Valaris Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 12 speakers on the call.

Operator

Good day, and welcome to the Velaris First Quarter 2024 Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Nick Georges, Vice President, Treasurer and Investor Relations. Please go ahead.

Speaker 1

Welcome everyone to the Volaris First Quarter 2024 Conference Call. With me today are President and CEO, Anton Divovitz Senior Vice President and CFO, Chris Webber Senior Vice President and CCO, Matt Lyne 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, earlier this 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 Divovitz, President and CEO. Thanks, Nick,

Speaker 2

and good morning and afternoon to everyone. During today's call, I'll begin with an overview of our performance during the quarter and provide an update on the offshore drilling market. I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and provide some additional color on recent contract awards as well as our contracting outlook. After that, Chris will discuss our financial results and guidance before I finish with some closing comments. To begin, I want to highlight some key points about our business that we will cover in more detail during this call.

Speaker 2

First, I'm very pleased with our start to 2024. Thanks to the efforts and focus of the entire Valaris team, we delivered strong safety, operational and financial performance and a great Q1. 2nd, we continue to make progress towards underwriting our earnings growth by securing new contracts at higher day rates and consistently building our contract backlog. This past quarter marks the 6th consecutive increase in our backlog, which now totals more than $4,000,000,000 And finally, we expect that the levels of customer demand we are seeing, particularly for work that is expected to commence in 20252026 will continue to support our anticipated earnings and cash flow growth over the next few years. And we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it.

Speaker 2

From a safety and operations perspective, our performance during the 1st 3 months of the year was excellent. We finished the quarter with no lost time incidents and fleet wide revenue efficiency of 97%, a great achievement by the entire Valera's team, both offshore and onshore. With several rigs celebrate safety milestones during the quarter and I'd like to congratulate in particular the Valaris 75 for reaching 5 years without a recordable incident, as well as the VALERIS 110 and 120 for each reaching 3 years without a recordable incident. Well done to everyone involved. I also want to congratulate the crews of Valeris DS8 for achieving a successful audit from ANP, the oil and gas regulatory body in Brazil with positive feedback on the rig condition, safety culture and maintenance processes following the rigs reactivation allowing for a smooth contract startup ahead of schedule.

Speaker 2

DS-eight is the 5th drillship that we have reactivated over the past 2 years. We are proud of our industry leading track record of executing reactivation projects and we remain highly focused on delivering another successful startup for DS-seven, which is due to commence a multiyear contract offshore West Africa later this quarter following its reactivation. Importantly, our strong safety and operational performance during the Q1 helped us deliver better than expected financial results. In the Q1, adjusted EBITDA was $54,000,000 and adjusted EBITDAR adding back one time reactivation costs was $84,000,000 These results were better than our guidance primarily due to the high levels of revenue efficiency that our team delivered during the quarter. Chris will provide further details on our financial results and guidance a little later.

Speaker 2

Turning now to the broader offshore drilling market. Oil prices have increased since the beginning of the year driven by demand growth, heightens geopolitical tensions and an extension of OPEC plus production cuts. The combination of these factors has led to the prospect of a tighter supply demand balance through the rest of the year. Looking at further, the 5 year Brent Ford price is above $70 per barrel, a level at which more than 90% of undeveloped offshore reserves are expected to be profitable. As a result, commodity prices remain very supportive for continued investment in long cycle offshore projects.

Speaker 2

We see positive signs from the leading indicators of offshore rig demand with global upstream CapEx and offshore FIDs both expected to see strong growth through 2026. The floater market continues to improve with the contracted benign environment floater count increasing to its highest point since late 2016. We are also seeing increased contract durations with new drills of fixtures signed so far this year averaging more than 2 years of term for the first time since 2014. The growth in opportunities with longer durations as well as increased lead times between contract award and commencement are both supportive of a sustained upcycle. While we expect to see some gaps in rig schedules this year and certain programs have pushed to 2025, leading edge dayrates continue to gradually move higher and we have recently seen an increasing number of dayrate fixtures in the high 400s and some in the low 500000s.

Speaker 2

We believe that rates will continue to move higher as demand increases. Average contract durations grow and sideline capacity is absorbed into the market. We continue to focus on maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best contract economics possible in each unique bidding situation. We anticipate contract awards for the programs currently being tendered will pick up pace over the remainder of the year. We believe that 2 to 3 year programs are likely to be awarded at or close to leading edge rates.

