Valaris Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Volaris Second Quarter 2023 Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Operator

Please go ahead.

Speaker 1

Welcome everyone to the Volaris Second Quarter 2023 Conference Call. With me today are President and CEO, Anton Dybovitz Senior Vice President and CFO, Chris Webber 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 Enlist 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, yesterday, 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 Dybovitz, President and

Speaker 2

CEO. 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. Then I'll comment on the outlook for the offshore drilling market and our fleet strategy, including an update on our plans for newbuild drillships, Valaris DS-thirteen and DS-fourteen. Finally, I'll provide an update on our share repurchase program and reiterate our capital returns philosophy.

Speaker 2

After that, I'll hand the call over to Chris to discuss our financial results and guidance. In the Q2, we continued to deliver strong operational performance, achieving revenue efficiency of 97%. Our success as a company is driven by our people, and I want to thank the entire Valeris team, offshore and onshore, For their ongoing commitment and efforts in delivering excellent performance for our customers. One of the hallmarks of Valaris is our project execution. During the Q2, Valaris DS-seventeen departed the shipyard ahead of its contract with Equinor Offshore Brazil, which is expected to commence this month following customer acceptance.

Speaker 2

This marks our 5th floater reactivation in the past 18 months And builds in our proven track record of project execution. Polaris DS-seventeen is one of the highest Vacation drillships in the global fleet today and will be the 1st rig to deploy NLV's ATOM RTX robotic system offshore, Reducing the need for personnel in the red zone. Valaris DS-seventeen also became only the 2nd rig in the world after Valaris DS-twelve To receive ABS' enhanced electrical system notation EHS E. The rig's electrical system is designed to optimize power plant performance, enabling operations on fewer generators and reducing emissions. These targeted upgrades help to improve the safety and efficiency of the rig and exemplify our company's purpose of providing responsible solutions that deliver energy to the world.

Speaker 2

Now turning to our financial performance for the quarter. We generated adjusted EBITDA of $15,000,000 and adjusted EBITDAR adding back one time reactivation costs of 59,000,000 Chris will provide further details on our financial results and guidance a little later. Turning our attention to the market. The outlook for our industry in Valeris remains very positive. Spot Brent crude has recently moved back above $80 per barrel And 5 year forward prices remain above $65 per barrel, a level at which more than 80% of undeveloped offshore reserves are estimated to be profitable.

Speaker 2

The supportive commodity price and attractive breakevens for most offshore projects provide customers with Confidence to invest in long cycle offshore projects and further growth in both offshore upstream CapEx and offshore project sanctioning are expected in 20 The constructive macro environment and increased upstream spending have led to increases in contracting and tendering activity across Active utilization for 6th and 7th generation drillships has On average exceeded 90% for more than 12 months. Looking at forward demand, we expect leading edge dayrates to continue on an upward trajectory from the current levels in the mid to high 400s. Recent fixtures and tenders with increased durations, lead times and day rates Provide further evidence that we are in a strong and sustainable upcycle. Improvements in ultra deepwater demand continues to be geographically widespread With new long term opportunities appearing in West Africa, the Mediterranean, Brazil and the Gulf of Mexico over the past several months. These include opportunities with durations of 5 plus years.

Speaker 2

Also for the first time in many years, Some customers are seeking to secure offshore rigs beyond the scope of their currently sanctioned projects and are contracting rigs for start dates into 2026. These are all positive signs that demonstrate both the confidence that our customers have in the economics of their offshore projects and a recognition of the increasing scarcity of high spec floaters. Across the Golden Triangle, East Africa and the Mediterranean, We currently see 25 to 30 opportunities for Ultra Deepwater Floaters with expected duration of greater than 1 year that are anticipated to commence over the next few years. This represents an increase from the 20 to 25 opportunities we referenced on our Q1 call, demonstrating the strong and growing pipeline of future demand. We've seen recent opportunities appear in the Mediterranean and West Africa We're commencing in 2024 and 2025 that are likely to require incremental rigs.

Speaker 2

In Brazil, there are 3 ongoing opportunities with Petrobras, each requiring multiple rigs and further visibility of future demand with IOCs. We anticipate that this demand will result in several incremental additions to The rig fleet offshore Brazil. In the Gulf of Mexico supply and demand continues to be balanced and we expect In total, we anticipate that 12 to 15 of these opportunities Will need to be met by either incremental reactivations of stacked and stranded newbuild rigs or active rigs moving regions, which we don't expect to see a lot of as many rigs due to complete contracts over the next few years will likely be retained by the existing customer. While demand is increasing, the pool of available rigs is shrinking and we believe there to be no more than 10 competitive rigs remaining amongst the stacked drillship fleet. There are further 8 newbuild drillships remaining at South Korean shipyards, including Valera's DS-thirteen and DS-fourteen.

Speaker 2

However, 3 of these 8 rigs are either contracted or have been selected for future work and are expected to be contracted soon. Further, We currently believe it is highly unlikely that we will see another flow to newbuild cycle, given high build costs, long lead times and limited shipyard availability. In summary, the outlook for the ultra deepwater market is very positive with increasing demand and constrained supply tightening the market. Further, recent developments around increased contract duration, lead times and day rates all point towards a strong and sustained upcycle. On the jackup side of the business, demand continues to steadily increase and the number of contracted jackups recently moved above 400 for the first time since mid-twenty 15.

