Valaris Limited
Q2 2021 Earnings Call Transcript

Published: 3 Aug 2021

[Operator:]

Good day, everyone, and welcome to Valaris' Second Quarter 2021 Financial Results Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Mr. Darin Gibbins, Vice President of Investor Relations and Treasurer, who will moderate the call. Please go ahead, sir.

[Darin Gibbins:]

Welcome, everyone, to the Valaris Second Quarter 2021 Conference Call. With me today are President and CEO, Tom Burke; Executive Vice President and CFO, Jon Baksht; and other members of our executive management team. We issued our press release, which is available on our website at valaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements.

[Thomas Burke:]

Thanks, Darin, and good morning, everyone. Welcome to the call, and thank you for your interest in Valaris. Today is the first quarterly earnings conference call for Valaris Limited. As you know, the company emerged from financial restructuring a little over 3 months ago. During today's call, I will provide a brief overview of Valaris and then provide some commentary on the current state of the offshore drilling market. I will then discuss recent Valaris contract wins, rig reactivations, our joint venture with Saudi Aramco and then comment on the overall industry landscape. At the end of my comments, I will hand the call over to Jon Baksht, our CFO, for a financial update. Valaris emerged from financial restructuring early this year on April 30, and it's been more than 15 months since our last quarterly conference call. Therefore, I will take a few moments to provide an overview of the company and to highlight why Valaris represents a compelling investment opportunity. Valaris has the largest fleet of rigs in the offshore drilling business. More importantly, the company has the highest quality fleet in the industry, a statement supported by independent third-party rig rankings with half of our fleet of 60 rigs ranked in the top quartile of assets globally. In addition, Valaris has an industry-leading operational platform underpinned by strong values and a purpose-driven culture. Valaris is focused on delivering operational excellence to its customers achieved through the 3 elements of our operational excellence framework

[onathan Baksht:]

Thanks, Tom, and good morning, everyone. First, I'd like to echo Tom's sentiment that it's great to be back speaking to everyone on our first quarterly conference call since emergence, particularly given the positive momentum we're seeing in the market and specifically for Valaris. The volume of recent contract awards and associated backlog, particularly for the floater fleet, will help to lay the foundation for an expected improvement in financial results and cash generation in 2022 and beyond. In our most recent fleet status report published yesterday, you can see an encouraging view for floater day rate progression over the next few years with average day rates increasing meaningfully each year. In my prepared remarks today, I'll provide an overview of second quarter results as well as our outlook for third quarter and full year 2021, along with some comments on our new capital structure. I'd also like to highlight our second quarter results press release. We have significantly enhanced the level of disclosure in the press release to provide additional transparency and a simplified trend analysis. You'll find a trailing 5-quarter analysis for the income statement, balance sheet and cash flows as well as supplemental data by asset category for revenue, contract backlog, available and operating days, utilization and average day rates. It includes further visibility into offshore gross margins by asset category. We have broken out onshore support costs that are incurred supporting rig operations which are a part of contract drilling expense on a consolidated basis and include non-G&A items such as our regional support basis. We provided more visibility into the cash generation of the active fleet with breakouts for reactivation, preservation and stacking costs. You'll see these as add-backs to EBITDA or EBITDAR or EBITDARPS, for short. We believe these metrics are helpful for investors as they provide the best proxy for the cash generation of the active fleet. We believe that Valaris has a compelling value proposition built on 4 key elements and that the best way to value Valaris is on a sum-of-the-parts basis. As a result, when discussing our full year 2021 financial guidance, I'll provide separate guidance for each of the 4 elements as well as providing consolidated numbers. The 4 parts of the value proposition are

[Operator:]

. Our first question will come from Connor Lynagh with Morgan Stanley.

[Connor Lynagh:]

Obviously, a lot of debate around your longer-term earnings power comes back to the stacked rigs. So good to see you putting them to work. I guess - just as you look at the remaining stacked rigs, how - can you talk through sort of how you've come up with your reactivation cost estimates? And certainly, we've seen from some competitors reactivation costs have drifted a bit higher versus what they had initially expected. So just curious how convicted you are? And how we might think about how that might change if you reactivate a rig a year from now versus two years from now, et cetera?

[Thomas Burke:]

This is Tom. So yes, I'll give that a first comment and then maybe see if Jon has anything to add. So when we preserve a rig, we have a detailed preservation plan, which is quite considerable, and it also contemplates the reactivation of the rig in significant detail step by step. And the - and typically, we stop the special survey on some components of the rig through the class society, not all, but some components. And our project group does reviews of these activation plans and we do inspections of the rigs. And as you know, some rigs, we actually have crews on, even though they're preserved, we have crews on them on full time. And so we are continually updating those, the activation plans, particularly of the drillships. And so I would say that we do have - we do feel good about the cost that we've given out. It varies by rig. The cost that we give out does not include the mobilization, which, of course, will vary depending on where we're taking the rig. And finally, I'd say that over time, the reactivation costs will go up and - but not tremendously. So Jon, do you have anything to add to that?

