Valaris Limited (NYSE:VAL) Q4 2023 Earnings Call Transcript February 22, 2024

Valaris Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Valaris Fourth Quarter 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. Today, we are experiencing national AT&T coverage Issues. [Operator Instructions] I would now like to turn the conference over to Darin Gibbins, Vice President of Investor Relations & Treasurer. Please go ahead.

Darin Gibbins: Welcome, everyone, to the Valaris fourth quarter 2023 conference call. With me today are President and CEO, Anton Dibowitz; Senior Vice President and CFO, Chris Weber; Senior Vice President and CCO, Matt Lyne 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. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations. As a reminder, last week, we issued our most recent Fleet Status Report, which provides details on contracts across our rig fleet. An updated investor presentation will be available on our website after the call. Now, I’ll turn the call over to Anton Dibowitz, President and CEO.

Anton Dibowitz: Thanks, Darin, and good morning and afternoon to everyone. During today's call, I will begin with an overview of our performance during the quarter, then provide some high-level commentary on the outlook for the offshore drilling market and finish with an update on our capital return program. I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and provide an overview of our recent contracting success and our contracting outlook for 2024. After that, Chris will discuss our financial results and guidance before I wrap up the call with some closing comments. Before I discuss the quarter, I want to highlight some key points about our business that we will cover in more detail during this call.

First, we remain confident in the strength and duration of this upcycle and the outlook for Valaris is positive with increasing demand and constrained supply tightening the market. Second, we continue to execute on the commercial front with nearly $3 billion of new contract backlog secured during 2023 at meaningfully improved day rates. Today, we sit with total contract backlog of more than $3.9 billion and nearly 60% increase from 12 months ago. And our contracted revenue coverage of more than 90% in 2024 underpins the meaningful improvement we expect in this year's financial results. Third, we are maintaining our 2024 EBITDA guidance range of $500 million to $600 million. And finally, we continue to demonstrate our commitment to returning capital to shareholders.

We repurchased $200 million of shares in 2023 and we are now increasing our share repurchase authorization from $300 million to $600 million. Starting with operations. Operating safely and efficiently remains our top priority and we ended the year with positive momentum with the fourth quarter safety performance being the strongest of the year. We remain focused on continued improvement and I would like to thank all our offshore crews and onshore personnel for their dedication to following our safe systems of work and keeping safety top of mind wherever we operate around the world. Of particular note, we had several rigs celebrate safety milestones during the quarter. And I'd like to congratulate the VALARIS Norway 72, 110 and 115 for each reaching three years without a recordable incident, a fantastic achievement by these teams.

We're equally proud of VALARIS 110 for being award TotalEnergies' and North Oil Company's Global jackup Rig of the Year, a great example of our focus on safe and efficient operations and our collaborative approach to working with our customers. I also want to congratulate the entire Valaris team for the successful reactivation of VALARIS DS-8. The team completed the reactivation and executed a best-in-class importation into Brazil and customer acceptance with Petrobras, enabling the rig to commence its contract ahead of schedule. This marked the fifth drillship reactivation that we've completed since early 2022 and our second during 2023 following the startup of DS-17 in September. We continue to make good progress on reactivating DS-7 and look forward to adding another drillship to the active fleet later this year for a 2.5 year contract offshore West Africa.

Our industry-leading ability to execute these complex projects has been an important part of our growth story and a key driver for the meaningful improvement that we expect to see in our financial results in 2024 and beyond. Moving to our financial performance for the quarter, we generated adjusted EBITDA of $58 million and adjusted EBITDAR, adding back 1x reactivation costs of $96 million. Chris will provide further details on our financial results and guidance a little later. Turning our attention to the market. Commodity prices remain supportive for continued investment in long cycle offshore projects with the five-year brent forward price around $70 per barrel, a level at which approximately 90% of undeveloped offshore reserves are expected to be profitable.

In addition, growing global demand for hydrocarbons means that these barrels will be needed to meet the world's energy needs. According to data from riStat [ph], offshore upstream CapEx is expected to increase by 10% in 2024 and at a compound annual growth rate of 6% over the next three years. The floater market continues to develop positively. This is evident in the customer activity we are seeing with a growing pipeline of opportunities that are providing increased term with longer lead times, a great sign for the duration of the current upcycle. However, as we mentioned in our previous quarterly call, considering lengthening contract lead times, customer acquired upgrades and repositioning rigs for work, we would expect to see some gaps in schedules across the industry during 2024.