Speaker 2

As a result, active utilization for jackups is above 90% With both average and leading edge day rates continuing to trend upwards as evidenced by our recent fixture offshore Australia at a rate of $180,000 per day. Over the past 18 months, demand growth for benign environment jackups has primarily been driven by the Middle East, 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 in Malaysia, Thailand and Vietnam, which will help to absorb supply in this region. While the outlook For benign environment jackups continues to be strong, the outlook for the harsh environment jackup market in the North Sea continues to be challenging In the second half of this year and through the end of twenty twenty four. In the U.

Speaker 2

K, while regulators are looking at ways to make the current tax regime More appealing to operators, it has not yet been sufficient to promote an increase in activity and we continue to see opportunities being delayed. Fortunately, some of our North Sea rigs such as Valaris 92, 120, 122 are contracted into 2025 and beyond. We will continue to seek attractive opportunities for our high spec harsh environment jackups in other regions, Such as our recent contract for Valaris 247 Offshore Australia. Following completion of its current contract in the U. K.

Speaker 2

North Sea later this year, The rig will mobilize to Australia for a 2 well contract undertaking a CCS project that is expected to commence late in the Q1 of 2024. The operating day rate for this contract is $180,000 a day and we will receive a mobilization and demobilization fee That covers all the moving and operating costs while the rig is in transit. We see strong demand for high specification rigs such as the Velaris 2 47 And we anticipate there will be follow on work in the region beyond its initial contract. Jack up opportunities in Norway continue to be very limited, exemplified by a tender that was recently deferred into 2025. As a result, we do not expect any of our end class rigs to be working offshore Norway During 2024.

Speaker 2

On the supply side, we believe that many of the jackups that are currently idle are not competitive, either due to their age or length of time stacked. 1 third of the current jackup fleet is more than 30 years of age with limited useful lives remaining. Out of the approximately 90 jackups that are currently idle, we count only 10 that are less than 30 years of age, Have been stacked for less than 3 years and are within the top half of global fleet rankings. As a result, we believe that many of these stacked rigs will never return to the active Further, excluding Arrow's newbuild program, there are only 18 newbuild jackups remaining at shipyards And 13 of these rigs are Chinese shipyards, many of which are expected to enter the local supply in China. In summary, we continue to see a Strong and improving market for modern high specification jackups in regions such as the Middle East, Southeast Asia and Latin America.

Speaker 2

However, the harsh environment jackup market in the North Sea and Norway continues to disappoint and we do not expect to see any meaningful improvement in 2024. Our fleet strategy remains unchanged and focused on driving long term shareholder value. Earlier this week, we were proud to announce a new long term contract for Volaris DS-seven Offshore West Africa, which is anticipated to be one Key basins for floater demand over the next several years. This most recent award represents the 7th contract awarded to 1 of our High quality stacked floaters since mid-twenty 21 and speaks volumes about our demonstrated track record of project execution When reactivating rigs and delivering operational excellence for our customers. We will continue to be disciplined in exercising our operational leverage By only returning STACK Rigs to the active fleet for opportunities that provide meaningful returns over the initial firm contract.

Speaker 2

The Valaris DS-seven is a prime example of this approach and Chris will provide further details that highlight the compelling economics of this contract during his As part of our fleet strategy, we want to have a critical mass of rigs in priority basins to benefit from economies of scale. Following the completion of our ongoing reactivations, we will have 11 floaters working across the Golden Triangle with 4 Offshore Brazil, 4 Offshore Africa and 3 in the Gulf of Mexico. At the beginning of the year, I stated that I was optimistic about being able to secure contracts for 2 of our stacked drillships in We have now delivered on that 7 months into the year and we see good opportunities for at least one more to be contracted by the end of the year. Following the contract award to DS-seven, we have only 1 uncontracted drillship remaining, the DS-eleven. Beyond this, Our operating leverage to the strong ultra deepwater floater market is through recontracting our existing active fleet and our attractive Purchase options for newbuild drillships DS-thirteen and DS-fourteen.

Speaker 2

Based on our contracting progress and the current market view, We intend to exercise the options for both of these rigs. Both DS-thirteen and DS-fourteen are amongst the high specification assets in the global fleet and are the most technically capable drillships still available at South Korean shipyards per third party rig rankings. They are the only remaining drill ships available at the South Korean shipyards with 2 BOPs and we estimate that it would cost approximately $50,000,000 To add a second BOP to a ship that is only equipped with 1. We see strong customer interest in these rigs. And based on our current market outlook, we believe that most, if not all of the supply of stacked and newbuild drillships in the global fleet will be needed to meet growing future demand.

Speaker 2

Based on estimates by 3rd party rig brokers, shipyard Clearing prices for the remaining rigs are likely to be $300,000,000 or higher when including the cost of a second BOP. By comparison, shipyard prices of $119,000,000 for the DS-thirteen and $218,000,000 for the DS-fourteen are very attractive, representing a discount of 60% 30% respectively to the current market rate for a comparable asset. As a result, we believe the purchase options for both DS-thirteen and DS-fourteen represent compelling investment opportunities That will generate attractive returns over their lives. That being said, we will continue to be disciplined in our approach to reactivating rigs and will only reactivate the DS-thirteen and DS-fourteen for contracts that are expected to generate a meaningful return on our reactivation costs Moving now to an update on ARO Drilling, our unconsolidated fifty-fifty joint venture with Saudi Aramco. We expect that Newbuild Rig 1 will be delivered in September with contract start up expected by the end of October.

