Valaris Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the Velaris Third Quarter 2023 Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Darren Gibbons, Vice President of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Welcome, everyone, to the Volaris Q3 2023 conference call. With me today are President and CEO, Anton Dybovitz Senior Vice President and CFO, Chris Webber Senior Vice President and CCO, Matt Line and other members of our executive management team. We issued our press release, which is available on our website at velaris.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.

Speaker 1

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.

Speaker 1

An updated investor presentation and ARO Drilling presentation will be available on our website after the call. Now, I'll turn the call over to Anton Dubovitz, President and CEO.

Speaker 2

Thanks, Darren, and good morning and afternoon to everyone. During today's call, I will start by providing an overview of our performance during the quarter and then provide some high level commentary on the outlook I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our contracting outlook for 2024. After that, Chris will discuss our financial results and guidance, including preliminary guidance for 2024. And finally, I'll wrap up the call with some closing comments. Before we get into the details of the quarter, I want to highlight some key points about our business going forward that we will discuss in more detail in this call.

Speaker 2

First, The outlook for Valaris is positive with increasing demand and constrained supply setting up a strong and sustained upcycle. 2nd, we have had great contracting success over the past 12 months and retained significant operating leverage to the improving market. Consequently, we expect a meaningful improvement in our full year results in both 2024 and 2025, driven by prior and ongoing reactivations And re pricing of legacy contracts. And finally, we have demonstrated our commitment to capital returns. And when our business begins generating meaningful and sustained free Moving to our Q3 operations.

Speaker 2

We're pleased that Valaris DS-seventeen commenced its contract with Equinor Offshore Brazil during the quarter Following its reactivation and expect it will contribute meaningful earnings and cash flow going forward. We're excited to be partnering with Equinor on their flagship Bacalhau project in Brazil and to increase our presence in this strategic basin. We will soon have 4 drill ships working offshore Brazil following the recent arrival of Operating safely is always our top priority. So we're proud to be honored by the Center For Offshore Safety, which recognized the Valera's Basic Training Program with its 2023 Safety Leadership Award. As demand for our services continues to improve, we are hiring an increasing number of men and women that are new to the industry.

Speaker 2

The Valeris Basic Training Program, which utilizes one of our stacked rigs in the U. S. Gulf to provide basic training for new hires is an innovative initiative to prepare new employees to work safely offshore. Remaining on the subject of safety, I'd like to congratulate the crews of the Valaris 76 for recently celebrating 5 years Now turning to our financial performance for the quarter. We generated adjusted EBITDA of $40,000,000 and adjusted EBITDAR Adding back one time reactivation costs of $91,000,000 our results in the quarter were impacted by unplanned floated downtime events in a few rigs, One of which will also impact the Q4 as well as delayed contract startups for the Valaris DS-seventeen and 107.

Speaker 2

While our floater revenue efficiency for the quarter was below our expectations, our year to date fleet wide revenue efficiency is strong at 97% and we remain financing from a syndicate of local Saudi Arabian Banks to finance the deliveries of its first two newbuild rigs, Kingdom 1 and Kingdom 2. Kingdom 1 was recently delivered from the shipyard and we anticipate that it will commence its maiden contract later this month, While Kingdom II is now expected to be delivered and commence its contract in the Q1 of 2024. The delivery and start up of the first two new builds will mark an important milestone in the growth story of ARO and is expected to lead to a substantial increase in 2024 earnings. We are pleased that Arrow has been able to secure financing for these rigs at highly attractive terms, demonstrating both the strength of the Arrow business and its relationship with local lenders in Saudi Arabia. Chris will provide further details on the financing terms a little later.

Speaker 2

Turning our attention to the market. The outlook for our industry in Valeris is positive. Commodity prices remain supportive With spot Brent crude above $85 a barrel, buoyed by tight supply and the recent escalation in geopolitical risk. More importantly, 5 year forward prices are now around $70 a barrel, a level at which more than 85% of undeveloped offshore reserves are estimated to be profitable. The supportive commodity price and attractive breakevens for most offshore projects provide customers with the confidence to invest in long cycle offshore projects.

