London-based hedge fund Granular Capital revealed new interest in Borr Drilling, saying the offshore driller’s shares could rise as much as 300% or 400%. Granular is the largest shareholder in Borr Drilling, which provides offshore drillships to major companies in the oil and gas industry for fixed-term charters for a fixed fee. The hedge fund’s paper centers on Borr’s fleet of 24 modern jack-up drilling rigs, which are specialized vessels used to sustain oil and gas production in shallow waters. Thiago Mordehachvili, founder and chief investment officer of Granular, said several fundamental market dynamics strengthen the investment case. First, there has been no new jackup rig construction in more than a decade as environmental, social and governance (ESG) concerns have driven banks out of the drilling industry, Mordehachvili said. In addition, approximately one-third of the global jack-up drilling fleet is approaching or beyond retirement age, suggesting that less equipment may be available in the future. “Supply has almost disappeared,” Modhachivili told the Thorne Conference in London on Wednesday. “There have been no new orders in the past decade. Banks have exited the drilling business due to ESG concerns.” Granular also believes that due to lower returns, Low, new jack-up rigs are unlikely to be built in the current economic climate, making the existing fleet more valuable. The fund estimates that even if new rigs cost $300 million each to build, leasing costs for chartering vessels would need to rise significantly from current levels to generate good returns. The price increase will also increase the price of Borr’s existing fleet and increase its cash flow. Borr Drilling, founded in Norway by chairman Tor Olav Trøim and listed on the New York Stock Exchange, currently trades at about $4 a share, down about 45% year to date. Arctic Securities analyst Sebastian Grindheim maintained his $7.50 price target on the stock, which represents an 85% upside from current levels, although he noted that the company’s outlook for the latest quarter was “somewhat dovish” due to customer caution over an oil supply glut. Saudi Aramco, a major player in the industry, has delayed its production growth plans by at least 12 months, leading to the suspension of some contracts. However, Borr also secured three contract extensions, including deals with Malaysia’s ExxonMobil, Thailand’s Valeura Energy and Mexico’s Fieldwood Energy, providing some revenue visibility through 2026. Analysts’ median price target is $6, which represents a 48% upside from current levels. Fearnley Securities analyst Truls Olsen was the most conservative, rising 28%, while Evercore ISI analyst Jason Bandel added 122%. Mordehachvili also dismissed any concerns that the transition to green energy would have a negative impact on Bor in the short to medium term. “We like shallow waters because these are essentially brown fields and the hydrocarbons are much cleaner and cheaper to extract than elsewhere,” Granular’s Mordehachvili told CNBC Pro on the sidelines of the conference. “They will be the last oil to be extracted. . So we are talking about being at the bottom of the cost curve.” Mordehachvili said the market dynamics have become more complicated for competitors because there are also fewer shipyards willing to build such ships. Singapore, which previously built 50% of the world’s jack-up drilling rigs, has converted much of its manufacturing capacity to other uses. The few remaining shipyards with the capacity to build these specialized vessels are turning their focus towards renewable energy projects, as evidenced by Seatrium’s recent transformation following its merger with Keppel Offshore and Marine. However, investors need to be aware of certain risks. This week, Seatrium signed a deal with India’s Cochin Shipyard to build jack-up drilling rigs, potentially lowering costs in the future.
