Valaris Limited (RIG) Earnings Call Transcript & Summary

All right. Good afternoon. Next up, I'm very pleased to introduce Mr. Anton Dibowitz, President and CEO of Valaris in September of 2021. Previously, he served as CEO of Seadrill from 2017 to 2020, following various roles at Seadrill since 2013 and has over 20 years of drilling industry experience. Anton has a number of slides to present after which, we'll have some time for Q&A. Anton, thanks for joining us today.

Thanks, Eddie. And you made me sound old, been in the business for a long time. I actually feel really old because I just moved my younger daughter into college this weekend, so an empty nester. So you just added to my angst on -- but great to be here. I have a couple of slides that I'll show and then we can do some Q&A. Let me see if we look at right. Forward-looking statements. I think you all know the story. Forward-looking projections, how we see the market. So let me tell you a little bit about Valaris. Valaris is the industry-leading driller. We have the largest fleet on water with 53 rigs comprising 18 high-spec floaters, which we're very proud of, and 35 jackups. That fleet rents highly and all the third-party rankings, 12 of our 13 ships are seventh generation. And it's important as a driller to have scale and to have a high-quality fleet. But what also matters is a driller in the center is to be able to deliver excellent operations with that fleet. Valaris has delivered more than 96% revenue efficiency for the last 3 years based on having that fleet. And we've done that at a time that we have reactivated 6 drillships into the market, including 2 this year. We've delivered 98% revenue efficiency this year with 2 reactivations coming into the market. That leads to strong, deep, broad customer relationships, which is really important for us to be able to execute on our commercial strategy. We've added backlog to our fleet for 7 successive quarters, standing at $4.3 billion right now, and that backlog and that earnings power is going to allow us to generate significant cash and earnings increases as we go forward, and deliver that cash to shareholders. So let's look at our flow to fleet, for example, for where we sit. We're very focused on having critical mass and significant presence at the 3 corners of the Golden Triangle. So Brazil, West Africa, and the Gulf of Mexico. Together, those 3 markets will deliver around 70% of demand between now and 2027. Having a number of rigs clustered in the market allows you to access local expertise and allows you to spread -- support costs over a number of rigs, and it gives you long-term presence in markets that will continue to have work. Beyond that, we have a niche position in Southeast Asia with a couple of floaters in Australia. And we have 3 of the highest-spec drillships available on the market; the DS-11, the DS-13, DS-14 for organic growth in this market. These are the highest spec rigs in the market because they all have 2 BOPs. They're our rigs, we built them. We maintain them all the way through the bottom of the cycle, and we'll wait for the right opportunities to put them back into the market and what is a structural up cycle that we're in the midst of. Similar position with jackups. We have a diversified fleet. Our 2 big focus areas are the Middle East and Saudi Arabia, where we have a JV with Saudi Aramco, operating 9 rigs that are owned, and 9 rigs that are leased into the JV, the largest customer in the world, a JV with the largest customer in the world in the largest market in the world, and our harsh environment fleet focused in North Sea, Norway right now. We're around 60% of demand for the period between now and 2027 is going to come from. Beyond that, we have strong niche presences in Trinidad and Australia, these are 2 particular markets where customers require high-spec rigs, and we can get premium day rates and premium durations on our rigs. And you can see between the floaters and the jackup space, we have a really excellent customer base because of the operations we deliver. We hold customer relationships with all of the major IOCs and the NOCs, and a lot of independence in these markets. So let's take back -- step back and look at the macro, it may be really important because we all see what's happening in the market this morning, right? Why are we positive about the outlook for our business? The supply stack today, which is the bar on the left, is around 102 million barrels of hydrocarbons. But the world continues to need secure, affordable energy. So by 2030, despite all the predictions over the last few years, demand for hydrocarbons continues to grow, up to 113 million barrels by these numbers. Different people have different estimates. In order to get there, when we consider the depletion that is happening on existing fields, 36 million barrels of new supply needs to be brought to the market. And a significant portion of that, where there's significant growth is going to come, is going to come from offshore. The biggest growth component of that is from deepwater. Why? Because it's affordable. The economics for offshore fields, deepwater offshore fields with their scale are highly attractive. And although we don't talk about it that much at conferences anymore, the emissions intensity of those barrels are important to our customers. So total in offshore between where we are now and where we're going to be at the end of the decade, offshore becomes increasingly important for the world to meet its energy needs. I know we'll have some discussion about day rates. And we thought we'd put this in for perspective, similar story in the jackup fleet, but we'll look at the floater fleet here. Drillship day rates are well below. There is significant headroom for where we are right now to where we were at the top of the last peak. So these are inflation-adjusted numbers. And you can see kind of going through kind of late '20, early '21 dayrates were around $200,000 a day for a drillship. And we were putting rigs back to work, seeing the up cycle coming at those rates. Today, leading-edge rates in the high 400s into the 500 for particular rigs, and we have about 91% utilization. The peak up in the last cycle was 99% utilization, where on an inflation-adjusted basis, today, you'd have to be contracting around $800,000 a day, and it would take about 10 rigs working for us to get back to around a 99% utilization. And based on the programs that we see tracking 30 programs, yes, a large majority of those are starting in late '25 and into '26, we see potential for additional coal on sideline capacity, including some of the 3 stack ships that we have on the sidelines and an increasing tighter market. And there is still headroom for day rates to keep moving as the cycle continues and the market continues to tighten. Commercial execution against that backdrop is important. We have added backlog to our fleet successively in each of the last 7 quarters, $4.3 billion today. And that backlog and the fact that we are cycling rigs that we started early in the cycle is a market significantly higher day rates is going to lead to a significant step up in earnings and cash flow as we get into '25 and beyond. Our expected '24 EBITDA is around 3.5x what we were in '23. We expect another step-up as we go into '25. And that will get us to the position now that we've reactivated a number of our ships where we can return capital to shareholders. We have a value-driven approach to capital allocation. It starts on the left. This is a cyclical business. There is volatility in it. We can see it this morning, right? There is white space, and I'm sure you'll ask me about it, Eddie, late '24 going into 2025. So maintaining low levels of leverage and having powder available is important to be a driller in this market. So we will maintain a conservative balance sheet. We will, of course, pursue accretive investments that make sense for our shareholders. We have the 3 highest spec ships available on the sidelines for a market that is tightening and reactivating those would be a good use of capital at the right time for the right opportunity. When you talk about corporate M&A, yes, if it makes sense, we already have the largest fleet on water, we already at scale. But we will absolutely take part of that if it makes sense for our shareholders. But our clear aim as we head into '25 and beyond is generating significant cash flow, generating significantly increased earnings and returning that cash to shareholders unless there's clearly a more value accretive use for it. So in summary, we're well positioned. We've got a great fleet. We have great customer relationships, and we delivered great operations for our customers, which we don't talk about enough, but is really, really important for executing in this business, and we have the scale that we need. There is a positive market backdrop for what we're doing. And we expect the contracting as we go forward to allow us to generate significant earnings and cash flow, and we intend to return it to shareholders.