Speaker 2

Data from Rystad indicates that offshore upstream CapEx is expected to grow at While the demand outlook over the next several years is robust, customers are being measured in how they approach their drilling Weighing their capital spending in a rising cost environment against the desire to return capital to shareholders. Looking at the benign environment flow to market, active utilization for 6th and 7th generation drillships remains in the mid-90s. We see a number of longer term opportunities commencing in late 2024 and beyond that provide further evidence that we are in a strong and sustainable upcycle. However, when considering lengthening contract lead times, customer acquired upgrades and repositioning rigs for work, We expect gaps in schedules across the industry during 2024. Looking at pricing, leading edge day rates continue to be in the mid to high 400s.

Speaker 2

We may see a wide range of rates in the near term depending on the specific circumstances of each opportunity. However, we continue to expect That we will see an upward trajectory in the medium term as stacked and newbuild capacity continues to diminish and the total supply and demand balance continues to tighten. 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 Similarly, we may see lower rates on some of the shorter term gap fill jobs as contractors are willing to bid more aggressively to avoid rigs going idle for a period. 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, whether through the day rates or meaningful upfront payments.

Speaker 2

We've made a deliberate effort to secure upfront payments on certain reactivation contracts. While moving more of the total contract value into an upfront payment May lower the headline day rate, upfront payments are not subject to operational risk, improve the overall return profile of the contract and drive shareholder value. For example, the Valaris DS-seventeen contract included an $86,000,000 upfront payment out of a total contract value of $327,000,000 And has a total effective day rate of over $600,000 Another example of a contract with a meaningful upfront payment is the DS-seven, which has a total effective day rate of approximately $430,000 This contract is expected to provide a cash payback on our reactivation costs of less 1 year and is anticipated to generate annualized EBITDA of $95,000,000 to $100,000,000 Taking a step back for a minute, it's worth remembering that when Valeris relisted in May 2021, we had only 4 out of 11 drillships contracted with minimal contract backlog. Since then, we have won 6 contracts for STACK drillships, increasing our drill backlog tenfold to more than $1,700,000,000 Looking forward, we have 3 drillships Currently on legacy dayrate contracts in the low to mid-two 100s that are expected to re contract at higher market rates in 2024 And a further 2 that are expected to recontract in 2025, which we anticipate will be a key driver of earnings growth going forward.

Speaker 2

We maintain further operating leverage to the strong flow to market with our one remaining uncontracted stacked drillship, Valera DS-eleven We will continue to remain disciplined in how we exercise our operational leverage and additional rigs will only be reactivated for opportunities That are expected to generate a meaningful return on our reactivation costs over the initial firm contract. Before I hand the call over, I'd like to take this opportunity Thank the entire Valaris team, offshore and onshore for the focus and commitment that they bring to work every day to deliver safe and efficient operations to our customers. Now, I'll hand the call over to Matt to provide more detailed commentary on the floater and jackup markets by region and our contracting outlook for 2024.

Speaker 3

Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of Q3, we've been awarded new contracts and extensions With associated contract backlog of approximately $800,000,000 These awards have increased our total backlog to approximately $3,200,000,000 representing a 40% increase A key driver of this backlog increase was the Volaris DS-seven contract, which has a total contract value, including an upfront payment of 3 $4,000,000 This equates to an effective rate of approximately $430,000 for work offshore West Africa, which is our lowest cost operating region In addition, we were recently awarded a 250 day extension on the Volaris DS-fifteen With Total Energy's Offshore Brazil at a day rate of 400,000, the extension includes options for up to 4 40 days at an implied average day rate in the high 400s. It's worth noting that these rates do not include NPD or additional services And an additional rate will be charged when these services are provided. Moving now to some commentary on our major markets. We currently see 25 to 30 opportunities for ultra deepwater floaters with expected duration of greater than 1 year.

