Middle East Tenders May Stabilize Day Rates, But Cash Flow Risks In Mexico Remain

Key Takeaways

• Completing the newbuild program and lower CapEx could boost cash flows and enhance margins and earnings.
  
• Incremental demand in West Africa and Southeast Asia may offset market weaknesses, driving revenue growth through increased contract activity.
  
• Softening demand and financial pressures may reduce Borr Drilling's revenue stability, profitability, and liquidity, impacting future earnings and strategic financial decisions.

Catalysts

Operates as an offshore shallow-water drilling contractor to the oil and gas industry worldwide.

• The completion of Borr Drilling's newbuild program and the expectation that regular maintenance CapEx will be below $50 million in 2025 should enhance future cash flows by reducing capital expenditures. This could positively impact net margins and earnings.
  
• The company has secured incremental demand in West Africa and Southeast Asia, which could offset some market weaknesses and improve revenue streams through increased contract activity in these regions.
  
• Borr Drilling's strategic positioning with a 77% contracted rig fleet for 2025 at higher day rates ($149,000 compared to $136,000 in 2024) suggests the potential for increased revenues and improved earnings in the upcoming year.
  
• Expected multi-rig and multiyear tenders in the Middle East, particularly from Saudi Arabia and Kuwait (KJO and KOC), could absorb excess supply, potentially stabilizing or increasing day rates and improving future revenue and net income.
  
• The company's efforts to capitalize on new and follow-on contracts, especially in Mexico and West Africa, may reduce idle periods and provide backlog visibility into 2026, supporting sustained revenue growth.

Borr Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Borr Drilling's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.1% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $647.4 thousand (and earnings per share of $0.05) by about July 2028, down from $50.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $49 million in earnings, and the most bearish expecting $-19.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 1585.9x on those 2028 earnings, up from 10.5x today. This future PE is greater than the current PE for the US Energy Services industry at 11.3x.
• 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

• Softening demand and declining day rates in the jack-up market, particularly in Saudi Arabia and Mexico, could pressure Borr Drilling's future revenue and profitability.
  
• Rig suspensions, especially in Mexico, may reduce revenue and cash flow due to idle periods and delayed mobilization.
  
• High financial expenses from recent bond issues increase pressure on net income and earnings, potentially impacting dividend payouts or share repurchases.
  
• Near-term market uncertainties, including rig contract suspensions and competitive day rates, could affect revenue stability and earnings projections.
  
• Payment collection risks in Mexico highlight cash flow uncertainties, which may strain liquidity and impact net margins if not managed effectively.

Valuation

• The analysts have a consensus price target of $3.198 for Borr Drilling based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $647.4 thousand, and it would be trading on a PE ratio of 1585.9x, assuming you use a discount rate of 11.6%.
• Given the current share price of $2.0, the analyst price target of $3.2 is 37.5% 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.