Valaris Limited (RIG) Earnings Call Transcript

Good afternoon. Next up, we've got Mr. Anton Dibowitz, President and CEO of Valaris since September of 2021, previously served as CEO of Seadrill from 2017 to 2020 following various roles 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 Q&A. Anton, thanks for joining us today.

Thanks, Eddie. I just said to Eddie, my deck, as I looked at it, is 28 slides, and I want to leave plenty of time for Q&A. So there's may be a little bit whistlestop and I'll cover everything in detail. But there's a lot of interesting stuff to talk about. So -- forward-looking statement. You can download it from the presentation or website. We'll be talking about forecast and stuff going forward. So appreciate that. Presentation is in 3 parts. First, I'm going to talk about Valaris and why we are the leading offshore driller. I'm going to talk about industry fundamentals, strong supportive market that we continue to see improvement in, why we're excited about where we're heading. And lastly, about the earnings and growth story that we see playing out, especially for us over the next little period. So starting with the first part. Valaris is the largest driller with high-spec fleets. We have the largest fleet and the highest-spec fleet, onboard 11 drillships, average age 9 years. 5 semisubmersibles, 4 of these can operate DP, 2 both in moored and DP mode. 12 ultra-harsh and harsh jackups, think about North Sea, Norway, U.K., Netherlands for those. 21 high-spec jackups and we think about those Southeast Asia, Middle East work and then 2 legacy jackups, which are a little less young than the rest of the fleet primarily doing P&A work in the U.K. and generating some nice cash. So not only the largest fleet, but the high-spec fleet on water. So more than 50% of our fleet is ranked in the top quartile. And these aren't our rankings. This is an independent third party. So look at that bar in each of those on the left there, kind of the dark gray color. More than 80% of our fleet is in the top half of the global fleet. For us, sustainability and being able to work through the cycle, high-spec rigs are preferred by customers, they work through the bottom of the cycle, and they get an advantage at the top of the cycle. Strong customer relationships beyond having a great fleet of high-spec assets having strong customer relationships is important. We have a diversified fleet. We operate both floaters and jackups. This gives us scale. It gives us a portfolio approach, increases our revenue potential through the cycle. Customers, especially IOCs, want a service provider who can provide them a rig in various geographies and also at various water depths. And you can see with a number of our major customers on the left side, we operate across water depths and geographies, both in jackups and floaters. And on the right-hand side is the more selective of the customers. We've been very focused in putting our rigs to work and focusing on those basins that are going to drive overwhelmingly demand for rigs over the next 5-plus years. So on the floater side of the business, we focus our efforts in the Golden Triangle, U.S. Gulf of Mexico, Brazil, West Africa. We have 4 rigs in or going to Brazil, 4 in West Africa, now with the recent announcement of the DS-7, and we have 2 ships in the Gulf of Mexico plus the semi that's operating there now. So this is the overwhelming driver of demand in the floater market going forward. On the jackup side, overwhelmingly concentrated in the North Sea and also in the Middle East, which is going to drive more than 50% of jackup demand over the next 5 years. We also have a nice position in Australia where we operate 2 floaters, 1 jackup right now and another jackup that we're relocating from the North Sea to Australia, and we'll talk about that, the reasons for that a little bit further down the presentation. Beyond our own fleet, we also have a strategic asset in our ARO Drilling joint venture. This is a joint venture with Saudi Aramco, the largest user of jackups in the world. It's also the place which many will say will drill the last offshore -- the last offshore well. ARO provides us with stable earnings, guaranteed contracts. You can see $1.5 billion of backlog in the entity right now. We have a 20 new-build program. These are 20 new-builds that will be backed on average by 16 years of contract for each new build. The first 8-year contracts giving a guaranteed EBITDA payback on the construction cost in the first 6 years of that 8-year contract. So there's a significant growth story that's playing out in ARO as we continue to build these rigs. First one is going to be delivered. We should have the rig naming later this month. Second one at the end of the year going into service early next year. and then we'll commit to rigs 3 and 4 beyond that. Beyond our 50% equity interest in ARO, we have 400 -- north of $403 million shareholder note. And from the Valaris side, we leased 9 rigs into ARO that provide stable, consistent high utilization earnings to Valaris based on the bareboat charges. We just issued our sustainability -- our '22 sustainability report earlier this year. Our focus when it comes to sustainability and emissions in particular, is about obviously reducing the core, our own and also working with our partners. This is a great business opportunity as we see going forward. We set a target between 10% and 20% to reduce our own emissions. We believe this is incredible. We have a road map. The technology is available to do this today. Fully expect that additional technology is going to arrive in market. We do need collaboration from our customers when we talk about things like availability of biofuels, but that 10% to 20% target can be achieved with technology that's available today and with our customers. As technology improves, you may see us move these targets over time as we have more technology. The second part is to partner with our customers on their transition efforts. Having a diversified fleet, jackups and floaters, most of the CCS wells or pretty much all the CCS wells that are being drilled today are close to infrastructure, right, that's the natural place for it to be. We've drilled CCS in the U.K. We're relocating a rig to Australia