Speaker 3

They are anticipated to commence over the next few years. We estimate that approximately half of these opportunities will need to be met by either incremental reactivations of stacked And stranded newbuild rigs or active rigs moving regions, which as we said, we don't expect to see a lot of Given many currently contracted rigs will likely be retained by their existing customers. We see continued opportunity in Brazil through 2024 and 2025 With 3 ongoing tenders across multiple operators and expect contract awards for some of the existing opportunities by year We see further demand in Brazil coming to market in 2024 with commencements in 2025, with potential for up to 5 incremental additions to the fleet Offshore Brazil. There's a strong pipeline of opportunities in Mediterranean and West Africa for work commencing in late 2024, 2025 and 2026, With approximately 17 requirements, more than half of which are likely to require incremental rigs. These include some multiyear opportunities that could help to increase demand for a limited supply of available rigs.

Speaker 3

While visible demand in the Gulf is lower than in other areas of the Golden Triangle. We continue to see a constructive supply and demand picture in the region and expect future demand to keep the majority of rigs occupied. Based on our current market outlook, we believe that most, if not all, of the supply stacked and newbuild drillships in the global fleet will be needed to meet growing future demand. In addition, we continue to believe it is highly unlikely that we will Another floater newbuild cycle in the foreseeable future given high build costs, long lead times and limited shipyard availability. On the jackup side of the business, demand continues to steadily increase with the contracted jackup count currently at its highest level Since mid-twenty 15.

Speaker 3

As a result, active utilization for jackups is above 90% with both average and leading edge dayrates continuing Since the beginning of last year, demand growth for benign environment jackups has primarily been driven by the Middle With Saudi Arabia, Qatar and the UAE all increasing their rig counts, more recently, we have also seen a return of longer duration opportunities in Southeast Asia, including Malaysia, Thailand and Vietnam. We anticipate that rigs from outside the region will be needed to satisfy some of this demand, which should enable dayrates to increase as contractors moving rigs in from other regions will seek to recover mobilization costs either through upfront payments or the day rate. We also continue to see a strong demand for high spec jackups in Trinidad And we're recently awarded a 1 year extension on the Valaris 118 and an additional short term program for Valaris 249 Offshore Trinidad. As outlined in our Q2 call, the outlook for harsh environment jackup market in the North Sea continues to be challenging through the end of 2024. Jackup opportunities in Norway, in particular, are very limited, and we do not expect any of our end class rigs to be working offshore Norway in 2024.

Speaker 3

Due to the relatively weak near term demand outlook, we expect to see a further reduction in available supply either through rigs being stacked, As we did with the Velaris Viking or by contractors moving rigs to other regions for attractive opportunities such as our recent contract for Velaris 247 Offshore Australia. While 2024 in the North Sea may be challenging, We are seeing an increase in tender activity and durations for opportunities commencing in 2025. For example, the Valaris 123 recently a minimum 170 day contract with TAKA commencing in late 2024, starting at a day rate in the low 140s and increasing the low 150s in 25, representing an improvement on recent fixtures in the region. In addition, we recently signed a nearly 4 year contract For FLARES 72, a 40 plus year old standard duty jackup to undertake a P and A program for ENI in the East Irish Sea. As we look to 2024, we currently have 4 of our 13 active floaters with meaningful contract availability.

Speaker 3

However, given that the 1 year priced option on the Volaris DS-sixteen is below current market rates, it is reasonable to expect this option will be exercised, leaving just the DS-four, DS-ten and DPS-five. Volaris DS-four recently received a 6 month contract With Petrobras, this is the final priced option for the DS-four on its current contract, which we will keep which will keep the rig working into the Q3 of 20 We are in advanced discussions regarding a multiyear opportunity for the rig, though we expect some out of service time between the end of its current contract and the start of its anticipated next program for contract preparations. Volaris DS-ten is due to complete its existing contract with Shell Offshore Nigeria For the Volaris DPS V, we recently secured a minimum 110 day program with ENI Offshore Mexico that is expected to commence in March of 2024 at a day rate of 345,000. The rig may be idle for up to 6 days between the end of its next In the U. S.

Speaker 3

Gulf and the start of its new contract offshore Mexico. We have a good track record of keeping the DPS-five well utilized with relatively And we see a number of opportunities in the pipeline that could keep the rig working through the majority of 2024. On the jackup side, we currently have contract availability on 6 of our 28 active rigs. 3 of these rigs are located in the North Sea, 247 and the 249 in the second half of twenty twenty four, but have good line of sight into opportunities offshore Australia and Trinidad, respectively, that we believe will keep these rigs working. Finally, we are pursuing near term opportunities for VALORIS 144 in the U.

