Valaris Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the Valeris 4th Quarter 2023 Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. Today, we are experiencing national AT and T 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 4th quarter 2023 conference call. With me today are President and CEO, Anton Dibovitz Senior Vice President and CFO, Chris Weber 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 will be available on our website after the call. Now, I'll turn the call over to Anton Dybovitz, President and CEO.

Speaker 2

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

Speaker 2

1st, we remain confident in the strength and duration of this upcycle and the outlook for Valaris is positive with increasing demand and constrained supply tightening the market. 2nd, we continue to execute on the commercial front with nearly $3,000,000,000 of new contract backlog secured during 2023 at meaningfully improved day rates. Today, we sit with total contract backlog of more than $3,900,000,000 a nearly 60% increase from 12 months ago. And our contracted revenue coverage of more than 90% in 2024 underpins the meaningful improvement we expect in this year's financial results. 3rd, we are maintaining our 2024 EBITDA guidance range of $500,000,000 to $600,000,000 And finally, we continue to demonstrate our commitment to returning capital to shareholders.

Speaker 2

We repurchased $200,000,000 of shares in 2023 and we are now increasing our share repurchase authorization from $300,000,000 to $600,000,000 Starting with operations. Operating safely and efficiently remains our top priority and we ended the year with positive momentum with the 4th quarter safety performance being the strongest of the year. We remain focused on continued improvement and I would like to thank all our offshore crews and onshore personnel for their dedication to following our safe systems of work and keeping safety top of mind wherever we operate around the world. Of particular note, we had several rigs celebrate safety milestones during the quarter. And I'd like to congratulate the Valaris Norway, 72, 110 115 for each reaching 3 years without a recordable incident, a fantastic achievement by these teams.

Speaker 2

We're equally proud of Valeris 110 for being award Total Energy's and North Oil Company's Global Jackup Rig of the Year, a great example of our focus on safe and efficient operations and our collaborative approach to working with our customers. I also want to congratulate the entire Valaris team for the successful reactivation of Valaris DS8. The team completed the reactivation and executed a best in class importation into Brazil and customer acceptance with Petrobras, enabling the rig to commence its contract ahead of schedule. This marked the 5th drillship reactivation that we've completed since early 2022 and our second during 2023 following the startup of DS-seventeen in September. We continue to make good progress on reactivating DS-seven and look forward to adding another drillship to the active fleet later this year for a 2.5 year contract offshore West Africa.

Speaker 2

Our industry leading ability to execute these complex projects has been an important part of our growth story and a key driver for the meaningful improvement that we expect to see in our financial results in 2024 and beyond. Moving to our financial performance for the quarter, we generated adjusted EBITDA of $58,000,000 and adjusted EBITDAR adding back one time reactivation costs of $96,000,000 Chris will provide further details on our financial results and guidance a little later. Turning our attention to the market. Commodity prices remain supportive for continued investment in long cycle offshore projects with the 5 year Brent Ford price around $70 per barrel, a level at which approximately 90% of undeveloped offshore reserves are expected to be profitable. In addition, growing global demand for hydrocarbons means that these barrels will be needed to meet the world's energy needs.

Speaker 2

According to data from Restart, offshore upstream CapEx is expected to increase by 10% in 2024 and at a compound annual growth rate of 6% over the next 3 years. The floater market continues to develop positively. This is evident in the customer activity we are seeing with a growing pipeline of opportunities that are providing increased term with longer lead times, a great sign for the duration of the current up cycle. However, as we mentioned in our previous quarterly call, considering lengthening contract lead times, customer required upgrades and repositioning rigs for work, we would expect to see some gaps in schedules across the industry during 2024. Looking at pricing, leading edge dayrates continue to be in the mid to high 400s as demonstrated by our 2 most recent drillship fixtures.

Speaker 2

And we believe that they will continue to move higher over time as the remaining stacked and newbuild capacity continues to diminish and the total supply and demand balance further tightens. We believe that 2 to 3 year programs are likely to be awarded at or close to leaving edge rates, while we may see lower rates for some of the 5 year plus opportunities as some contractors may be willing to accept a lower rate to secure long term duration and backlog. Similarly, we may see somewhat lower rates on shorter term gap fill jobs to avoid rigs becoming idle. For Valaris, we are focused on maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best economics possible in each unique bidding situation. Our recent purchase of newbuild drillships, Velaris DS-thirteen and DS-fourteen at highly attractive prices demonstrates our confidence in the strength and duration of the upcycle.