Speaker 2

Beyond these, we may see a range of rates for shorter term jobs, whether for gap fill jobs to avoid idle time or opportunistic pricing for rigs in the right place at the right time. We continue to see customer interest in our STACK 7th generation drillships Volaris DS-eleven, DS-thirteen and DS-fourteen. These rigs are the highest specification assets remaining on the sidelines and we are in active discussions with customers to put these rigs to work. We will only reactivate these rigs for opportunities that we expect will provide a meaningful return on the reactivation costs over the firm contract term. Moving to shallow water, the global jackup market remains tight.

Speaker 2

Marketed utilization is nearly 95 percent and the contracted rig count ended the Q1 at its highest level in nearly a decade. On our Q4 call, we discussed the announcement from Saudi Arabia that the kingdom was delaying plans to increase its maximum sustainable capacity. As expected, the direct impact on our business has been minimal with ARO receiving a contract suspension notice for just one of its 19 rigs, Valaris 143, which Valaris leases to ARO. Valaris 143 is a highly capable modern jackup and we see opportunities to work the rig outside of Saudi. As such, we made the decision to terminate the contract rather than accepting a 12 month suspension, resulting in the loss of $4,000,000 of backlog.

Speaker 2

The rig will be delivered back to Valeris in the coming weeks. We're actively pursuing contracting opportunities in other markets and we'll be patient to find the right job for the rig. More broadly, offshore drilling contractors have announced Saudi Aramco contract suspensions for a total of 22 rigs. We believe that approximately half of these rigs are likely to be competitive in other high specification benign environment ultimately leave Saudi Arabia, we expect there to be sufficient incremental demand to absorb them in an orderly fashion. In terms of the harsh environment market, the supply demand balance in the North Sea improved meaningfully in the latter half of twenty twenty three and fundamentals have remained positive since then.

Speaker 2

Marketed utilization in this region is currently 91%. Our rigs are fully contracted for 2024 and we see robust customer interest for programs that line up well with our 2025 availability. Before I finish, I'd like to briefly comment on our capital return program. Last year, we returned $200,000,000 to shareholders through our share repurchase program. Earlier this year, the Board increased our repurchase authorization to $600,000,000 from $300,000,000 and we intend to use it opportunistically.

Speaker 2

Looking ahead, we expect to generate meaningful and sustained free cash flow in 2025 and beyond. And we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it. 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. Thanks Anton and good morning and afternoon everyone. Since the beginning of the Q1, we have secured new contracts and extensions with associated contract backlog of more than $520,000,000 These awards have increased our total backlog to more than $4,000,000,000 representing 43% increase over the past 12 months and our 6th consecutive quarter of backlog growth.

Speaker 2

Recent awards include a multi year contract offshore Angola for the Volaris 144 at a leading edge day rate for a benign environment jackup, along with 3 year extensions for Mad Dog and Thunder Horse, which we manage on behalf of BP in the U. S. Gulf of Mexico. For floaters, we saw priced options exercised on Volaris DS-nine with Exxon Offshore Angola and the DS-seventeen with Equinor Offshore Brazil, the latter of which was a day rate of $497,000 The exercise of these options extends the firm programs for these rigs into mid-twenty 25, as well as our The contracted The contracted benign environment floater count increased to 127 rigs during the Q1, its highest point since late 2016, an increase of 26 contracted rigs since the lows reached in early 2021. We continue to see strong customer preference for high specification 7th Velaris fleet.

Speaker 2

Marketed utilization for class of assets stands at 92% globally and has exceeded 90% since early 2023. These high levels of utilization have resulted in a continued improvement in average day rates for new contracts, which have increased from approximately $450,000 in the second half of twenty twenty three to approximately $480,000 through the 1st 4 months of 2024. Looking at expected future demand and ongoing tenders, we continue to see Brazil, Africa and the Mediterranean combined, accounting for more than 60% of the roughly 30 floater opportunities we are tracking with durations of at least 1 year. We anticipate 10 to 15 of these opportunities will need to be met by either incremental reactivations of stacked or new build rigs or active rigs moving regions. In Brazil, Petrobras currently has 31 contracted floaters, including 6 rigs that have yet to commence contracts.

Speaker 2

Petras has 2 ongoing tenders, Hancadore and Sepia, with the potential for another tender to be launched later this year. IOCs are also evaluating potential programs in Brazil, and of these may result in incremental rigs needed to meet demand in the market. We are currently tracking more than a dozen opportunities offshore Africa and in the Mediterranean, with up to half of these requiring incremental rigs. And we anticipate that the floater count in this region could rise to nearly 30 rigs over the next few years. We are excited about 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 may be attractive opportunities for our active fleet along with the DS-eleven, DS-thirteen and DS-fourteen.