Speaker 3

S. Gulf While looking for longer term opportunities outside the region. In summary, we feel good about the 2024 contracting outlook with only a small number of our rigs with contract availability and a strong pipeline of opportunities. I will now hand the call over to Chris to take you through the financials.

Speaker 4

Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of 3rd quarter results, Our outlook for the Q4 and will also provide preliminary guidance for full year 2024. Starting with our Q3 results, revenue was $455,000,000 up from $415,000,000 in the prior quarter And adjusted EBITDA was $40,000,000 up from $15,000,000 in the prior quarter. Adjusted EBITDAR, which adds back reactivation was $91,000,000 up from $59,000,000 in the prior quarter. Adjusted EBITDA increased primarily due to more operating days and a higher average daily revenue for the jackup fleet, which increased to $108,000 from 99 $1,000 in the prior quarter.

Speaker 4

Results from the jackup fleet benefited from contract startups for Valeris 121 in the UK North Sea And Valeris 249 Offshore Trinidad as well as several rigs commencing new contracts at higher day rates. Adjusted EBITDA also increased due to Valeris DS-seventeen commencing its contract with Equinor Offshore Brazil in early September, Along with an increase in average daily revenue for the rest of the floater fleet during the Q3, these items are partially offset by Fewer floater operating days due to unplanned downtime as well as higher reactivation expense. 3rd quarter reactivation expense was $51,000,000 compared to $44,000,000 in the prior quarter, primarily due to commencement of the Valeris DS-seven reactivation project following its contract award in July. Relative to our prior guidance, 3rd quarter results were below our expectation, primarily due to the unplanned floater downtime and delayed contract startups for Valeris DS-seventeen and 107. The DS-seventeen contract started a little later than anticipated, Primarily due to the integration of some first of its kind technologies on the rig and the 107 was late starting its campaign offshore New Zealand Due to a delay in the arrival of the heavy lift vessel hired to move the rig from Australia.

Speaker 4

Cash from operations in the quarter was $48,000,000 and capital expenditures were $106,000,000 CapEx increased by $35,000,000 versus the prior quarter. This was primarily due to higher reactivation and contract specific CapEx driven by higher spend on Valeris DS-eight as CapEx ramped up ahead of the rig's departure from the shipyard in the Q4. CapEx also increased due to Valera 72 Completing its SPS and contract preparation work prior to returning to its long term P and A program with ENI. In the Q3, maintenance and upgrade CapEx was $51,000,000 and reactivation and contract specific CapEx was $55,000,000 We had a total cash balance of $1,100,000,000 at the end of the quarter. Cash increased by $252,000,000 during the quarter, primarily due to the issuance of $400,000,000 of additional Senior secured second lien notes due 2,030, partially offset by capital expenditures and share repurchases.

Speaker 4

The net proceeds from the issuance are expected to fund the purchase of newbuild drillships Valeris DS-thirteen and DS-fourteen and for general corporate purposes. We are pleased that we were able to hit an attractive window earlier in the quarter in what has been a volatile period in the capital markets, Financing the expected new bill purchases with notes that priced above par. Following the $400,000,000 add on, We have $1,100,000,000 of senior secured second lien notes due 2,030 with a coupon of 8.38. In addition, our $375,000,000 have repurchased $171,000,000 of shares, representing 2,600,000 shares or 3.4% of our share count. We remain on track to achieve our 2023 share repurchase target of $200,000,000 by year end.

Speaker 4

Now I'll move to a brief overview of ARO Drilling's financials. As a reminder, ARO is not consolidated in the financial results of Alaris. Aero EBITDA increased to $24,000,000 from $17,000,000 in the prior quarter, primarily due to more operating days and lower repair resulting from less out of service time for planned maintenance. Arrow's 4th quarter EBITDA is expected to increase to $30,000,000 to $32,000,000 from $24,000,000 in the 3rd quarter primarily due to the impact of newbuild Kingdom 1 which is expected to commence its maiden contract later this month. As Anton mentioned earlier, Arrow recently secured highly attractive financing in the form of a $359,000,000 term loan With a syndicate of local Saudi Arabian banks to finance the deliveries of its first two newbuild rigs Kingdom 1 and Kingdom 2, The loan matures in 8 years, requires equal quarterly amortization payments during the term with a 50% balloon payment due at each maturity As a reminder, these newbuilds are backed by 16 years of guaranteed work with Aramco.