Looking at pricing, leading edge day rates continue to be in the mid to high-400s as demonstrated by our two most recent drillship fixtures and we believe that they will continue to move higher over time as the remaining stacked and newbuild capacity continues to diminish and the total supply and demand balance further tightens. We believe that 2- to 3-year programs are likely to be awarded at or close to leading edge rates, while we may see lower rates for some of the 5-year plus opportunities as some contractors may be willing to accept a lower rate to secure long-term duration and backlog. Similarly, we may see somewhat lower rates on shorter term gap fill jobs to avoid rigs becoming idle. For Valaris, we are focused on maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best contract economics possible in each unique bidding situation.

Our recent purchase of newbuild drillships VALARIS DS-13 and DS-14 at highly attractive prices demonstrates our confidence in the strength and duration of the upcycle. And we will be disciplined in waiting for the right opportunities to reactivate these rigs and VALARIS DS-11. Moving to shallow-water. While the recent announcement from Saudi Arabia has created some uncertainty, we remain positive on the outlook for the jackup market. First, we expect that Saudi Arabia will continue to be the largest jackup market in the world for the foreseeable future. We understand the recent announcement reflects a change in the timing and pace at which Saudi will develop their resources given that they currently hold about 3 million barrels of spare capacity.

The delay in increasing maximum sustainable capacity from 12 million to 13 million barrels per day is expected to be focused on the expansion of just two oilfields, Safaniyah and Manifa, and we do not think it changes the kingdom's long-term view on the need for these resources given their expectations for growing oil demand. Second, the global jackup market is extremely tight with active utilization approaching 95% and the contracted rig count at its highest level in nearly nine years. And we continue to see incremental demand coming to market outside of Saudi Arabia, which Matt will talk about a little bit later. And finally, approximately 90 contracted jackups representing more than 20% of the contracted global jackup fleet at least 40 years old, meaning it is likely that some of these rigs will be retired and the overall number of jackups in the global fleet will decline further over time.

Regarding our business, we have eight rigs leased to ARO, our unconsolidated joint venture with Saudi Aramco with an additional two rigs scheduled to commence leases this year. For context, the charter revenue on all our lease rigs accounts for just 5% of our contract backlog. Aramco and the Kingdom remain fully committed to ARO, including its newbuild program, which is a cornerstone project of the Saudi Vision 2030 program. And we think that the recent Saudi announcement will have minimal, if any, impact on our business. Moving now to an update on our capital return program. We expect to deliver significant earnings and cash flow growth over the next few years as we reprice rigs to market day rates and reactivated rigs go back to work. And we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it.

We continue to demonstrate our commitment to returning capital to shareholders. Last year, we authorized the $300 million share repurchase program and returned $200 million to shareholders And we are now increasing the authorization to $600 million, providing increased capacity to opportunistically repurchase shares. Now, I'll hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our recent contracting success and our contracting outlook for 2024.

Matt Lyne: Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of the fourth quarter, we have secured new contracts and extensions with an associated contract backlog of approximately $1.5 billion. These awards have increased our total backlog to more than $3.9 billion, representing an almost 60% increase over the past 12 months. More than $1 billion of this new backlog is for the floater fleet, including multi-year contracts for drillships, VALARIS DS-4 and DS-16. DS-4 was awarded a nearly 3-year contract with Petrobras Offshore Brazil and DS-16 received a 2-year contract extension with Oxy in the U.S. Gulf of Mexico. Importantly, these contracts are expected to contribute to a meaningful improvement in financial results with day rates transitioning from legacy rates in the low 200s to leading edge day rates.

We are also awarded several new jackup contracts across the North Sea, Trinidad and Australia, which combined added nearly $500 million in backlog, demonstrating the broad based strength of the shallow water market. Most notably, we received a 3-year contract extension for VALARIS 120 with Harbour Energy in the UK North Sea. This extension is expected to commence in the third quarter of 2025 at a day rate that is meaningfully higher than the current spot rates, indicative of an improving North Sea jackup market. Moving now to some commentary on our major markets, starting with floaters. The contracted benign environment floater count reached 123 during the fourth quarter, its highest point since late 2016 and utilization for the active sixth and seventh generation drillships was at 93%.