Speaker 2

In the Gulf of Mexico, we see several long term opportunities on the radar and expect this market to remain balanced with customer demand largely met by existing supply in the region. A more recent indicator of the strength of the floater market has been the uptick in demand in Southeast Asia, with several operators looking at opportunities that could require incremental rigs in the region. On the jackup side of the business, marketed utilization for jackups is approaching 95%, with leading edge day rates in the mid to high $100,000 in several regions. However, if contracts for each of the 22 rigs suspended by Aramco were terminated, global marketed jackup utilization would decline by approximately 5%. While this may lead to some pressure on dayrates in the near term, we do not think that the rates announced on the 2 recent contracts for rigs relocating from Saudi are indicative of the broader market.

Speaker 2

As Anton mentioned, we have seen an improvement in the North Sea market and customer interest remains strong, particularly for programs commencing in the second half of twenty twenty We're also encouraged by the increasing number of longer term new energy and plug and abandonment programs that could result in incremental demand in this region. In terms of our immediate contracting priorities, we have near term availability on just 2 of our 13 active floaters, Volaris DS-ten and the DPS-five. DS-ten is now expected to continue its existing contract with Shell Offshore Nigeria until late May, with the potential to continue into June based on well timing. We continue to believe the rig is well placed for long term opportunities that are expected to start in 2025. And in the interim, we are actively pursuing short term opportunities that could fill some of the expected gap.

Speaker 2

DPS V is expected to complete its current program with ENI Offshore Mexico late in Q2. While some of the programs we were initially targeting for the rig have pushed into 2025, we remain in discussions with customers for work in the second half of the year. In addition, DS-twelve began its campaign offshore Egypt during the Q1. The firm term of this contract concludes in the Q4. There is potential the customer's well program extends to the end of the year, and the rig is well positioned for future opportunities in the Mediterranean and offshore Africa.

Speaker 2

Looking ahead to 2025 floater availability, 2 of our rigs have priced options, one of which is at a legacy rate, and we expect both will be exercised. We are in active discussions for the remaining rigs with either the existing customer or other operators with work programs that are expected to commence next year. On the jackup side, with the Velaris 144 recently contracted, our only rig with meaningful contract availability in 2024 is the Valaris 143, and we are pursuing opportunities for the rig outside Saudi Arabia. Our active North Sea fleet is sold out for 2024. Excluding rigs with priced options, we have 4 rigs with available days in 2025 and are in active discussions regarding programs that would keep these rigs busy through next year.

Speaker 2

This includes Velaris 92, which has been efficiently executing its customers' work scope and is now expected to complete this work in the Q1 of 5, 1 year earlier than previously anticipated. We are already in discussions with other operators about alternative programs for the rig and feel confident we will replace this backlog soon. In summary, we are focused on capitalizing on the attractive opportunities we see in the market, building contract backlog through new contracts at significantly higher day rates and are laser focused on filling our uncontracted days in 2024 and securing work commencing in 2025 beyond. And now, I will hand over the call to Chris to take you through the financials.

Speaker 3

Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of the Q1 results, our outlook for the Q2, and I also will provide an update on our guidance for the full year. Starting with our Q1 results, revenue was $525,000,000 up from $484,000,000 in the prior quarter and adjusted EBITDA was $54,000,000 down from $58,000,000 in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense was $84,000,000 down from $96,000,000 in the prior quarter. As expected, adjusted EBITDA decreased primarily due to lower revenues and higher costs for the jackup fleet associated with planned out of service time for rigs undergoing special periodic surveys and contract preparation work.

Speaker 3

This was partially offset by more operating days for the floater fleet. In the Q1, jackup revenues decreased primarily due to fewer operating days for several rigs, including Valeris 107, 123 and 247. The Valeris 107 was idle for most of the first quarter between completion of its previous contract offshore New Zealand and its current program offshore Australia. While VALERIS 1 hundred and twenty three and 247 underwent planned SPS and contract preparation work ahead of new contracts that are expected to commence in the 2nd quarter. Contract drilling expense for the jackup fleet also increased due to contract preparation costs for Valeris Stavanger, which is expected to start a new contract this month.

Speaker 3

These items were partially offset by an increase in EBITDA for the floater fleet, primarily due to Valeris DS-eight starting its contract with Petrobras late last year following reactivation and higher revenue efficiency in the Q1 compared to the prior quarter. Our Q1 results came in better than our guidance primarily due to higher revenues resulting from strong revenue efficiency. We had cash and cash equivalents of $509,000,000 at the end of the quarter. Cash declined by $127,000,000 during the quarter, primarily due to capital expenditures of $151,000,000 partially offset by cash generated from operations of $26,000,000 Our $375,000,000 revolving credit facility remains fully available providing total liquidity of $884,000,000 at the end of the quarter. Moving now to our 2nd quarter outlook, we expect total revenues in the range of $580,000,000 to $600,000,000 compared to $525,000,000 in the Q1.

