Valaris Limited's Quarterly Report (Form 10-Q)
Valaris Limited, a Bermuda-based company, filed its quarterly report for the period ended June 30, 2024. The company reported a net loss of $143.4 million, compared to a net loss of $134.4 million in the same period last year. Revenue decreased by 14% to $343.1 million, primarily due to lower drilling activity and reduced dayrates. The company’s operating loss was $143.1 million, compared to an operating loss of $134.1 million in the same period last year. As of June 30, 2024, the company had cash and cash equivalents of $143.4 million and a debt balance of $2.4 billion. The company’s liquidity and capital resources are sufficient to meet its current and anticipated future obligations.
Valaris Delivers Strong Quarterly Performance Amid Industry Upcycle
Valaris, a leading provider of offshore contract drilling services, has reported impressive financial results for the second quarter of 2024, showcasing the company’s ability to capitalize on the ongoing recovery in the offshore drilling industry. The report highlights Valaris’ strategic positioning, operational excellence, and positive outlook for the future.
Financial Highlights
In the second quarter of 2024, Valaris reported revenues of $610.1 million, a 16% increase from the previous quarter. This growth was driven by a net increase of $61.4 million from more operating days, as well as higher average daily revenues of $25.7 million, primarily due to certain rigs commencing contracts at higher day rates.
The company’s operating income for the quarter was $108.9 million, a significant increase of 272% compared to the previous quarter. This was largely attributable to the higher revenues, as well as a decrease in contract drilling expenses, which fell by 1% due to lower reactivation costs.
Valaris’ net income for the quarter was $150.8 million, a remarkable 491% increase from the previous quarter. This was further bolstered by a discrete income tax benefit of $63.9 million, primarily due to changes in liabilities for unrecognized tax benefits and the resolution of prior period tax matters.
For the first half of 2024, Valaris reported revenues of $1.135 billion, a 34% increase compared to the same period in the prior year. Operating income for the six-month period was $138.2 million, a significant improvement from the $1.4 million operating loss in the prior year period. Net income for the first half of 2024 was $176.3 million, compared to $21.3 million in the same period of 2023.
Operational Highlights
Valaris’ operational performance during the quarter and the first half of 2024 was strong across its business segments, reflecting the company’s ability to capitalize on the improving market conditions in the offshore drilling industry.
Floaters Valaris’ floater segment, which includes its drillships and semisubmersible rigs, saw a significant increase in revenue and profitability. Floater revenue increased by 18% in the second quarter and 60% in the first half of 2024 compared to the respective prior-year periods. This was primarily driven by incremental revenue from rigs that have recently commenced new contracts, such as VALARIS DS-17, VALARIS DS-8, and VALARIS DS-7, as well as higher average daily revenue across the floater fleet.
The company’s floater utilization rate increased from 61% in the first quarter to 66% in the second quarter of 2024, and from 59% in the first half of 2023 to 64% in the first half of 2024. This improvement in utilization reflects the increased demand for Valaris’ high-specification floater assets, particularly its 6th and 7th generation drillships, which have seen their global utilization rate rise to 88%.
Jackups Valaris’ jackup segment also performed well, with revenue increasing by 22% in the second quarter and 8% in the first half of 2024 compared to the respective prior-year periods. This was driven by higher average daily revenue and more operating days, as certain jackups transitioned from mobilization or contract preparation activities to new contracts.
Jackup utilization increased from 53% in the first quarter to 58% in the second quarter of 2024, though it remained flat at 58% in the first half of 2024 compared to the same period in 2023. The company noted that the industry has seen a meaningful increase in jackup day rates, reflecting the improved demand environment.
ARO Valaris’ 50⁄50 unconsolidated joint venture, ARO, which operates in Saudi Arabia, contributed $20.1 million in operating income for the first half of 2024. ARO’s revenue increased by 9% in the first half of 2024 compared to the same period in the prior year, primarily due to the addition of new rigs to its fleet, including Kingdom 1 and Kingdom 2.
Backlog and Outlook
Valaris’ contract backlog, which reflects signed drilling contracts, increased to $4.307 billion as of July 29, 2024, up from $3.921 billion as of February 15, 2024. This growth was driven by various contract awards and extensions, including a multi-year contract for VALARIS DS-17 offshore Brazil and a six-month contract extension for VALARIS DS-9 offshore Angola.