We continue to see a strong pipeline of opportunities for floaters and we are currently tracking approximately 30 prospects, each with an expected duration of greater than one year that are estimated to commence before the end of 2026. We anticipate that approximately half of these opportunities will need to be met by either incremental reactivations of stacked and stranded newbuilds or active rigs moving regions. This compares favorably to a pool of approximately 10 drillships across the stacked and newbuild fleet, that are considered likely reactivation candidates in today's market. In terms of timing, we estimate that a handful of these 30 opportunities will commence later this year, with the remainder likely to be evenly weighted between 2025 and 2026.

We continue to see Brazil being a key driver of ultra deepwater floater demand, and Petrobras currently has opportunities for five rigs across its Sepia and Roncador developments outstanding. In addition, we anticipate that Petrobras are likely to come to market for additional rigs beyond the two active tenders, and we believe that these opportunities combined could increase the floater count offshore Brazil by up to three additional rigs. We are currently tracking more than a dozen opportunities off the coast of Africa. We are excited by the prospect of increased activity in this region with several large IOCs expected to add rigs over the next few years, including some long-term programs that could cover multiple operating locations that may be attractive opportunities for both our active fleet and the DS-11, DS-13 and 14.

Brazil and Africa combined account for approximately two-thirds of the total opportunities with the remainder spread across other parts of South America, Southeast Asia and the Gulf of Mexico, and primarily with large IOCs. On the jackup side of the business, demand continues to steadily increase with the contracted jackup count now at its highest level in almost nine years. As a result, active utilization for jackups is approaching 95%, with leading-edge day rates firmly established above 150,000 in several regions. We expect to see solid demand growth over the next few years in the broader Middle East, Southeast Asia and West Africa that could absorb in the range of 10 to 15 incremental rigs. The strength of the global jackup market is evidenced by some of our recent contract awards, including a second contract for the VALARIS 247 offshore Australia at a market leading rate of 180,000 per day and a 300-day contract for the 249 offshore Trinidad at approximately 163,000, representing a 30% increase over its current day rate.

We have had great contracting success in North Sea, having secured new contracts and extensions with associated backlog of more than $420 million since the beginning of fourth quarter. Contract awards for the VALARIS Stavanger 121 and 123 mean that our active North Sea fleet is now fully soldout for 2024, and we are in active discussions for opportunities commencing in '25 and beyond. The 3-year extension for VALARIS 120 that I mentioned earlier provides a good indication of the strengthening commercial environment in the UK North Sea from 2025 onwards. Our contract wins since the start of the fourth quarter have further improved our 2024 contract coverage. On the floater side, we now have just 2 of our 13 active floaters, the DS-10 and the DPS-5 with near-term contract availability.

DS-10 is due to complete its existing contract with Shell Offshore Nigeria towards the end of first quarter, and we believe the rig is well placed for long-term opportunities in the region that are expected to commence in late 2024 or early 2025. In the interim, we are actively pursuing short-term opportunities that could fill some of the potential gap. DPS-5 is currently mobilizing for its 110-day contract with Eni Offshore Mexico. We are in active discussions regarding opportunities in the region, but anticipate the rig will experience some idle time in the second half of the year. On the jackup side, our remaining contract availability in 2024 is down to just two rigs, the VALARIS 247 and the 144. Recently, we have seen encouraging developments around environmental permit approvals for projects offshore Australia.

And as a result, we now have good line of sight into future work for the VALARIS 247. For the VALARIS 144, we continue to pursue near-term opportunities in the Gulf of Mexico, while looking for longer-term opportunities outside of the region. Finally, we are in advanced discussions with BP related to contract extensions for Mad Dog and Thunder Horse, the two production platforms that we manage in the U.S. Gulf of Mexico. And we expect to finalize these extensions soon. In summary, we are extremely pleased with our contracting success in 2023, adding nearly $3 billion in new contract backlog during the year at meaningfully improved day rates. We remain laser focused on filling our remaining uncontracted days in 2024 and securing attractive contracts for work commencing in 2025 and beyond.

