Valaris Ltd. Q2 FY2024 earnings call

Performance Highlights - The second quarter built on a strong start in 2024, with the backlog increasing for the seventh consecutive quarter to over $4.3 billion. - Achieved a fleet-wide revenue efficiency of 99% without a lost-time incident and celebrated multiple safety milestones across rig teams. - Reactivated Valaris DS-7 for a long-term contract offshore West Africa. ### Market Insights - Oil prices have been relatively stable with spot Brent crude above $80 per barrel. Deepwater upstream CapEx is expected to grow at a 9% compound annual growth rate over the next three years. Drillship average day rates have increased, with six fixtures above $500,000 per day. The benign environment jackup market has a 93% marketed utilization, and the North Sea harsh environment jackups are fully contracted for 2024 with limited availability in 2025. ### Financials - Adjusted EBITDA exceeded guidance due to strong operating performance, longer contracts, and favorable cost timing. Cash and cash equivalents stood at $410 million at quarter-end, with a fully available $375 million revolving credit facility.

In the second quarter, adjusted EBITDA reached $139 million, a significant increase from $54 million in the first quarter. When adding back one-time reactivation costs, adjusted EBITDAR was $150 million. For the floater segment, drillship backlog grew nearly 50% over the past 12 months to more than $2.5 billion, and the average day rate in the backlog increased. The jackup segment had a marketed utilization of 93% in the benign environment, with leading-edge day rates north of $150,000 per day. Floater revenues rose due to full-quarter operations of several rigs and higher day rates, while jackup revenues increased because of higher utilization.

Third Quarter Outlook - Total revenues are expected to range from $610 million to $630 million, with adjusted EBITDA projected at $120 million to $140 million. Contract drilling expense is forecasted to be between $455 million and $465 million, and G&A expense is approximately $30 million. EBITDA is expected to be lower due to rigs being idle, cost shifts, and potential impacts from Saudi Aramco contract suspensions. Valaris 249's leg damage is estimated to have a financial impact of $5 million to $10 million. Third-quarter capital expenditures are anticipated to be $90 million to $100 million. ### Full Year Outlook - The full-year EBITDA guidance has been lowered to $480 million to $540 million, with revenue expected to be between $2.35 billion and $2.4 billion. This adjustment reflects the impact of DS-10 and DPS-5, Valaris 249's damage, and Saudi Aramco suspensions. Full-year capital expenditures are projected to be $450 million to $480 million, with approximately $55 million reimbursed through upfront customer payments. The free cash flow profile is expected to improve in the second half of the year.

• Saudi Aramco contract suspensions could adversely impact 2024 EBITDA by up to $10 million. - Valaris 249's leg damage has a financial impact of $5 million to $10 million. - Timing of costs, mobilizations, and demobilizations can affect financial results.

Q: Discuss capital allocation and returning cash to shareholders, as well as thoughts on reactivating DS-14, 13, and 11.

A: Been clear on capital return plans and will return cash to shareholders when generating cash. Still see strong opportunities for DS-13 and 14 with a pipeline of work in the latter half of 2025 and 2026.

Q: Talk about the DS-17 contract and the standby rate.

A: DS-17 is a high-spec asset, and Equinor is a good customer that invested in innovative technology. The standby rate reflects confidence in the rig for future developments, signaling a strong market for high-spec assets.

Q: Regarding jackup suspension notices for Valaris 147 and 148, and other rigs.

A: Discussions are ongoing about which rigs may be suspended. Five more rigs are expected to be suspended in Saudi, but the benign jackup market remains tight with 93% utilization.

Q: What is the net incremental 7G deepwater rate demand through 2026?

A: Approximately 10 of 30 opportunities may provide incremental potential, with 12 of 13 drillships being 7th generation and good opportunities for sideline capacity.

Q: Thoughts on M&A in the offshore drilling space.

A: There is room for more M&A, and Valaris is well-positioned with high-spec capacity, willing to engage in M&A if value accretive.

Q: Jackup contracts in Trinidad and lead times.

A: The Trinidad contract was finalized recently, not directly affected by the first round of Saudi suspensions. Contracting is not linear, with lead times varying by geography, but day rates are increasing.