Valaris Limited (RIG) Earnings Call Transcript & Summary

On to the next session. So thanks, everybody, for coming to the conference. It's still early. So thanks for coming. And the next session, we've got Valaris. Most of you here probably know Valaris, they're a leading offshore driller. They're uniquely positioned with a diversified offshore rig fleet. And from Valaris today, we're excited to have their President and CEO, Anton Dibowitz. I thought about he'd had to pronounce my name, if I could pronounce his right. So -- but thanks for joining us today, Anton. He's been President and CEO of Valaris since December of 2021. Obviously, a lot of offshore experience before that. But it's a privilege to share the stage with you today. And from the entire Bank of America team, we thank you for joining us. And with that, I'll hand it over to you. I know you had some slides you wanted to flip through, so we'll do that, and then we'll launch into some Q&A. So...

Thanks, Chase. Thanks to Bank of America for having us here. I'm going to stand up [indiscernible] nervous energy to walk around. So good to be here. Today, I'm going to talk about Valaris, we have our standard forward-looking statements that you can speed read here or you can see it on the Investors section on the Valaris website. I'm going to start -- my presentation is 3 parts. I'm going to do a little bit of a Valaris overview, talk a little bit easier to do things in 3s, talk a little bit about the market and where we see the market going and then talk about the value proposition that is Valaris. Valaris is the industry leader with the high specification and largest fleet on water. On the fleet side, 52 rigs, 11 drillships, 5 semisubmersibles and 36 jackups. Beyond our owned and managed fleet, we also have a strategic joint venture with Saudi Aramco, the largest user of jackups in the world. On the operational side, a demonstrated track record of delivering operations. You can see the revenue efficiencies and once again, this year being ranked the #1 driller in customer satisfaction by the leading industry survey. On the financial and balance sheet side, strong balance sheet, net cash position, significant contract backlog and significant operating leverage to an improving market that we see today. Valaris' purpose is to provide responsible solutions that deliver energy to the world, and we do that by following a 3 pillage strategy, being focused, value-driven and responsible in everything we do. And this is all underpinned by a value-driven culture, as you can see at the bottom. We have the largest modern fleet on water, 11 drillships with an average age of 8 years, 5 semisubmersibles, 4 of these can operate in dynamically positioned mode. And of those 4, 2 can operate in a hybrid mode, i.e., both dynamically positioned and moored mode. On the bottom left, 12 heavy-duty ultra-harsh and harsh environment jackups. Think about the North Sea harsh environment jack-up work, including 3 that are capable of operating on the Norwegian continental shelf. 21 high-specification, heavy-duty and standard duty modern jackups, Think about the Middle East, Southeast Asia, Latin America and the Gulf of Mexico, benign jack-up environments; and then 3 legacy jackups average age 40 years, including one that we recently did a sales agreement on. The transaction is going to be closing at the end of the first quarter next year for $28.5 million. Not only do we have the largest fleet on water, we also have the highest specification fleet. So there are different colors on these bars reflect quartiles, and this is according to third-party rig rankings. What you see on the Valaris fleet is that we don't have any rigs in the fourth quartile. 80% of our fleet are in the top 2 quartiles depending on which category you look at, and more than 50% of our fleet is in the top quartile. We have a diversified fleet. We operate jackups and floaters. That means we can serve major international oil companies, national oil companies and independents around the world. And you can see on here the breadth of those relationships, we operate for a number of large international and national oil companies in various jurisdictions across water depths and across asset classes. We believe is a key driver of our business being able to serve these customers around the world. And part of the reason that we continue to get high customer satisfaction ratings from our customers, including, as I said, being ranked as the #1 driller this year. Part of our focus strategy is being focused on those basins that are going to drive the most significant portion of demand going forward. So the big blue circles, you can see is where our floater fleet is largely focused. The golden triangle, traditionally, the overwhelming majority of drillship demand comes from the Golden Triangle, the U.S. Gulf of Mexico, West Africa and Brazil. We also have 2 more floaters down in Australia. This is a very nice niche market, high barriers to entry. On the jackup side, our jackup fleet is concentrated between the Middle East and again, in the North Sea and Norway. Together, these 2 markets are expected to drive more than 50% of jackup demand over the next 5 years. To be a good driller, you need to be able to deliver safe, reliable and efficient operations to our customers. We do this by having robust systems and processes and exceptional crews who work hard every day to maintain the standards that we have and the results are clear. Demonstrated track record of delivering revenue efficiency, 97% year-to-date, 98% in 2021 and again being recognized by our customers as the best driller in the business. We spent a significant amount of effort over the last few years in creating an industry-leading cost structure, reducing the average cost that it takes to operate each rig that we have in our fleet. We've done this by driving a shared services model, which allows us to be scalable and flexible and quickly adapt to changing market conditions. We have the strongest balance sheet in the drilling market, one of only 2 drillers with a net cash position. The $644 million of liquidity that we had in the balance sheet at the end of the last quarter, provides us with ample cash to fund our operations and also to exercise our significant operating leverage for a market that we see as improving. We have only 1 tranche of debt, the $550 million senior notes during 2028, first call in April '23, and we recently completed a consent solicitation to increase our flexibility with respect to capital returns. Importantly, we have no newbuild commitments. We exercise a disciplined fleet management