Valaris Limited 2021 Form 10-K Summary
Business context and reporting period
Valaris provides offshore contract drilling services on a day-rate basis. At December 31, 2021, it owned 56 rigs and held a 50% interest in ARO, a joint venture with Saudi Aramco that owned seven additional rigs. The company operated in 14 countries.
The fiscal year ended December 31, 2021, but results span two accounting entities: the Successor period (May 1–December 31, 2021) and the Predecessor period (January 1–April 30, 2021). Valaris emerged from Chapter 11 on April 30, 2021, adopted fresh start accounting, and states that post-emergence and historical financial statements are not comparable. The combined full-year 2021 figures below are management’s non-GAAP combination of the two periods.
Financial and operating metrics
| Metric | 2021 | Comparable period / context |
|---|---|---|
| Combined revenue | $1.232 billion | Down 13.6% from $1.427 billion in 2020 |
| Combined operating loss | $902.0 million | Includes $756.5 million of noncash impairment recorded before emergence |
| Combined net loss attributable to Valaris | $4.500 billion | Versus $4.856 billion in 2020; heavily affected by $3.6 billion of reorganization items |
| Cash and cash equivalents | $608.7 million | Up from $325.8 million at December 31, 2020 |
| Working capital / current ratio | $784.6 million / 2.9 | At December 31, 2021 |
| Debt | $550 million principal; $545.3 million carrying value | First Lien Notes due 2028 |
| Operating cash flow / capital expenditures | $(66.0) million / $58.9 million | Combined 2021 amounts: $(26.2) million and $(50.2) million in the Successor period; $(39.8) million and $(8.7) million in the Predecessor period |
The combined 2021 net loss should not be read as a recurring operating result: the Predecessor period included $3.6 billion of reorganization expense, including fresh-start adjustments. Successor-period revenue was $835.0 million and net loss attributable to Valaris was $33.0 million. The filing does not provide a directly comparable full-year GAAP Successor result.
- Combined 2021 contract drilling expense fell 27.1% to $1.073 billion, mainly from lower idle-rig costs and cost controls; reactivation costs partly offset the decline.
- Combined 2021 interest expense was $33.4 million, down from $290.6 million in 2020, principally because debt was substantially reduced through restructuring.
- At December 31, 2021, restricted cash was $35.9 million, including $31.1 million of collateral for letters of credit. Total reported liquidity was $608.7 million; the former $500 million DIP facility ended at emergence.
- Rig utilization was 54% overall in 2021 versus 52% in 2020. Floater utilization was 27% versus 26%; jackup utilization was 54% in both years. Average day rates rose for jackups to about $95,000 from $86,000 and were roughly flat for floaters at about $193,000.
Material changes versus prior periods
- Emergence from Chapter 11 eliminated $7.1 billion of debt. Valaris issued $550 million of First Lien Notes and received $520 million in cash, after the backstop premium and related mechanics.
- Combined 2021 revenue declined from 2020, largely due to fewer operating days and prior-year contract termination fees. Higher rates on certain rigs partly offset the decrease.
- Impairments were substantially lower than in 2020: $756.5 million in the four-month Predecessor period versus $3.646 billion in 2020. These were noncash charges.
- Contract backlog was approximately $2.444 billion as of February 21, 2022, up from $1.041 billion at December 31, 2020, mainly from contract awards and extensions. ARO’s separately reported backlog was $1.501 billion.
Outlook, risks and unusual items
Management described offshore drilling conditions as improving in 2021, particularly for floaters and drillships, amid higher oil prices and increased contracting activity. It expected utilization and day rates for floaters to improve as contracts awarded late in 2021 commenced. Management cautioned that the recovery remained uncertain and depended on sustained oil prices, demand, and market improvement. The filing provides no formal earnings or revenue guidance.
- Valaris expected 2022 capital expenditures of approximately $225–$250 million for rig enhancements, reactivations and upgrades, with customers expected to reimburse a significant portion. It anticipated reactivating four floater rigs during 2022.
- About $428 million of the February 2022 backlog related to a VALARIS DS-11 project that had not received final investment decision. The customer elected not to sanction the project and withdrew from it; it had not formally terminated the contract as of the filing, and Valaris was discussing next steps. Management said any termination fee and contractual reimbursements would more than cover project costs and commitments.
- First Lien Notes carry a $550 million principal amount, mature in 2028, and allow interest choices of 8.25% cash, 10.25% with half paid in kind, or 12% paid in kind. Payment-in-kind interest increases principal. The indenture restricts additional debt, dividends, asset sales and other actions; Valaris reported covenant compliance at year-end.
- ARO may require additional funding for its newbuild program if operating cash or third-party financing is insufficient. Valaris’s potential aggregate contribution is subject to a stated maximum of $1.25 billion, reduced proportionately by actual newbuild costs.
- Key risks include oil-price and offshore-cycle volatility, contract cancellation or renegotiation, rig reactivation cost overruns, COVID-19 and supply-chain disruption, customer concentration, climate and regulatory changes, cybersecurity, uninsured Gulf of Mexico hurricane losses, and international political, tax and currency exposures.
- Contingencies include contested tax assessments and environmental matters. A $0.4 million liability was recorded for Brazilian spill-related assessments. An Indonesian well-control investigation remained unresolved; the filing says its scope and outcome could not be predicted.
- Valaris reported no dividends and noted that debt covenants limit its ability to pay them. Its 5,645,161 warrants have a $131.88 exercise price and expire in 2028; the management incentive plan also reserves shares for awards, creating potential dilution.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021.
Important facts for investors to verify
- Review the fresh-start accounting and Predecessor/Successor split before comparing annual earnings, assets, depreciation or debt with prior periods.
- Check subsequent developments in the VALARIS DS-11 contract, including final investment decision, termination rights, fees and reimbursement; assess the resulting backlog exposure.
- Track actual cash generation, liquidity, reactivation spending and customer reimbursements against the 2022 capital expenditure outlook.
- Confirm the interest option selected for the First Lien Notes and its effect on cash interest and principal accretion.
- Assess ARO’s newbuild financing needs, potential Valaris funding obligations, Saudi Aramco concentration, and the collectability and timing of shareholder-note repayments.
- Monitor tax disputes, environmental investigations, contract backlog conversion, customer concentration, and potential warrant or incentive-award dilution.