to drill a CCS well, and we have upcoming programs in the Gulf of Mexico. This is an important growing part of our business and something that we see as we head forward into the future, becoming a more significant part of our business that we can access by having a high-spec jackup fleet and having these relationships with these large customers. Strong balance sheet. We refinanced our exit financing earlier this year, $700 million note, due 2030. We recently did an add-on intended to fund the purchase of the DS-13 and -14, provides us with additional flexibility, added a $375 million revolver gives us liquidity to execute our business and capital allocation flexibility as we go forward. So turning now to the market. Starting on the top left. The world's need for energy continues to grow. It's recovering to pre-COVID levels this year and kind of as we speak and is expected to grow beyond that. Brent forward prices were above $90 today, right? The forward curve 5 years in the $69 to $76 range. And if you look at that curve on the right, the overwhelming majority of undeveloped reserves are profitable at these levels, and a huge portion of those are right to the left of those bar charts below the kind of $40, $45 level. So this is an attractive business. The world needs this energy, and it's attractive business for our customers. That leads down to offshore upstream CapEx and project sanctioning, both of which are set to have good compound annual growth rates over the next few years. These are numbers from Rystad showing a 16% increase going into this year and another 4% next year. Project sanctioning, similarly. Our customers' confidence in where the market is going and that they're going to need these reserves is driving increased spending. That increased spending then drives demand for the services that we provide. Again, numbers from Rystad going forward, floater demand over the next several years with a compound annual growth rate of 7%. We saw a huge jump in demand for jackups as a number of jackups were taken into Saudi over the last year, but again, a stable business. I think what's really interesting in this slide, if take a look, is that blue bar, the blue block right at the bottom of the bar. Here it's called wildcat, this is exploration drilling, right? This was something that 2, 3 years ago, some prognosticators said, we don't need to explore for anymore oils, just develop what we have and the world will be good, transition will take care of the rest. The fact that our customers are allocating on those '24, '25, '26, 25% to 30% of what they're going to do on exploration. Some of it's near field, some of it is rank exploration, wildcats is an important driver of where this market is going because that exploration then leads to development programs from those finds down the road. Turning to the supply side. So right at the back, the light gray, rationalization, the supply-demand balance is largely up until a couple of years ago, been handled by drillers rationalizing their fleet, taking older, less technically-proficient rigs out of the market. So on the floater side, 44% of the floater market was retired through the down cycle. Jackup side, a little less so around 8%, all right. So on the floater side, the majority of assets are relatively high-spec, what's left. On the jackup side, there has been less fleet rationalization from the supply side. It's just easier to stack a jackup, the option cost is significantly less. We'll point out on the slide, a number of these rigs are old and not really competitive. So that leads to utilizations. In the drillship, the high-spec drillship market, 6- and 7-gens. We're talking numbers well north of 90% and have been there for quite a period of time, same in the benign jack-up market. The high-spec semi market lags behind a little bit because customers generally prefer ships if they can right now because they're available. But this is something I think we could see change as the available supply of drillships continues to dwindle and our customers become more horses for courses as they select rigs for their programs. So very solid market. So let's kind of wrap it up and say where does that leave us with supply/demand. The available capacity is shrinking. 10 competitive warm or cold stacked high-spec ships available held by 3 contractors. There are 8 new-build ships left in the South Korean yards and those are the ones we really consider to be competitive. 2 to 4 of those are already slated for programs. We have the DS-13 and -14, that leaves 2 to 3 rigs available left at the yards. And I'll be clear, given the expected cost to build another drillship, we have zero expectation that there will be another build cycle in the floater side of the market. Jackup, as I said, is a little different. Number of rigs were stacked rather than retired. But if you look at the numbers there, of the 95 rigs that are sitting on the sidelines, 60 of them over 30 years, a number of them in stacked for more than 3 years, lower-spec rigs in the global fleet rankings, a number of these rigs will not come back to market or we don't have to be a significantly improved market to see them come back. Beyond the 20 rigs that we're building in ARO, nobody is going to be building rigs. There are about 20 rigs left in yards in China, new build jackups. But 13 of these -- 20 new builds up the yards, 13 in China, those are likely to go into the local Chinese market. So the result of all of this is a significant increase in day rates. Floater rates have more than doubled over the last couple of years. jackup rates have almost doubled, and we talked about the utilization numbers before. That's the second part. Third part. So what does that mean for us, all right. We expect to see significant earnings and cash flow growth from our business over the next couple of years based on 3 things. The first is recontracting legacy contracts into market day rates. The second is the impact of attractive reactivation contracts that we've signed over the last year coming to market. And the third is having the availability for operating leverage, the DS-11 and then the 2 options that we recently said we intend to exercise on the 13 and 14. So what does that look like on the page. Up at the top, you