Speaker 2

And we will be disciplined in waiting for the right opportunities to reactivate these rigs and Valera's DS-eleven. Moving to shallow water. While the recent announcement from Saudi Arabia has created some uncertainty, we remain positive on the outlook for the jackup market. 1st, we expect that Saudi Arabia will continue to be the largest jackup market in the world for the foreseeable future. We understand the recent announcement reflects a change in the timing and pace at which Saudi will develop their resources, given that they currently hold about 3,000,000 barrels of spare capacity.

Speaker 2

The delay in increasing maximum sustainable capacity from 12000000 to 13000000 barrels per day is expected to be focused on the expansion of just 2 oilfields, Safania and Manifa and we do not think it changes the kingdom's long term view on the need for these resources given their expectations for growing oil demand. 2nd, the global jackup market is extremely tight with active utilization approaching 95% and the contracted rig count at its highest level in nearly 9 years. And we continue to see incremental demand coming to market outside of Saudi Arabia, which Matt will talk about a little bit later. And finally, approximately 90 contracted jackups representing more than 20% of the contracted global jackup fleet are at least 40 years old, meaning it is likely that some of these rigs will be retired and the overall number of jackups in the global fleet will decline further over time. Regarding our business, we have 8 rigs leased to ARO, our unconsolidated joint venture with Saudi Aramco with an additional 2 rigs scheduled to commence leases this year.

Speaker 2

For context, the charter revenue on all our leased rigs accounts for just 5% of our contract backlog. Aramco and the Kingdom remain fully committed to ARO, including its new build program, which is a cornerstone project of the Saudi Vision 2,030 program. And we think that the recent Saudi announcement will have minimal, if any impact on our business. Moving now to an update on our capital return program. We expect to deliver significant earnings and cash flow growth over the next few years as we reprice rigs to market day rates and reactivated rigs go back to work.

Speaker 2

And we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it. We continue to demonstrate our commitment to returning capital to shareholders. Last year, we authorized a $300,000,000 share repurchase program and returned $200,000,000 to shareholders. And we are now increasing the authorization to $600,000,000 providing increased capacity to opportunistically repurchase shares. Now, I'll hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our recent contracting success and our contracting outlook for 2024.

Speaker 3

Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of Q4, we have secured new contracts and extensions with an associated contract backlog of approximately $1,500,000,000 These awards have increased our total backlog to more than $3,900,000,000 representing an almost 60% increase over the past 12 months. More than $1,000,000,000 of this new backlog is for the floater fleet, including multi year contracts for drillships Velaris DS-four and DS-sixteen. DS-four was awarded a nearly 3 year contract with Petrobras Offshore Brazil and DS-sixteen received a 2 year contract extension with Oxy in the U. S.

Speaker 3

Gulf of Mexico. Importantly, these contracts are expected contribute to a meaningful improvement in financial results with dayrates transitioning from legacy rates in the low 200s to leading edge dayrates. We are also awarded several new jackup contracts across the North Sea, Trinidad and Australia, which combined added nearly $500,000,000 in backlog, demonstrating the broad based strength of the shallow water market. Most notably, we received a 3 year contract extension for Volaris 120 with Harbour Energy in the U. K.

Speaker 3

North Sea. This extension is expected to commence in the Q3 of 2025 at a day rate that is meaningfully higher than the current spot rates, indicative of an improving North Sea jackup market. Moving now to some commentary on our major markets, starting with floaters. The contracted benign environment floater count reached 123 during the Q4, its highest point since late 2016. And utilization for the active 6th and 7th generation drillships was at 93%.

Speaker 3

We continue to see a strong pipeline of opportunities for floaters, and we are currently tracking approximately 30 prospects, each with an expected duration of greater than 1 year that are estimated to commence before the end of 2026. We anticipate that approximately half of these opportunities will need to be met by either incremental reactivations of stacked and stranded new builds or active rigs moving regions. This compares favorably to a pool of approximately 10 drillships across the stacked and newbuild fleet that are considered likely reactivation candidates in today's market. In terms of timing, we estimate that a handful of these 30 opportunities will commence later this year, with the remainder likely to be evenly weighted between 20252026. We continue to see Brazil being a key driver of vulture deepwater floater demand and Petrobras currently has opportunities for 5 rigs across its sepia and Hancador developments outstanding.