Speaker 2

Newbuild Rig 2 is still expected to be delivered before year end with contract start up anticipated in the Q1 of 2024. Arrow continues to progress the financing for the new builds, which we expect to be in place prior to delivery of both rigs. Saudi Arabia is an attractive, growing and sustainable market And Arrow is well positioned with its 20 rig newbuild program. The delivery and startup of the first two newbuilds will mark an important milestone in the growth story of Arrow. Moving now to an update on our share repurchase program.

Speaker 2

In May, we announced an increase in our share repurchase authorization to $300,000,000 Nine tend to repurchase $150,000,000 of shares by year end We began the repurchase program in May and to date we have repurchased $94,000,000 of shares at an average price of $62 As a result of the recent contract awarded to Valaris DS-seven, which includes a meaningful upfront payment and our Continued commitment to returning capital to shareholders, we have increased our 2023 share repurchase target from $150,000,000 to $200,000,000 We expect to achieve significant earnings growth and generate meaningful and sustained free cash flow over the next few years As rigs transition from legacy day rate contracts to higher market rates and reactivated rigs return to work on attractive contracts. Our philosophy on what to do with this future free cash flow is simple. We intend to return it all to shareholders unless there is a better or more value accretive use for it. This philosophy is consistent with our value driven approach to capital allocation And our goal of maximizing long term shareholder returns. I will conclude by reiterating some of the key points from my prepared remarks.

Speaker 2

First, We continue to deliver excellent operational performance, evidenced by achieving 97% revenue efficiency in the 2nd quarter and 98% through the first 2nd, the outlook for our industry and Valaris remain very positive with increasing demand constrained supply tightening the market. Further, we continue to see increases in contract duration, lead times and day rates, all of which point towards a strong and sustained up cycle. And finally, due to the positive market outlook And strong customer interest in these high spec assets, we intend to exercise the purchase options on newbuild drillships Valaris DS-thirteen and DS-fourteen as we believe that these investments will generate attractive returns. As we look ahead, we will continue to be disciplined in exercising our operational leverage And laser focused on maximizing long term shareholder value. I'll now hand the call over to Chris to take you through the financials.

Speaker 3

Thanks, Anton, and good morning and afternoon, everyone. Before reviewing our financial results for the Q2, I would like to take a moment to the recent change we have made to our adjusted EBITDA and adjusted EBITDAR calculations to better reflect the earnings profile of our operations and more closely aligned with the calculation methodology used by our closest offshore drilling peers. EBITDA and adjusted EBITDAR now include amortization associated with deferred mobilization and contract preparation revenues and costs And deferred capital upgrade revenues. We adjusted the calculation methodology in the Q2 and have restated all comparative periods in our 2nd quarter results Moving now to a review of our 2nd quarter results. Adjusted EBITDA was $15,000,000 compared to $28,000,000 in the prior quarter and adjusted EBITDAR was $59,000,000 Compared to $55,000,000 in the prior quarter.

Speaker 3

The impact of the calculation change on both adjusted EBITDA and adjusted EBITDAR Was negative $2,000,000 in the 2nd quarter and positive $4,000,000 in the 1st quarter. Excluding reimbursable items, revenues decreased to $390,000,000 from $408,000,000 primarily due to fewer operating days for the jackup fleet And lower mobilization and demobilization revenues. These were partially offset by an increase in the average day rate for both floaters and jackups. Jackup revenues decreased primarily due to fewer operating days and lower mobilization and demobilization revenues for the Valeris 249, which completed its contract offshore New Zealand late in Q1 and was in transit to its next contract offshore Trinidad during the Q2. In addition, Valeris 54 was sold following the completion of its contract late in the Q1 and Valeris 108 spent most of the second Quarter undergoing contract preparation work ahead of its upcoming 3 year bareboat charter to ARO Drilling.

Speaker 3

These decreases were partially offset by more operating days for Valeris 115 and 247 as both rigs commenced new contracts after idle periods in the first Order for contract preparation work and a 5 year survey respectively. Floater revenues increased due to more operating days in a higher average day rate primarily related to Valeris DS-twelve, which commenced a new higher day rate contract in the 2nd quarter after spending part of the Q1 mobilizing from Mauritania to Angola. Excluding reimbursable items, Contract drilling expense decreased to $348,000,000 from $356,000,000 primarily due to lower cost for Rigs that were idle or between contracts in the 2nd quarter and lower repair and maintenance costs associated with special periodic surveys and contract preparation work. These were partially offset by higher reactivation expense, which increased to $44,000,000 from $26,000,000 in the prior quarter. The increase in reactivation expense was due to the commencement late in Q1 of a reactivation project for Valeris DS 8 ahead of a 3 year contract offshore Brazil.

Speaker 3

This was partially offset by lower reactivation costs for Valaris DS-seventeen which is expected to commence operations this month offshore Brazil. General and administrative expense increased to $26,000,000 from $24,000,000 Primarily due to higher personnel costs and depreciation expense increased to $25,000,000 from $23,000,000 in the prior quarter. Other income decreased to $7,000,000 from $13,000,000 in the prior quarter. This was primarily due to A $29,000,000 loss recognized on a refinancing transaction completed in April and a $6,000,000 increase in interest associated with the refinancing transaction, which increased the principal amount of notes outstanding to $700,000,000 from $550,000,000 These were partially offset by $27,000,000 pre tax gain recognized in the Q2 on the sale of Valeris 54. We had tax expense of $25,000,000 compared to a tax benefit of $28,000,000 in the prior quarter.

