Valaris plc — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020; comparisons are with the three and nine months ended September 30, 2019. Financial amounts are in U.S. dollars unless stated otherwise. Valaris provides offshore contract drilling services through floater, jackup, ARO-related and other operations.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $285.3 million | $551.3 million | $1,130.7 million | $1,541.1 million |
| Operating loss | $94.4 million | $236.2 million | $4,165.4 million | $474.9 million |
| Net income (loss) | $(672.0) million | $(197.5) million | $(4,788.5) million | $21.8 million |
| Net cash used in operating activities | Not separately stated for quarter | Not separately stated for quarter | $(396.4) million | $(427.5) million |
- Q3 revenue fell 48% year over year; nine-month revenue fell 27%. Management attributed the declines primarily to fewer contracted rig days, asset sales, contract cancellations and reduced ARO service revenues.
- Q3 net loss included $497.5 million of net reorganization items, chiefly a $447.9 million non-cash write-off of debt discounts, premiums and issuance costs. Nine-month results also included $3.646 billion of non-cash impairment charges recorded in the first and second quarters.
- Q3 other operating income of $118.1 million was insurance recovery for the VALARIS DS-8 incident. The company said this represented the full amount owed under the applicable policy.
- At September 30, cash was $180.4 million; total liquidity was $680.4 million, including $500 million of undrawn DIP capacity. Working capital was $676.8 million and the reported current ratio was 2.7, but that ratio excludes debt classified as subject to compromise under Chapter 11.
- Pre-petition debt and related claims were classified as $7.314 billion of liabilities subject to compromise. This included $581 million drawn on the revolving facility; no further revolver borrowings were permitted. The company had no DIP borrowings at quarter-end. The DIP facility bears 7% cash-pay or 8% payment-in-kind interest and is secured by substantially all debtor assets.
- Capital expenditures were $82.9 million for the first nine months, versus $174.2 million in 2019. The company projected approximately $22 million of capital expenditures for the remainder of 2020, about $12 million of which was expected to be customer-reimbursable.
Material changes and operating trends
- Fleet utilization declined year over year: total Valaris utilization was 50% in Q3 versus 64%; floaters were 18% versus 48%, and jackups 52% versus 65%. Average day rate for the total Valaris fleet declined to $78,050 from $106,157; floater rates fell to $148,968 from $215,157, while jackup rates rose to $88,554 from $77,888.
- Backlog declined to $1.2 billion at September 30 from $2.5 billion at December 31, 2019, mainly from cancellations, customer concessions and revenue earned. Floater backlog was $222.6 million and jackup backlog $841.5 million.
- Cash used in operations improved to $396.4 million for the nine months from $427.5 million a year earlier, largely due to lower interest costs, but management expected operating cash flows to remain negative near term.
- Net property and equipment fell to $11.082 billion from $15.097 billion at year-end 2019, primarily reflecting impairment charges and asset sales. Total equity fell to $4.513 billion from $9.310 billion.
Restructuring, outlook and risks
- Valaris and certain subsidiaries filed Chapter 11 petitions on August 19, 2020 and continued operating as debtors-in-possession. The auditor noted conditions raising substantial doubt about the company’s ability to continue as a going concern; management concluded its plans did not alleviate that doubt.
- A restructuring support agreement, supported by approximately 72% of noteholders as of September 14, contemplated a plan including a $500 million rights offering of new secured notes. The proposed treatment would allocate new equity among senior noteholders and revolving-credit lenders; existing shares were contemplated to be cancelled, with existing shareholders potentially receiving only up to 0.01% of new equity and warrants if specified conditions were met. Plan confirmation and completion were not assured.
- The RSA contemplated emergence by June 15, 2021, subject to a potential 60-day extension. The DIP facility’s stated maturity was the earliest of August 17, 2021, specified acceleration or termination events, plan consummation, or an asset sale.
- Management expected the offshore drilling market and contracting environment to remain challenging through at least 2021. COVID-19, lower oil prices, weak customer spending, contract renegotiations and cancellations, and possible further rig idling or stacking were key risks. Management said COVID-related operational downtime had been limited to date, while additional personnel, housing and logistics costs continued.
- The company had two ultra-deepwater drillships under construction, with scheduled deliveries in 2021 and 2022 and $248.9 million of remaining stated construction commitments. The RSA contemplated rejection of those construction contracts unless otherwise agreed; rejection could require payment of liquidation recovery amounts.
- Other exposures include a possible requirement to contribute up to $1.25 billion toward ARO’s newbuild program, subject to the joint-venture terms and bankruptcy-court approval; $123.1 million of outstanding letters of credit; and a contested Australian tax assessment for which a $16.4 million liability was recorded.
- Valaris shares were delisted from the NYSE effective September 14, 2020 and traded on the OTC Pink market under VALPQ. Management warned that existing equity could be cancelled and that recovery for shareholders was uncertain.
Important facts for investors to verify
- Progress, court approval, creditor support and timing of the Chapter 11 plan and rights offering; confirm any final treatment of existing shares and claims.
- Actual cash burn, DIP availability and compliance with the lender-approved budget and covenants; the filing states liquidity could prove insufficient if cash flows materially deviate from projections.
- Subsequent changes in backlog, utilization, day rates, contract concessions, cancellations and rig sales.
- Disposition or rejection terms for the DS-13 and DS-14 shipyard contracts and any resulting liabilities or financing needs.
- Potential ARO funding requirements and outcomes of the Australian tax matter and other litigation or investigations.