At the beginning of this month, Borr Drilling (BORR) enjoyed a major upside move together with other offshore drilling stocks. Unlike others, Borr had a fundamental catalyst for upside – the company managed to complete a minor restructuring with dilution but no wipeout of the common equity. Now that the dust has settled and offshore drilling stocks are slowly trending down as market conditions remain ultra-tough, it’s high time to evaluate Borr’s chances to get through the current crisis.

In the restructuring, Borr deferred the delivery of five newbuild jack-ups until mid-2022, deferred certain interest payments of $60 million, deferred debt amortization in 2021 of $65 million and got relaxed covenants until the end of 2021. To get this deal, Borr conducted a $30 million equity offering, selling 46.2 million shares.

At the end of the first quarter, Borr had $13.2 million of cash and $93.8 million of restricted cash, so the company really needed a capital infusion (in the second quarter, Borr sold two jack-ups for $15.8 million). Now that the company has eliminated near-term liquidity concerns and amended covenants until the end of 2021, it has two main problems to solve. The first one is to keep current rigs busy, while the second one is to deal with debt in 2022.

Not surprisingly, Borr was very happy with the deal: “We are extremely pleased with the support given to the company by all stakeholders. The amended financing package gives a required cash breakeven bareboat contribution in 2021 at only around $20,000 per rig based on just 12 rigs in operation.”

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Currently, Borr has 12 rigs in operation while 6 newbuild rigs have been activated, so the company wanted to point out the potential upside. However, the first task is to keep those 12 rigs busy, which may be a challenge in the current environment. Four rigs – Idun, Njord, Frigg and Ran – have contracts ending in September–December 2020. These rigs will have to find new jobs which will likely come at very modest day rates. Currently, Bassoe Offshore estimates that a day rate for a premium jack-up is $75,000.

This month, Bassoe has not reported any new jack-up contracts while it recorded terminations for Grupo R’s Cantarell III and Shelf Drilling’s (OTCPK:SHLLF) High Island IV (12-month suspension) and Trident 16. The recent upside on the oil price front will not change the near-term dynamics of the jack-up market since oil companies are so shocked by the coronavirus pandemic and the long-term impact it may have on oil demand that they will postpone most serious decisions until 2021. At the same time, the number of available jack-ups is set to increase as rigs roll off their existing contracts, so oversupply will become a problem again.

If Borr manages to deal with the first problem, it will have to reposition itself in 2021 to get ready for the return of covenants and debt maturities in 2022. This will be a major challenge, to put it mildly. Frankly, I do not believe that Borr will need the 5 jack-ups whose delivery was postponed into 2022 as it’s hard to expect that the market will rebound so fast after such a major shock. The shock of 2014–2015 was softer, but it took a lot of time for offshore drilling activity and day rates to start a meaningful rebound. With 11 newbuild jack-ups without contracts (six of them have been activated, 5 have been simply delivered), Borr has more than enough spare capacity to satisfy the market needs when activity returns.

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In order to refinance the debt due in 2022, Borr will have to find work for additional jack-ups while keeping current working rigs busy. It remains to be seen whether the market will rebound fast, but the history of offshore drilling activity and day rates after the previous oil price crash does not provide investors with too much optimism.

Borr made a major step towards saving common equity. The company has plenty of work to do to ensure its viability, and the market must recover in a timely fashion for Borr to stay a viable enterprise with the current capital structure. In addition to the above-mentioned risks, Borr will likely have to deal with a number of competitors who have eliminated their debt in restructurings and can bid low to get rigs working. It’s too early to make the final call and there will be many developments ahead. In the near term, I think that Borr shares may have further room to fall as the recent upside move was purely speculative and the market remains in a total freeze with a complete absence of new contracts.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks.

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