Speaker 3

Floater revenues are expected to increase due to more operating days for Valeris DS-twelve and DPS-five, both of which commenced new contracts during the Q1, as well as Valeris DS-seven, which is expected to commence its contract offshore West Africa in June following its reactivation. In addition, Valera's DS-fifteen and DS-sixteen will roll to higher day rate contracts during the Q2. Jackup revenues are also expected to increase due to more operating days for rigs that recently commenced new contracts or are expected to start new contracts during the Q2. We expect that contract drilling expense will be $460,000,000 to $470,000,000 up from $445,000,000 in the Q1. This is due to the addition of operating costs for several rigs following the contract startups that I just mentioned, along with costs for Valera's DS-thirteen and DS-fourteen, which arrived in Las Palmas during the first quarter and are being stacked.

Speaker 3

These items are expected to be partially offset by lower reactivation expense. General and administrative expense is expected to be approximately $30,000,000 compared to $27,000,000 in the Q1. We expect adjusted EBITDA of $85,000,000 to $105,000,000 including approximately $10,000,000 of reactivation expense for Valaris DS-seven. CapEx in the Q2 is expected to be $100,000,000 to $110,000,000 Maintenance and upgrade CapEx is expected to be approximately 75,000,000 dollars including upgrades to Valera 76 ahead of its long term bareboat chartered Arrow. Reactivation and associated contract specific CapEx is expected to be approximately $25,000,000 and newbuild CapEx is expected to be approximately $5,000,000 primarily related to trailing mobilization costs for Valera's DS-thirteen and DS-fourteen.

Speaker 3

Our second quarter outlook is largely in line with what we expected at the beginning of the year. Turning to full year guidance, our revenue for 2024 is almost entirely contracted except for the and DPS-five. While our full year EBITDA guidance range of $500,000,000 to $600,000,000 contemplates some uncontracted time for these rigs in the second half of the year, we need to secure some incremental work for both rigs to be able to achieve the midpoint of the range. We are in active discussions with customers and remain laser focused on securing the work. As we look to the second half of the year, revenues and EBITDA are expected to increase meaningfully compared to the first half for both our floaters and jackup fleets.

Speaker 3

Floater results are expected to increase due to Valera's DS-seven commencing a contract following its reactivation and the impact of DS-sixteen rolling to a higher day rate contract. Jackup results are expected to increase due to higher utilization and dayrates for the North Sea fleet and contract commencement offshore Australia for Valeris 107 and 247 during the first half of the year. Full year 2024 capital expenditures are expected to total $420,000,000 to $460,000,000 This is $30,000,000 higher than our prior guidance range with the increase due to contract preparation and survey costs for VALERIS-one hundred and forty four ahead of its recently announced multiyear contract offshore Angola that is expected to commence early next year. This incremental CapEx is expected to be incurred in the 4th quarter. As a reminder, we expect that approximately $55,000,000 of our full year 2024 CapEx will be reimbursed through upfront customer payments.

Speaker 3

That concludes my review of our financial results and guidance. 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, I'm very pleased with our start to 2024 as we have delivered strong safety, operational and financial performance. Congratulations to the entire Valaris team on an excellent start to the year. 2nd, we continue to execute on the commercial front and we are making progress towards underwriting our earnings growth by securing new contracts at higher day rates and consistently building our backlog.

Speaker 2

And finally, we see strong customer demand for work that is expected to commence in 20252026 that will continue to support our anticipated earnings and cash flow growth over the next few years. We believe the future is strong for Valeris and we thank our employees, customers and investors for their support. 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 Greg Lewis with BTIG. Please go ahead.

Speaker 4

Yes, thank you and good morning everybody and thanks for taking my questions. I guess my first question is, I was hoping to get some more color around the 144 jackup. Clearly, that was a good contract. Just some kind of high level questions around the all in rate, kind of roughly how much does it cost to maybe mobilize a rig like that from basin to basin? And really when kind of timing wise did those contract negotiations kind of get to the finish line?

Speaker 4

Just there's been some questions around with all the noise, with all the, I guess, volatility out of Saudi Arabia, what that's doing for rates just given the that was a pretty healthy day rate on that rig?