Speaker 3

In addition, we anticipate that Petrobras are likely to come to market for additional rigs beyond the 2 active tenders, and we believe that these opportunities combined could increase the floater count offshore Brazil by up to 3 additional rigs. We are currently tracking more than a dozen opportunities off the coast of Africa. We are excited by the prospect of increased activity in this region with several large IOCs expected to add rigs over the next few years, including some long term programs that could cover multiple operating locations that may be attractive opportunities for both our active fleet and the DS-eleven, 13 and 14. Brazil and Africa combined account for approximately twothree of the total opportunities with the remainder spread across other parts of South America, Southeast Asia and the Gulf of Mexico, and primarily with large IOCs. On the jackup side of the business, demand continues to steadily increase with the contracted jackup count now at its highest level in almost 9 years.

Speaker 3

As a result, active utilization for jackups is approaching 95% with leading edge dayrates firmly established above 100 and 50,000 in several regions. We expect to see solid demand growth over the next few years in the broader Middle East, Southeast Asia and West Africa that could absorb in the range of 10 to 15 incremental rigs. The strength of the global jackup market is evidenced by some of our recent contract awards, including a second contract for the Volaris 247 Offshore Australia at a market leading rate of 180,000 per day and a 300 day contract for the 2 49 Shore Trinidad at approximately 163,000, representing a 30% increase over its current day rate. We have had great contracting success in North Sea, having secured new contracts and extensions with associated backlog of more than $420,000,000 since the beginning of Q4. Contract awards for the Volaris Stavanger 121123 mean that our active North Sea fleet is now fully sold out for 2024, and we are in active discussions for opportunities commencing in 'twenty five and beyond.

Speaker 3

The 3 year extension for Volaris 120 that I mentioned earlier provides a good indication of the strengthening commercial environment in the U. K. North Sea from 2025 onwards. Our contract wins since the start of the 4th quarter have further improved our 2024 contract coverage. On the floater side, we now have just 2 of our 13 active floaters, the DS-ten and the DPS-five with near term contract availability.

Speaker 3

DS-ten is due to complete its existing contract with Shell Offshore Nigeria towards the end of the Q1. And we believe the rig is well placed for long term opportunities in the region that are expected to commence in late 2024 or early 2025. In the interim, we are actively pursuing short term opportunities that could fill some of the potential gap. DPS V is currently mobilizing for its 110 day contract with E and I Offshore Mexico. We are in active discussions regarding opportunities in the region, but anticipate the rig will experience some idle time in the second half of the year.

Speaker 3

On the jackup side, our remaining contract availability in 2024 is down to just 2 rigs, the Volaris 2 47 and the 144. Recently, we have seen encouraging developments around environmental permit approvals for projects offshore Australia. And as a result, we now have good line of sight into future work for the Volaris 247. For the Volaris 140 forty four, we continue to pursue near term opportunities in the Gulf of Mexico, while looking for longer term opportunities outside of the region. Finally, we are in advanced discussions with BP related to contract extensions for Mad Dog and Thunder Horse, the 2 production platforms that we manage in the U.

Speaker 3

S. Gulf of Mexico, And we expect to finalize these extensions soon. In summary, we are extremely pleased with our contracting success in 2023, adding nearly $3,000,000,000 in new contract backlog during the year at meaningfully improved day rates. We remain laser focused on filling our remaining uncontracted days in 2024 and securing attractive contracts for work commencing in 2025 beyond. I will now hand over the call 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 the 4th quarter results, our outlook for the Q1 2024, and I also will provide updated guidance for the full year 2024. Starting with our 4th quarter results, revenue was $484,000,000 up from 4 $55,000,000 in the prior quarter and adjusted EBITDA was $58,000,000 up from $40,000,000 in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense, was $96,000,000 up from $91,000,000 in the prior quarter. Adjusted EBITDA increased primarily due to more operating days across the fleet and lower reactivation expense.

Speaker 4

In the Q4, we had more operating days for Valeris DS-seventeen which commenced its contract with Equinor offshore Brazil in early September following its reactivation. We also had more operating days for jackups Valeris 107, 249 and the Norway, all of which incurred some idle time during the prior quarter. These benefits were partially offset by fewer operating days in the Q4 for Valera's DS-twelve due to mobilization and a brief shipyard visit between contracts as well as jackups Valeris 76 and 123, both of which completed contracts during the Q4 and are undergoing contract preparation and planned maintenance work prior to the start of their next contracts. 4th quarter reactivation expense was $39,000,000 compared to $51,000,000 in the prior quarter, primarily due to lower reactivation expense for Valeris DS-eight, which commenced its contract with Petrobras offshore Brazil at year end, partially offset by higher reactivation expense for Valeris DS7, 7, which is expected to commence its contract offshore West Africa in mid-twenty 24. One item to note is that 4th quarter income tax was a $790,000,000 benefit.