Speaker 4

Day rates for the initial 8 year contracts will be determined using a pricing mechanism that targets a 6 year payback for construction costs on an EBITDA basis. These initial contracts will be followed by a minimum additional 8 year term repriced every 3 years based on a market pricing mechanism. Moving now to our Q4 2023 outlook. We expect total revenues will be in the range of $480,000,000 to $490,000,000 as compared to $455,000,000 in the 3rd quarter. Revenues are expected to increase primarily due to Full quarter of operations for Valeris DS-seventeen and 107 following contract startups.

Speaker 4

These are expected to be partially offset by fewer operating days for Valeris DS-twelve, which will mobilize from West Africa to the Mediterranean ahead of its next contract which is expected to commence offshore Egypt around the end of the year. We expect that contract drilling expense will be $405,000,000 to $415,000,000 as compared to $391,000,000 in the 3rd quarter, primarily due to higher operating costs for Valaris DS-seventeen and 107 following their contract startups. This is anticipated to be partially offset by lower reactivation expense as Valeris DS-eight departed the shipyard for Brazil in late October. In addition, operating costs for Valera's DS-twelve are expected to decrease in the 4th quarter as it will spend part of the quarter mobilizing from West Egypt ahead of its upcoming contract. General and administrative expense is expected to be approximately $28,000,000 Up from $24,000,000 in the prior quarter primarily due to an anticipated increase in professional fees as certain costs that were expected to be incurred in 3rd quarter had been delayed to the 4th quarter.

Speaker 4

As a result, we expect adjusted EBITDA to be $45,000,000 to 50,000,000 And adjusted EBITDAR to be $85,000,000 to $90,000,000 This is below what was implied by our prior guidance, Primarily due to a delayed start up for Valeris 108 ahead of its upcoming 3 year bareboat charter with Arrow, The floater downtime that Anton mentioned earlier and the timing of reactivation and survey costs as some are shifting from 2024 into the 4th quarter. CapEx in the 4th quarter is expected to be approximately $110,000,000 compared to $106,000,000 in the 3rd quarter. Maintenance and upgrade CapEx is expected to be approximately $50,000,000 including upgrades to Valera 76 ahead of its 5 year bareboat charter to Arrow. Reactivation and associated contract specific CapEx is expected to be approximately $60,000,000 And this includes approximately $20,000,000 of DS-eight CapEx being accelerated from 2024 into the 4th quarter. We expect approximately $30,000,000 of customer reimbursements for CapEx in 2023, most of which has already been received.

Speaker 4

This CapEx guidance does not include assumed expenditures for exercising our to purchase the drillships Valeris DS-thirteen and DS-fourteen. Exercising the options on both rigs would increase 4th quarter CapEx by approximately $370,000,000 The incremental CapEx covers the purchase price of the rigs and cost to prepare the rigs to be moved from South Korea to Las Palmas, where they would be stacked alongside Valeris DS-eleven until they are contracted. I will now provide preliminary financial guidance for full year 2024. Similar to prior years, we will provide more specific guidance on our Q4 earnings call in February. This preliminary guidance does not account for any incremental reactivations for contracts that have yet to be executed.

Speaker 4

We currently forecast revenues to be between $2,250,000,000 $2,350,000,000 and adjusted EBITDA to range from $500,000,000 to 600,000,000 Including approximately $30,000,000 of reactivation expense. 2024 revenue and EBITDA are expected to benefit from a full year from Valeris DS-seventeen and they are anticipated to increase meaningfully in the second half of the year versus the first half Driven by contract startups for the DS-eight and DS-seven in the first half, as well as drillships rolling to higher day rate contracts during the year. As Matt discussed, we have a limited number of rigs with contract availability next year. At the midpoint of the revenue range, we currently have 83% of the revenue contracted and if we include price options with rates well below current market, it would be 87%. I also want to highlight that the midpoint of this EBITDA guidance range is approximately 4 times higher than expected 2023.