Speaker 3

The Q1 tax provision included $44,000,000 of discrete tax benefit, primarily attributable to the favorable resolution of uncertain tax positions relating to prior years. Adjusted for discrete items, tax expense increased to $18,000,000 from $16,000,000 in the prior quarter. I want to finish my review of 2nd quarter results by commenting on our 2nd quarter performance relative to prior guidance. Our 2nd quarter EBITDA was better than our prior guidance, primarily due to higher than expected utilization as well as lower rig operating expenses, which benefited from lower crew costs and repair and maintenance expense. Before I get into details of our go forward guidance, I want to flag that our Q3 and full year 2023 guidance is impacted by 2 discrete items.

Speaker 3

1, the change to our EBITDA calculation methodology and 2, the recently announced contract for Valeris DS-seven And associated reactivation cost that falls into this calendar year. To help folks isolate the impact of these two changes, We have added a slide to the appendix of our investor presentation that lays out the impact of these items on Q3 and full year 2023 EBITDA, EBITDAR and CapEx. The investor presentation will be available on our website shortly after the end of today's call. A key thing to note is that, but for the impact of these discrete changes, the midpoint of our full year 20 For Q3 2023, we expect total revenues to range from $475,000,000 to $485,000,000 As compared to $415,000,000 in the 2nd quarter. Revenues are expected to increase primarily due to contract Startups for Valeris DS-seventeen, 121 and 249, which were all idle during the 2nd quarter And higher average day rate for both floaters and jackups as several rigs commence new contracts.

Speaker 3

We expect that contract Drilling expense will be $395,000,000 to $405,000,000 as compared to $374,000,000 in the 2nd quarter, Primarily due to Valeris DS-seventeen commencing its contract, more operating days for the jackup fleet and an increase in reactivation expense. Reactivation expense is expected to increase to approximately $55,000,000 from $44,000,000 in the prior quarter, Primarily due to the commencement of the Valeris DS-seven reactivation and a ramp up in spend associated with the DS-eight reactivation project, partially offset by the wind down of the Valeris DS-seventeen reactivation project. Stated expense is expected to be approximately $27,000,000 up slightly from $26,000,000 in the prior quarter mostly due to higher personnel costs. The change in EBITDA calculation methodology is expected to have a $10,000,000 positive impact on adjusted EBITDA And adjusted EBITDAR in the 3rd quarter. Taking these items together, adjusted EBITDA is expected to increase to $50,000,000 to $55,000,000 Compared to $15,000,000 in the 2nd quarter and adjusted EBITDAR is expected to be $105,000,000 to $110,000,000 compared to $59,000,000 in the 2nd quarter.

Speaker 3

Moving now to an update on our full year 2023 guidance. We currently expect revenues to be $1,800,000,000 to $1,830,000,000 which is at the lower end of our previously provided guidance range. This is primarily due to the continued softness we are seeing for harsh environment jackups in the North Sea, fewer operating days For Valeris DS-seventeen, which is expected to commence its contract a little later than previously anticipated following its reactivation And fewer operating days for Valeris DPS V following the change in the customer's drilling program that will lead to some time spent off rate While we are expecting lower revenue on the DPS-five versus our prior guidance, The fact that we are able to fill most of the rigs availability in the second half of the year on short notice with 2 separate contracts in U. S. Gulf It's a real testament to the strength of the market and our strong customer relationships.

Speaker 3

Contract drilling expense is expected to be in the range of 1 point $5,200,000,000 to $1,540,000,000 which is in line with our prior guidance despite our current revenue guidance coming down a bit. This result is due to an increase in reactivation expense of approximately $55,000,000 with approximately $40,000,000 due to the reactivation of Valeris DS-seven and the remainder due to slightly higher than anticipated costs on Valera's DS-seventeen and DS-eight. These incremental reactivation costs are Expected to be offset by lower operating expenses across the fleet due to fewer rig operating days, particularly in the North Sea, as well as lower crew and repair and maintenance expense. General and administrative expense is expected to be approximately $105,000,000 which is at the low end of our prior guidance range. The change in the EBITDA calculation methodology is expected to have a benefit Approximately $25,000,000 on full year EBITDA and EBITDAR.

Speaker 3

Taken together, these items Move full year guidance slightly lower for adjusted EBITDA to a range of $175,000,000 to $195,000,000 And higher for adjusted EBITDAR to a range of $330,000,000 to $350,000,000 Moving now to capital expenditures. 2nd quarter CapEx was $71,000,000 compared to $56,000,000 in the prior quarter. 2nd quarter CapEx included $44,000,000 for maintenance CapEx enhancements and upgrades and $27,000,000 for reactivation and contract specific CapEx for Valeris DS-eight and DS-seventeen. 3rd quarter CapEx is expected to be $100,000,000 to $110,000,000 with roughly half going towards maintenance CapEx enhancements and upgrades and the other half going toward reactivation and associated contract specific CapEx, including $10,000,000 for DS-seven. We anticipate that our full year CapEx will be in the range of $310,000,000 to $350,000,000 This is at the lower end of our previously guided range, primarily due to timing of reactivation and enhancement spend that is Expected to push from the Q4 into 2024, partially offset by an additional $20,000,000 related to the DS-seven reactivation project.