Speaker 4

This is due to an $800,000,000 non cash benefit that resulted from a change in valuation allowance for certain deferred tax assets. Given our constructive outlook, we now believe it is likely that we will be able to utilize these assets over time. Cash flow from operations in the Q4 was $97,000,000 and capital expenditures were $463,000,000 including $348,000,000 related to the purchase of newbuild drillships Valeris DS-thirteen and DS-fourteen, which is comprised of the purchase price for the rigs and the cost incurred to prepare them for mobilization from South Korea to Las Palmas. We had cash and cash equivalents of $636,000,000 at the end of the quarter. Cash declined by $422,000,000 during the quarter due to capital expenditures, primarily the purchase of DS-thirteen and DS-fourteen as well as share repurchases.

Speaker 4

These were partially offset by $97,000,000 of cash generated from operations. Our $375,000,000 revolving credit facility remains fully available providing total liquidity of just over $1,000,000,000 at the end of the quarter. In the Q4, we repurchased $50,000,000 of shares, taking our full year repurchases to $200,000,000 representing 3,000,000 shares or approximately 4% of the total outstanding share count. Now I'll provide a brief overview of ARO Drilling's financials. As a reminder, ARO is not consolidated in the financial results of Valeris.

Speaker 4

ARO EBITDA increased to $39,000,000 in the 4th quarter from $24,000,000 in the prior quarter, primarily due to new build jackup Kingdom 1, commencing its maiden contract in November and more operating days for ARO 4000 and 1 following some out of service days for planned maintenance during the Q3. Moving now to our Q1 2024 outlook, we expect total revenues will be in the range of $490,000,000 to $500,000,000 as compared to $484,000,000 in the 4th quarter. Floater revenues are expected to increase due to contract start ups for Valeris DS-eight and DS-twelve. However, jackup revenues are expected to decrease due to idle time for several rigs, including Valeris 107, 120, 123 and 247. 3 of these rigs are undergoing special periodic surveys and contract preparations prior to the start of their next contracts, including Valeris 2 47, which after leaving the shipyard will mobilize from the North Sea to Australia ahead of its next job.

Speaker 4

Each of these rigs are scheduled to commence new contracts before the end of the second quarter. Expect that contract drilling expense will be $430,000,000 to $440,000,000 as compared to $402,000,000 in the 4th quarter. This is primarily due to the addition of operating costs for Valeris DS-eight and DS-twelve following their recent contract startups as well as costs associated with the jackup SPS and contract preparation work that I just mentioned. In addition, we rolled out offshore wage increases in certain regions at the beginning of the year. General and administrative expense is expected to be approximately $27,000,000 up from $24,000,000 in the prior quarter.

Speaker 4

As a result, we expect adjusted EBITDA to range between $30,000,000 to $40,000,000 including $25,000,000 to $30,000,000 of reactivation expense for Valaris DS-seven ahead of its expected contract commencement in the Q2. CapEx in the Q1 is expected to be $145,000,000 to $155,000,000 Maintenance and upgrade CapEx is expected to be approximately $70,000,000 including upgrades to Valera 76 and 108 ahead of their long term bareboat charters to ARO. Reactivation and associated contract CapEx is expected to be approximately $50,000,000 including $20,000,000 of reactivation spend that was previously anticipated in late 2023. Finally, newbuild CapEx is expected to be approximately $30,000,000 primarily related to mobilization costs from South Korea to Las Palmas for Valeris DS-thirteen and DS-fourteen. I'll now provide our current financial guidance for the full year 2024.

Speaker 4

Consistent with the preliminary guidance provided on the Q3 call, our full year 2024 guidance does not account any incremental reactivations for contracts that have yet to be executed. We currently forecast revenues of $2,300,000,000 to $2,400,000,000 contract drilling expense of $1,650,000,000 to $1,750,000,000 and G and A expense of $105,000,000 to $110,000,000 As Anton mentioned, we are maintaining our full year adjusted EBITDA guidance of $500,000,000 to $600,000,000 and this includes reactivation expense of approximately $40,000,000 At the midpoint, this is approximately 4 times higher than 2023 EBITDA with the increase primarily driven by contract startups for reactivated drillships, rigs rolling to higher dayrate contracts during the year and increased earnings from our North Sea jackup fleet. Given our contract wins in the Q4, we now have 92% of our 2024 revenue contract at the midpoint of our revenue guidance range. As we look across the year, revenues and EBITDA are expected to increase meaningfully in the 2nd quarter compared to the 1st quarter, primarily due to several jackups starting new contracts following SPS and contract preparation work. Further improvement is expected in the second half of the year, primarily due to Valeris DS-seven, which is scheduled to start its contract late in the Q2 following its reactivation and certain rigs rolling to higher day rate contracts.

