Valaris Limited — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Valaris provides offshore contract drilling services and reports Floaters, Jackups and its 50%-owned ARO joint venture as reportable segments. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Operating revenue | $525.0 million | $430.1 million | Up 22% |
| Operating income | $29.3 million | $8.5 million | Up $20.8 million |
| Operating margin | 5.6% | 2.0% | Improved |
| Net income attributable to Valaris | $25.5 million | $46.7 million | Down 45% |
| Diluted EPS | $0.35 | $0.61 | Down |
| Operating cash flow | $26.3 million | $151.7 million | Down $125.4 million |
| Capital expenditures | $151.3 million | $56.3 million | Up $95.0 million |
Revenue growth chiefly reflected VALARIS DS-17 and DS-8 entering contracts after reactivation in 2023, higher floater average daily revenue and reimbursable revenue. Contract drilling expense rose 18% year over year, including costs for those reactivated rigs, higher personnel costs and maintenance. The lower reported net income mainly reflects the comparison with Q1 2023, which included a $43.8 million discrete tax benefit; Q1 2024 included a $6.6 million discrete tax benefit. Excluding those discrete items, income tax expense was $19.5 million versus $16.2 million.
Financial position and liquidity
- At March 31, 2024, cash and cash equivalents were $494.1 million, down from $620.5 million at year-end 2023. Including restricted cash, period-end cash was $509.1 million.
- Current assets were $1,197.6 million and current liabilities were $760.7 million. Accounts receivable, net, totaled $510.9 million.
- Long-term debt was $1,080.1 million, comprising $1.1 billion principal amount of 8.375% Second Lien Notes due April 2030. The notes’ estimated fair value was $1,134.0 million. No borrowings were outstanding under the revolving credit facility; the company reported $375 million of availability, including a $150 million letter-of-credit sublimit. Debt covenants were in compliance.
- Q1 cash declined by $126.6 million, primarily as $151.3 million of capital expenditures exceeded $26.3 million of operating cash flow. Management attributed the year-over-year operating cash flow decline in part to working-capital movements; Q1 2023 included collection of $45.9 million in tax receivables.
Changes, operating trends and outlook
- Compared with Q4 2023, revenue rose 9% to $525.0 million, but operating income declined 23% to $29.3 million. Higher revenue included $30.2 million from DS-8; expense increases included repairs, claims, DS-8 costs and DS-7 reactivation. Net income fell from $835.2 million to $25.5 million, largely because Q4 included a $799.5 million deferred tax benefit to reduce the valuation allowance on deferred tax assets.
- Year over year, Floaters revenue increased 51% to $324.4 million, while Jackups revenue decreased 10% to $152.3 million, primarily reflecting fewer operating days. Q1 total-fleet utilization was 64% for Valaris and 92% for ARO; Valaris active-fleet utilization was 82%. Average daily revenue was $153,000 for Valaris, versus $124,000 a year earlier.
- At April 30, 2024, Valaris backlog was $4.02 billion, up from $3.92 billion on February 15; ARO backlog was $1.98 billion, down from $2.14 billion. Valaris backlog movements included a 770-day VALARIS 144 award and extensions for DS-9, DS-17 and managed rigs. ARO backlog was reduced in part due to a suspension notice for VALARIS 143, expected to terminate effective May 2024.
- Management described the offshore drilling outlook as positive, citing improving contracting activity, utilization and day rates, and a smaller available fleet. Management also noted that inflation is raising personnel, equipment and project costs and that recovery of higher costs from customers under contract escalators is uncertain.
- Management expects 2024 capital expenditures of approximately $420 million to $460 million, primarily for maintenance, upgrades and reactivations, and expects about $55 million of upfront customer payments related to those projects. Further reactivations or investment depend on market conditions and opportunities.
- The board increased the share repurchase authorization to $600 million in February 2024; approximately $400 million remained available at quarter-end. No shares were repurchased in Q1.
Material risks, contingencies and unusual items
- ARO’s newbuild program may require additional partner funding if ARO lacks cash or third-party financing. Each partner may be required to contribute up to an aggregate $1.25 billion, subject to reductions under the shareholder agreement. ARO’s $402.7 million principal amount of notes payable to Valaris is subordinated to ARO’s term loan; distributions to partners are discretionary, and ARO has made none since formation.
- In April 2024, Luxembourg authorities ruled that assessments for 2019–2021 were not enforceable. Valaris expects to reverse the approximately $63 million uncertain-tax-position liability and recognize a tax benefit in Q2 2024.
- A Malaysian tax assessment of approximately $25 million, including penalty, followed an unfavorable court decision; Valaris has not recorded a liability and intends to contest it. Australian tax assessments remain contested; the company reported an $18.2 million liability for unrecognized tax benefits related to them.
- Brazil’s Federal Court of Accounts seeks approximately $120 million in damages jointly from Valaris, Samsung Heavy Industries and others concerning alleged 2015 overbilling to Petrobras. Valaris cannot estimate its potential exposure and intends to defend itself. The company also disclosed patent arbitration and environmental assessment matters; it does not expect these or other ordinary-course proceedings to have a material adverse effect, but outcomes are uncertain.
- Letters of credit outstanding were $97.2 million, supported by $13.2 million of collateral deposits. The company identifies exposure to offshore drilling cyclicality, contract suspensions or cancellations, operating downtime, inflation, reactivation costs, customer concentration, geopolitical events, foreign currency movements and regulatory and climate-related changes. It does not currently hedge foreign currency risk.
Important facts for investors to verify
- Whether DS-7 reactivation and other planned projects meet cost, timing and contract-return expectations, and whether the $420–$460 million capex outlook changes.
- Developments in Saudi Aramco contract suspensions, including the expected VALARIS 143 termination, and any resulting effects on ARO utilization and backlog.
- ARO’s newbuild financing, potential Valaris capital contributions, repayment capacity on Valaris’s notes receivable, and timing of any distributions.
- The Q2 accounting effect and cash implications of the Luxembourg tax decision, alongside progress on the Malaysia, Australia and Brazil proceedings.
- Cash generation and liquidity as capital spending rises, the use of the repurchase authorization, and compliance with debt covenants.