Valaris Limited (NYSE: VAL) ("Valaris" or the "Company") today reported third quarter 2023 results.
President and Chief Executive Officer Anton Dibowitz said, “We are pleased that VALARIS DS-17 commenced its contract offshore Brazil during the quarter and expect that it will contribute meaningful earnings and cash flow going forward. While our floater revenue efficiency for the quarter was below our expectations, our year to date fleetwide revenue efficiency remains strong at 97%, and we remain committed to delivering safe and efficient operations.”
Dibowitz added, “During the third quarter, we were awarded new contracts and extensions with associated contract backlog of approximately $465 million. Our long-term contract for VALARIS DS-7 was the seventh contract awarded to our previously stacked floaters since mid-2021. Following this reactivation we will have 10 drillships working and will remain disciplined in exercising our operational leverage with only one stacked drillship and two newbuild drillship options remaining.”
Dibowitz concluded, “The outlook for Valaris is positive, with increasing demand and constrained supply tightening the market. We are confident in the strength and duration of this upcycle, and we expect to deliver meaningfully improved earnings in both 2024 and 2025 due to the impact of recent and ongoing drillship reactivations at attractive day rates, as well as the repricing of rigs from legacy day rate contracts to higher markets rates.”
Financial and Operational Highlights
- Net income of $17 million, Adjusted EBITDA of $40 million and Adjusted EBITDAR of $91 million;
Delivered revenue efficiency of 94% during the quarter and 97% year to date;
- Recognized by the Center for Offshore Safety with its 2023 Safety Leadership Award for the Valaris Basic Training program;
- Awarded new contracts and extensions with associated contract backlog of approximately $465 million during the third quarter;
- Additional new contracts and extensions awarded following quarter end, with associated contract backlog of approximately $335 million;
- Executed $400 million add-on to Senior Secured Second Lien Notes to finance expected exercise of purchase options for newbuild drillships VALARIS DS-13 and DS-14;
- Repurchased $85 million of shares during the third quarter and $171 million to date;
- Remain on track to deliver on our 2023 share repurchase target of $200 million;
- ARO Drilling secured attractive financing for newbuild jackups Kingdom 1 and 2.
Third Quarter Review
Net income was $17 million compared to net loss of $27 million in the second quarter 2023. Adjusted EBITDA increased to $40 million from $15 million in the second quarter primarily due to two jackups and one floater commencing contracts during the quarter after not working in the second quarter, as well as an increase in average daily revenue for both the floater and jackup fleets. These items were partially offset by higher reactivation expense and an increase in unplanned downtime related to several floaters. Adjusted EBITDAR increased to $91 million from $59 million in the second quarter.
Revenues increased to $455 million from $415 million in the second quarter 2023. Excluding reimbursable items, revenues increased to $427 million from $388 million in the second quarter. The increase was primarily due to two jackups and one floater commencing contracts during the quarter after not working in the second quarter, as well as an increase in average daily revenue for both the floater and jackup fleets. These items were partially offset by an increase in unplanned downtime related to several floaters.
Contract drilling expense increased to $391 million from $374 million in the second quarter 2023. Excluding reimbursable items, contract drilling expense increased to $369 million from $348 million in the second quarter. The increase was primarily due to higher reactivation expense and higher operating costs resulting from the contract startups mentioned above.
Depreciation expense increased to $26 million from $25 million in the second quarter 2023. General and administrative expense decreased to $24 million from $26 million in the second quarter 2023.
Other income increased to $11 million from $7 million in the second quarter 2023. This was primarily due to foreign currency exchange gains during the quarter compared to losses in the second quarter.
Tax expense decreased to $11 million from $25 million in the second quarter 2023. The third quarter tax provision included $2 million of discrete tax benefit, which was primarily attributable to the resolution of prior period tax matters, partially offset by changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. The second quarter tax provision included $6 million of discrete tax expense, which was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Adjusted for discrete items, tax expense decreased to $13 million from $18 million in the second quarter primarily due to a reduction in deferred tax asset valuation allowances.
Cash and cash equivalents and restricted cash increased to $1.1 billion as of September 30, 2023, from $805 million as of June 30, 2023. The increase was primarily due to the issuance of $400 million of additional 8.375% Senior Secured Second Lien Notes due 2030, partially offset by capital expenditures and share repurchases. The net proceeds from this issuance are intended to fund the purchase of drillships VALARIS DS-13 and DS-14, and for general corporate purposes.
Capital expenditures increased to $106 million from $71 million in the second quarter 2023 primarily due to an increase in reactivation and customer-specific capital expenditures associated with VALARIS DS-17, DS-8 and DS-7.
Third Quarter Segment Review
Floaters
Floater revenues increased to $243 million from $227 million in the second quarter 2023. Excluding reimbursable items, revenues increased to $232 million from $216 million in the second quarter. The increase was primarily due to VALARIS DS-17 commencing its contract with Equinor offshore Brazil in early September, following its reactivation, as well as an increase in average daily revenue for the rest of the floater fleet during the third quarter. These benefits were partially offset by fewer operating days for several floaters primarily due to unplanned downtime events.
Contract drilling expense increased to $215 million from $196 million in the second quarter 2023. Excluding reimbursable items, contract drilling expense increased to $206 million from $185 million in the second quarter. The increase was primarily due to higher reactivation expense associated with VALARIS DS-7 following a contract award in July for which the rig is being reactivated and VALARIS DS-17 commencing a contract in early September.
Jackups
Jackup revenues increased to $166 million from $145 million in the second quarter 2023. Excluding reimbursable items, revenues increased to $155 million from $135 million in the second quarter primarily due to more operating days and an increase in average daily revenue. Revenues from the jackup fleet benefited from contract startups for VALARIS 121 and 249, as well as several rigs commencing new contracts at higher day rates.
Contract drilling expense decreased to $122 million from $124 million in the second quarter 2023. Excluding reimbursable items, contract drilling expense of $114 million was in line with the second quarter. Lower repair and maintenance costs across the fleet and lower costs resulting from the sale of VALARIS 54 were offset by higher operating costs for VALARIS 249, which commenced a contract offshore Trinidad during the quarter after mobilizing from New Zealand during the second quarter.
ARO Drilling
Revenues increased to $122 million from $118 million in the second quarter 2023 primarily due to more operating days resulting from less out of service time for planned maintenance during the third quarter. Contract drilling expense decreased to $92 million from $95 million in the second quarter primarily due to lower repair costs associated with the previously mentioned planned maintenance.
Other
Revenues increased to $46 million from $43 million in the second quarter 2023 and contract drilling expense increased to $19 million from $18 million in the second quarter.
Third Quarter Results Versus Guidance
The Company's third quarter 2023 results were lower than prior guidance primarily due to lower than expected floater revenue efficiency and two contract commencement delays.
As previously announced, Valaris will hold its third quarter 2023 earnings conference call at 9:00 a.m. CT (10:00 a.m. ET) on Tuesday, November 7, 2023. An updated investor presentation will be available on the Valaris website after the call.