Speaker 5

Hi, Greg. Matt here. So thanks for the questions on 144. So maybe hit with the timing first. The discussions were ongoing during the late half of 'twenty three, but the contract was signed in March of 'twenty four after we had learned about Saudi Aramco's challenges or intention to suspend 22 rigs.

Speaker 5

From a we're not able to disclose the day rate based on the agreement with the customer, but what I can tell you is that from a cost of mobilization, we're assuming a little bit less than $10,000,000 to move the rig. So you can make some assumptions based on the TCV that we've provided for the range of the program.

Speaker 6

Okay. That's great.

Speaker 2

This is Anton. I'll just reiterate. I mean, the contract came together around the same time. The Saudi announcement was in January. The contract was signed in March.

Speaker 2

But I would reiterate Matt's comments on during his prepared remarks that there have been some fixtures out in the market, but we don't believe that those are indicative of the broader market for jackups and where it will be going forward. And this is a great contract and we're really excited about moving the 144 to West Africa and commencing that contract.

Speaker 4

Yes, absolutely. And then you kind of talked about the you kind of lumped in West Africa Med or Africa and Med together. And I guess a couple of questions around that is, you talk about the potential for 30 rigs in the region. So as we think about that basin really or that I guess area I guess is probably the better word, A couple of questions around, where is that market currently in terms of versus the 30 you're thinking about? Really does that include any opportunities in East Africa or kind of and then really as you're looking at these opportunities, any kind of sense for realizing it's probably multiple types of opportunities?

Speaker 4

Any kind of sense on the durations of these a lot of this work? Are these kind of shorter term, longer term on average type contract durations that kind of are going to start absorbing rigs into this region?

Speaker 5

Sure. So let's start with timing. On the indicative numbers we're sharing that more than 30 across those regions, they're based on opportunities greater than 1 year starting in 'twenty five and 'twenty six, okay? If you look at the number 30, if you use that as the assumption basis for Africa Med, you're close to about half of those represented in that region. So that gives you an idea of quantum of the potential growth of that area.

Speaker 5

And if you we often take a look at using Rystad to model the CapEx process across multiple years. And so some of the growth we're seeing when you look at say if you ran from 20 22% to 30% versus now 24% to 30%, we're seeing an increase in CapEx spend across that period of 26% on a comparative basis from 22% to 24%. And what's interesting is in the top 2 of that, one of those is Africa, which we see a potential increase in CapEx of up to 52%, which is quite evenly split between shallow and deepwater. So indicative of the work for 144 moving to West Africa and then the opportunities that we see both known and future potential prospects makes it look quite a bright area. And yes, within there, there are some opportunities in East Africa, particularly if you're referring to Mozambique, does provide some of the supply to that area demand to that area.

Speaker 2

But let me just take it back a second. So we're going from the potential incremental demand in Africa. Generally, we're really excited about. We're talking about numbers from the low 20s to the 30 number that Matt talked about. So potentially incremental assets that need to serve Africa broadly around 7.

Speaker 4

Okay, wow. Thank you very much. Super helpful.

Speaker 2

Certainly a bright spot in the market.

Operator

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

Speaker 7

Hi, good morning. I wanted to dig deeper into the outlook on the jackup market. So it's a 22 suspended jackups in Saudi. You alluded to some potential pressure on day rates in the near term, leading edge recently for the benign market has been around that 160,000 to 170,000 level. Is it reasonable to assume that that leading edge could fall to maybe, I don't know, 130,000 to 140, Just curious on your thoughts as to the potential magnitude of the pricing pressure that you highlighted?

Speaker 5

Sure. Eddie, maybe I'll jump in 1st and then Chris and Anton can add some color. So of the 22, we see about half and I think Anton mentioned that in his prepared remarks. And you also mentioned that the jackup utilization for high spec units is at 95%. So there's sufficient demand based on the current utilization to absorb those rigs.

Speaker 5

Will there be some near term rate pressure for those contractors who want to fix rigs sooner? There may be as we've seen through a couple of fixtures, but we don't think that's indicative of a longer term trend. So we feel as though there's sufficient demand tying back to some of the topics I just mentioned around CapEx growth where we see a strong market in the future and we may not see all of those rigs come back into the competitive international benign environment market as quickly as those first two.

Speaker 2

So to scope it, roughly half of those 22 are even competitive in the international market. We think they can be absorbed in the market in an orderly fashion. From our perspective, we have 19 rigs outside of those that we have operating in Saudi. The majority of those 15 are in the North Sea, Trinidad and Australia, which leaves us with 4. 3 of those are on long term contracts.

