Borr Drilling Limited 2026 Q2 Earnings Call

Please go ahead. Good morning, and thank you for participating in Borr Drilling second quarter earnings call.

I am Bruno Morand, and with me here today is Magnus Vaaler, our Chief Financial Officer. Before we begin, I would like to remind all participants that certain statements made on this call are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from those projected in these statements. For further details, I please refer you to our latest public filings. Before I begin, I would like to recognize our teams around the world for their commitment to safety and reliable operations. During the quarter, several rigs achieved notable safety milestones across the fleet. The Groa and Gersemi each reached seven years LTI three, while the Ran and Skald achieved six and five years LTI three respectively. Additionally, rigs Hild, Galar, Knut, Arrigoni, and Grid also achieved multi-year LTI and recordable three milestones.

I would like to thank our employees for their commitment to safety, as well as our customers and stakeholders who partner with us in fostering a culture where safety remains our highest priority. Our operational performance in the second quarter of 2026 result in technical utilization of 98.4% and economic utilization of 96.4%. Revenues for the period were negatively affected by the decline in average number of rigs operating in the quarter. Second quarter adjusted EBITDA was $43.8 million, a decline of $44.7 million compared with Q1. The sequential decrease was primarily driven by four factors. First, we incurred additional preparation work and regulatory approval activities for the Odin ahead of its contract in the U.S., with $22.5 million of operating expenses during the quarter and an $11.1 million quarter-on-quarter increase.

Second, six rigs were transitioning between contracts during the quarter, leading to reduced revenue. However, this impact is now largely behind us as these rigs have commenced their contracts. Third, the conflict in the Middle East led to higher insurance and fuel costs, contributing to a $7.3 million quarter-on-quarter increase in rig operating expenses. The increase in fuel expenses was primarily driven by a higher number of rigs transition between contracts during the quarter, a period during which we are generally responsible for fuel costs. And finally, we also recognized $10.8 million of credit loss related to a former customer in West Africa. Following this additional provision, we carry net zero receivables from this customer on our balance sheet. Looking at the Odin, contract preparations took longer than anticipated, with regulatory approvals received in mid-July.

In light of the operational constraints resulting from the hurricane season, in collaboration with our customers, we agreed to revise the rig deployment sequence to improve overall operating efficiency. The Odin is currently preparing to mobilize its first location, where it will commence the previously announced two-well firm contract with an undisclosed customer. Upon its completion, the rig will expect to transition directly to Cancun. We are disappointed with the delays for the Odin, and the initial startup requirements were greater than would have typically expected when entering a new market. These result in higher cost and delays in revenue. We are taking the learnings from these events very seriously. That being said, our entry into U.S. Gulf was a strategic decision to provide customers with access to one of the most capable rigs in its class.

Discussions with our customers leaves us optimistic about the demand for this rig in the region. The Odin's current contract provides firm work into mid-2027, with additional options that could extend its contract well into 2029. The elevated rig transition activity experienced during Q2 is now substantially completed. The rigs Idun, Gunnlod, Skald, Sif, Knut, and Prospector 5, which were transitioned into and between contract during the quarter, are now fully operational. Together with the soon-to-commence Odin contract, we expect Q3 to average approximately 23 active rigs, and hence adjusted EBITDA to improve significantly from second quarter. Since the last earnings report, we have secured eight contract commitments representing over 2,100 days of additional work. This includes new contract in Asia, West Africa, North Sea, and Americas.

Notably, the rigs Galar and Gersemi in Mexico had their contract extended by two years each and are contracted into 2030. During the quarter, we also successfully refinanced substantially all of our debt while also upsizing our RCF. These transactions extended our maturity, reduced financing costs, and further strengthen our liquidity runway, which Magnus will discuss next. In July, our 50/50 joint venture with our long-term Mexican well construction partner completed the purchase of five premium jackups from Fontis at an attractive valuation and with limited equity commitment. Currently, three of these rigs are contracted, with two of them operating and a third expected to commence operation later in the quarter. Our focus now is deploying the remaining rigs and converting the opportunity pipeline into contracted work.

I will walk you through the market in more color later in the call, but now I will hand the call to Magnus to discuss the second quarter financial results.

Thank you, Bruno. I will now go through some details of the financials for the second quarter. Total operating revenues for Q2 were $232.3 million, a decrease of $14.7 million or 6% compared to Q1. The total operating revenues consisted of $187.7 million in day rate revenue, $32.9 million in bareboat charter revenue, and $11.7 million in management contract revenue. The overall decrease was primarily driven by $21.8 million reduction in day rate revenue, mainly due to fewer operating days and lower average day rates for the rigs Odin, Gunnlod, and Skald, lower recognition of mobilization and demobilization revenue for the Vali, and fewer operating days for the Groa. These decreases were partly offset by increased recognition of mobilization and demobilization revenue for the Grid. The decrease in day rate revenue was partially offset by a $6.3 million increase in bareboat charter revenue due to an increase in operating days.

The total operating expenses were $232.1 million, an increase of $31.1 million compared to Q1. The increase was primarily due to $30.4 million increase in rig operating and maintenance expenses. The largest driver of the overall increase was the Odin, which incurred $22.5 million of costs during the quarter, an increase of $11.1 million compared to Q1. The costs were primarily related to the preparations for its upcoming contract in the U.S. Gulf, including significant repair and maintenance activities. We expect regular rig OPEX once the rig is fully operational to be approximately in the mid-$70,000 per day range. However, we anticipate some additional incremental operating expenses also in the third quarter related to the preparations of between $6 million to $9 million.

In addition to the Odin, the increase in operating expenses were driven by overall costs associated with a higher number of operating days for the Grid, including amortization of deferred costs, expenses related to the five rigs acquired in January from Noble, and an increase in the provision for credit losses. We recognized $10.8 million of credit losses related to a former customer in West Africa, an increase of $4.8 million compared to Q1. Following this additional provision, the receivable from this customer was fully provided for, resulting in a net zero receivable balance as of June 30th. The total operating expenses also includes a $5.1 million increase in fuel costs due to higher fuel prices and rigs transitioning between contracts and a $2.2 million increase in insurance costs related to the ongoing conflict in the Middle East.

Moving to other non-operating income in Q2 was $6 million related to compensation received to remove certain operating restrictions associated with the sale of a rig in a prior period, with no comparable income in Q1. Total financial expenses net were $236.5 million, an increase of $173.8 million compared to Q1. This increase was primarily related to our refinancing during the quarter as we recognized $176.3 million loss on the extinguishment of the senior secured notes due 2028 and 2030, and the partial extinguishment of our convertible bonds due 2028. The loss on debt extinguishment consisted of $123.7 million in redemption premium payments and $52.6 million from the derecognition of the unamortized portion of deferred finance charges associated with the repaid facilities.

Net loss for Q2 was $241.4 million, an increase in loss of $212.4 million compared to Q1, and adjusted EBITDA was $43.8 million, a decrease of $44.7 million compared to Q1. Turning to liquidity, cash and cash equivalents as of June 30th were $223.6 million, a decrease of $22.4 million from March 31st. In addition, we had $250 million of undrawn available borrowings under our revolving credit facility, resulting in total liquidity of $473.6 million at the end of the quarter. Net cash used in operating activities for Q2 was $21.8 million. This includes $115.8 million of cash interest payments and $15.1 million of income taxes paid. Net cash used in investing activities was $2.3 million, which related to $8.3 million spent on additions to jackup rigs, primarily long-term maintenance costs and capital additions, partially offset by the $6 million proceeds received as noted earlier in non-operating income.