Interim President and Chief Executive Officer Anton Dibowitz said, “Valaris' best in class team continues to deliver at a high level for our customers, as demonstrated by achieving 99% revenue efficiency during the third quarter and year to date. This performance, combined with a high quality fleet and deep customer relationships, has enabled us to continue translating our operational leverage into meaningful backlog additions. We have added approximately $330 million of backlog in the past three months and more than $2.1 billion year to date, including recent contract wins for VALARIS DS-4 offshore Brazil as well as DS-9 and DS-10 offshore West Africa, enhancing our presence in these important deepwater markets. Over the past several months, we have secured term backlog on four preservation stacked drillships, highlighting our customers' confidence in our operational capabilities.”
Dibowitz added, “As a part of the value chain that delivers affordable energy, we recognize the importance of delivering that energy responsibly. In our business, emissions from our drilling rigs currently represent the largest contributor of atmospheric CO2 and are therefore the target of our near-term sustainability effort. While we are early on that journey, we have made great strides. For example, jackup VALARIS 123 is being upgraded with a selective catalytic reduction system that, when in operation, is designed to eliminate almost all NOX and SOX emissions from the rig, and drillship VALARIS DS-12 recently became the first vessel in the world to receive the ABS Enhanced Electrical System Notation EHS-E. This system is designed to optimize powerplant performance, enabling operations on fewer generators and thereby reducing emissions.”
Dibowitz concluded, “The market environment for offshore drilling has improved meaningfully in 2021, helped by a strong rebound in demand for hydrocarbons and constructive commodity prices. We have taken advantage of improving market conditions by winning an outsized share of contracts and rig years awarded, providing a platform for increased earnings in 2022 and beyond. Valaris is well-positioned to benefit from the opportunities we see in the market today, and we will continue to take a disciplined approach to capital allocation, with a focus on maximizing earnings and driving free cash flow as the market continues to recover.”
Fresh Start Accounting
Valaris emerged from Chapter 11 bankruptcy protection on April 30, 2021 (the "Effective Date"). Upon emergence, Valaris applied fresh start accounting which resulted in Valaris becoming a new reporting entity for accounting and financial reporting. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes prior to that date. As required by GAAP, results for the second quarter must be presented separately for the predecessor period from April 1, 2021, through April 30, 2021 (the "Predecessor" period) and the successor period from May 1, 2021, through June 30, 2021 (the "Successor" period). However, the Company has combined certain results of the Predecessor and Successor periods ("Combined" results) as non-GAAP measures to compare the third quarter and combined second quarter since we believe it provides the most meaningful basis to analyze our results. The Predecessor and Successor results for the second quarter are more fully discussed in our quarterly report on Form 10-Q for the period ended June 30, 2021 filed with the SEC on August 3, 2021.
Third Quarter Highlights
Revenues increased to $327 million in the third quarter 2021 from $293 million in the Combined second quarter. Excluding reimbursable items, revenues increased to $293 million in the third quarter from $261 in the Combined second quarter primarily due to higher utilization for the floater fleet as VALARIS DS-12 started a new contract early in the third quarter, and VALARIS DS-15 and MS-1 had a full quarter of revenues after commencing contracts in the latter part of the second quarter.
Contract drilling expense increased to $274 million in the third quarter 2021 from $254 million in the Combined second quarter 2021. Excluding reimbursable items, contract drilling expense increased to $255 million in the third quarter from $236 million in the Combined second quarter primarily due to more operating days for the floater fleet. This was partially offset by rig reactivation costs, which declined to $19 million in the third quarter from $24 million in the Combined second quarter.
Depreciation expense declined to $24 million in the third quarter 2021 from $54 million in the Combined second quarter due to a full quarter impact of fresh start accounting adjustments, which significantly reduced the carrying value of property and equipment on the balance sheet. General and administrative expense increased to $27 million in the third quarter 2021 from $19 million in the Combined second quarter primarily due to severance costs related to the departure of three senior executives during the third quarter.
Tax expense was $53 million in the third quarter 2021 compared to a tax benefit of less than $1 million in the Combined second quarter 2021. The third quarter tax provision included $39 million of discrete tax expense primarily related to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. The Combined second quarter tax provision included $12 million of discrete tax benefit primarily related to fresh start accounting adjustments. Adjusted for discrete items, tax expense of $14 million in the third quarter compared to tax expense of $12 million in the Combined second quarter.
Adjusted EBITDA of $30 million in the third quarter 2021 compared to $17 million in the Combined second quarter. Adjusted EBITDAR of $50 million in the third quarter 2021 compared to $41 million in the Combined second quarter.
Segment Highlights
Floaters
Floater revenues increased to $104 million in the third quarter 2021 from $68 million in the Combined second quarter. Excluding reimbursable items, revenues increased to $94 million in the third quarter from $62 million in the Combined second quarter primarily due to higher utilization as VALARIS DS-12 started a new contract early in the third quarter, and VALARIS DS-15 and MS-1 had a full quarter of revenues after commencing contracts in the latter part of the second quarter.
Contract drilling expense increased to $91 million in the third quarter 2021 from $67 million in the Combined second quarter 2021. Excluding reimbursable items, contract drilling expense increased to $83 million in the third quarter from $63 million in the Combined second quarter primarily due to more operating days in the third quarter.
Jackups
Jackup revenues of $186 million in the third quarter 2021 were marginally lower than revenues of $188 million in the Combined second quarter. Excluding reimbursable items, revenues of $168 million in the third quarter were marginally higher than revenues of $167 million in the Combined second quarter.
Contract drilling expense declined to $141 million in the third quarter 2021 from $144 million in the Combined second quarter. Excluding reimbursable items, contract drilling expense of $134 million in the third quarter was consistent with the Combined second quarter.
ARO Drilling
Revenues declined to $118 million in the third quarter 2021 from $125 million in the Combined second quarter 2021 primarily due to out of service days for a special periodic survey for one of ARO's owned rigs and VALARIS 22 completing its lease contract with ARO during the third quarter. Contract drilling expense of $94 million in the third quarter was marginally higher than $93 million in the Combined second quarter. EBITDA was $18 million in the third quarter compared to $28 million in the Combined second quarter.
Other
Revenues of $36 million in the third quarter 2021 were marginally lower than $37 million in the Combined second quarter and contract drilling expense of $14 million in the third quarter was in line with the Combined second quarter. EBITDA was $22 million in the third quarter compared to $23 million in the Combined second quarter.
