Borr Drilling: Navigating Near-Term Challenges to Long-Term Gains

The oil services sector is a study in volatility, where near-term risks often overshadow long-term resilience. For Borr Drilling (BORR), a key player in the jackup rig market, investors face a complex calculus: the company's Q1 2025 results highlight credit and operational headwinds, but its modern fleet, improving liquidity, and strategic focus on high-demand regions position it to thrive if it can secure 2026 contracts. Here's why the bulls still have a case—and why Mexico's production recovery remains a critical watchlist item.

Credit Metrics: A Dip Now, But Momentum Ahead

Borr's Q1 2025 results painted a mixed picture. Adjusted EBITDA dropped to $96.1 million from $136.7 million in Q4 2024, largely due to temporary rig suspensions in Mexico and preparations for new contracts. This decline, coupled with a net loss of $16.9 million, has raised concerns about its ability to handle $135 million in debt amortization due in 2026.

Yet, three mitigants stand out:
1. Liquidity Surge: The company collected $120 million in overdue PeMex receivables during Q1, plus an additional $35 million post-quarter, boosting total liquidity to $320 million (cash + undrawn credit). This provides a “runway” to navigate 2026's debt obligations.
2. Operational Turnaround: Rig activity is rebounding. By Q2, 22 of 24 rigs were active, with three suspended PeMex units (Galar, Gerd, Gersemi) back online. This should drive EBITDA growth in H2 2025, supporting Bloomberg's consensus of $460 million for the year.
3. Contract Protections: Most deals include termination-for-convenience clauses requiring compensation for lost EBITDA, reducing revenue uncertainty.

Customer Concentration: PeMex's Sword of Damocles

Borr's reliance on PeMex—a customer accounting for ~35% of 2025 contracted days—is a double-edged sword. The Mexican national oil company's payments were delayed in late 2024, but Borr's recent collections suggest progress. However, PeMex's production decline (down 6% in Q1 2025) underscores the urgency to extend contracts beyond 2025.

Key Catalysts:
- Contract Extensions: Discussions are ongoing to extend five PeMex rigs' terms, which could lift 2026 coverage to 55% from the current 35%.
- Diversification: Borr is pursuing new deals in Thailand (PTTEP), Vietnam (Vietso Petro), and West Africa, reducing overreliance on Mexico.

Market Fundamentals: Jackups' Resilience in a Volatile Oil Market

The jackup rig sector, Borr's core, is proving its mettle. Unlike deepwater or floaters, jackups are cost-efficient for shallow-water production—critical as oil majors prioritize $60/bbl breakeven projects.

Industry Tailwinds:
- Supply Tightness: The global jackup fleet is aging, with Borr's fleet averaging 5 years old (vs. an industry average of 15+). This gives it a competitive edge in securing high-dayrate contracts.
- Demand Signals: ADNOC recently sought two jackups, and Valaris reported new contracts, signaling sector-wide recovery.

Borr's Q1 results reflect this: average day rates rose to $147,000 (+8% vs. 2024), with 2026 targets including $150,000+ rates in Mexico.

Investment Thesis: Hold with a Bullish 12-Month Outlook

Risks to Avoid:
- 2026 Backlog Gaps: If coverage remains below 50%, debt pressures could trigger ratings downgrades.
- PeMex Delays: Further payment issues or production cuts would strain Borr's liquidity.

Why Stay Bullish?
1. Fleet Advantage: Borr's young, high-spec rigs are in demand, especially in Mexico, where PeMex needs efficiency to revive production.
2. Liquidity Cushion: $320 million in cash and credit provide flexibility to weather short-term headwinds.
3. Valuation: At ~3.5x 2025E EBITDA, shares trade below peers like Transocean (5x) and Seadrill (4.5x), offering upside if 2026 contracts materialize.

Conclusion: Monitor Mexico and Contracts—But Stay Invested

Borr Drilling is a story of near-term pain for long-term gain. Investors should hold the stock while watching two metrics:
1. PeMex Production Recovery: A rebound in Mexican oil output would validate contract extensions.
2. 2026 Backlog Progress: A jump from 35% to 55% coverage by year-end 2025 would quell downgrade fears.

With shares down 25% year-to-date and a resilient fleet, Borr offers a compelling risk/reward at current levels. The bullish 12-month outlook hinges on execution—watch Mexico closely.

Risk Disclosure: Oil price volatility and geopolitical risks in Mexico remain key downside factors.