Speaker 3

This CapEx guidance does not include assumed expenditures for exercising our options to purchase drillships Valeris DS-thirteen and DS-fourteen. Exercising the options on both rigs would increase 2023 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 Valaris DS-eleven. I would now like to take a moment to provide further details around the recently awarded contract for Valaris DS-seven. This is a great contract win for Valeris, providing an opportunity to return one of our high quality stacked drillships to work offshore West Africa, which is expected to be one of the key basins for floater demand over the next several years. The economics for this contract are compelling And we expect to generate a meaningful return on our reactivation costs over the initial contract term.

Speaker 3

The total contract value of $364,000,000 which includes a meaningful upfront payment due at contract commencement implies an effective day rate of $428,000 per day. It is worth noting that this contract does not include the provision of any additional services or MPD, which typically increase daily operating cost by approximately $40,000 to $60,000 per day. In addition, our operating costs in West Africa are generally at least $20,000 per day lower than in other areas of the Golden Triangle. As a result, we expect that this contract will generate rig level annualized EBITDA of $95,000,000 to $100,000,000 and it will contribute meaningfully to our expected earnings growth in 2024 and beyond. Reactivation cost for Valeris DS-seven is expected to be approximately $90,000,000 plus approximately $10,000,000 of contract specific and other upgrades for a total project cost of roughly $100,000,000 The $90,000,000 of reactivation cost is higher than our previously guided cost range, primarily because we need to purchase more Capital equipment and inventory compared to our prior reactivations.

Speaker 3

This is due to us consuming most of our excess capital spares and inventory on completed and ongoing reactivation projects. Given the attractive drilling contract, which includes the meaningful upfront payment I mentioned earlier, we expect to pay back on the Reactivation project costs, including the contract specific upgrades to be less than 1 year. We also expect to earn a very attractive return on rate of 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 results of Valeris. Arrow EBITDA decreased to $17,000,000 from $28,000,000 in the prior quarter, primarily due to out of service time and increased costs associated with planned maintenance on 1 of Arrow's owned rigs.

Speaker 3

Arrow's 3rd quarter EBITDA is expected to increase to $20,000,000 to $22,000,000 from $17,000,000 in the 2nd quarter, primarily due to Valeris 108 commencing its 3 year lease contract and fewer out of service days. Arrow's full year 2023 EBITDA is expected to be approximately $100,000,000 to $110,000,000 which is $10,000,000 lower than prior guidance, At the end of the second quarter, we had cash and cash equivalents of $787,000,000 plus restricted cash of $18,000,000 providing a total cash balance of $805,000,000 Our total cash balance decreased by $39,000,000 during the quarter, primarily due to The increase in working capital was primarily due to 2 large invoices outstanding at quarter end For capital upgrades on Valeris DS-seventeen and mobilization for Valeris-two forty nine, both of which have now been received. As discussed on our Q1 conference call, we completed a refinancing transaction in April, resulting in the private placement of We used a portion of the net proceeds to fund the redemption of all of our $550,000,000 of senior secured first lien notes due 2028. In addition, we secured a 5 year revolving credit facility permitting borrowings of up to $375,000,000 which is secured on a 1st lien by the same assets that secure the new second lien notes.

Speaker 3

The revolver was undrawn as of June 30, 2023. To conclude my prepared remarks, I want to make a few comments on our capital allocation framework that is focused on 3 priorities. First, we want to maintain a conservative balance sheet with low leverage. In our recent refinancing and revolving credit facility transaction, enhanced our capital structure and provided us greater flexibility around capital allocation. 2nd, We will continue to pursue attractive investments and strategic growth opportunities, including investments in our fleet, such as our recent and ongoing drillship reactivations They're intended to generate meaningful returns and maximize future earnings and free cash flow.

Speaker 3

To be clear, we will to provide a meaningful return over the initial contract term. And 3rd, we are committed to returning capital to shareholders As demonstrated by the increase in our 2023 share repurchase target from $150,000,000 to $200,000,000 that we announced in conjunction with the DS-seven contract award. The DS-seven drilling contract includes a meaningful upfront payment It requires a low level of contract specific upgrades in the reactivation scope. These positive factors increase our flexibility to return capital to shareholders and we are acting on it. As we look to the future, our business should begin generating meaningful and sustained free cash flow as rigs under legacy contracts are recontracted at current market rates, reactivated rigs go on contract and reactivation spend ramps down.

Speaker 3

To reiterate Anton's earlier comment, our philosophy on what to do with this future free cash flow is simple. We intend to return it all to shareholders unless there is We've now reached the end of our prepared remarks. Operator, please open the line for questions.

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. The first question is from Eddie Kim of Barclays, please go ahead.

Speaker 4

Hi, good morning. So the comments around your intention to exercise both Purchase options on the DS-thirteen and fourteen is obviously a very strong sign of confidence in the market outlook. You were very clear about not reactivating these rigs and still securing attractive contracts for them. Just based on the conversations you're having now, Is it possible we could see one of these rigs securing a contract and beginning the reactivation process Even later this year or do you expect the reactivation from both these rigs to be more of a 2024 event?