Speaker 4

Full year 2024 capital expenditures are expected to range from $390,000,000 to $430,000,000 compared to our prior guidance of $325,000,000 to $365,000,000 inclusive of the newbuild CapEx we announced late last year upon delivery of DS-thirteen and DS-fourteen. The increase is primarily due to contract preparation costs which are largely reimbursable and the timing of spend. Maintenance and upgrade CapEx is expected to be approximately $290,000,000 with about $55,000,000 being reimbursable. This covers SPS and contract preparation requirements as well as capital spares. Like 2023, 2024 is expected to be a heavy year for jackup SPS projects.

Speaker 4

The $40,000,000 increase in maintenance and upgrade CapEx compared to our preliminary guidance is largely related to contract preparation work for Valeris DS-four's contract with Petrobras, which we announced in December, as well as preparation work for 108's 3 year bareboat charter with Arrow. This incremental CapEx is largely reimbursable through upfront fees. Reactivation and contract specific CapEx is expected to be approximately $80,000,000 which is $20,000,000 higher than our preliminary guidance due to spend that was expected to be incurred in the Q4 pushing into 2024. Finally, we anticipate newbuild CapEx of approximately $40,000,000 primarily related to the mobilization of Valeris DS-thirteen and DS-fourteen from South Korea to Las Palmas. That concludes my review of our financial results and guidance.

Speaker 4

I'll now hand the call back to Anton for some closing remarks.

Speaker 2

Thanks, Chris. I'll conclude by reiterating some of the key points from our prepared remarks. First, we remain confident in the strength and duration of this upcycle and the outlook for Valaris is positive with increasing demand and constrained supply tightening the market. 2nd, we continue to execute on our operating leverage in a disciplined and thoughtful manner by repricing rigs from legacy day rates to much higher market rates and successfully delivering reactivated rigs with attractive contracts. Our recent contracting success including the addition of approximately $1,500,000,000 in new contract backlog since the beginning of Q4 has increased contracted revenue coverage to more than 90% in 2024, underpinning the meaningful improvement expected in this year's financial results.

Speaker 2

And finally, we continue to demonstrate our commitment to returning capital to shareholders by repurchasing $200,000,000 of shares in 2023 and now increasing our share repurchase authorization from $300,000,000 to $600,000,000 We expect to generate meaningful sustained free cash flow over the next few years and we intend to return it all to shareholders unless there is a better or more value accretive use for it. We've now reached the end of our prepared remarks. Operator, please open the line for questions.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from David Smith with Heikkinen Energy Advisors. Please go ahead.

Speaker 5

Hey, thanks. Good morning. Congratulations on the quarter.

Speaker 2

Thanks, Dave. Thanks, Dave.

Speaker 5

It does seem that there's a healthy amount of opportunities for term floater programs starting in the next 12 to 24 4 months. And I'm curious how you think about bidding a potential reactivation versus an active drillship on these? Kind of how you see the trade off between putting another drillship to work versus locking in duration and minimizing potential white space for the active fleet?

Speaker 2

I can hi, Dave. Look, I think we've been pretty clear. Our first priority is to keep our active fleet highly utilized and there are great opportunities for us to do that. When it comes to stack capacity, the 13, 14 and 11, I think we've been clear that we expect to get a meaningful return on reactivation costs around $100,000,000 maybe with as long as we can get a term contract, we see some opportunities to do that as well. We have people talking to us and interest in all 3 of the 13, 14 and 11.

Speaker 2

But again, our first priority is to keep the active fleet highly utilized on attractive contracts and then look for the incremental opportunities that we see coming to market as demand continues to increase, waiting for the right opportunity. Look, we have 10 rigs once the 7 goes to work in the middle of this year working. That's a fair stretch away from where we were a couple of years ago with just 4 of our ships working. And we're willing to be patient given the positive momentum we see in the market to wait for the right opportunity to put those rigs to work.

Speaker 5

I Appreciate that. And follow-up question, if I may. Nice to see the execution of the $200,000,000 of share repurchases through year end and nicer to see the authorization double to $600,000,000 How should we think about the pace at which you might use that authorization going forward?

Speaker 4

Yes, Dave, this is Chris. I appreciate the question. We remain committed to returning capital to shareholders. As Anton mentioned, we returned $200,000,000 of capital to shareholders last year through share repurchases on a $300,000,000 authorization. Our Board just doubled that authorization to $600,000,000 from 3 $100,000,000 This is an open ended authorization and with the additional capacity AFR repurchases, you think this gives us the ability to opportunistically repurchase shares in 'twenty four and into 'twenty five?