I will now hand over the call to Chris to take you through the financials.

Chris Weber : Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of the fourth quarter results, our outlook for the first quarter 2024, and I also will provide updated guidance for the full-year 2024. Starting with our fourth quarter results. Revenue was $484 million, up from $455 million in the prior quarter and adjusted EBITDA was $58 million, up from $40 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense, was $96 million, up from $91 million in the prior quarter. Adjusted EBITDA increased primarily due to more operating days across the fleet and lower reactivation expense. In the fourth quarter, we had more operating days for VALARIS DS-17 which commenced its contract with Equinor offshore Brazil in early September following its reactivation.

We also had more operating days for jackups VALARIS 107, 249 in the Norway, all of which incurred some idle time during the prior quarter. These benefits were partially offset by fewer operating days in the fourth quarter for VALARIS DS-12 due to mobilization and a brief shipyard visit between contracts, as well as jackups VALARIS 76 to 123, both of which completed contracts during the fourth quarter and are undergoing contract preparation and planned maintenance work prior to the start of their next contracts. Fourth quarter reactivation expense was $39 million compared to $51 million in the prior quarter, primarily due to lower reactivation expense for VALARIS DS-8, which commences contract with Petrobras Offshore Brazil at year-end, partially offset by higher reactivation expense for VALARIS DS-7, which is expected to commence its contract offshore West Africa in mid-2024.

One item to note is that fourth quarter income tax was a $790 million benefit. This is due to an $800 million non-cash benefit that resulted from a change in valuation allowance for certain deferred tax assets. Given our constructive outlook, we now believe it is likely that we will be able to utilize these assets over time. Cash flow from operations in the fourth quarter was $97 million and capital expenditures were $463 million, including $348 million related to the purchase of newbuild drillships VALARIS DS-13 and DS-14, which is comprised of the purchase price for the rigs and the cost incurred to prepare them for mobilization from South Korea to Las Palmas. We had cash and cash equivalents of $636 million at the end of the quarter. Cash declined by $422 million during the quarter due to capital expenditures, primarily the purchase of DS-13 and DS-14 as well as share repurchases.

These were partially offset by $97 million of cash generated from operations. Our $375 million revolving credit facility remains fully available, providing total liquidity of just over $1 billion at the end of the quarter. In the fourth quarter, we repurchased $50 million of shares, taking our full year repurchases to $200 million, representing 3 million shares or approximately 4% of the total outstanding share count. Now, I'll provide a brief overview of ARO Drilling's financials. As a reminder, ARO is not consolidated in the financial results of Valaris. ARO EBITDA increased to $39 million in the fourth quarter from $24 million in the prior quarter, primarily due to newbuild jackup Kingdom 1, commencing its maiden contract in November and more operating days for ARO 4001 following some out of service days for planned maintenance during the third quarter.

Moving now to our first quarter 2024 outlook. We expect total revenues will be in the range of $490 million to $500 million, as compared to $484 million in the fourth quarter. Floater revenues are expected to increase due to contract startups for VALARIS DS-8 and DS-12. However, jackup revenues are expected to decrease due to idle time for several rigs, including VALARIS 107, 120, 123 and 247. Three of these rigs are undergoing special periodic surveys and contract preparations prior to the start of their next contracts, including VALARIS 247 which, after leaving the shipyard, will mobilize from the North Sea to Australia ahead of its next job. Each of these rigs are scheduled to commence new contracts before the end of the second quarter. We expect that contract drilling expense will be $430 million to $440 million as compared to $402 million in the fourth quarter.

This is primarily due to the addition of operating costs for VALARIS DS-8 and DS-12, following their recent contract startups, as well as costs associated with the jackup SPS and contract preparation work that I just mentioned. In addition, we rolled out offshore wage increases in certain regions at the beginning of the year. General and administrative expense is expected to be approximately $27 million, up from $24 million in the prior quarter. As a result, we expect adjusted EBITDA to range between $30 million to $40 million, including $25 million to $30 million of reactivation expense for VALARIS DS-7, ahead of its expected contract commencement in the second quarter. CapEx in the first quarter is expected to be $145 million to $155 million.