see the 17, the 8 and the 7. These are all contracts that are done at day rates north of $400,000 a day. that will be coming to market before the middle of next year. 17 is about to go on contract and then the 8 and the 7 coming to contract at these day rates before the middle of next year. The 10, the 15, and the 4 are rigs that were contracted at the beginning of the cycle, day rates, yes, in the low to mid-200s, $227,000 in average there that we'll be rolling on to market day rates before the middle of next year, plus another rig by the end of this year. So as we reprice all these rigs into the market, you'll see a significant increase in our earnings and also our cash flow. We've been very clear about how we were going to approach the market in a way it comes to reactivations that we would not return rigs to the market unless the initial contract provided attractive returns under the initial firm term of the contract. I mean said simply, if the world came to an end, on the last day of the initial contract, it was the right decision for us to take. That's the approach we've taken from the beginning, and we will take. And the DS-7 that we signed based on a bid earlier this year is a clear example of that. This is a rig that will generate $95 million to $100 million of EBITDA on an annualized basis. The payback on the reactivation of $100 million when you consider that we're getting some upfront cash will be paid back in significantly less than a year. We have a proven track record of reactivating rigs. And to take a step back for a second, when we emerged -- relisted in May 21, I came on the Board about a month later, Valaris had 11 drillships, 4 of them were working, and we had $160 million of backlog on that fleet. Between then and now, we have reactivated 6 drillships back into the market. Backlog has increased more than tenfold. And a couple of minutes I talked ago, I talked about the fact that we're going to be repricing these contracts into an even more attractive market. Beyond the DS-7 that I just talked about, 2 more examples of the most recent reactivations we've done. The DS-17 in Brazil, effective day rate on that contract, which was contracted a year ago north of $600,000 when you consider the upfront costs. The DS-8 in Brazil, this was the eighth rig out of an 8-rig tender selected, i.e., it was the highest price that was bid under that tender. And we have additional operating leverage. I stated on our recent earnings call that we intend to take the options in the DS-13, -14. That's based on, one, the price that we can take those assets and steel, and two, our contracting success; and third, how we see the forward market. So talk to a broker, the clearing price for a new drillship, -- these are the highest spec rigs available in the yard right now. We built them. We've had our people on them since day 1. Broker estimates are north of $300 million for a rig, especially when you consider that both of these rigs have a second BOP, which would be an extra $50 million cost for other rigs that are sitting at the yard that only have 1 BOP. The fact that we can buy them at $119 million and $218 million, respectively, is a 30% to 60% discount of steel. We will take the same approach about reactivating these rigs as we have with any other rig. And it's not truly a reactivation, but you can think of a reactivation type expense in a year to get these rigs ready to drill. We will only return these rigs to market for a contract that provides a meaningful return under its initial contract. We're taking the decision, and we will take the decision to take these towards the end of the year, give us additional operating leverage and then we will find the right contract to bring them to market. Given the size of our fleet and the specs of our fleet, we have significant earnings potential. As we ramp down our reactivation activities and get into kind of normal cycle business, you can see some illustrative utilizations and day rates. I'd say we're pretty much in a column B or better market right now other than maybe harsh environment jackups which are lagging behind as a theme disappointing and we see some recovery but probably beyond '24. Capital allocation approach. First, maintain a strong balance sheet. As my CFO tells me on a regular basis, a business that has high operating leverage doesn't need to also have high financial leverage. So I think we've all learned lessons in the industry over the last decade, and we will maintain a strong conservative balance sheet to be a sustainable business. Second, in the near term, pursue accretive investment opportunities. For us, up until now, and it will continue to be for a little while, that's about getting our high-spec rigs back to work into an attractive market. Beyond that, it's return cash to shareholders. I think we've been very clear on our intentions. We can see the inflection point coming as we recontract and bring these rigs to work, and that is return cash to shareholders. We've increased our share -- repurchase authorization to $300 million. We set a target this year to buy back $200 million shares and we're already at $120 million. So to close up, so we'll leave a couple of minutes for questions. We are well positioned to deliver to our shareholders. We are the leading driller. We have the largest high-spec fleet on water with strong customer relationships. We're in the basins that are going to drive the overwhelming amount of demand going forward. There are very strong industry fundamentals in our market. Supply has dwindled, demand continues to increase, and it's a very supportive commodity environment for us to thrive over the next few years as we go forward. And lastly, we can expect to see significant earnings and cash flow growth over the next few years as we re-rate our contracts and bring some of these attractive reactivations to market. Yes, there will be some additional opportunities if we find them to reactivate the 11, which is our only stack rig left plus the options on the 13 and the 14. But beyond that, our intentions are absolutely clear. We will return cash to shareholders unless there is a clear better use for it. And I'm closing -- you probably asked me in a second but that's not building rigs, all right. Thank you.

