Valaris plc — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The Rowan combination closed April 11, 2019, so Rowan’s results are included only from that date; comparisons with 2018 are not on a like-for-like basis. The interim statements were reviewed, not audited, by KPMG.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $583.9 million | $458.5 million | $989.8 million | $875.5 million |
| Operating loss | $157.4 million | $32.6 million | $238.7 million | $83.9 million |
| Operating margin | (27.0%) | (7.1%) | (24.1%) | (9.6%) |
| Net income (loss) attributable to Valaris | $405.5 million | $(151.0) million | $215.1 million | $(291.1) million |
| Net cash used in continuing operating activities | Not separately provided for Q2 | $293.4 million | $18.0 million |
Revenue rose 27% in Q2 and 13% for the first half, largely because Rowan contributed $147.2 million of Q2 revenue after closing. Operating costs also increased: Q2 contract drilling expense was $500.3 million and depreciation was $157.9 million. General and administrative expense was $81.2 million in Q2, including merger-related costs.
Reported earnings were dominated by a provisional $712.8 million bargain-purchase gain from the Rowan transaction, included in other income. Without that unusual item, operating performance remained loss-making; the filing’s unaudited pro forma results, which exclude the gain and specified transaction/integration costs, show net losses of $264.9 million for Q2 and $596.4 million for the first half of 2019.
At June 30, cash and cash equivalents were $959.1 million and short-term investments were $135.0 million. Current assets were $2.22 billion against current liabilities of $1.90 billion (current ratio 1.2). Debt principal was $7.68 billion; reported debt carrying value was $7.15 billion, including $1.13 billion of current maturities. Net interest expense was $118.3 million in Q2 and $199.3 million in the first half.
After July’s debt tender offers, the company reported pro forma debt principal of $6.73 billion and cash and short-term investments of $353.4 million. It repurchased $951.8 million principal amount of notes for $724.1 million, and expected a third-quarter pretax debt-extinguishment gain of about $195.7 million. On July 29, it also borrowed $125 million under its credit facility toward the August 2019 note maturity.
First-half capital expenditures were $134.8 million, versus $331.9 million a year earlier. The company cited Rowan-related costs and declining margins as factors in the increase in operating cash use. It expected 2019 capital expenditures of approximately $340 million, excluding integration-related capital expenditures.
Operating trends and changes
- Q2 total-fleet utilization was 65%, compared with 62% a year earlier. Floater utilization was unchanged at 53%; jackup utilization increased to 69% from 66%.
- Average day rates declined for floaters to $218,339 from $237,513 and were broadly flat for jackups at $78,229 versus $78,408. Total Valaris average day rate fell to $110,063 from $132,348.
- Management reported improving shallow-water demand and higher jackup utilization, but depressed day rates. Floater recovery was weaker than expected, with short-term awards and low pricing.
- Segment operating losses widened: Q2 floaters lost $52.0 million and jackups lost $38.5 million. ARO reported $27.2 million of operating income for the post-acquisition period; Valaris recognized only $0.6 million of equity earnings after basis-difference amortization.
- Backlog was $2.4 billion at June 30, up from $2.2 billion at December 31, 2018, reflecting acquired Rowan backlog and awards/extensions, partly offset by revenue recognized.
Outlook, risks and unusual items
- Management expected near-term market conditions to remain challenging and operating cash flows to remain negative as higher-rate contracts expire, new contracts are signed at market rates, and possible rig reactivation costs arise. No specific earnings or revenue guidance was provided.
- Two ultra-deepwater drillships were under construction. Remaining scheduled contractual payments shown at June 30 totaled $250.9 million; management was discussing possible further delivery/payment deferrals for ENSCO DS-13 and DS-14, with no assurance of an outcome.
- ARO, the 50/50 Saudi Aramco joint venture, may require partner capital contributions for its planned newbuild program if operating cash or third-party financing is insufficient. The filing describes a maximum aggregate partner commitment of $1.25 billion, reduced as rigs are funded.
- Tax authorities assessed approximately $159 million plus interest against Rowan Luxembourg subsidiaries and approximately $69 million plus interest in Australia. The company is contesting both; it had preliminarily recorded $52 million of additional uncertain-tax-position liabilities related to Rowan, and anticipated potentially material partial upfront payments.
- A tribunal awarded Valaris $180 million in damages against Samsung Heavy Industries; both parties sought permission to appeal, and collection of any damages, interest or costs was uncertain. A separate Middle East partner lawsuit sought unspecified damages exceeding £100 million; Valaris said it could not yet estimate potential liability.
- A July well-control event offshore Indonesia could lead the operator to terminate a contract, reducing June 30 backlog by approximately $19 million if terminated for cause. Other risks include rig oversupply, low rates, contract cancellations, operational hazards, debt and refinancing constraints, and potential changes to provisional acquisition accounting.
- The filing also disclosed an expected approximately $900 million deferred tax asset from restructuring, subject to a full valuation allowance, and a potential third-quarter debt-extinguishment gain. Neither should be treated as recurring operating performance.
Key facts for investors to verify
- How the provisional Rowan purchase-price allocation and $712.8 million bargain-purchase gain change as acquisition valuations are finalized.
- Underlying operating performance and cash generation excluding Rowan transaction effects, the bargain gain, and other nonrecurring items.
- Post-tender liquidity, upcoming maturities, credit-facility availability and covenant compliance, including the effect of the July borrowing and tax payments.
- Resolution and cash impact of the Luxembourg and Australian assessments, the SHI award and appeal, and the Middle East lawsuit.
- Whether rig utilization, day rates and backlog improve, and whether the Indonesia incident or newbuild delivery/payment changes affect contracts, costs or liquidity.