Speaker 4

And this is all part of our commitment to returning capital to our shareholders.

Speaker 2

We believe we trade at a discount to our intrinsic value. We put the increased authorization into place for a purpose. We intend to use it and we're going to be opportunistic about it.

Speaker 5

Great to hear. Thank you. I'll circle back in the queue.

Operator

Thanks. Thank you. The next question comes from Eddie Kim with Barclays. Please go ahead.

Speaker 6

Hi, good morning. Just wanted to ask about how you see the trend in dayrates have been in that mid to high 400s for about 6 to 8 months now. You mentioned in your remarks that you believe day rates will continue to move higher over time, but did highlight some potential for maybe some lower day rates on longer term work and even some shorter term gap fill work. So just taking all that together, would it be fair to say leading edge levels could hold flat through year end before starting to trend higher again next year? Just how are you thinking about the trend here?

Speaker 7

Hi, Eddie. I'll start this off. It's Matt. I mean, I think if we take a look at the market fundamentals over the last 12 months to 18 months, we've seen increase in lead time for tenders, which means customers are coming out further in advance of when they expect to commence. The contracting durations are increasing.

Speaker 7

These are all data points that support the longevity of this market. And I think probably one of the most recent data points is that we're now seeing majors picking up rigs on what I would

Speaker 2

classify as speculative

Speaker 7

supply or speculative demand, depending on which side you look at it from. So what that means is if you look at the JV that was announced recently Total, they while we know they have a long string of development opportunities around the world, it's unlikely they have approval on all of those programs. So they're picking up rigs or picking up a rig to satisfy some of their demand with the idea that they can pick it up for rates that are favorable to them for obvious reasons to avoid alternatives. So we see that as a really strong mark in the business where speculative demand is starting to pick back up again. So the read across day rates is that that illustrates the strength in the market.

Speaker 7

And so we see the trend and the range that we offer to continue.

Speaker 2

Eddie, this is Anton. I mean, we're always reticent. I know everybody wants us to predict when are we going to get to that next milestone. And prognostication is a difficult art. But what I will say if you look back over quarters, leading edge day rates continue to grind higher on average.

Speaker 2

The market continues to tighten. The simple economic supply and demand, the market continues to tighten. There are less attractive assets sitting on the sidelines and incremental demand coming to market. And that will drive day rates higher over time. But that is not to say when we we shouldn't take a single data point and extrapolate it that there are not going to be gaps in programs given increasing lead times to contract and repositioning rigs for work in attractive markets and needing to do upgrades.

Speaker 2

But overall, we were positive on the market and rates have continued to grind higher over time.

Speaker 6

Got it. Got it. Great. Thank you for that. My follow-up is just on the Saudi capacity expansion curtailment.

Speaker 6

So they've had a big increase in their jackup rig count over the past 12 months to around, I believe, 85 jackups today. The announcement probably doesn't change the kingdom's long term view, as you mentioned, but I have to think it could impact their needs in 202520 6. So just in that context, do you think we could see Saudi's jackup rig count decline a bit over the next 2 years before trending higher afterwards? And what could this mean for your 4 or so leased rigs that come off contract at the end of this year?

Speaker 2

Yes, it's a good question. I think you have it characterized quite well. Look, at this stage, it's a little bit early to say what, if any, the exact impact is going to be on Saudi's rig count. But in my prepared remarks, I said, as far as our business, we believe it will have minimal to any impact on our business. They delayed the expansion of Sufontein and Munifah.

Speaker 2

These are 2 oil focused fields, but they fully expect to develop resources and in their own prediction see increasing demand for oil and gas over time. I think what's really important is that the overall global jack up market is really tight right now. Active utilization approaching 95% and the total rig count in its highest level in almost 9 years. So we see incremental demand coming to market outside the Middle East and in fact in the Middle East as well with 10 to 15 incremental rigs. So if and it's a big if, still to be seen, if there are rigs that are relocated from Saudi, there is incremental demand to take on those rigs.

Speaker 2

If you look at our fleet, we have 8 Arrow is an unconsolidated joint venture. Valeris, we have 8 rigs leased in there. We have 2 additional rigs going in there. These are new contracts for ARO. So we'll have new lease contracts going in there this year.

Speaker 2

Saudi Aramco and the Kingdom remain fully committed to the Arrow joint venture. The newbuild program that we have at IMI is a cornerstone project of the Saudi 2,030 Vision. 2 of our rigs that we have leased in are operating on gas fields, which is not the focus. And if you look at the remainder of those rigs, it's around 5% of our backlog. So we're very comfortable with our position and the go forward position in Saudi and also the global jackup market.