Speaker 2

Hi, Eddie. Thanks. I think you've got it exactly right. We make a clear distinction about compelling value of Taking these assets given where we have similar assets, especially given that they have 2 BOPs are trading versus What we've been very clear about is being disciplined about reactivating a rig. DS-eleven, which is our only remaining drillship That is stacked right now that we put to market is a very, very similar asset to the 13 and the 14.

Speaker 2

So these are all Almost sister eggs, similar specifications. Ultimately, the decision as to which to put to work first is going to come down to Combination of what the customer is looking for. Everything else being equal, I'd say given the fact and the investment we're making in the 13 and the 14, we'd like But we're just going to need to see what the opportunity is, where it is in the world, have the discussions with Customers, we have had customers visit these rigs already. They're in fantastic shape. I was out there looking at them myself Recently, so we'll just have to see how it plays out.

Speaker 4

Okay. Okay, understood. And then just my follow-up, I mean, just with the DS-seven reactivation, this is now your 7th floater reactivation and you have far less, I guess available capacity than you did 18 months ago. So in that context, could you just update us on your latest thoughts On M and A, whether for specific assets or even a corporate acquisition, is this something you're still considering? Or are you content at this point We're finding good contracts for the DS-eleven, DS-thirteen and DS-fourteen, as you mentioned.

Speaker 2

Yes, Eddie. Absolutely. I mean, I think we've been very clear that this is an industry that needs to continue to consolidate. We continually look at market about consolidation opportunities. We're very comfortable with having a high specification fleet, gives us competitive advantage And we wouldn't want to see that being diluted.

Speaker 2

If there is an M and A opportunity that makes sense based On the synergies that can be generated from that transaction, we would absolutely look at it. But we also have plenty of opportunity To grow our business, I think we put a slide in investor deck that will be coming out. Our first focus is rolling out our high spec fleet that we have on water. We have 3 reactivations that are coming to market and we'll be earning day rates over the Before the middle of next year, we have 3 legacy contracts in the next 12 months that we need to roll From legacy contracts to market clearing rates and then some beyond that. So it's a combination of the both.

Speaker 2

We're very comfortable with Organic growth taking 13 and the 14 and growing our business that way, but if there are opportunities that make On the M and A side, we will absolutely execute on those.

Speaker 4

Got it. That makes sense. Great. Thanks for the color Anton. I'll turn it

Speaker 5

back. Thanks Eddie.

Operator

The next question is from David Smith of Pickering Energy Advisors. Please go ahead.

Speaker 5

Hey, good morning and thank you for taking my questions.

Speaker 2

Good morning.

Speaker 5

Good luck. Congratulations on the DS-seven contract, Very strong economics there. I did want to switch over to the jackups. I've been seeing some very strong jackup rates in multiple regions outside the North Sea, Yes, including a couple you recently announced in Australia. Just wanted to make sure I didn't miss it, but how would you characterize leading edge rates For the modern standard and heavy duty fleets?

Speaker 2

Yes. I I think you have that right. I mean, obviously, the North Sea has been we've been probably pretty forthright and transparent about that. The North See, especially in the UK side continues to disappoint, but we have a high spec fleet that can find opportunities in other places and we're actively doing that. Leading edge rates in the jackup market is more geographically diverse, so different markets operate slightly differently.

Speaker 2

We're obviously very proud to see the 247 going to work in Australia on a CCS project, which is a growing part of our business And we'll be a growing part of our business going forward at a leading edge rate of 180. We have a couple of additional contracts in Australia at 1 Southeast Asia is starting to catch up a little bit. So I think you're definitely well into the 100s. I'm not going to sit here and say that every contract that's signed is going to be at those leading edge rates. So There is a range depending on what market you're in, which is also dependent on kind of operating costs and kind of what the local supply demand Position is in those markets, but well into the 100.

Speaker 5

Certainly appreciate it. And they do seem a lot higher than they were last year. And where I'm going is as we think a little further ahead for your jackups leased to Arrow, Several of those leases expire late 'twenty four through 'twenty five. And I just wanted to check, A, if those leases might have options, the price options for Ascension, but if not, if those rigs were to stay with Arrow, How should we think about the relationship between potential new leases versus leaving out trade?

Speaker 2

Okay. I think Saudi Arabia is a long term sustainable market with long term work. So there is a I think there's plenty of work to be done in Saudi through those leased rigs. And Saudi rates Have continued to increase as have the other rates around the world. So we're a little way away From talking about the future of those rigs, but I think there are attractive opportunities in Saudi.

Speaker 2

It is the largest jackup market for high Jackups in the world, so also the market that many people say we'll drill the last well in the world. So having a strong presence as we have Through ARO, both through the owned rigs, the leased rigs and the 20 rig newbuild program is a great position for us to be in. So We'll look at the opportunities and do as we do, find what makes sense.

Operator

The next question is from Kurt Hely of Benchmark. Please go ahead.

Speaker 6

Hey, good morning, everybody.

Speaker 2

Good morning, Kurt. Good morning, Kurt.

Speaker 6

Hey, thanks for all that great detail. I really appreciate it. So, you had one of your larger competitors yesterday talked about the prospect for leading edge rates for 6th, 7th gen drillships getting into the high $500,000 a day sometime in 2024. Obviously, you're in a very good position to potentially capture that With those 2 drillships plus the stacked asset that you have. So just wondering if you can kind of Give everybody here on the call some insights as to how you think about pricing strategy going forward And what how you think your assets are potentially positioned to get kind of be in that leading edge rate discussion?