strategy. If you talk to me and hear me talk, you'll probably hear me say discipline 10 times because it's really important for a driller to be disciplined in all of their actions. The first is about fleet optimization. Our first priority is to roll out active fleet to make sure that the rigs that are already active continue on contracts, having a large diversified fleet allows us to take a portfolio approach, have a mix of short- and long-term contracts preferably with staggered roll-offs. We also, as I said on a few slides ago, aim to have our critical mass of our rigs operating in the largest basin so we can get synergies and efficiencies of scale in those basins. When it comes to reactivations, we will be disciplined in reactivating our operating leverage. We've proven the ability to win work for our preservation stacked rigs. We've undertaken 4 reactivations and have a fifth 1 ongoing right now. Those 4 rigs were delivered within our cost guidance and basically on time for what we said they were going to do. And those rigs are operating at the top of their game with a high revenue efficiency for the customers that we reactivated them for. We will continue to look at our fleet and look at divestiture candidates and be opportunistic. We've already sold 2 rigs earlier this year, the 113 and the 114. These were jackups that have been stacked for more than 6 years, and we sold them for a combined $125 million. And as I mentioned earlier, we recently sold a 40-year-old jackup that we didn't see as part of the future of our high-specification fleet for a contract -- for a deal that's going to close early next year for $28.5 million. We've been on sustainability journey for a significant period of time. We have a strong framework for our ESG activities. We have a Board-level committee, I added an ESG executive reporting to me as part of the executive management team, and we have an internal working group that looks for opportunities for us to take part and drive all parts of the ESG, not just the E or so the S&G. On the E side, because that's what people seem to be quite interested in these days, and we've already taken significant steps. Our focus here is to reduce emissions from our own operations and after that, to partner with our customers on their emissions journey. We had the first rig in the world, the Valaris DS-12 to get ABS' enhanced EHSE notation. It allows us to run fewer engines at high workload, using less fuel and less emissions. We're doing the same upgrade on the DS-17 that we're reactivating for Brazil right now. We have implemented SCR systems on a number of rigs, including 1 jackup that was drilling a carbon transport well. We've done CCUS or carbon transport type work on 2 projects in the North Sea and are looking at -- in discussions, looking at opportunities both in Australia and the Gulf of Mexico to further this work. On the market. Demand for energy has recovered, continues to recover and is expected to be at pre-COVID levels into 2023. On the flip side, underinvestments in new sources of production over several years led to a tight supply-demand balance. And this has been exacerbated as we all know, by geopolitical instability recently and also by a renewed search for energy security. Brent crude prices, although what a lot of people talk about is oil above [ $90 ] now. What our customers look at is the forward curve and the forward curve with 2-year prices above $75 a barrel and 5-year forward prices above $70 a barrel. I mean, if you look at the graph on the right, the overwhelming majority of unproduced resources are profitable at these levels, which makes for a highly constructive market. Given these fundamentals and dynamics offshore upstream CapEx is expected to increase over the next few years, again, having double-digit increases as we head into 2023 and offshore project sanctioning. So this is final investment decisions on new projects are expected to be at levels that we haven't seen in more than a decade since 2014 at the beginning of the last downturn. As this pushes down and translates down to demand for actual drilling services, this is data presented by Rystad floater demand is expected to increase in a compound annual growth rate of 6% over the next 5 years and jackup demand significantly over the next couple of years driven by shorter cycle barrels and the owners of those resources seeking to maximize returns given current high oil prices. What's interesting here is not only the number of development opportunities, which are the kind of the gray bars in the middle but also the fact which -- what is a significant driver of our long-term business is the expiration that is still happening. That's the bottom blue bars because today's expiration leads to tomorrow's appraisal and development down the road. So folks are still looking for resources to replace production. Turning from the demand side to the supply side. Over the last several years, the increasing utilization levels, as you've seen utilization of rigs increasing has been driven by drillers like us, taking supply out of the market, scrapping less capable older rigs through the downturn because they just weren't -- there wasn't a demand for them. 44% of the floater fleet has been taken out of the market over the last several years. Around 10% of the jackup fleet, I think the number is around 9%, partly because the option cost of holding jackups is a lot less versus floaters. But it is important that 1/3 of that supply is more than 30 years old. So we see a number of these rigs will continue to be scrapped and have limited useful lives left. This leaves us with active utilization around 90% in pretty much all segments. There are some newbuilds and stacked assets, including our own that we can bring back to market but there are a number of rigs that still need to come out of the market. We expect a number of these rigs that have been stacked for protracted periods of times may never come back to the market. And we believe that the newbuilds that were stranded at the yards will take long-duration contracts and day rates that are at current or continue to be at above current levels for a period of time for it to make sense for people to bring these rigs back into the market. So this is the picture of how day rates have increased over the last period since late 2020, more than 100% increase in floater day rates or drillship day rates. These are figures presented as of the last quarter, including some fixtures north of [ $4.25 ] a day. Active utilization continues to be above 90% and has been in this market, which is why these day rates continue to increase. On the