Global Energy Demand Will Drive Modern Rigs Despite Debt Concerns

Key Takeaways

• Strong global rig demand, limited new supply, and a young fleet position Borr Drilling to outperform expectations with rising margins and sustainable revenue growth.
  
• Enhanced liquidity enables strategic acquisitions as industry consolidation accelerates, further boosting long-term earnings potential and revenue diversification.
  
• Policy shifts toward renewables, debt risk, customer receivables, ESG pressures, and a concentrated fleet expose Borr Drilling to liquidity, revenue, and margin volatility.

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.

• Analyst consensus sees higher day rates and strong contract coverage supporting improved earnings, but this likely understates the potential for an accelerated upward re-pricing cycle as persistent global energy demand and minimal newbuild supply could trigger a scarcity premium for modern rigs, driving both utilization and day rates beyond current forecasts and materially boosting revenue and net margins.
  
• Analysts broadly agree new contracts in Mexico, West Africa, and Southeast Asia will stabilize activity, but improved fiscal stability at Pemex plus the rapid scale-up of private investment projects in Mexico could lead to a step-change in backlog and multi-year contract coverage, driving significantly higher revenue visibility and cash flow conversion over the next several years.
  
• Borr Drilling's young, high-spec jack-up fleet is exceptionally well-positioned to capture premium contracts as aging competitors retire and stricter environmental and technical standards are adopted globally, allowing for sustainably higher margins and outsized returns on invested capital.
  
• A strengthened balance sheet and liquidity position, combined with recent successful equity and debt raises, provide Borr Drilling with ample firepower to pursue value-accretive M&A or asset acquisitions as industry consolidation accelerates, opening up new revenue streams and enhancing long-term earnings growth.
  
• Global underinvestment in upstream oil and gas and the slow pace of energy transition-especially across emerging Asia and Africa-are likely to drive structurally elevated rig demand through the end of the decade, securing high utilization rates and above-trend revenue growth well beyond current market expectations.

Borr Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Borr Drilling compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Borr Drilling's revenue will grow by 3.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 5.5% today to 2.5% in 3 years time.
• The bullish analysts expect earnings to reach $26.9 million (and earnings per share of $0.09) by about August 2028, down 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 bullish analyst cohort, the company would need to trade at a PE ratio of 70.3x on those 2028 earnings, up from 12.2x today. This future PE is greater than the current PE for the US Energy Services industry at 13.2x.
• 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

• Accelerating capital flows and policy pressure toward renewables and decarbonization threaten long-term offshore oil and gas investments, which could reduce Borr Drilling's addressable market and contract backlog, ultimately placing downward pressure on future revenues and earnings.
  
• The company's reliance on a concentrated fleet of premium jack-up rigs exposes it to shallow water market cycles, which makes Borr Drilling susceptible to volatile utilization and dayrates; this could lead to unpredictable revenue and margin swings in periods of oversupply, harming earnings stability.
  
• Borr Drilling's high leverage and semiannual debt service obligations create significant refinancing risk and leave the company exposed to rising interest costs or adverse credit market conditions, potentially eroding net income and free cash flow.
  
• Delays and uncertainty in collecting receivables from major customers such as Pemex in Mexico highlight persistent counterparty risks, which can strain liquidity and reduce working capital, threatening both operating cash flows and the ability to meet debt or investment obligations.
  
• Heightened ESG scrutiny and tightening environmental regulations may increase operating costs or restrict access to capital, while climate litigation or carbon taxes have the potential to further compress net margins and reduce the attractiveness of Borr Drilling as an equity investment.

Valuation

• The assumed bullish price target for Borr Drilling is $5.59, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $26.9 million, and it would be trading on a PE ratio of 70.3x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $2.31, the bullish analyst price target of $5.59 is 58.7% 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.