The past six months have been a windfall for Borr Drilling’s shareholders. The company’s stock price has jumped 114%, hitting $5.54 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Borr Drilling, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Borr Drilling Not Exciting?
We’re happy investors have made money, but we're sitting this one out for now. Here are two reasons there are better opportunities than BORR and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
The size of the revenue base is a way to assess topline, and it tells an investor whether an Energy producer has crossed the line between being a more vulnerable commodity taker and a durable operating platform. Scaled businesses tend to produce and generate revenue from many wells, pads, takeaway routes, and geographies, not just a single field or drilling program.
Borr Drilling’s $1.02 billion of revenue in the last year is pretty small for the industry, suggesting the company is subscale business in an industry where scale matters.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Borr Drilling’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 13.4%, meaning it lit $13.40 of cash on fire for every $100 in revenue.
Final Judgment
Borr Drilling isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 7.7× forward EV-to-EBITDA (or $5.54 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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