendor payment reforms are not assured; systemic delays or policy reversals could stress working capital, impact cash flow generation, and weigh on earnings volatility.
  
• Although Borr's focus on maintaining high utilization through flexible asset management offers temporary resilience, the company's high leverage and ongoing refinancing needs still pose risks-should macroeconomic or regional instability affect access to capital or increase the cost of debt, future earnings and deleveraging progress could be undermined.
  
• While increased exploration and production spending offshore and strengthening backlog suggest some tailwinds for revenue, accelerating advancements in onshore shale or alternative energy extraction could siphon capital away from offshore projects, potentially limiting Borr's long-term growth and negatively affecting revenue and margins.

Borr Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Borr Drilling compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Borr Drilling's revenue will decrease by 1.2% annually over the next 3 years.
• The bearish analysts are not forecasting that Borr Drilling will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Borr Drilling's profit margin will increase from 5.5% to the average US Energy Services industry of 7.4% in 3 years.
• If Borr Drilling's profit margin were to converge on the industry average, you could expect earnings to reach $70.1 million (and earnings per share of $0.29) by about August 2028, up from $54.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from 12.2x today. This future PE is lower than the current PE for the US Energy Services industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 5.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Borr Drilling Future Earnings Per Share Growth

Risks

• Borr Drilling remains highly exposed to ongoing payment delays and credit risk from Pemex in Mexico, with around sixty to sixty-five million dollars in outstanding receivables and a significant portion of future revenue reliant on government financing and political will, potentially constraining liquidity and cash flow in the long run.
  
• The company's business relies heavily on continued demand for shallow-water oil and gas drilling, but the global acceleration of renewable energy adoption and stricter climate policies could limit long-term contract opportunities, reducing future revenues and utilization rates.
  
• Elevated leverage and the need for periodic equity raises to strengthen liquidity, such as the recent one hundred and two point five million dollar equity raise, could subject existing shareholders to future dilution and erode net margins due to persistently high interest expenses.
  
• Downward pressure on jack-up rig day rates, driven by oversupply from suspended rigs in the Middle East and aggressive pricing strategies in Southeast Asia, threatens Borr Drilling's ability to maintain premium pricing and could compress operating margins if not absorbed by new demand.
  
• Heightened regulatory risks, including rising costs for environmental compliance and the potential for stricter offshore drilling regulations, may lead to higher operating expenses and capital requirements over time, negatively impacting net income and overall profitability.

Valuation

• The assumed bearish price target for Borr Drilling is $2.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Borr Drilling's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.59, and the most bearish reporting a price target of just $2.8.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $952.6 million, earnings will come to $70.1 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $2.31, the bearish analyst price target of $2.8 is 17.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.