Speaker 2

I think we have on average high spec fleet, a lot of high spec fleets in the 50% in the top quartile, especially when you look on the ship side and the 13% and the 14% exercise those options will add to that. The floater and drillship market continues to move higher. I think I appreciate the comments on the DS-seven. I It's important for people to remember that not all markets are the same and not all contracts are the same. So the DS-seven is already a high It doesn't require any significant upgrades for this rig to go to work.

Speaker 2

West Africa is generally a low cost operating And as many tenders in West Africa are, these are kind of long cycle, long duration tenders. These rigs that rig was bid Kind of in January of this year and was a leading edge rate at the time it was bid. But rates continue to extend. I said on my I think day rates are in that kind of mid to high 400s. And as the supply demand continues to tighten up, I think it's going Continue to progress from there.

Speaker 2

The pacing of that is always somewhat debatable, but we've seen a clear progression in day rates through the 300s into the 400s and low 400s earlier in the year and the mid to high 400s where we are now and we see most bids going out And I think they'll continue to progress higher as the supply demand balance tightens.

Speaker 6

Yes, I appreciate that. So maybe in a different context, That's right. You've got the DS-thirteen, the DS-fourteen and you've got to reference the prospects of getting very positive Economic returns on those assets, what sort of day rate would you need over what duration To get those objectives that you think you need to get?

Speaker 2

Look, I think there's a balance, right? We run our fleet as a And I referenced, I think it was to Eddie's question earlier about having rigs rolling off to be able to leverage Into an upmarket, but there needs to be some balance. It's great to see increasing durations, in this market and for us Seeking some balance between now some very long term opportunities that are out there and building a base load of long term backlog is important. So not every rig needs to be treated equally. And having a significant fleet, one of the advantages of scale Being able to take a commercial approach where you get some long term contracts at what today are very attractive rates generating north of $90,000,000 of EBITDA on a rig a year and balance that with some opportunism, if we want to call it that and having some assets available To really kind of cherry pick and set at leading edge rates.

Speaker 2

So we're just going to we have the 11 and now we're looking at 13 and the 14. So we have Three more opportunities plus the rigs that we're rolling and we will take a portfolio approach. I think that's all I want to say about that. Okay.

Speaker 6

Well, that's fair enough. So just one more, if I may, right. So you referenced you got I think your comment was 12 to 15 incremental rig demand and a number of these rigs are going to require the activation Idle assets or potentially some of the stranded newbuilds. So kind of when you roll through that dynamic, right, what How many idle assets do you think that incremental demand will wind up absorbing?

Speaker 2

I would say 12 to 15. I mean, we talked about the number of rigs that are still attractive at the yards. We may see some rigs rolling from one part of the world to another, although that's not how we see the market playing out here. Most rigs that are On contract with a customer or working in a basin continue to be extended. And I think we as most of our competitors will look at Obviously, one of the considerations is not to have significant white space.

Speaker 2

We try to minimize the time between contracts Because there is an economic cost to moving a rig from one region even if you're being compensated, a portion switching contracts. So we balance that Between the alternative opportunities that are available to move the rig. So definitely there is a demand as we see it right now and what the projections say for as demand continues Increase, I think we went from 15 to 20 20 to 25, 25 to 30 opportunities that we're tracking right now. That's kind Five incremental opportunities in the upside and the downside in the since our Q1 call and that number continues to increase. So demand continues to increase.

Speaker 2

The market continues to tighten and I think there's a good projection that all of the attractive High spec ships like the 11, the 13 and the 14 and some portion of the realistically Reactivatable or at an economic cost need to come to market to meet the future demand from our customers.

Speaker 6

Got it. Okay. Thanks so much. Really appreciate it. Thanks.

Operator

And the final question today is from Fredrik Stena of Clarksons Securities. Please go ahead.

Speaker 7

Hey, Anton, Chris and team. Hope you are Well, and thanks for all the color today so far. I wanted to circle a bit back to the jackup Sorry to finish it up here. It seems like the North Sea market, as you say, is quite subdued, both this year And the next, and I think you said that the M class, not expect that to work in Norway in 2024 at least. But on the other hand, I think if you look in the same region, but to the floaters, we have definitely seen a tightening there now with very Large part of the fleet moving out of the regions.

Speaker 7

So I guess kind of my question is twofold. First, Now that there seems to be a shortage of semi subs in Norway in at least 25, Are you seeing any kind of new inquiries from your customers for projects that could either use a large Jacob Ora Semi, that's the first part. And secondly, are you able to give more color Broadly on where you potentially see the most opportunities for your North Sea tracker fleet Outside of the North Sea? In other words, where do you think you could potentially move some of your assets to reduce idle time? Thanks.

Speaker 2

Thanks. Good questions. Look, I'll start with some overall comment. I mean, we've been Quite transparent that the North Sea continues to be challenging second half of this year and through the end of 'twenty four. In the UK, Actually regulators are looking to ways to make the current tax regime more appealing to operators, but It really hasn't been sufficient to kind of promote getting back to work.

Speaker 2

That being said, we do have a number of rigs, The 92, 120 and 122 that are contracted well into 2025. There is work available, but it's generally shorter term. There is growing CCS work in the North Sea. I mean, we worked on Northern Endurance And Porthus in the Netherlands and I think recently, I mean, some announcements in the UK backing 2 additional large scale CCS projects, Acorn and Which is attractive for that market long term. Sometimes when people see rigs Leaving the area and heading over the horizon to better pastures, it does stir some thought Between regulators and industry that something needs to be done to retain assets.