Thanks, Anton, for that overview. I have a few questions for you here, and then maybe we'll close out the session pulling some questions from the audience here. Let's just start with valuations for all offshore drillers are down materially over the past 1.5 months on a combination of macro concerns, maybe uncertainty about the oil price, as well as white space between contracts, maybe through mid-next year. Could you just update us on recent conversations you're having with your customers? Are they concerned? And are they pushing out programs because of uncertainty about next year? If you could give us a flavor of your conversations recently.

We have deep customer relationships, and we obviously talk to them a lot. And I would say that short-term or even medium-term, macro concerns are not a driver to the white space that we're seeing right now. They are not concerned about what happens with oil price on a day-to-day basis, so in the short to medium term. Our customers look more at where forward prices are. And if you look at that bar chart I showed about needing to find 36 million barrels of oil, they're focused on, yes, the economics and the need for those resources. And they're looking more at where the 5-year forward on Brent is. And it's still at $70 a barrel, 90% of resources are highly attractive to them, fields that are available for development. At an oil price of $60, you're still around 80%. So there are attractive economics even with some pressure on oil prices for what they need to do. The pushback of some programs from '24 into '25 -- say, I mean, there are a number of factors. It's a function of, they don't have the infrastructure to produce the oil. FPSOs are delayed. They are being quite, let's say, disciplined anymore in this industry. They're all being quite disciplined with their balance sheet. They've made commitments to shareholders about how much CapEx they're going to spend like dividends they're going to pay, some things that are more expensive and they're spending more in part of the business. So they're pushing some programs. And there are a lot of partners involved in this program. So you have one operator who wants to drill and another one said,"I don't want to prove that program. I'd rather wait until next year to do it. " So a lot of logistics infrastructure kind of supply chain reasons why things are moving. But the macro, the short term macro view is not really what's driving our customers' decision.

Got it. white space. So you lowered full year guidance on the most recent earnings call, primarily due to a more tempered outlook on the DS-10 and DS-5 in the second half of this year. You mentioned you're looking for short-term opportunities for those rigs commencing in the fourth quarter. The white space on the DS-10 is especially surprising because it's seventh gen, one of the highest-quality drillships in the global fleet. What would you say is the main reason we're seeing white space even for high-quality rigs like that? You might have sort of answered your...

No, it goes a little bit back to the question just had about their ability to execute programs to the internal resource. I mean the DS-10 has been drilling in Nigeria since 2018. It's drilled lights out. The customers are very happy with the rates going a fantastic crew. Nigeria is actually a place where we expect to see incremental demand coming to market over the next couple of years. But the customer is taking a pause in country. So they don't have work for the rig to continue with, but it has a great reputation. But we need to find some short-term work for it until there's a long-term program in the second half of '24, '25. Between that and the DS-12, which is rolling off next year, there are some short-term dislocations in the market, and it's not great. We were in a similar position with the 12 and the 5 last year. We've got a great commercial team. They managed to cobble together some programs and keep the rigs working almost continuously. I mean, I can't sit here and say that we're necessarily going to be able to replicate that this year. We had some great programs we were chasing on the 5 and the 10 in our first quarter call, and I felt if you ask me personally, I felt really good about them. One got pushed into '25. One got a sublet and the program was bifurcated. So right now, we're more chasing work in the fourth quarter for these rigs, and that led us to adjust where we see the guidance well for this year.