Speaker 2

So we think there's plenty of capacity given the utilization levels in the international market. There's strong demand that those rigs that may come out of Saudi for those who choose not to wait or maybe take them back to their owners home market like China or Egypt for those rigs to be absorbed in an orderly fashion. And as said on the 143, we think there are great opportunities for that rig. We'll be patient and we'll find the right job for it.

Speaker 7

Got it. Thanks for that color. Just shifting over the floater market here. Anton, in your prepared remarks, you said you expected these 2 to 3 year contracts to be awarded at or close to leading edge rates, which is great to hear. But I assume that that comment is more in reference to hot rigs currently working.

Speaker 6

How much of a discount do

Speaker 7

you expect we could see for sidelined rigs winning some of that longer term work?

Speaker 2

I don't think we can expect to see a discount for sidelined rigs. I can't talk for what other people do, but personally how we view the market. The 11, the 13 and the 14 are the highest specification assets available in the market, 2 BOPs. We've seen the market for 7th generation rigs. We see strong demand for them over the next few years.

Speaker 2

So I don't think yes, leading edge rates and when we're talking about term 2 to 3 year contracts are in that mid to high 400s range with potentials and we've seen that. It's great continue to gradually move higher as we've said with average day rates moving from the mid-400s to the 480s in the 1st 4 months of the year. And we think they'll continue to move higher as the supply demand balance increases, because there's more incremental demand coming out and we're looking forward to finding the right opportunities for the 11, 13 and 4 gs.

Speaker 7

Got it. Great. Thank you, Anton. I'll turn it back.

Operator

Thank you. The next question is from David Smith with Heikkinen Energy Advisors. Please go ahead.

Speaker 8

Hey, thank you. I had some technical difficulties, so hopefully I'm not asking the same question someone else did. But question for Chris, just circling back to the guidance, I wanted to make sure I understood correctly that 24 EBITDA guidance is maintained that 500 to 600 range, but would need incremental work for the DS-ten and the DPS-five to get to the midpoint. So I wanted to make sure I heard that correctly, but also wanted to ask about your comfort level for the low end of guidance, if minimal incremental work for those rigs materializes?

Speaker 9

Yes, David, it's exactly right. We're maintaining our guidance range $500,000,000 to $600,000,000 To get to the midpoint of that range, we need to get some incremental work on the 10 and the 5. We do assume but we need some incremental work to get to the midpoint of that range. So that's what we're focused on. Matt and his team and the whole organization is laser focused on securing that work and we're active discussions with customers for it.

Speaker 10

Okay.

Speaker 8

If Mexico work doesn't materialize in the second half for the DPS-five, would you look at that rig as a candidate for U. S. Gulf well intervention and P and A work? Not a lot of rigs in the region are good candidates for midwater work. So that might be an opportunity?

Speaker 2

I'll let Matt talk about the capability of the rig because that is a great asset and then maybe I'll come back on your question.

Speaker 5

Thanks for the excellent leading question. I think for the DPS-five, it's both moored and DP capable. So it broadens the market opportunities for that rig both in U. S. And Mexican Gulf.

Speaker 5

The program it's working on right now with ENI, it's doing one well in moored capability and the other one in DP. So it provides quite a flexible opportunity. There are a number of opportunities on the well intervention side, So that market is proving to be quite interesting in the U. S. Gulf.

Speaker 5

There are also continued opportunities with P and A and traditional drilling. And I think when we look at our track record, similar situation to last year, we've been able to fill those opportunities that keep the rig fully active through the year. The next key is what's next. So there's longer term opportunities in the Gulf of Mexico region. There were some longer term opportunities that shifted from 24 to 25 that we had we're focused on that are likely to return that are attractive, but we're also marketing the rig internationally.

Speaker 5

So there's a number of longer term opportunities exist across the Atlantic that are quite attractive to provide us the revenue visibility for that rig on a long term and lower cost basis.

Speaker 2

So I mean 24% is 97% underwritten from a revenue Clearly, we have work to do on the DS-ten and also the DPS-five, but we'll remind, we were in exactly the same position with the DPS-five last year at this time. And Matt and the team did a great job of stringing together work, near constant work in the second half of the year and delivering on those rigs. So we're just going to have to see have some pieces fall in place and see what we can do. We are modeling some idle time on those rigs, but we clearly have some work to do as Chris said to deliver the midpoint of our guidance.

Speaker 8

Appreciate the color. Thank you. I'll circle back. Thanks.

Operator

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

Speaker 10

Hi, Anton and team. Hope all is well. I have two questions for you today, and I just want to follow-up a bit on what David asked about the guidance. Anton, you said that 97% of the revenue was underwritten. Is that on the low end of the revenue guidance 2.97 percent or $2,300,000,000 Just wanted to get the details correctly.