Speaker 4

Full year 2024 capital expenditures excluding any potential CapEx associated with Valeris DS-thirteen and DS-fourteen are expected to be approximately $290,000,000 to $330,000,000 compared to an anticipated $340,000,000 in 2023. Maintenance and upgrade CapEx is expected to be approximately $250,000,000 with about $20,000,000 being reimbursable. This covers SPS and contract preparation requirements as well as capital spares. Like 20 specific CapEx, primarily related to Valera's DS-seven and DS-eight. In addition, if we exercise the newbuild options as planned, We expect to spend a further $30,000,000 to mobilize Valera's DS-thirteen and DS-fourteen from South Korea to Las Palmas.

Speaker 4

That concludes my review of our financial results and guidance. I'll now hand the call back to Anton for some closing remarks. Thanks, Chris. I'll conclude by reiterating some of

Speaker 2

the key points from our prepared remarks. First, The outlook for Valaris is positive with increasing demand and constrained supply setting up a strong and sustained upcycle. 2nd, we've had great contracting success over the past year and remain focused on winning attractive work for our fleet. Our total backlog currently sits at $3,200,000,000 representing a 40% increase over the past 12 months and provides over 80% contract coverage in 2024 and we expect this number to grow further by the end of the year. In addition, we retain significant operating leverage and line of sight into attractive opportunities.

Speaker 2

2024 EBITDA is expected to be approximately 4 times higher than 2023, and we expect another material improvement in 2025, Driven by recent and ongoing drillship reactivations and the repricing of rigs on legacy day rate contracts to higher market rates. And finally, we are well on our way to returning the $200,000,000 of share repurchases we have targeted this year. As we look into the future, when our business begins to generate meaningful and sustained free cash flow, we intend to return it all to shareholders, We've now reached the end of our prepared remarks. Operator, please open the line for questions.

Operator

Our first question today will come from Eddie Kim of Barclays. Please go ahead.

Speaker 5

Hi, good morning. Anton, just in your prepared remarks, you mentioned that day rates For 2 to 3 year opportunities are likely to be at leading edge levels, but that 5 year opportunities are likely to be A bit lower. We haven't seen that many 5 year contracts signed to date. So just curious how many of these 5 year opportunities you're Currently seeing and if these opportunities are specific to a certain region or if they're fairly broad based?

Speaker 2

Good question, Eddie. Yes, a couple of things. We know that there are at least 2 IOCs that are looking at the Potential for long term jobs beyond the 2 to 3 years that we're generally seeing in the market. I think that's a really good sign of as the market continues Titan, their desire to lock down supply. When you see compound annual growth in demand 8% over the next Few years, customers are focusing on making sure that they have attractive rigs for their opportunities.

Speaker 2

I think there is a rate Trade off potentially for a very long term opportunity. Do you take a slightly lower rate to create a base of earnings? Our perspective on it is we're very comfortable with where rates are in the mid-four 100s. We expect them to grow. And yes, would there be a rate trade off Potentially for a long term opportunity, but not at any price.

Speaker 2

And we've walked away from opportunities before because we didn't think they were Attractive for driving shareholder value and we'll continue to do that. So we will look at those opportunities in that context. If it makes sense, As a manageable trade off, we'll take it. Otherwise, we'll walk away from it and let somebody else have

Speaker 5

Got it. That's a great sign and great to hear. My follow-up is just on the remaining Stacked and stranded newbuild drillship capacity you're currently seeing today in the market commentary it was mentioned that most If not all, this capacity is going to be needed to meet growing demand. As you know, there are a lot of stacked rigs that are really old And there's also a lot of stranded newbuilds that are currently being built by less reputable shipyards. So just curious how many rigs you're thinking about it in both those buckets that could realistically be a part of the active fleet?

Speaker 2

I'll let Matt take that one and maybe I'll have some cover up after.