Speaker 2

So There is plenty of work to be done in the area. We just have to see how it plays out. Obviously, Australia with high spec rigs is one good opportunity for Kind of the high spec assets that we operate to operate. There's work in the Middle East, where they generally like high spec assets, where we Look at in class or other of our high spec rigs. Those harsh environment rigs can work for non environment.

Speaker 2

It's just Finding the right opportunity and a commercial deal where the customer is willing to as was the case with the 2 47 I'm compensated for the mobilization. And Southeast Asia is now kind of coming back and Picking up demand, longer durations, high day rates there, which add that to the mix. So pretty wide Spread set of opportunities and we will look at what we see in the near term market versus what's available elsewhere in the world and As far as kind of high spec jackups in the Doing some of the work that was done by Semi Subs, there is a crossover there. There's a potential crossover in water depths between the 2, especially for kind of The shallow water, harsh environment rates, we haven't seen a huge amount of that coming through to the jackup market yet. But let's see how As you say, the Somerset market continues to be extremely tied to undersupplied.

Speaker 2

So that may be a factor we see coming through as we go forward.

Speaker 3

And I'd add even just when we think about moving rigs outside the North Sea, I mean it's been great to see with the one that we're moving to Australia to Be able to get that coverage not just on the mode there, but on the mode back and that's definitely something that we think about as part of the move.

Speaker 6

Which I will say

Speaker 2

we take as downside protection because we believe there are great opportunities for the 2 47 to continue in Australia. But if that doesn't pan out the way we We do have that downside protection of moving it back to the North Sea if we see a recovery there.

Speaker 7

Super helpful. And actually one word, just circling back to your the filters on contracting A strategy which you partially touched on. But as you say, with the DS-seven, that's the 7th rig you've taken out now in a relatively short Amount of time. So call it the overhang or optionality of your stacked Fleet, you can or you have become more and more comfortable with the cash flow that you'll generate from The rigs that you've already reactivated. So I guess one thing when it comes to reactivation is, let's just say, you need to get your cost covered, etcetera, and it needs to be A good economic decision on a project basis.

Speaker 7

But I guess you can also regardless of whether it's the DS 11, 13 or 14 that you take First, you can afford now to be a bit more greedy in a way you approach that. Have you The way that you're going to bid these 3 last assets, has anything changed there in terms of kind of holding on out for better rates?

Speaker 2

Look, we've been very clear from the beginning even when we were talking about bringing the 4 out a couple of years ago that We wanted to cover reactivation costs, right? Now as day rates have moved up and we've put additional of these rigs to work, We've, let's call it, increased our hurdle rates. We've expected to see a better return on each successive contract become, if you want Colloquial is a little more choosy on the contract that we're looking for and being more willing to be more patient On finding the right contract. And I think you've seen that action from us as we've Continue to put rigs to work. And yes, you're quite correct.

Speaker 2

Now with the 11 being the only remaining rig From our cold stacked fleet that's still available. We will, if necessary, be patient and wait for the right opportunity because we do Strongly believe in a constructive market. I mean, I think there are great opportunities with a balance of Opportunistic in having rigs that can roll in a few years and some potential very long term opportunities that are attractive and we have seen interest from customers on these rigs.

Speaker 3

And our criteria for turning these on forces us to be choosy, right, which is we've got to earn a meaningful return over that initial firm contract. And so we're only turning these on when we satisfy those criteria and we'll wait until we can.

Speaker 2

So we talk about the discipline of reactivating them and making sure that we get a meaningful return on that. But as the good commercial practices as the market gets stronger and we see increasing opportunities that we have an increasing Expectation of what it takes to turn these rigs and put them back into the active fleet.

Speaker 7

All right. Thank you both for further color. I appreciate it. And I wish you both a good day. Thanks, sir.

Speaker 7

Thanks. Thanks for the question.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Darren Gibbons for closing remarks.

Speaker 7

Thanks, Kate,

Speaker 1

and thank you to everyone on the call for your interest in Volaris. We look forward to speaking with you again when we report our Q3 2023 results. Have a great rest of your day.

Operator

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

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Key Takeaways

  • Volaris achieved 97% revenue efficiency in Q2 and completed its fifth floater reactivation (DS-17) ahead of schedule, including first offshore deployment of NLV’s ATOM RTX robotic system and ABS EHS-E certification.
  • Q2 adjusted EBITDA was $15 million (EBITDAR $59 million), with Q3 revenues guided to $475–485 million and EBITDA to $50–55 million, while full-year EBITDA is expected between $175–195 million.
  • Offshore drilling market remains strong with spot Brent above $80/barrel, 6th/7th-generation drillship utilization over 90%, and 25–30 ultra-deepwater opportunities projected, pushing leading-edge dayrates into the mid-to-high $400,000s amid shrinking supply.
  • Fleet strategy emphasizes disciplined reactivations and capital discipline, leaving only DS-11 uncontracted, and the company plans to exercise purchase options on newbuild drillships DS-13 and DS-14 at significant discounts to market prices.
  • Volaris increased its share repurchase authorization to $300 million and raised its 2023 buyback target to $200 million, reaffirming a policy to return all future free cash flow to shareholders absent higher-return investments.
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Earnings Conference Call
Valaris Q2 2023
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