Valaris plc — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Valaris provides offshore contract drilling services. It completed its combination with Rowan on April 11, 2019; Rowan’s results are consolidated only from that date, limiting direct comparison with 2018. The company changed its name to Valaris plc in July. Interim financial statements were reviewed by KPMG, not audited.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $551.3 million | $430.9 million | $1,541.1 million | $1,306.4 million |
| Operating income (loss) | $(236.2) million | $(41.9) million | $(474.9) million | $(125.8) million |
| Operating margin | (42.8)% | (9.7)% | (30.8)% | (9.6)% |
| Net income (loss) attributable to Valaris | $(197.1) million | $(145.0) million | $18.0 million | $(436.1) million |
| Diluted earnings (loss) per share | $(1.00) | $(1.34) | $0.10 | $(4.02) |
| Cash from operating activities | Not separately stated for quarter | Not separately stated for quarter | $(427.5) million | $(82.2) million |
- Revenue and operating performance: Q3 revenue rose 28%, and nine-month revenue rose 18%, principally due to Rowan and newly contracted rigs. Contract drilling expense rose faster than revenue, while day rates were lower across much of the existing fleet. Average day rate for Valaris overall was $106,157 in Q3 versus $132,348 a year earlier; utilization was 64% versus 59%.
- Reported earnings include significant unusual gains: Nine-month results included a $659.8 million bargain-purchase gain from Rowan and a $194.1 million gain on debt extinguishment. The 2019 nine-month net profit therefore does not represent operating profitability. Q3 included an $88.2 million non-cash impairment for VALARIS 5006.
- Cash flow and capital spending: Nine-month operating cash use increased to $427.5 million from $82.2 million. Capital expenditures were $174.2 million, down from $378.7 million. Cash declined to $129.5 million from $275.1 million at year-end 2018; 2019 cash flows also included $931.9 million of Rowan cash acquired.
- Debt and liquidity: Debt principal was $6.67 billion, or 41.2% of total capitalization, versus $5.16 billion and 38.9% at year-end 2018. Cash plus remaining credit-facility capacity totaled $1.61 billion; $140.6 million was drawn and $1.48 billion remained available. Working capital was $324.4 million and the current ratio 1.4, down from $781.2 million and 2.5 at year-end. Debt maturities through 2023 totaled $997.8 million, including $761.4 million in 2022.
Material changes and management outlook
- The Rowan combination expanded the fleet and added debt, pension obligations, and the 50/50 ARO joint venture. Valaris reported 77 operating rigs excluding two under construction and two marked for retirement; its reported fleet counts also include leased rigs and held-for-sale units under specified categories.
- Management described gradual improvement in jackup and floater utilization, but characterized floater pricing and the broader recovery as weak. It cautioned that expiring above-market contracts, low-margin replacement work, rig reactivation costs, and market conditions could keep operating cash flow negative in the near term.
- Backlog was $2.3 billion at September 30, 2019, versus $2.2 billion at December 31, 2018. Management expected to fund liquidity needs through cash, credit-facility borrowings, or future financing, including possible shipyard financing. No specific earnings or revenue guidance was provided.
- 2019 capital expenditure expectations were approximately $235 million, excluding integration-related capital expenditures. Two ultra-deepwater drillship deliveries were deferred to September 2021 and June 2022; remaining contractual payments were $248.9 million, with estimated final milestone payments and interest of about $313 million if delivered on the revised dates.
- ARO plans up to 20 newbuild jackups over approximately 10 years. If ARO cannot fund the program or obtain third-party financing, each partner may be required to contribute up to $1.25 billion in aggregate, reduced as rigs are funded. Valaris had $452.9 million of notes receivable from ARO, due in 2027 and 2028; ARO had made no partner cash distributions.
Risks, contingencies, and other notable items
- Luxembourg tax assessments totaled approximately $155 million; Valaris recorded an approximately $101 million liability and is contesting the assessments. Australian assessments totaled approximately $68 million; Valaris paid about $29 million to litigate and said it did not expect a material adverse effect from that matter.
- A tribunal awarded Valaris $180 million in damages in its dispute with Samsung Heavy Industries; appeals were pending and collection timing and amount were uncertain. A UK lawsuit by a Middle East local partner seeks unspecified damages exceeding £100 million; Valaris said it could not reasonably estimate potential liability.
- A July 2019 Indonesian well-control event could lead to contract termination and reduce backlog by approximately $14 million; authorities were investigating and potential penalties or liabilities were uncertain.
- