Hedge fund bets on a key oil and gas supply chain stock, saying it could rise over 300%
London-based hedge fund Granular Capital has revealed a renewed interest Borr Drilling , saying the offshore drilling company’s shares could increase by up to 300% or 400%. Granular is the largest shareholder of Borr Drilling, which provides offshore drilling vessels for hire to large companies in the oil and gas industry on a fixed-term basis for a set fee. The hedge fund’s thesis centers on Borr’s fleet of 24 modern jack-up rigs – specialized vessels used to maintain oil and gas production in shallow waters. The investment case is strengthened by several fundamental market dynamics, according to Granular’s founder and Chief Investment Officer Thiago Mordehachvili. BORR YTD line First, there’s been no new jack-up rig construction in over a decade as environmental, social, and governance (ESG) concerns have caused banks to withdraw from the drilling sector, according to Mordehachvili. Additionally, about one-third of the global jack-up fleet is approaching or has exceeded retirement age, suggesting a likely decrease in available equipment going forward. “The supply is all but gone,” Mordehachvili told the Sohn Conference London on Wednesday. “There have been no new orders over the past decade. The banks are out of the drilling business due to ESG concerns.” Granular also believes that new jack-up rigs are unlikely to be built in the current economic environment due to low single-digit returns — making the existing fleet more valuable. The fund estimates that even if new rigs are built at $300 million apiece, the rental cost for hiring vessels will need to rise drastically from current levels to yield good returns. An increase will also lift the prices for Borr’s existing fleet, adding to its cash flow. Borr Drilling, founded by chair Tor Olav Trøim in Norway and listed on the NYSE, currently trades at around 4 dollars per share, having declined about 45% year to date. Arctic Securities analyst Sebastian Grindheim maintains a price target of $7.50 on the stock, representing 85% upside from current levels, despite noting “slightly more subdued” outlook comments from the company in the recent quarter due to customer caution about excess oil supply. Saudi Aramco, a major player in the sector, has postponed its production growth plans for at least 12 months, leading to some contract suspensions. However, Borr also secured three contract extensions, including agreements with Exxon Mobil in Malaysia, Valeura Energy in Thailand, and Fieldwood Energy in Mexico, providing some revenue visibility through 2026. The median price target of five analysts polled by FactSet is $6, or 48% upside from current levels. Fearnley Securities analyst Truls Olsen was the most conservative, with a 28% upside, while Evercore ISI’s Jason Bandel analyst had an upside of 122%. Mordehachvili also dismissed any concerns about the transition to greener energy sources having a negative impact on Borr in the near and medium term. “We like shallow water because those are basically brown fields, and much cleaner hydrocarbons than elsewhere, also cheaper to extract,” Granular’s Mordehachvili told CNBC Pro on the sidelines of the conference. “They will be the last oil to be drilled. So we were talking about being the bottom of the cost curve.” The market dynamics have been made more complicated for competitors as shipyards willing to build such vessels have also shrunk, according to Mordehachvili. Singapore, which previously constructed 50% of global jackup rigs, has largely converted its manufacturing capacity to other uses. The few remaining shipyards capable of building these specialized vessels are shifting focus toward renewable energy projects, as evidenced by Seatrium ‘s recent pivot following its merger with Keppel Offshore and Marine. However, there are certain risks for investors to be aware of. This week, Seatrium signed an agreement with India’s Cochin Shipyard to build jack-up rigs, potentially at a lower cost in the future.
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