Maintenance and upgrade CapEx is expected to be approximately $70 million, including upgrades to VALARIS 76 and 108, ahead of their long-term bareboat charters to ARO. Reactivation and associated contract-specific CapEx is expected to be approximately $50 million, including $20 million of reactivation spend that was previously anticipated in late 2023. Finally, newbuild CapEx is expected to be approximately $30 million, primarily related to mobilization costs from South Korea to Las Palmas for VALARIS DS-13 and DS-14. I'll now provide our current financial guidance for the full-year 2024. Consistent with the preliminary guidance provided on the third quarter call, our full-year 2024 guidance does not account for any incremental reactivation for contracts that have yet to be executed.

We currently forecast revenues of $2.3 billion to $2.4 billion, contract drilling expense of $1.65 billion to $1.75 billion and G&A expense of $105 million to $110 million. As Anton mentioned, we are maintaining our full year adjusted EBITDA guidance of $500 million to $600 million. And this includes reactivation expense of approximately $40 million. At the midpoint, this is approximately 4x higher than 2023 EBITDA, with the increase primarily driven by contract start-ups for reactivated drillships, rigs rolling to higher day rate contracts during the year and increased earnings from our North Sea jackup fleet. Given our contract wins in the fourth quarter, we now have 92% of our 2024 revenue contracted at the midpoint of our revenue guidance range.

As we look across the year, revenues and EBITDA are expected to increase meaningfully in the second quarter compared to the first quarter, primarily due to several jackups starting new contracts, following SPS and contract preparation work. Further improvement is expected in the second half of the year, primarily due to VALARIS DS-7, which is scheduled to start its contract late in the second quarter, following its reactivation and certain rigs rolling to higher day rate contracts. Full-year 2024 capital expenditures are expected to range from $390 million to $430 million compared to our prior guidance of $325 million to $365 million, inclusive of the newbuild CapEx we announced late last year upon delivery of DS-13 and DS-14. The increase is primarily due to contract preparation costs, which are largely reimbursable and the timing of spend.

Maintenance and upgrade CapEx is expected to be approximately $290 million, with about $55 million being reimbursable. This covers SPS and contract preparation requirements as well as capital spares. Like 2023, 2024 is expected to be a heavy year for jackup SPS projects. The $40 million increase in maintenance and upgrade CapEx compared to our preliminary guidance is largely related to contract preparation work for VALARIS DS-4's contract with Petrobras, which we announced in December as well as preparation work for 108’s 3-year bareboat charter with ARO. This incremental CapEx is largely reimbursable through upfront fees. Reactivation and contract-specific CapEx is expected to be approximately $80 million, which is $20 million higher than our preliminary guidance, due to spend that was expected to be incurred in the fourth quarter pushing into 2024.

Finally, we anticipate new build CapEx of approximately $40 million, primarily related to the mobilization of VALARIS DS-13 and DS-14 from South Korea to Las Palmas. That concludes my review of our financial results and guidance. I'll now hand the call back to Anton for some closing remarks.

Anton Dibowitz: Thanks, Chris. I'll conclude by reiterating some of the key points from our prepared remarks. First, we remain confident in the strength and duration of this upcycle, and the outlook for Valaris is positive, with increasing demand and constrained supply tightening the market. Second, we continue to execute on our operating leverage in a disciplined and thoughtful manner, by repricing rigs from legacy day rates to much higher market rates and successfully delivering reactivated rigs with attractive contracts. Our recent contracting success, including the addition of approximately $1.5 billion in new contract backlog since the beginning of the fourth quarter, has increased our contracted revenue coverage to more than 90% in 2024, underpinning the meaningful improvement expected in this year's financial results.

And finally, we continue to demonstrate our commitment to returning capital to shareholders by repurchasing $200 million of shares in 2023 and now increasing our share repurchase authorization from $300 million to $600 million. We expect to generate meaningful and sustained free cash flow over the next few years, and we intend to return it all to shareholders, unless there is a better or more value accretive use for it. We've now reached the end of our prepared remarks. Operator, please open the line for questions.

See also 13 Best Dow Jones Dividend Stocks According to Analysts and 25 Secret Websites to Make Money Online in 2024.

To continue reading the Q&A session, please click here.