Speaker 2

At the midpoint.

Speaker 10

At the midpoint. Okay, super helpful. Are you when you think about the DPS-five, DS10 and relation to the comments around or in your prepared remarks about rates potentially being maybe a bit more volatile for short term work. How are you balancing that when you're bidding these 2 rigs forward? Should we expect to see rates that would be deemed materially below leading edge rates?

Speaker 10

Or should we see something that's at least for the DS-ten still in the 400s?

Speaker 2

I'd go back to my comments and this is more a general market comment, but I think it applies broadly and including to us. Term programs and we talk about term programs 2 to 3 years in the mid to high 400s into the 500s for the right opportunity. I think where you see that range is more look, we look at getting the highest day rate we can to get the best economics on every job that we go after. But I think what you can see is, if you're talking about gap fill bridging, we're focused on getting the right program and fixing rigs long term where we can. And then you work backwards from that and talk about the gap fill that you may be looking for.

Speaker 2

And I think that's where you may see more of a variety and it may make economic sense for you to take a bridge program and look at what economics you can achieve on that. That's how we think about it.

Operator

Mr. Steen, your line is open.

Speaker 10

Can you hear me? Yes, okay. Perfect. Sorry, Anton, I dropped out actually when you started your answer. So I'll look at that at the transcript.

Speaker 2

We can follow-up with you offline, Parekh.

Speaker 10

Yes. Okay. Good. Just have one more in terms of contracting strategy and how to think about rates going forward. And I totally understand that you might not want to reveal your strategy.

Speaker 10

But in general, we have some sideband capacity. You're mentioning the DS-eleven-thirteen-fourteen. There are some other rigs that have been taken out from the yard. So clearly, there's new and high spec quality wanting to get into the market here. In terms of high spec assets versus lower spec assets, you could either argue that there will be a discrepancy in rates just because of the specs or that they will tend towards each other as the market tightens and customers won't have any choices in terms of choosing the best rigs.

Speaker 10

How are you thinking about that? And I'm asking particularly for 'twenty four and 'twenty five more than in the long term.

Speaker 2

Look, I can't talk for others, but I can tell you what our philosophy is and I did allude to it on an earlier question. 12 of our 13 ships are 7th generation and that's a great position to be on, including the 11, the 13 and 14. These are the highest spec rigs that are on the sidelines and we can deploy for the right opportunity. We see strong pipeline of customer demand, especially in 2025 and 2026, and we will maximize the economics that we can work those rigs on as we see the opportunities.

Speaker 10

Perfect. And finally, any new thinking around any of your other stacked assets, EPS III, EPS VI, any of the jackups? Or are they going to be as is for now?

Speaker 2

Look, as it is now, there is a preference in the market right now from our customers for high specification assets. From a capital allocation perspective, it's made more sense for us to deploy capital towards our high spec drillship fleet. That's what we've been focused on over the last couple of years. Our focus is on the 11, 13 and 14, but as the supply demand balance continues to tighten over the next few years, what we may see, there are only 10 as we see it, effective reactivation candidates sitting on the sidelines in the high specification assets. As that market continues to tighten over the next few years, we could likely see more opportunities for semis to come back to the market.

Speaker 2

But right now, our focus is on the drillships.

Speaker 10

Perfect. Thank you very much for taking my questions and have a good day.

Speaker 2

Absolutely. Thanks, Ruud.

Operator

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

Speaker 6

Hey, good morning, everybody.

Speaker 8

Good morning, Kurt.

Speaker 2

Good morning.

Speaker 6

Hey, so, Anton, I wanted to follow-up. You referenced the prospect of an increase in the cadence of contract awards as we go into the second half of this year. Just wondering if you can maybe give some additional context around that in terms of maybe how do you quantify that? Is 20%, 10%, 15%, 20% increase? Just some context around how you're looking at it.

Speaker 2

I don't know if we can quantify in percentage terms. I mean, there have been some talk about seasonality and pace of contracting. What I can say is that the pace of contracting the number of tenders that are out there are really solid for 2024. You may see fewer awards in a certain quarter and given that we expect there to be a good number of awards points to when we look at the tenders that are out there, an increase of pace because people are looking for rigs in the second half of the year. And part of that's driven by these are a good number of long term programs.

Speaker 2

Some of them are in multiple more complexity take a longer time to process. Programs can move forwards and backwards by quarter depending on how they make progress. But clearly based on the number of tenders that we see that are active that are out there that we expect to be completed, We expect the pace of tendering award activity to increase over the remainder of the year.