I hope not. Thanks, Anton.

My first question is just on kind of reactivation economics. You highlighted on your slide the economics of the DS-7 less than a 1-year payback on the reactivation cost. Hard to argue with that. You've been the most active in bringing back cold-stacked rigs to work. Is there something different about the way that Valaris initially stacked the rigs or you're reactivating the rigs that perhaps makes the economics unique to you versus one of your peers.

There's a little bit of both. I mean different drillers took different strategies through the bottom of the cycle. I'd say the previous Valaris management team took the decision to stack rigs at the bottom of the cycle rather than burn cash, which ultimately was the right thing for the creditors, right. But that means that we started, as I said, with 4 rigs working out of a fleet of 11, and it was imperative for us to get our rigs back to work. But they were stacked the right way. They were thoughtfully stacked. You take fluids out the equipment, you're very thoughtful about how you do it, which means -- and we've had people on those rigs since day 1, and we have a very good idea -- had a good idea and now a demonstrated track record of what it takes to reactivate a rig. So we've been very clear on the budgets that we set, we would reactivate. This industry is replete with disasters of people reactivating rigs and budgets being 1x, 2x what they planned. We've largely hit our budgets on timing and cost to reactivate our rigs. And that's the reason why we've reactivated 6 and our largest peers in combination have reactivated 8. I think there is something about having the project teams available. And then it's about finding the right opportunity for those rigs to go back to work. The DS-7 contract is a clear example of that. Having the track record of doing it, demonstrating it gives customers the confidence to take a stack rig or even a new build back into the market. Not all rigs were stacked equally. And I think probably some -- there have been some mergers, there have been some legacy companies. I think it depends who stacked the rig, how thoughtful were they, what was their position when they stacked it. But we're confident that we can reactivate the rig that we have under reactivation at the budgets. I think we set around $100 million right now. I think the 11 would be in about the same price range. And I think to get the 13 of the 14 to work today beyond the steel price would be about a similar time frame and a similar cost.

One remaining cold stacked rig, the DS-11, you set a high bar for yourself on the DS-7. Is that the type of payback that you're anticipating on the 11? Or would you be willing to take a 2-year payback on that reactivation investment? Or how are you thinking about that?

So I think we also need to remember the DS-7 was contract. We bid on that contract at the beginning of this year. That was a January bid. As we have added rigs to the market, the market continues to improve, we have increased the hurdle rate on our reactivation. So no, I think we would be more opportunistic. Now we have 10 out of 11 rigs working plus 2 options. We see supply dwindling. We're confident in the market is going. We're going to be quite thoughtful and increase our hurdle rates as we reactivate rigs rather than the other way around.

Got it. Just kind of a bigger picture question on where leading-edge day rates could go. I asked this on the last session as well. But I mean, demand, very constructive. It's amazing what a difference 12 to 18 months can make. And at the same time, the supply is limited. So is $600,000 a day, something in play for the end of next year? Is that getting a little too ahead of ourselves?

Where can I go? I didn't hear what Rob had said, but we've had this debate a couple of times this morning. And yes, absolutely. Where could high-spec floater day rates go, new build parity, right? Ultimately, is where your limiting point is in kind of from one basis. And to build a rig today would be north of $1 billion and the day rates would be astronomical [indiscernible]. So yes, absolutely. I think, are we going to get there? There are a couple of reasons I think, we may not. But where they're going to go over the next less available rigs in the market, right? So we say 2 to 3 stranded assets really left kind of 10 rigs that are controlled by 3 drilling contractors to come back to market and 12 to 15 opportunities over the next couple of years that either need a rig to be reactivated for that we're tracking or need a rig to be relocated into the market is going to put a significant amount of pressure on day rates once that remaining drillship capacity comes back to market. Now a couple of other things can happen. We have the DPS-3 and -6 stacked semis. What you may see happening is customers becoming a little more horses for courses in selecting rigs. Right now, you take a drillship because it's available. So we could see better opportunities for kind of high-spec semis recovering and as a little bit of a balance to that day rate. But let's be clear, right, kind of $450,000, $550,000, $600,000 day rates and $150,000 of OpEx. None of this is bad business.

Very attractive economics there. In your prepared remarks, you said -- is that your expectation of a new build cycle?