The company’s ARO joint venture also had a substantial backlog of $1.833 billion as of July 29, 2024, though this represented a decrease from $2.138 billion as of February 15, 2024, primarily due to the termination of the VALARIS 143 contract.
Valaris’ positive outlook for the offshore drilling industry is supported by several key factors:
Improved Demand: The more constructive oil price environment has led to an increase in contracting and tendering activity for both floaters and jackups, contributing to higher global utilization rates for the industry’s marketed fleet.
Reduced Supply: Rig attrition, particularly in the floater segment, has resulted in a smaller global fleet of rigs available to meet customer demands. Additionally, the high cost of newbuild construction and lack of shipyard capacity are not expected to support significant floater newbuild activity in the foreseeable future.
Suspension of Contracts: While the recent suspension of some contracts by Saudi Aramco has added some supply to the jackup market, the impact is relatively limited, representing only 1% of the marketed jackup fleet.
Despite the positive industry outlook, Valaris acknowledges that inflationary pressures remain elevated, leading to increased personnel costs and higher prices for goods and services required to operate its rigs. The company expects these cost pressures to continue in the near term, though certain long-term contracts contain provisions for escalating costs.
Financial Position and Capital Allocation
Valaris maintains a strong financial position, with $398.3 million in cash and cash equivalents as of June 30, 2024. The company has no debt principal payments due until 2030 and had $375.0 million available for borrowing, including up to $150.0 million for the issuance of letters of credit, under its senior secured revolving credit agreement as of July 26, 2024.
In 2023, Valaris issued $700.0 million and $400.0 million in aggregate principal amount of 8.375% Secured Second Lien Notes due 2030, further strengthening its liquidity and capital structure.
The company’s capital expenditures during the first half of 2024 were $261.5 million, primarily related to the maintenance and upgrades of its drilling rigs, reactivation costs, and the mobilization of the recently delivered VALARIS DS-13 and VALARIS DS-14. Based on current projections, Valaris expects capital expenditures during 2024 to be in the range of $450.0 million to $480.0 million.
Valaris’ investment in its 50⁄50 joint venture, ARO, is a significant component of its capital resources. The company expects to receive cash from ARO in the future through the maturity of its Notes Receivable from ARO, as well as from the distribution of earnings from the joint venture. However, the timing and amount of any cash distributions from ARO are at the discretion of the ARO board of managers and cannot be predicted with certainty.
The company’s board of directors has authorized a share repurchase program of up to $600.0 million, of which approximately $400.0 million remained available as of June 30, 2024. Valaris may continue to act opportunistically to monetize assets and enhance stakeholder value, subject to certain restrictions under its debt agreements.
Risks and Challenges
While Valaris’ financial and operational performance has been strong, the company acknowledges several risks and challenges it faces:
Inflationary Pressures: The elevated inflationary environment has led to increased personnel costs and higher prices for goods and services required to operate its rigs. Although certain long-term contracts contain provisions for escalating costs, Valaris cannot predict its ability to successfully claim recoveries of higher costs from its customers.
Tax Assessments: Valaris is facing several tax assessments in various jurisdictions, including Malaysia, Luxembourg, and Australia. While the company believes its tax returns are materially correct as filed, the outcome of these assessments and related administrative proceedings cannot be predicted with certainty.
Potential Contract Suspensions: In early 2024, Saudi Arabia announced plans to maintain maximum sustainable capacity, leading to the suspension of several offshore drilling contracts, including two of Valaris’ jackups leased to ARO. Further suspensions may occur, adding additional supply to the jackup market.
Financing and Capital Allocation: Valaris’ ability to fund future growth and capital expenditures will depend on its future operating performance, restrictions to incur additional debt, and the availability of equity and debt financing. The company may need to rely on the issuance of debt and/or equity securities, which could result in higher interest rates, shorter maturities, and potential dilution to shareholders.
Conclusion
Valaris’ strong financial and operational performance in the second quarter and first half of 2024 demonstrates the company’s ability to capitalize on the ongoing recovery in the offshore drilling industry. The company’s strategic focus on high-specification floaters and premium jackups, combined with its disciplined approach to reactivations and capital allocation, has positioned it well to navigate the current market environment.
While Valaris faces some challenges, such as inflationary pressures and potential contract suspensions, the company’s positive outlook for the offshore drilling industry, robust financial position, and strategic initiatives suggest that it is well-positioned to continue delivering value to its shareholders in the years to come.
