At the end of January, Saudi Arabia’s state-run oil company, Aramco, reported plans to halt its intended increase in crude production capacity. Originally, Aramco intended to expand production volumes from 12 million barrels per day to 13 million barrels by 2027. This has potential implications for the worldwide crude oil supply and oil production companies directly exposed to Saudi Aramco, like offshore drilling contractor Borr Drilling (NYSE:BORR). Given the uncertainty, investors may want to monitor the situation and look for a window of stability as a possible entry point for a value play on a solid company.
The market hates uncertainty, and in the days that followed Aramco’s announcement, Borr Drilling’s share price has been depressed by the overhang of anticipated action, dropping roughly 4%. On Thursday, Borr received official notice that one of the three rigs it operates for Saudi Aramco has been suspended, and the stock dropped another 7% immediately on the news. The market may be overreacting (as it has been known to do), as Borr has a lot of positive characteristics.
Jack-up Rigs
Borr Drilling is a global offshore shallow-water drilling contractor for the oil and gas industry. It owns, contracts, and manages modern, high-specification jack-up drilling rigs capable of operating in water depths up to approximately 400 feet. The company has a fleet of 24 rigs (22 in operation, two under construction) across the North Sea, the Middle East, Mexico, West Africa, and Asia.
The offshore rig market is currently displaying favorable conditions, with continued demand outpacing potential growth in supply. A study by Fearnley Offshore predicts that only six out of 15 rigs under construction will enter the market in 18 to 24 months. However, the demand for modern rigs is projected to increase by 20 to 25 units within the same timeframe.
S&P Global’s latest World Rig Forecast also supports this perspective, estimating a global rise in jack-up demand by 36 units by mid-2025, with a significant portion anticipated to be modern rigs.
Borr Drilling’s Recent Performance
Borr Drilling’s Q4 2023 performance surpassed expectations. Revenue was $220.6 million, higher than the predicted $207.86 million, driving an EPS of $0.11, also beating the consensus of $0.06. The company finished the year with a total contract revenue backlog of $1.75 billion as of December 31, 2023.
For 2024, management expects adjusted EBITDA to be between $500 million and $550 million. Considering the midpoint of the projected range, the guidance reflects a 50% increase from the 2023 figure. To date, in 2024, the company has received $82 million in backlog from three new commitments.
Borr Drilling has also successfully completed refinancing its 2025 debt maturities by issuing $1.54 billion of secured notes, with maturities spanning 2028 and 2030. This move solidifies the company’s long-term capital structure.
What is the Price Target for BORR Stock?
BORR stock is down over 19% year-to-date and trades at the low end of its 52-week price range of $5.70-$9.01. It demonstrates negative price momentum, trading below the 20-day (6.51) and 50-day (6.50) moving averages.
The company appears to be relatively underpriced compared to its peers, with a P/S ratio of 1.9x and a P/B ratio of 1.5x. However, knowing how much of that price delta represents Saudi exposure is tough, so I would take this with a grain of salt until more data can be observed.
The company is thinly followed by Wall Street. It is rated a Moderate Buy based on the reported coverage of one analyst. The price target for BORR stock is $10, representing an upside of 71.23% from current levels. However, based on recent events, I expect an updated rating/price target to be issued shortly.
Big Picture on BORR
The recent decision by Saudi Arabia’s Aramco to halt production expansion has stirred global uncertainty, affecting oil production companies like Borr. Yet, despite a temporary stock drop, Borr’s fundamentals remain strong. Despite BORR stock currently trading at a low, the company’s value appears underpriced relative to its peers, posing the potential for an eventual bounce-back.
While investor caution around its exposure to Saudi Arabia may prevail in the short term, the longer-term outlook for Borr points towards a strong recovery and growth. As the dust settles, savvy investors may have an opportunity to pick up a long-term growth stock at a decent value.