Just in the near term, in terms of day rate progression, I think I have your sense of what the longer-term progression looks like. But just in the near term, maybe through middle of next year, one of your competitor, one of your peers have said day rates may be remaining here in the high 400s, low 500s until mid next year. Is that how you see the day rates?

Yes. I mean, if you go back and replay what I said last year or 2 years before, I don't think we've ever been advocating that there's going to be a hockey stick in day rates. This is a structural up cycle and rates are going to continue to grind higher as we go through the cycle. And that doesn't mean that every contract is going to be higher than the last. If you look at 6 months over 6 months, second half of '23 versus '24, average day rates and floaters are 480 versus 450. We've had half a dozen prints above 500 halfway through the year, where we only had a couple all of last year. So on average, and that's what's really telling me, on average, the rates continue to grind higher, and I expect that they will continue to grind higher over time. What we're probably going to see maybe is how you count your averages is, we may see more variability in rates in this kind of late '24, '25 period because we are looking for gas fill and keeping the crew together, and keeping the rig working is important. So we may see more flex and more bigger band in the day rates. But I think over time, even over the next year for the right rig in the right place, customers are willing to pay for that asset. I mean we have a customer willing to essentially pay a substantial portion of the day rate to have a rig sitting waiting for up to 6 months because they want that rig to drill their program next year. And you can't argue with the economics, increasing contract durations, increasing day rates. That's the fact of where this market is going.

I ask this question in the last session, I'll ask the same to you. Two scenarios. We're sitting here 2 years from now, September 2026. Well, we have seen contract leading-edge deepwater contracts at the same level where they are today, kind of high 400s, low 500, or more likely in the mid- to high 500s, I'll say. And I think I know your answer already. So maybe notability is it 50-50? Or is it 30, 70?

I've never been accused of being overly frothy on the market. I try to be realistic and tell you what I really, really see happen. I think a year from now, so you're going to be talking about contracts that are now being '26, '27 based given 30 opportunities that we see in the market, incremental demand in West Africa, potentially a coal on sideline capacity given the number of contracts that are going to be happening over the next year, there is a higher likelihood of increased day rates sitting here this time next year. I do think we have a period to manage through, and we're very open about that in '24 and '25. But I think sitting a year from now, looking forward, we're going to have a tighter market potentially with some sideline capacity in progress of coming back to market and day rates that are solid to up from where we are now.

That slide was very interesting about the inflation adjusted kind of day rate peak back in 2011 and 2014, I think it was around $800,000. Do you think that, that is achievable like 5 years from now? We probably won't get there, but we'll probably, a little less than that?

Look, if you look at the economics of new builds, and I heard as I walked and Robert was talking about kind of new build parity, we're not going there. So in one way, sky's the limit. But there is plenty of headroom for day rates. We're certainly not hearing from our customers that the reason why programs are being pushed or the economics of fields are being degraded by the day rates that we have. Will we get to 800. I don't know. I don't think we need to. When you're generating in order of $100 million of EBITDA on a rig in the high 400s, low 500s, we could be in a worse position as an industry and as a company than having 13 ships work and making $100 million of EBITDA a few years down the road. But I think there is some -- definitely some headroom for day rates given the economics of these programs.

Yes, let's not get too greedy. You guys are making -- you in the industry making sufficient free cash flow even at day rates where they are today. Just shifting gears to your sideline capacity, the DS-11, 13, 14, you've been the most active in reactivating cold-stacked rigs, and you have potentially 3 others left. Just based on the conversations you're having, what's the likely cadence of when we could expect these rigs to actually start working? Maybe one by year-end next year? Another a year after that and another year-end kind of 2027, like '25, '26, '27?

Just I think that's a fair look at Mark and Jim predict. I mean what I will say is we have a job to do, right? We have 4 ships working 3 years ago. We needed to get this high-quality fleet onward and work. We've got 10 ships working now. We have the 3 best assets sitting on the sidelines, dual BOP, seventh generation rigs. We have been in customer discussions with people who are interested in these rigs. We haven't liked the economics of the deals that are available. We're very focused on keeping our active fleet highly utilized. And given the supply-demand dynamics that we see, we believe there will be the right economics to bring these rigs back to market, and they will be increasingly there. So we've done a job of our reactivation I think on a year over 3 years is probably a fair assumption. Not a single one of the rigs that we've brought back to market has taken a job. We are not trying to displace incumbents, these rigs have come back to the market for incremental demand, and we see incremental demand coming to the market late '25, '26, which is going to give us opportunities with these quality of assets in our operations and a demonstrated track record of bringing them back to market and being able to deliver operations with them to bring them back for the right opportunity. So we've walked away from opportunities we didn't quite like, and we will be patient and wait to deploy them on the right opportunity as good a guess as any.