right side, for jackups, it's slightly less pronounced, but a 40% increase is still very significant. And it's important to remember the jackup day rates didn't get down to the depths that floated day rates stayed at the bottom at the bottom of the cycle. So the upside here, how they've developed over the last year. This is still a significant number with some fixtures above $120,000 a day for jackups around the world benign jackups. So lastly, and then I'll let you answer me some questions, is the value proposition of Valaris. So there are 4 parts here. The first part is the active fleet in the top left, 33 rigs, including the DS-17 that we're currently reactivating. This is a meaningful operating margin cash-generating segment of our business. And the earnings of this segment are set to increase with tight utilization levels as these rigs roll on to new contracts at higher day rates, the earnings potential of this active fleet increases. I'll talk a little bit more about the stack fleet newbuild options, 11 high-specification assets. On the top right, our leased and managed rigs. We lease 8 rigs, charter them to ARO, our joint strategic joint venture, and we manage 2 rigs. This is high utilization, stable earnings and then ARO Drilling, our strategic joint venture with Saudi Aramco. So looking at the stack rig, improving market. We have 8 high-specification assets that we can bring back to market, including 3 high-specification drillships. These rigs have the specifications that meet most all of the attractive opportunities that we see coming to market over the next period. In addition to those, we have options to take 2 newbuilds out of the yard, the DS-13 and DS-14 at $119 million and $218 million, respectively. On the right shows the development and reactivation economics from a year ago, third quarter '21 to third quarter '22. The day rate here is the average day rate that was fixed during the last quarter. And despite the fact that reactivations cost quite a bit more than they did a year ago, given that we have commercial leverage to get customers to help contribute to our reactivations at these day rate levels, a reactivated rig once the reactivation is paid for can contribute around $95 million of EBITDA a year to the fleet. And based on these numbers, the reactivation, the net out on the reactivation given a small contribution from the customer can be recovered in around 6 months. With the scale and quality of our fleet with all of the rigs working, this sheet provides illustrative EBITDA earnings potential of the fleet. They've given various day rates in the columns and also making assumptions about the overall fleet utilization kind of the fourth row up from the bottom. We'll say that this does not include reactivation costs, which we view as kind of growth CapEx, but it does give you an idea of the earnings potential of the fleet when the fleet is fully utilized. And I will say that if you look at these columns other than maybe harsh environment jackups, which are lagging a bit, if anybody listened to our last call, pretty much the market clearing day rates are around the middle column here. ARO Drilling is a strategic joint venture with Saudi Aramco, both the biggest user of jackups in the world. In a location that will probably drill the last oil well in the world given the economics there. ARO owns 7 jackups, and we also, as I said before, lease 8 jackups to ARO as part of their operations. ARO is building 20 newbuild jackups. Two of those will be delivered next year and 18 to follow at the new IMI yard in Saudi. We have a 50% equity interest in ARO, and we also have a $403 million note receivable from ARO. This is after the partial early repayment of $40 million that we received in the last quarter. These 20 newbuilds are all backed by long-term Saudi Aramco contracts, 16 years of contract on average for each of these rigs. The first [ 8-year ] contract is set to achieve 6-year EBITDA payback on the build cost. Given the quality and the counterparty of these contracts is a highly financeable contracts. We're already working on financing for the first 2 rigs, and there is no expectation that either of the JV partner, Saudi Aramco, Valaris will need to put any capital into the ARO venture. Despite the fact that we've significantly outperformed since our listing, our peers, we've still remain, in our opinion, undervalued versus some of our peers, partly because what I just talked about, ARO, given the fact that it's an unconsolidated joint venture, we don't think that people truly appreciate the value of ARO. And I think if you look at recent IPOs and asset transactions that have happened in the Middle East, these serve to highlight the value that we see in the ARO venture. If you look at implied steel values on an ultra-deepwater equivalent basis, adjusted for backlog versus recent market transactions for drillships in the market when adjusted for the reactivation costs, which have been averaged around $290 million, the implied value of steel within our fleet is 1.5x -- it's 1.5x ex difference. We'll continue to take a disciplined approach to how we manage the fleet. We're going to exercise our operational leverage in a disciplined manner, reactivating rigs for opportunities that provide meaningful returns. We have 3 high-specification drillships that I talked about. We have the 2 options at the yard, but we will be opportunistic, we'll be opportunistic in reviewing our fleet, we'll be opportunistic looking at M&A transactions, we will be opportunistic in assessing how we run the business. And we are highly returns-focused. Our first priority, and we see the best use of cash right now is reinvesting and bringing our attractive assets back to market so they can generate significant cash flow. We have a strong balance sheet that provides liquidity and but our recent actions, including the consent solicitation and although the authorization of a share repurchase program give us capital flexibility to return cash to shareholders when it makes sense. So just to reiterate a couple of key takeaways. The largest high-specification fleet on the water with strong customer relationships in every major market around the world, across water depths and geographies, industry-leading cost structure and balance sheet. The dynamics of our market are constructive going forward. We have significant operating leverage to play into that market. We have an advantaged position in the largest drilling market with the largest user of jackups with Saudi Aramco, and we have been, and we will continue to take a disciplined approach to fleet management and contracting.