Operator

Thank you. The next question is from Frederic Steen with Clarksons Platou Securities. Please go ahead.

Speaker 8

Hey, guys. Hope all is well. I wanted to circle back to the capital return policy. And as you said and announced today, you've now opened up for €300,000,000 more, and I totally agree that share repurchases for you guys is a good thing right now, given where your steel values are, at least in my framework. However, I wanted to challenge you a bit in a way on the addition to you say you want to return all free cash flow to shareholders and then you add that unless there's a better way or more value accretive use for it.

Speaker 8

And then you could potentially end up chasing value forever and not getting, as I said, sent out in a way. Is there a stop to that? If you've done the DS-eleven, 13 and 14, is that kind of at the point where you look for no more value and then say that now is the time to distribute each cent? Or could it be value accretion beyond those 3 rigs as well?

Speaker 2

It's a good question. And we expect to deliver significant earnings and cash flow growth over the next couple of years. We're heading into well into an up cycle and we expect it to continue. And I think we've been very clear about our intention for what we're going to do with that increased earnings and cash flow growth and return it all to shareholders. It's never a great idea to make absolute statements, right?

Speaker 2

And so I wouldn't read too much into that caveat. Our job is to maximize shareholder growth. And there may be things that make sense for us to invest in, in keeping with that, whether it's additional MPD systems or a very attractive opportunity to buy an asset. I'm just throwing examples out there. So having absolute statements is never a great idea, but let's be very clear on what our shareholder return policy is.

Speaker 2

When we're generating significant amounts of cash, we intend to return it all to shareholders, unless there is clearly a better value accretive use for that cash.

Speaker 8

Thank you very much. That's very helpful. Just one more from me. You have clearly, at least in my world, DS-eleven, 13 and 14 are the 3 rigs that you should prioritize to take out, if any. But there are some other stacked jackups, semis, etcetera, across your fleet.

Speaker 8

Or have you come to a point for some of these assets where you would more actively consider scrapping them or selling them for non drilling use? Or is this still something you would, call it, keep on your balance just for future optionality?

Speaker 2

Look, I think for us, we prioritize getting ships back to work. That's a capital allocation question. The returns talked earlier, previous question about the reactivation costs versus where leading edge day rates are and the ability to return on that reactivation cost and on attractive contracts. For jackups internationally the durations of the contracts even though the numbers are a lot smaller have made it a more difficult capital allocation or a less attractive capital allocation decision. But we do have those jackups, we do see jackup durations increasing, which means increasingly there may be some opportunities for some of those assets.

Speaker 2

But right now given where we see the momentum in the markets, the 3, the 6 and our jackups are options for us and with positive growth in the market, we think they're attractive options for us to hold right now.

Speaker 8

All right. Thank you very much. Thank you for taking my question and have a good day.

Speaker 2

Absolutely. Thanks a lot for the questions.

Operator

Thank you. The next question comes from Greg Lewis with BTIG. Please go ahead.

Speaker 9

Hey, thank you and good morning and thanks for taking my I guess most of my questions have been asked. So I was kind of curious on your views like Total announced that rig joint venture with Vantage. Just knowing that Volaris and previously Ensco have really had a good long term relationship for Total for years. I'm curious if that was something you actually looked at or considered and kind of your view on the potential opportunity for those types of JVs going forward?

Speaker 2

Look, I think it's a great sign for the market in general, as Matt said earlier, that operators are looking for the first time in a long time at contracting rigs well beyond programs that they have approved or FID and it speaks to their view of the market that the market is going to continue to tighten and where day rates are going to be going. So it's an attractive opportunity and I think it's a great sign for where the market is going. We will absolutely part of having it's important to have scale in this business. And part of having scale in this business means you can take a portfolio approach. So we have 10 ships that are working or looking to go to work.

Speaker 2

Yes, we would be willing to look at an opportunity to secure long term backlog and baseload backlog for a long period of time and then be opportunistic, more opportunistic on some of our other assets. But we look at each opportunity and bidding situation in its own rights. And if it makes sense and is value accretive to shareholders and fits into the portfolio, we would absolutely look at engaging something like that. But it depends on the commercial opportunity that's available.

Operator

Thank you. The next question comes from Kurt Hallead with Benchmark. Please go ahead.

Speaker 10

Hey, good morning.

Speaker 2

Good morning, Kurt. Good morning.