Speaker 6

Okay. Appreciate that color. Follow-up I have then is on the DS-eleven, 13 and 14 and couple of parts to the question, right? First one is, in the context of those 3, can you just remind us which one might be the one more likely to go first? And then second dynamic is given elements related to shipyard capacity, labor, supply chain dynamics, what's the feasible number of rigs in a given year?

Speaker 6

You got 3. So how many of those could you feasibly activate in a given year?

Speaker 2

I mean, 11, 13 and 14 are all fantastic assets. They're all they're almost interchangeable. The customer decides what asset they want. One customer may prefer a rig like the 11 that has a track record and has worked before and some customers prefer a new shiny car right off the lot, right, the 13 and the 14. So for us, they're somewhat fungible, but we will focus on getting all 3 of them to work.

Speaker 2

As far as capacity, we've done 4 floater reactivations in parallel before and done it very successfully. One of the true strengths of this organization is our ability to execute complex projects and reactivation projects leading the industry as you've seen on the DS-8s and I fully expect the team will deliver the DS-seven in the same way. So we feel very comfortable with our ability to effectively reactivate those rigs when we find the right opportunities, whether it's serially or in parallel.

Speaker 10

Okay, great. Appreciate that. Thanks.

Operator

Thank you. The next question is from Doug Beka with Capital One. Please go ahead.

Speaker 11

Thank you. Just following along the same tenor of questions, how would you frame the likelihood of hearing about a contract for 1 or more of those rigs this year and particularly potential for a JV with an operator for one of these rigs?

Speaker 2

I'm not going to get into speculation of percentages. I mean, what I would say is, we will look at traditional or non traditional ventures, if it is accretive and makes economic sense for our shareholders. We have critical mass of rigs working. We've got 3 attractive assets in a growing and increasing demand market that we can deploy on the right contract with the right customer at the right time. And we're going to be very focused on finding given what we see with the demand profile over the next couple of years, finding the right job for those assets, if that comes.

Speaker 2

We're in active discussions on all three of those assets right now. If it makes economic sense, then we've been very clear on having meaningful returns on reactivation costs and it makes sense for us and our shareholders absolutely will execute on. But we're also willing to be patient and wait for the right opportunity to put those assets back to work because they are the best assets available on the sidelines.

Speaker 9

Yes. And our criteria is the same as it always been. I mean, a meaningful return on the reactivation costs over that initial firm contract. So that's the same way we're looking at training as we've looked at everything else.

Speaker 11

Right. No, that all makes sense and very consistent. Maybe switching to 2Q, revenue efficiency was very strong in the Q1. Is this strong performance continuing this quarter? And just maybe some of the parameters that are baked into the 2Q revenue guidance for revenue efficiency?

Speaker 2

Revenue efficiency is solid in the second quarter. I think I'm not sure if this is the question you're alluding to, but our EBITDA guidance for the Q2 is in line with what we expected at the beginning of the year. I think some people and obviously, we don't know what's in your models. I think some people model kind of a linear growth of our revenue and earnings through the year where we had a lot of rigs that were transitioning between contracts, doing SPSs, moving locations, when you look at the 247 going all the way to Australia, plus the DS-seven coming to work middle of the year. So for us, there's more a ramp towards in the Q3 and the Q4 versus a linear progression when you compare kind of quarter to quarter guidance versus what we've given for the full year.

Speaker 9

Yes. And when we think Q2 versus Q1, I mean, kind of big drivers of the revenue growth are more operating days on the floater fleet. So we'll have particularly the DS-seven starting up in June and then just more days on the DPS-five and DS-twelve since they started contracts in the Q1. And then we've got a couple of ships that are rolled to higher rates in the Q2. And then all these jackups that have really a drag in the Q1, as it relates to idle time and contract prep and survey work, they're going back to work in the Q2.

Speaker 9

And so we'll see a lift there. So we're excited about the Q2. We'll see EBITDA up based on our guidance almost 80% relative to the Q1. So and then as Anton mentioned, big jump in second half of year versus first half with the DS-seven online, impacted the higher DS-sixteen contract. North Sea basically kind of working, I mean everything is working in the North Sea, moving to some higher rates and then we've got the contribution from the 2 jackups in Australia.

Speaker 9

So we expect a pretty meaningful ramp across the year.

Speaker 11

Got it. Thank you very much.

Operator

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Nick Georges for any closing remarks.

Speaker 1

Thanks, MJ, Thanks again to everyone on the call for your interest in Volaris. We look forward to speaking with you again when we report our Q2 2024 results. Have a great rest of your day.

Operator

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

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Earnings Conference Call
Valaris Q1 2024
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