Very awesome, Anton, thanks for that. Pretty positive outlook for offshore.

And I want to dig into the drillships a little bit, and then I'm going to let Lauren who works on the oilfield service team over here with us dig into the semis and jackups real quick. And we've got about 10 minutes left. So it's going to be a little bit of a speed dating. No, you were great. That's great slide.

[ High tide ] my passion.

It is it is. So let's talk about drillships, and the drillship market, obviously, is pretty tight. The demand started to really come back. Supply has been pretty disciplined. But day rates, like you said, over $400,000 a day. So I guess maybe look back and like how did this happen? I mean if we were sitting here probably 12, 24 months ago, I'm not sure anybody in this room would have expected $400,000 a day plus. I mean, I think I remember when I'm talking to Transocean and they said something, I'll be honest, I laughed and now look at the market. Now people are calling for $500,000 day rates. So what happened? And then where do you think day rates can go?

Look, differentiate between active utilization and kind of overall utilization. And active utilization in the drillship fleet has been quite high for a significant period of time, right? So there is a significant cost as we've shown to bring rigs back into the market. And while the economics are a lot better at $400,000 day rates, you need an extended long-term contract in order to justify it around $200,000, bringing another drillship back into the active fleet. So the utilizations stayed around 90% for around a year. And as you add a little bit of incremental demand in that market, the competition for those active rigs has a tendency to drive day rates up. I think we're quite comfortable with the levels we are now. Given $400,000 day rates, there is an opportunity to bring some more rigs back into the market. But I think we're going to be disciplined about it and thankfully for the recent past. And right now, our competitors continue to be disciplined as well. I will say that of the preservation stacked assets that are available, 90% of them sit in the hands of 3 drilling contractors, include ourselves, and that should add to the discipline as far as reactivations are concerned.

