Valaris Limited — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. Valaris provides offshore contract drilling services and reports Floaters, Jackups and its 50%-owned ARO joint venture as reportable segments.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $455.1 million | $437.2 million | $1,300.4 million | $1,168.9 million |
| Operating income (loss) | $16.6 million | $61.6 million | $15.2 million | ($3.9) million |
| Net income | $17.0 million | $77.7 million | $38.3 million | $150.7 million |
| Net income attributable to Valaris | $12.9 million | $74.3 million | $30.2 million | $147.3 million |
| Diluted EPS | $0.17 | $0.98 | $0.40 | $1.95 |
| Operating cash flow | — | $170.8 million | ($27.7) million | |
| Capital expenditures | — | $233.1 million | $153.1 million |
Q3 operating margin was approximately 3.6%, versus 14.1% a year earlier; nine-month operating margin was approximately 1.2%, compared with a loss in the prior-year period. Nine-month operating cash flow less capital expenditures was approximately negative $62.3 million.
At September 30, cash and cash equivalents were $1.041 billion, restricted cash was $16.2 million, and current assets were $1.728 billion against current liabilities of $723.0 million. Long-term debt was $1.079 billion. Valaris had no revolver borrowings and reported $375 million of revolving commitments available as of November 2, 2023, including a $150 million letter-of-credit sublimit. No debt principal payments are due until 2030.
Material changes and business drivers
- Against Q2 2023, Q3 revenue increased $39.9 million, or 10%, and Valaris returned to attributable net income of $12.9 million from a $29.4 million loss. Revenue growth was primarily from DS-17, VALARIS 249 and VALARIS 121 starting contracts; higher daily revenue was partly offset by fewer operating days from downtime and mobilization.
- Year-to-date revenue rose 11%, largely due to higher daily revenue and additional operating days from rigs returning after reactivation. Contract drilling expense also rose 11%, reflecting reactivated rigs, repairs and reactivation costs. General and administrative expense increased 32%.
- Year-to-date profit was down sharply from 2022, when results included a $51 million DS-11 contract termination fee and substantially larger asset-sale gains. 2023 included a $29.2 million loss on extinguishing the former First Lien Notes, partly offset by a $27.3 million gain on the sale of VALARIS 54. A $34.5 million impairment was recorded in 2022, not 2023.
- In April and August 2023, Valaris issued a total of $1.1 billion principal amount of 8.375% Second Lien Notes due 2030, and redeemed its First Lien Notes. The new notes carry an effective interest rate of 8.76%. The company reported compliance with relevant debt covenants.
- Valaris repurchased 2.3 million shares for approximately $150 million in the first nine months, including 1.2 million shares for $85 million in Q3. The board’s repurchase authorization is $300 million; management expected approximately $200 million of total repurchases by year-end.
Outlook, management commentary and risks
- Management described offshore demand prospects as positive, citing improved utilization and day rates, industry rig attrition and constructive longer-term commodity prices. As of November 1, 2023, Valaris contract backlog was $3.158 billion, up from $2.463 billion in February; ARO reported $2.291 billion of backlog. Backlog is based on signed contracts and is not guaranteed revenue.
- Management expected 2023 capital expenditures of approximately $340 million, excluding possible purchases of DS-13 and DS-14. It expected to exercise options for both by December 31, 2023, at estimated prices of $119.1 million and $218.3 million, respectively, and said it intended to fund the purchases with cash on hand.
- Inflation is increasing labor, goods and project costs; Valaris cautioned it cannot be certain of recovering higher costs from customers. Reactivations may cost more and take longer due to labor, materials and parts availability. Rig downtime, contract delays or cancellations, customer spending, commodity-price volatility and geopolitical events could also affect results.
- ARO delivered its first newbuild jackup in October 2023 and expected the second in Q1 2024. ARO obtained a $359 million term loan; Valaris’s notes receivable from ARO are subordinated to that loan. Valaris could be required to contribute capital if ARO lacks cash or third-party financing, subject to stated program commitments.
- Valaris reported a Brazilian administrative proceeding seeking approximately BRL 601 million (about $120 million) jointly from Valaris, Samsung Heavy Industries and others. The company said it could not estimate potential exposure and intends to defend itself. A related Brazilian criminal investigation was closed in October 2023 without accusations against former Pride employees, but the administrative matter remains pending. A separate patent arbitration exposure also could not be estimated; Valaris did not expect it to materially affect results.
- Other items to monitor include Australian tax assessments, Brazilian environmental assessments, customer and contract concentration, foreign-exchange exposure (which Valaris does not hedge), and the possibility that a substantial deferred-tax valuation allowance may or may not be reduced. Management stated disclosure controls were effective and reported no material quarterly change in internal controls over financial reporting.
Key facts for investors to verify
- Whether DS-13 and DS-14 options were exercised, their final delivery costs, and the resulting effect on cash and capital spending.
- Execution of backlog awards and extensions, including mobilization, reactivation costs, downtime and achieved day rates.
- Debt-service burden under the 8.375% notes, covenant headroom and available revolver capacity as capital needs evolve.
- ARO’s ability to service its new term loan and notes receivable, fund newbuilds, and make any future distributions; Valaris says ARO has not distributed earnings to partners to date.
- Developments and potential exposure in the Brazilian administrative proceeding, patent arbitration and tax matters, which the filing says are not currently estimable in full.
- Whether buybacks and planned capital expenditures remain consistent with liquidity, operating cash generation and the company’s investment priorities.