Borr Drilling faces challenging financial situation amid payment delays in Mexico

Offshore drilling contractor Borr Drilling is facing a very challenging financial situation in 4Q and going into 2021 amid difficult market environment combined with payment delays for its rigs working for the Mexican oil giant Pemex.

Borr Drilling has five rigs operating for Pemex offshore Mexico.

According to its report on Monday, during the third quarter of 2020, Borr has had several interactions with Pemex regarding collections and the need for more timely payments.

The rig owner had a meeting in August with the full top management of Pemex, which resulted in strong assurances and commitments about future payments.

The situation improved substantially. However, Borr has recently experienced a slowdown in payments from Pemex causing operational challenges.

To remind, in 2019, Borr entered a new business in Mexico, by participating in four joint ventures (JVs), in which Borr has a 49 per cent ownership.

Two of the JVs provide Integrated Well Services (IWS) and the other two Joint Ventures provide contract drilling services to the IWS business on fixed day rates. IWS in turn provides integrated well services to Pemex.

The Borr drilling rigs used in these integrated well services are the Grid, Gersemi and Odin in Cluster 2, and the Galar and Njord in Cluster 3.

During the third quarter of 2020, Borr’s IWS JVs worked on a total of 8 wells, out of which 3 wells have been completed and are producing hydrocarbons.

In August this year, the IWS JVs agreed to a payment plan with Pemex, which helped to reduce the outstanding billings and improve the liquidity of the JVs and consequentially for Borr.

During the third quarter of 2020, all of the IWS Joint Ventures overdue balances with Pemex as of 30 June 2020 were paid, and the IWS Joint Ventures collected a total of $109.3 million.

As of 30 September 2020, the IWS Joint Ventures had an outstanding receivables balance with Pemex of $41.1 million, of which $40.7 million was overdue and has not been paid.

In addition, the IWS Joint Ventures had unbilled receivables, representing work performed but not yet billed, of $133.1 million.

Excluding the distribution rights of 49 per cent of the profits, Borr’s receivables from the Mexico operations at the end of September were $34.5 million, which will be settled as the project progresses and wells are completed and as Pemex resumes the normal payment schedule.

With oil demand recovering at a fast pace since April 2020 and stabilization of the oil price in sight, bolstered by news on vaccines and OPEC+ discipline, the recovery in demand for shallow water development and infill drilling is expected, Borr said.

Borr further stated: “We are already seeing early signs of this recovery, with tendering levels within the quarter returning to those experienced throughout 2019 and pre COVID.

“This increased tendering activity is focused in three different geographic areas (North Sea, Africa and South-East Asia). This confirms both the low breakeven for shallow water developments and a positive demand outlook for the jack-up segment”.

Taking a closer look around the globe and starting in South-East Asia, while the near term remains challenging, a number of tenders with start dates in the second half of 2021 have emerged among the regions independent IOCs and NOCs.

These programs are for multiple high-specification modern assets with multiyear commitments and Borr Drilling believes it is well-positioned to benefit.

Activity in the fourth quarter and in the first half of 2021 will continue to be impacted by the capex reductions oil and gas companies have had to make as a result of the lower oil price. Borr anticipates increased activity levels as oil prices approach $50/bbl.

According to Borr, there are several factors contributing positively to the shallow water offshore jack-up business.

Firstly, oil demand is expected to increase significantly, to the extent that the forecasted 2021 demand growth will be the largest increase ever according to the International Energy Agency.

While spare capacity is available in some parts of the world, Borr thinks there needs to be a realization that there has been multiple years of low investments in the sector, affecting both production decline in existing fields as well as severely limiting the start-up of new projects, as is evidenced by the low number of FIDs taken in the last years.

Secondly, almost 80 per cent of the shallow water offshore jack-up market is operated by National Oil Companies and they have the opportunity to regain market share in the oil market and have plenty of quick payback resources left to develop.

The challenging business environment of the last years in combination with the Covid-19 pandemic has been very difficult for the offshore drilling industry, causing several companies to file for bankruptcy protection and other forms of financial restructuring.

Borr believes that the offshore drilling industry will likely change significantly during the next 12-18 months.

As a result of this difficult market environment, combined with payment delays in Mexico, a large amount of debt and significant newbuild obligations, the company continues to face a very challenging financial situation in the fourth quarter and going into 2021.

The company is in specific dialogue with its creditors, with the intention to extend its liquidity runway. There is no certainty that these negotiations will succeed.

Successful execution of the plan will materially strengthen the company’s financial flexibility, which should benefit both creditors and equity holders in order to attract new capital and create a platform for consolidation.

The increased security and reduced risk should position the company to give a solid return to the shareholders as the market recovers.

It is also worth mentioning that Borr booked revenues of $59.2 million in 3Q 2020 compared to revenues of $84 million in 2Q 2020.

This decrease of $24.8 million was mainly a result of fewer rigs operating and the realisation of suspension rates on two rigs.

Furthermore, the rig owner reduced its net loss to $61.9 million in 3Q 2020 from the loss of $109.6 million in 2Q 2020.