Yes. I mean could you talk to the cost of reactivations you've got 3 potential reactivations, I think in 1 of your slides, I mean, people can do math. But you said $95 million of EBITDA per year, if you were to reactivate it. I would imagine that most of those are at or below somewhere, I mean, for a 1-year payback, right? So walk through that.

Yes. So there has been a big step up. The first 4 reactivations we did, we guided about $45 million. The DS-17 that we're busy reactivating to go to [ Bacalhau ] in Brazil for Equinor is around $75 million. And that's a function of things we've all seen in the market. Wages, we've had to retain people and increased wages, oilfield equipment is more expensive in order of 10% to 20%. But as much as anything else because of the challenges we've seen in supply chain, we're looking at a 12-month project, which also helps the supply-demand dynamic versus the 9-month project just to do the job properly. And a longer project just costs more because you have crews and people working on it for a longer period of so around $75 million. But again, if you can get a contribution from a customer, which we do have the commercial leverage in a number of cases now, so a contribution from the customer, you're paying off that reactivation in 6, 9 months, right? So on a stand-alone basis, that project is a value-generating project in and of itself and that's how we view it. We're not going to reactivate rigs if it doesn't make sense on a project basis.

Yes. So like if you're going to get a phone to ask you, you said the customers are paying, I guess, is like cash upfront, and then you still get a [ $400-plus thousand ] a day rate. It's not like, okay, day rates are [ 400 ], we're going to pay you [ 375 ] and pay you $25 million upfront?

No. Generally, the way it works is we ask our customers that there are specific CapEx upgrades or specification upgrades that they want that they will pay those. So on the recent deal that we did on the [ '17 ], I think the payment was $86 million from Equinor. Now a portion of that is equipment that they wanted on the rig. A portion of that is the contribution towards mobilization of the rig and a portion of that is contribution towards our reactivation cost.

Okay. And if you look at the stacked fleet, like you said, it's really kind of in 3 hands. And really, if you look at it at 2/3 sitting 1 of the larger drillers hands, obviously, they've got some, I guess, financial requirements, we'll say. And so it's keeping them a little bit more disciplined. But so that should be able to drive further day rate momentum. So if we think about this like a 1-year payback, like I would think you and your other competitor that's not as financially constrained, would reactivate rigs. I mean a 1-year payback, less than a 1-year payback is -- I mean, what keeps you from doing that? I mean, I mean, if you've got a -- are you looking for a 2-year contract and you get payback within a year like...

I think, look, although you can say there are kind of 10, 15 high-specification stacked rigs that are out there. I think it's important to remember that amongst that fleet, there is a cost curve even within that fleet. Different people stack those rigs. I know that Valaris spent quite a bit of cash and time and resources, making sure that the rigs were a preservation stacked the right way. But amongst the fleet by our assessment that is still available, not all of these are, let's say, work stacked in [indiscernible] and some of them have been stacked for a protracted period of time. So with our recent -- that guidance I gave about $75 million, I think there's a cost curve and reactivation. So not every rig may make sense to reactivate at that price level, I think people are going to have to see longer-term contracts and increased day rates for a longer period of time before a portion of that stack fleet comes back. And then the strain and newbuilds are at different price points, right. Even our options, $119 million and [ $218 million ]. For all of those stranded assets, you need to think about kind of a reactivation type expense on top of that takeout cost from the yard, which implies that even another leg up in day rates or long-duration contracts for it to make sense for people to bring those back. I think what's really, really important in this market is now versus previous cycles is we don't see for the foreseeable future any chance of a newbuild cycle. The costs -- the yards haven't built rigs in a significant period of time. The absolute costs to build another that's what's derailed this market through previous cycles. And for the foreseeable future, we do not see another newbuild cycle emerging. And just with a tick up in demand and as we slowly bring these rigs back to market to see a nice sustain based on the fundamentals sustained up cycle.

Yes. I mean, I know that you don't see any newbuilds and so you're not asking because you're going to build or somebody's going to build, but we think about it maybe from an economics where day rates -- obviously, day rates step up with the reactivation, the cold stacked fleet, the stranded newbuilds and then you get to new builds, which is not going to happen anytime soon, at least. If you were to build a rig today, what would it cost?

Don't quote me. I mean I know there's public at be held, but I think you're probably looking at all in including project costs around $1 billion.