[Jonathan Baksht:]

Maybe just a couple of other points just to highlight for Connor that if you look at the 9 floaters that we have stacked today, all but 2 of them have been stacked for less than 18 months. And so as you look at the estimates and the duration, to the part that you mentioned in your question, yes, the longer that a rig is stacked, the more expensive it will be to reactivate. We're reactivating the DS-16 with today's announcement. The DS-11 will require - it's a bit of its own animal, given the 20,000 upgrade. So that will take some time. But I would point out that once - now that DS-11 and DS-16 are spoken for, we have 5 additional drillships that are ranked in either Q1 or Q2 of rig ranking quartiles. And so they are very attractive rigs and have not been stacked for very long. And so from a marketability standpoint, if we were to reactivate those in the near term, near to medium term, we would expect the reactivation cost to be on the lower side. And then I'd also just add that today, our active fleet is - of drillships is 100% utilized. And so if we're looking at additional opportunities for contracting, we do have available capacity in a stacked fleet with very high-quality rigs.

[Connor Lynagh:]

Sort of related and also, I guess, extends to the ARO newbuilds. But given that you are sort of tapping the supply chain a bit more and I assume, buying new components as well as steel. Just curious if you could discuss if, to what extent, it's occurring at all, you're seeing inflation affect reactivation costs and/or the expected newbuild costs at ARO.

[Thomas Burke:]

Well, let me think and I'll answer that. So on the first 2 rigs, we clearly have locked in pricing and those rigs are well under construction. So there's no real - there's no - and they're turnkey from the shipyards, so there's no cost inflation on those. For rig 3 and 4, I think it's yet to be determined because we've gone out - or rather I'd say ARO has gone out to the shipyard and they're in the process of reviewing those. I would say that there are - as you know, Connor, there aren't many new build programs where OEMs can put new equipment in the market. So people want the work. So we haven't seen any significant pricing changes yet on the newbuild program at ARO, but it's probably a little premature to say as we haven't seen the pricing on rig 3 and 4 yet.

[Connor Lynagh:]

Got it. And that comment that you haven't really seen a lot of component inflation would hold for the contemplated reactivations as well?

[Thomas Burke:]

Yes, we've seen some inflation. But actually, it's much around inflation as it is lead times. So on certain components, for example, drill pipe. And if you want it quickly, it will be expensive. But if you order it ahead of time, the pricing hasn't moved that much. So - and a lot of the reactivation isn't actually replacing equipment. It's on preserving it.

[Operator:]

Our next question will come from Greg Lewis with BTIG.

[Gregory Lewis:]

I was hoping we could talk a little bit about - congrats on a lot of these, the few multiyear contracts you've been able to kind of cobble together here in the last couple of months. Do you get the sense that like - obviously, these were competitive bidding processes? Do you get the sense that a lot of this has to do with - obviously, you guys - these rigs are all high-quality rigs, but is it almost like, hey, with that Chevron contract, we were already there and kind of that gives us kind of - we're in the catbird seat, and with that, we're able to maybe push pricing a little bit higher just because of the transition to bring in a new driller would cost more than market rates? Is that kind of the right way to think about it? Or it's more competitive and that really maybe is not that real advantage of being there already?

[Thomas Burke:]

I'd say on the Chevron example, we were already there and the rig was performing well. So we were on a shorter-term contract, as you know, but it was well - it was working well. And I think Chevron - and we actually had an opportunity for that rig to go somewhere else. So we went to Chevron and talked to them about it. They're really pleased with the performance, and we agreed an improved rate, quite significantly improved rates. So it's definitely - there is an incumbency advantage there for sure on the Chevron contract.

[Gregory Lewis:]

Okay. Great. And then just pivoting a little bit. Clearly, there's a lot of discussions around M&A in the space. It's interesting, I mean, you guys clearly during the previous cycle were pretty active in M&A. It seems like for now, maybe Valaris, at least when you see the media news, is maybe sitting this out. Tom, could you talk a little bit about that? Is that maybe a function of you're looking at the valuation of your stock and kind of just - kind of curious, maybe you guys are active in doing the diligence and maybe the media is just not picking it up? Or is it just kind of Valaris is approaching at least this part of the cycle a little differently than it has maybe in the past?