Speaker 10

Hey, thanks for the updates. So I'm kind of curious in the context, right? You have now, as you mentioned, 3 drillships that can be activated and brought into the market, maybe a couple of semisubmersibles, but obviously the focus of the market is on the ultra deepwater ships, right? Now my question really relates to this, right? As you've gone through this process of activating rigs over the course of the past 12 months, the industry, the drillers have been very much focused on making sure that they get some upfront payment for the activation of these assets.

Speaker 10

So I'm just kind of curious as we roll forward with less, fewer activations, but as you mentioned, kind of contract prep opportunities, are the offshore drillers and you in particular in a position continue to demand upfront payments from your customers for the contract prep work that's going to happen?

Speaker 2

Yes, absolutely. As the market continues to tighten, we absolutely continue to have that opportunity. I think we kind of led the charge on that in seeking upfront payments. It's we look at the opportunity based on the economics of the opportunity and getting a significant upfront payment. 1, it's not subject to kind of operational downtime risk and it helps the cash flow profile, economics of a job.

Speaker 2

We have a different cost of capital versus our customers. And if not all operators are amenable to it, some of them like it and would prefer to pay cash upfront and maybe get a lower headline day rate. But we look at the economics of the job. So I think the opportunities for significant upfront payments are as much there, if not more there than they ever have been.

Speaker 10

Okay. That's good color. So as you guys are very much aware, right, the investor community has been a little bit reticent to continue to put money flow into offshore drillers broadly. Some of that was due to concerns about the pace of contracting activity slowing down and pretty much the concept around leading edge rates stalling out and maybe temporarily early, but stalling out nonetheless. You addressed both elements of that in your prepared comments, but what is the if demand is so tight and the outlook for demand exceeds supply, I don't know.

Speaker 10

I mean, it does beg the question like it seems like you guys are in the driver's seat and oil companies seem to still have some element of, I don't know, leverage to keep the lid on pricing. So what do you think is at play here?

Speaker 2

Look, I mean stalling out or taking a pause versus being solid with Leading Edge generating $100,000,000 annually of EBITDA, it's a really good market. And incremental demand continues to come to market. The number of attractive sideline capacity in the form of STACK rigs continues to dwindle around 10 today. So I think this is a process that plays out over time. And we fully expect there as the supply demand balance continues to tighten there to be continued pressure on day rates and day rates to move higher over time.

Speaker 2

It's going to be a we see a long duration cycle and we just need to play it out and be disciplined as we play into that cycle, which is why we have the 11, the 13 and the 14 and we're going to be patient and disciplined about bringing that capacity back to the market.

Speaker 10

Okay. And then just lastly on shareholder distributions, you made it clear that your stocks are undervalued, which is why you're going to buy back stock. Obviously, if the market starts to recognize the inherent value, he starts begging the question as to whether or not you may consider a dividend. So can you just give us an update on how you're thinking about the dynamics between share repo and the dividend strategy longer term?

Speaker 4

Yes. No, Kurt, great question. As we said, when this business really starts generating sustained and meaningful free cash flow, which we don't think we're that far away from, we think having both

Speaker 9

makes sense.

Speaker 4

And so from a dividend would obviously want to have that be at a level that sustainable through the cycle, but we think both are good components of a capital return policy.

Speaker 10

Okay. Appreciate that. Thanks, guys. Thanks.

Operator

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

Speaker 1

Thanks, MJ, and thank you to everyone on the call for your interest in Volaris. Look forward to speaking with you again when we report our Q1 2024 results. Have a great rest of your day.

Powered by Quartr

Key Takeaways

  • Market outlook positive: demand rising and supply constrained is tightening both floater and jackup markets, with leading-edge dayrates in the mid-to-high $400k for drillships and above $150k for jackups.
  • Contracting success: secured nearly $3 billion of new backlog in 2023—boosting total backlog to $3.9 billion (up 60% YoY) and achieving over 90% 2024 revenue coverage, including $1.5 billion in awards in Q4.
  • Guidance maintained: reiterating full-year 2024 adjusted EBITDA of $500–600 million and revenues of $2.3–2.4 billion, with Q1 EBITDA expected at $30–40 million and annual capex of $390–430 million.
  • Capital return commitment: repurchased $200 million of shares in 2023, doubled buyback authorization to $600 million, and plan to return all future free cash flow to shareholders unless higher-return uses emerge.
  • Operational execution: achieved five drillship reactivations since early 2022, acquired two newbuild drillships at attractive prices, and delivered the strongest quarter-end safety performance with multiple rigs reaching multi-year incident-free milestones.
AI Generated. May Contain Errors.
Earnings Conference Call
Valaris Q4 2023
00:00 / 00:00