Valaris Reports Second Quarter 2022 Results

(BUSINESS WIRE)–Valaris Limited (NYSE: VAL) (“Valaris” or the “Company”) today reported second quarter 2022 results.

President and Chief Executive Officer Anton Dibowitz said, “I would like to thank the Valaris team for their continued focus on delivering the safe, reliable and efficient operations that our customers have come to expect from us, in particular the achievement of 97% revenue efficiency during the second quarter and 98% through the first half of the year, a period in which several rigs have commenced new contracts following reactivations or shipyard projects.”

Dibowitz commented, “I am extremely proud of the entire Valaris team for having now successfully executed reactivation projects on four of our preservation stacked floaters after having secured contracts for these rigs in 2021. Last year, we set out to build our contract backlog by reactivating some of our high quality stacked fleet for long-term contracts, and these rigs which are now all on contract are expected to generate a combined annualized EBITDA of more than $100 million.”

Dibowitz added, “The fundamental outlook for our industry remains constructive, with spot Brent crude prices above $100 per barrel for most of the past five months and two-year and five-year forward prices above $80 per barrel and $70 per barrel, respectively. As a result, we continue to see an increase in both contracting and tendering activity across both floater and jackup markets.”

Dibowitz concluded, “Since reporting our first quarter 2022 results, we have been awarded new contracts and extensions with associated contract backlog of approximately $560 million, with several new contracts awarded at leading-edge rates for their respective markets. We are particularly pleased to have secured yet another contract for one of our preservation stacked drillships, VALARIS DS-17, and we look forward to partnering with Equinor on their flagship Bacalhau project in Brazil. We expect Brazil to be a significant growth market for high-specification floaters over the next several years and we are well-positioned to benefit by now adding a third rig to this strategic basin. We were also awarded a four-year contract with Brunei Shell Petroleum in Southeast Asia for jackup VALARIS 115. This represents the largest backlog award for a benign environment jackup outside of the Middle East this year and provides further evidence of the improving market for modern benign environment jackups.”

Second Quarter Review

Net income was $113 million in the second quarter 2022 compared to a net loss of $40 million in the first quarter 2022. Adjusted EBITDA increased to $29 million in the second quarter from negative $31 million in the first quarter. Adjusted EBITDAR increased to $54 million in the second quarter from $31 million in the first quarter.

Revenues increased to $413 million in the second quarter 2022 from $318 million in the first quarter 2022. Excluding reimbursable items, revenues increased to $385 million in the second quarter from $291 million in the first quarter. The increase was primarily due to a $51 million fee related to the termination of a contract for drillship VALARIS DS-11, as well as higher utilization and average day rates for both the floater and jackup fleets.

Contract drilling expense increased to $362 million in the second quarter 2022 from $331 million in the first quarter 2022. Excluding reimbursable items, contract drilling expense increased to $334 million in the second quarter from $305 million in the first quarter, primarily due to more operating days for the floater fleet, increased costs of certain claims and costs associated with the VALARIS DS-11 contract termination. This was partially offset by lower reactivation costs, which decreased to $24 million in the second quarter from $61 million in the first quarter as reactivated rigs returned to work.

Loss on impairment of $35 million in the second quarter 2022 related to the termination of a contract for VALARIS DS-11. Costs incurred for capital upgrades specific to the customer requirements resulted in a pre-tax, non-cash loss on impairment during the quarter. There was no loss on impairment in the first quarter 2022.

Depreciation expense decreased to $22 million in the second quarter 2022 from $23 million in the first quarter 2022. General and administrative expense of $19 million in the second quarter 2022 was in line with the first quarter 2022.

Other income increased to $149 million in the second quarter 2022 from $9 million in the first quarter 2022. Second quarter other income included a gain on sale of assets of $135 million primarily related to the sale of jackups VALARIS 113, 114 and 36 as well as additional proceeds received in the current quarter on the sale of a rig in a prior year, compared to a $2 million gain on sale of assets related to the sale of jackup VALARIS 67 in the first quarter.

Tax expense was $20 million in the second quarter 2022 compared to a tax benefit of $1 million in the first quarter 2022. The second quarter tax provision included $6 million of discrete tax expense primarily attributable to income associated with a contract termination. The first quarter tax provision included $15 million of discrete tax benefit primarily related to a reduction in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Adjusted for discrete items, tax expense of $14 million in the second quarter was in line with the first quarter.