Speaker 6

Sure. Look, I mean, maybe if we bifurcate into the 2 segments, STACK drillships and then stranded newbuild supply. I'll take the second one first. On the stranded newbuild supply, I think we see Approximately 5 rigs which we see as credible entrants into the market over the term, 2 of which obviously represented by the DS 13 and 14, which those 2 obviously represent also the highest spec 7th gens units and the only ones with 2 BOPs. On the STACK side, you could argue that there are probably up to 10, but I think if you narrow that down and you look at the behaviors of Both ourselves and our competitors, people have a tendency to focus on the 7th gen It is a priority knowing that customers continue to value specification over all of the things to provide them flexibility in what they do.

Speaker 6

So you look at that, you've got about 4 stacked 7th gen rigs with a range of How the duration they've been stacked and their age. So having to take into account where they are in their SPS cycle with respect to reactivation costs will play a factor in that.

Speaker 2

So overall, what I'd say is that the number of attractive stacked and shipyard assets continues to diminish. If you look at the contracts that we have reactivated ShipSpo over the last couple of years, Priority is always to focus on utilizing our active fleet first and the reactivations from us as well as competitors have Come from incremental demand that is coming to the market. Supply demand has been 90% utilization on drillships For a significant period of time and we continue to see incremental demand that's coming to the market over the next few years That is going to drive taking up that additional capacity. So yes, we feel comfortable that there is incremental demand That will take those attractive assets into the market over time.

Operator

Our next question today will come from Kurt Hallead with Benchmark. Please go ahead.

Speaker 7

Hey, good morning.

Speaker 2

Good morning. Good morning, Kurt.

Speaker 7

Hey, Seth. I want to really appreciate you putting into context total contract value Relative to day rate, so in that context, right, one of your larger competitors You know, made a comment that they're being violent opposition to $500,000 per day kind of day rate dynamics, right? By taking that into a bigger context, right, what is the dynamic at play currently With respect to the operators understanding there is a constrained supply And marrying that up with their project needs, say, in 2024, 2025 and understanding that No matter how they shake it out, they're going to have to pay more for what's coming down the pipe.

Speaker 2

I'll let Mats talk. Thanks.

Speaker 6

So I mean, we feel really good about where the market sits today and the longevity of this cycle. So I guess if we look at a couple of the supply metrics to kind of lead us down that path, which You know, both directly relate to continued improvement in the day rate. Lead times for tendering for contracts are increasing. And we're also seeing, as you were pointing out, customers increasing duration by connecting their programs To make it more attractive. And why would they be doing that would be they see potential or they see supply decreasing, which incentivizes them to pick up rigs for longer to ensure they have the assets they need to drill.

Speaker 6

Utilization is increasing, which Resulting in a reduction in supply. And so looking at these main factors from a supply side metrics, it paints a positive picture On the direction of the market.

Speaker 7

I mean, what I'll say, I

Speaker 2

mean, I don't know about violent disagreement, but no operator wants So it comes down to simple economics and supply and demand. And day rates seldom move in a nice clean parabola like you did in math Class, as the supply demand picture continues to tighten and incremental demand comes to the market, we have more commercial leverage And day rates, as we have seen, will continue to trend and move up. So What people's feelings about where they want rates to be are kind of neither here nor there in the grand scheme of things. If people want rigs and the demand continues, the supply to tighten and demand continues to increase, which is what we see happening going into a sustained cycle, then rates will continue to move upwards.

Speaker 7

Okay, great. Appreciate that. Now my follow-up is you've targeted $200,000,000 of share repurchase for 2024. What's your general sense of what that share repurchase target could be for 2020 to me? You earmarked Going for 'twenty three, what are your markings for 'twenty four?

Speaker 4

Yes. So thanks, Kurt. 1, we're really demonstrating our commitment So returning capital to shareholders, we repurchased 171,000,000 shares year to date. That's about 3.5% of our Outstanding shares outstanding. We're on track to execute on that $200,000,000 target this year.

Speaker 4

We're going to provide And a more detailed perspective on 24 return of capital plans on the Q4 call. But I want to reiterate what Anton mentioned. Our philosophy around return around return of capital is simple. When this business is generating meaningful and sustained free cash flow, we're going to return it all to shareholders unless we've got a more Accretive or better use for it. As we look forward, that's going to include a dividend.

