Modern Jack-Up Rigs Will Benefit From Secular Demand Amid Risks

Key Takeaways

• Borr's modern fleet and lower maintenance costs enable higher free cash flow, stronger margins, and sustained pricing power as global rig supply is constrained.
  
• Robust offshore drilling demand and increasing contract coverage position Borr for long-term revenue growth, enhanced earnings visibility, and premium contract terms.
  
• Heavy reliance on jack-up rigs, high debt, and energy transition risks threaten Borr Drilling's long-term revenue, refinancing ability, and capacity for growth or adaptation.

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 Borr's margins and cash flows improving as newbuild CapEx winds down, but this likely understates the impact of the company's aggressively lower maintenance CapEx, which now structurally positions Borr for much higher free cash flow conversion and EBITDA scalability as the fleet operates near full utilization.
  
• While analysts highlight higher day rates and increased contract coverage, this view does not fully capture the financial leverage from the rapid shift toward 80% to 85% fleet coverage at premium day rates, setting up outsized revenue and cash flow upside as contract renewals roll in at materially higher rates.
  
• Major oil companies and national oil companies are restarting investments and prioritizing offshore jack-up rigs to secure stable energy supply amid geopolitical uncertainty, supporting multi-year backlog visibility and a step-change in Borr's forward revenue base.
  
• The sharply accelerating retirement of older, less efficient jack-ups globally and limited newbuild capacity has created an unprecedented supply constraint; Borr's modern, high-spec fleet is now positioned to achieve sustained pricing power and premium contract terms, directly boosting earnings and net margins over multiple years.
  
• As energy transition investments underperform and global oil demand remains structurally robust, Borr is uniquely positioned to capitalize on rising customer preference for efficient outsourced drilling, which should translate into longer-term contracts, greater backlog security, and improved earnings visibility.

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 2.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 5.1% today to 3.0% in 3 years time.
• The bullish analysts expect earnings to reach $31.8 million (and earnings per share of $0.11) by about August 2028, down from $50.8 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 56.4x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Energy Services industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 4.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Borr Drilling Future Earnings Per Share Growth

Risks

• The global acceleration of the energy transition away from fossil fuels could structurally reduce demand for offshore oil drilling and limit long-term rig utilization, placing sustained pressure on Borr Drilling's revenues and backlog growth.
  
• Borr Drilling's ability to access capital markets may be constrained by growing ESG-focused investing frameworks and policy pressures, which would raise the company's cost of capital and restrict refinancing options, ultimately impacting net margins and long-term earnings.
  
• High leverage and a persistent debt load restrict Borr Drilling's capacity to invest in fleet upgrades or navigate industry downturns, exposing the company to amplified downside risk during periods of reduced dayrates and depressed earnings.
  
• The company's strategic focus on jack-up rigs leaves it exposed to dayrate volatility, oversupply risk, and intense competition in a narrow market segment, reducing diversification opportunities and threatening revenue stability if shallow-water demand weakens.
  
• Improvements in drilling efficiency, increased industry automation, and shifting oil producer preferences toward short-cycle and onshore projects could further shrink the addressable market for jack-up rigs, constraining long-term contract opportunities and leading to thinner future net margins for Borr Drilling.

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 $2.2.
  
• 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 $31.8 million, and it would be trading on a PE ratio of 56.4x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $1.88, the bullish analyst price target of $5.59 is 66.4% 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.