Cash and cash equivalents and restricted cash decreased to $577 million as of June 30, 2022, from $608 million as of March 31, 2022. Net working capital increased due to a ramp up in operating activities as rigs returned to work following reactivation and special survey projects and the $51 million DS-11 termination fee that was subsequently collected in July. In addition to the increase in net working capital, we incurred $61 million of capital expenditures. These were partially offset by $145 million of net proceeds from the sale of assets, primarily related to jackups VALARIS 113 and 114.

Segment Review

Floaters

Floater revenues increased to $188 million in the second quarter 2022 from $100 million in the first quarter 2022. Excluding reimbursable items, revenues increased to $171 million in the second quarter from $87 million in the first quarter. The increase was primarily due to a $51 million termination fee related to the termination of a contract for VALARIS DS-11, as well as the impact of VALARIS DPS-1 and DS-16 returning to work following reactivation projects and VALARIS DPS-5 returning to work following a special periodic survey. This was partially offset by idle time between contracts for VALARIS MS-1 and mobilization time between contracts for VALARIS DS-12.

Contract drilling expense increased to $165 million in the second quarter 2022 from $148 million in the first quarter 2022. Excluding reimbursable items, contract drilling expense increased to $148 million in the second quarter from $135 million in the first quarter primarily due to higher activity levels, increased costs of certain claims and costs associated with the VALARIS DS-11 contract termination. These were partially offset by lower reactivation costs, which declined to $24 million in the second quarter from $61 million in the first quarter.

Jackups

Jackup revenues increased to $186 million in the second quarter 2022 from $181 million in the first quarter 2022. Excluding reimbursable items, revenues increased to $180 million in the second quarter from $170 million in the first quarter primarily due to more operating days for VALARIS 249, which commenced a contract offshore New Zealand during the first quarter. This was partially offset by VALARIS 141 rolling off contract in April prior to commencement of a three-year bareboat charter agreement with ARO that is expected to begin in August.

Contract drilling expense increased to $142 million in the second quarter 2022 from $139 million in the first quarter 2022. Excluding reimbursable items, contract drilling expense increased to $136 million in the second quarter from $129 million in the first quarter primarily due to higher repair and maintenance costs largely related to leg repairs on VALARIS 107.

ARO Drilling

Revenues increased to $116 million in the second quarter 2022 from $111 million in the first quarter 2022 primarily due to a full quarter of operations for VALARIS 140, which was added to the leased fleet late in the first quarter. This was partially offset by VALARIS 36 completing its contract in May before returning to Valaris and being sold. Contract drilling expense decreased to $82 million in the second quarter from $84 million in the first quarter. Operating income was $16 million in the second quarter compared to $5 million in the first quarter. EBITDA was $31 million in the second quarter compared to $22 million in the first quarter.

Other

Revenues increased marginally to $39 million in the second quarter 2022 from $38 million in the first quarter 2022. Contract drilling expense increased to $25 million in the second quarter from $16 million in the first quarter primarily due to increased costs of certain claims. Operating income was $13 million in the second quarter compared to $22 million in the first quarter. EBITDA was $15 million in the second quarter compared to $23 million in the first quarter.

Fresh Start Accounting

Valaris emerged from Chapter 11 bankruptcy protection on April 30, 2021 (the “Effective Date”). Upon emergence, Valaris applied fresh start accounting which resulted in Valaris becoming a new reporting entity for accounting and financial reporting. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes prior to that date. As required by GAAP, results for the second quarter must be presented separately for the predecessor period from April 1, 2021, through April 30, 2021 (the “Predecessor” period) and the successor period from May 1, 2021, through June 30, 2021 (the “Successor” period). However, the Company has combined certain results of the Predecessor and Successor periods (“Combined” results) as non-GAAP measures to compare the combined second quarter with other quarters since we believe it provides the most meaningful basis to analyze our results. The Predecessor and Successor results for the second quarter are more fully discussed in our quarterly report on Form 10-Q for the period ended June 30, 2021 filed with the SEC on August 3, 2021.

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