Speaker 4

We'll flex with share repurchases and we'll even look at special dividends if we got a significant liquidity event, because as we said, this team is dedicated to capital return to shareholders.

Speaker 2

I'll just reiterate that. This is a Board and a management group that is laser focused on generating significant cash Into an up cycle and our philosophy is very, very simple. We will return it all to shareholders unless there is clearly a more value accretive use We've demonstrated that this year with what we've done and we will continue to deliver on that going forward.

Speaker 7

All right. Appreciate that. Thank

Operator

Our next question is from David Smith of Pickering Energy Partners. Please go ahead.

Speaker 8

Hey, good morning and thank you. Good morning, David. Sorry if I missed it. Did you provide any color on the unplanned Q3 down And for several floaters, if there is a common thread or any lessons learned to help secure revenue efficiency in the future? Yes.

Speaker 2

Look, I can give you some color. Obviously, the quarter and our downtime Was below our expectations and we're focused every day on 1st delivering safely and second delivering efficiently for our customers. These were largely 3 events on 3 floaters, subsea related, And it's a fact of this business that if you have an issue with a BOP, by the time you pull it up to surface, It's a 2 week event. So this quarter is not where we would want to be on our subsea downtime particularly And revenue efficiency, but what I would point to is our track record. Year to date, 97% revenue efficiency across the fleet, And we will focus and make sure that we rectify those issues and continue to deliver in the manner that people have Become accustomed to us.

Speaker 8

Appreciate that. And then switching over, when I look at the global fleet of Jackups that are less than 25 years old, very few idle today, very few are stacked, cold stacked and you I think you own most of them. Just given some of the leading edge rates we've seen pushing above 150,000 a day, certainly it seems like that kind of rate plus duration Could provide attractive economics on the reactivation. So I just wanted to ask if you also see it that way and if there are any discussions on your radar that could see 1 or more of the jackups greenlit for reactivation in the next year?

Speaker 2

I'll let Matt start with the market and then I'll come back on the philosophy after. So I

Speaker 6

think what we're starting to see, and I'm giving some of my prepared remarks, I mentioned the Middle East dominating Jack up consumption in the past years and now we're starting to see the resurgence of Asia. And one of the things that makes it really interesting is The duration, the term of the opportunities that they're suggesting and also pushing out the contract lead times because obviously there is some Time required in order to reactivate and move the rigs to the correct market. So we're seeing signs of those opportunities materialize. And I would say on a general basis, we are bidding our stacked rigs more often these days to fit Certain opportunities where we can provide guaranteed availability. They will obviously take Secondary position to increasing the utilization of our active fleet.

Speaker 6

But as you saw in the prepared remarks with limited availability in 'twenty four and that utilization continues to improve, that's going to put pressure on evaluating and

Speaker 2

Let me just emphasize a couple of points that Matt made. The first is about lead time. So generally, the reactivation of a jackup And it's a shorter cycle market between tender and actual contracting. So you need the lead time in order to reactivate a jackup. The second thing is simply a capital allocation question for us.

Speaker 2

Up until now, it has been much more value accretive for us to Enter into flow to reactivations based on where the day rates are and the payback times. That being said, you're absolutely right now that jackup Rates are increasing and the durations of those contracts, which gives you a better ability to recover that reactivation cost, What you put in the order depending on the rig of $20,000,000 to maybe $30,000,000 depending on specifications. So now that we have longer duration contracts more prevalent Middle East, there are more opportunities to see one of those jobs making sense for reactivation. So We like the assets we have. They're a great option for us to continue to play into the jackup up cycle.

Speaker 2

Up until now, it's been a capital allocation question where floaters have Been more value accretive, but yes, we're absolutely focused on and we continue to bid jackups into those opportunities

Operator

At this time, we will conclude our question and answer session. I'd like to turn the conference back over to Darren Gibbons for any closing remarks.

Speaker 1

Thanks, Allison, and thank you to everyone on the call for your interest in Volaris.

Operator

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

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Earnings Conference Call
Valaris Q3 2023
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