[Thomas Burke:]

Sure. I'll give you some comments on that, and then I'll ask Jon to make some comments as well. So when I think about our history on M&A, we have - do have quite a track record with the Pride, the Atwood acquisitions and the Ensco Rowan merger. So we know how to do M&A, and we've got the right tools, and we certainly know how to do it. We are only out of Chapter 11 sort of 90 days or so. So definitely, it's sort of early days yet. But I would say, as far as the Board of Directors and the company, I think the absolute focus on driving shareholder value. And we are - we will look at things. We'll contemplate - there's a program inside the company where we look at a lot of stuff, but really focused on shareholder value. And so if we think it will drive shareholder value, we will be all over it. And if we don't think it will, then we certainly would stand back. But certainly, I wouldn't say that we are stood back from any kind of process. We're certainly looking at lots of opportunities, as you would expect us to be, but just focused on value creation for our shareholders. Go ahead. Jon's not going to make a comment on that. Go ahead, Greg. Other questions?

[Jonathan Baksht:]

I was just going to - I don't have anything really to add, Tom. I think you covered it - covered it well. To use your words, Greg, sitting this one out. I think we're not sitting this one out, but we are going to be disciplined in how we evaluate opportunities. And we are going to - and as Tom mentioned, the Board is very focused on driving shareholder value. So the opportunities we look at will certainly fit into that category, and we'll evaluate them. That will be disciplined.

[Operator:]

Our next question will come from Fredrik Stene with Clarksons Platou Securities.

[Fredrik Stene:]

Fredrik here from Clarksons. Congratulations on these new long-term contracts. So I was just - even though you have touched a bit upon it already, I was wondering, in your discussions with customers, and now I'm talking particularly about the DS-11 and DS-16 and potentially other things you have going on with your stacked assets. Have you been experiencing any pushbacks just due to the fact that these assets have been stacked? Or is this relatively short stacking period that you've had, many of them being really no obstacles at all. And I guess the answer is partially yes, since we've gotten new contracts, but it would be interesting to hear if you've experienced any differences between whatever assets you've bid, et cetera, around that. Just trying to get a sense on what customers are willing to take at this point.

[Thomas Burke:]

Yes, Fredrik. It's good to talk to you as well, and thanks for coming on the call, Fredrik. So I'd say this just at a high level, when we think about what the customers want, certainly a hot rig, a warm rig is more attractive, perhaps, all things being equal in a preservation stacked rig. However, our customers are pretty sophisticated, and they've got some very experienced operations people that go out and inspect rigs and look at plans. And so when we talk to them about when we bid on contracts, we do lay out for what the reactivation plans are and give them confidence in contracting the rigs. We look at our track record, show them what we've done and talk them through the steps and it gets them comfortable. I'd also think that the specific asset and the operator's experience of the asset also has - and has a way into the decision. So if customers have actually used a rig before and feel comfortable about it, then they will also - even though it's preserved, they'll have an interest in using it again. I think I really sort of covered it.

[Fredrik Stene:]

That's super helpful. Just a final one for me. Touching upon ARO. You - I think from my own discussions with investors, people really appreciate a higher degree of disclosures as you have done now recently trying to turn what you often talk about into something more tangible and understandable. So I was wondering - I'm sorry if you mentioned it, but I had phone trouble earlier. Have you kind of figured, now that you - or on your balance sheet is in proper shape this shareholding loan and the way that you're kind of financially exposed to ARO. Is there any plans there to potentially pay out and even there refinance that shareholder loan or something like that, just to try to, I guess, make value in that pocket more reasonable?

[Thomas Burke:]

Yes. So Fredrik, you are going in and out a little bit there, but I think I got the gist of your question. I will repeat it back to you. So as we think about - as you think about ARO, are we thinking about a dividend or paying down the shareholder notes to help drive Valaris shareholder value. It was coming in and out a little bit, Fredrik. But that's the question, right?

[Fredrik Stene:]

Yes.

[Thomas Burke:]

Okay. So what I would say with ARO is, certainly, the company is just 4 - 3.5, 4 years old. So it's early in its history. And I would also say that we are - and but it is performing well, and Jon talked through its financial performance. It does have a newbuild program in front of it. And certainly, we are about to - as I mentioned in my remarks, we're about to move from the yard in the UAE to a yard in Saudi Arabia. So that's a big change. But I think that the company is well positioned and firing on all cylinders. And certainly, I think there's a desire amongst the shareholders to put in place an appropriate capital structure, and we are certainly having conversations with Saudi Aramco to that end. And Jon is on the Finance Committee with Saudi Aramco, the ARO Drilling Finance Committee, Saudi Aramco finance executives. So I would say that there's certainly a desire to look at the capital structure. Having said that, we are looking at it carefully and there aren't any immediate plans for any shareholder - no paybacks or anything like that. But certainly, something we're very interested in exploring.

[Operator:]

There are no further questions at this time. I will turn the call over to Tim Richardson, Director of Investor Relations, for any closing remarks.

[Tim Richardson:]

Thanks, Matt, and thank you to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our third quarter 2021 results. Hope you have a great rest of your day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.