Valaris plc — Q1 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three months ended March 31, 2021. Valaris provides offshore contract drilling services and holds a 50% interest in ARO, its joint venture with Saudi Aramco. The company was operating as a debtor-in-possession after filing for Chapter 11 in August 2020. The Bankruptcy Court confirmed its reorganization plan on March 3, 2021; Valaris expected emergence soon, but reported substantial doubt about its ability to continue as a going concern.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Operating revenue | $307.1 million | $456.6 million |
| Operating loss | $846.1 million | $3,051.8 million |
| Net loss attributable to Valaris | $910.0 million | $3,006.3 million |
| Loss per share, basic and diluted | $4.56 | $15.19 |
| Cash used in operating activities | $31.7 million | $204.4 million |
| Capital expenditures | $6.0 million | $36.3 million |
- Margins: The operating loss was approximately 276% of revenue and net loss attributable to Valaris approximately 296% of revenue, calculated from reported amounts. These exceptionally negative ratios principally reflect impairment charges.
- Impairment: Valaris recorded a $756.5 million non-cash impairment charge on certain floaters, compared with $2.8 billion on assets in Q1 2020. The impaired assets’ estimated fair value was $26.0 million; valuation relied on significant unobservable assumptions.
- Liquidity: Cash was $291.7 million at March 31, down from $325.8 million at year-end. Reported total liquidity was $791.7 million, including the full $500 million available DIP facility; no DIP borrowings were outstanding. Working capital was $657.6 million and the reported current ratio 2.4, but that ratio excludes $7.3 billion of liabilities subject to compromise.
- Debt: $7.3 billion of liabilities were classified as subject to compromise, including senior notes, revolving-credit borrowings, accrued interest and rig holding costs. The revolving facility had $581 million outstanding and no further borrowing was permitted. Valaris stopped accruing interest on the pre-petition debt after the bankruptcy filing; Q1 contractual interest not recorded was $100.3 million.
Changes versus the prior comparable period
- Revenue fell $149.5 million, or 33%, mainly from fewer days under contract, sold rigs and lower ARO-related service revenue; higher day rates on certain rigs partly offset the decline.
- Contract drilling expense fell 47%, to $252.2 million, reflecting lower idle-rig costs, asset sales and spending controls. General and administrative expense declined 54%, to $24.3 million.
- Operating cash use improved by $172.7 million year over year, which management attributed primarily to lower interest costs and improved margins. Q1 2021 cash nevertheless declined by $34.1 million overall.
- Valaris fleet utilization was 54%, versus 59% a year earlier. Floater utilization was 29% versus 38%; jackup utilization was 50% versus 61%. Average day rates were about $198,485 for floaters and $95,043 for jackups, compared with $195,541 and $81,492, respectively, in Q1 2020.
- Valaris backlog was $1.2 billion, unchanged from December 31, 2020. ARO backlog, excluding work on Valaris-leased rigs, increased to $869.5 million from $84.2 million, largely from awards to five ARO-owned rigs.
Outlook, restructuring, and risks
- The confirmed restructuring plan contemplated $550 million of new secured notes. Under the disclosed plan, existing shareholders were expected to receive seven-year warrants to purchase up to 7% of reorganized equity, subject to dilution, rather than retain their existing shares. Completion and emergence were not assured; the plan milestone required emergence by June 15, 2021, subject to a possible 60-day extension.
- Management expected cash on hand and the DIP facility to fund operations during Chapter 11 and expected exit financing to support ongoing operations and working capital. It also warned projected cash flows could be negative in 2021. The auditor’s interim review highlighted the going-concern uncertainty; management said its plans did not alleviate substantial doubt for one year after issuance of the financial statements.
- Management reported Brent crude near $62 per barrel in April 2021 and a slight increase in customer tendering, but described offshore drilling conditions as challenging through 2021, into 2022 and potentially beyond. Recovery remained uncertain amid COVID-19 impacts, oil-price volatility, excess rig supply and customer spending decisions.
- Q1 reorganization expense was $52.2 million, primarily professional fees. The revolving-credit and senior-note claims were subject to the bankruptcy process, and the DIP facility imposed budget, covenant and collateral restrictions.
- Other exposures include potential ARO capital contributions of up to $1.25 billion over the joint venture’s newbuild program if operating cash and third-party financing are insufficient; $248.9 million of then-current shipyard commitments for two Valaris drillships; $116.6 million of outstanding letters of credit; tax disputes; and legal and environmental proceedings. Amendments to the drillship shipyard agreements, effective upon emergence, gave Valaris the option to take delivery by December 31, 2023 or walk away without further obligation.
- Saudi Aramco held a contractual right to purchase Valaris’s ARO interest following a change-of-control notice; that right was scheduled to expire May 12, 2021. COVID-related crew, logistics and operating disruptions, further impairments, contract cancellations, and market and regulatory changes were also identified as risks.
Important facts for investors to verify
- Whether and when the confirmed Chapter 11 plan became effective, and the final treatment, dilution and value of existing-shareholder warrants and new equity.
- Post-emergence cash, debt, exit financing and liquidity, compared with cash burn and operating cash-flow needs.
- Whether backlog converts to contracted revenue and cash, including the effects of customer concessions, cancellations, utilization and day rates.
- The assumptions and remaining impairment risk for the fleet, plus the cost or abandonment implications of the DS-13 and DS-14 shipyard arrangements.
- The resolution and potential financial effects of ARO change-of-control and funding obligations, tax assessments, and legal and environmental contingencies.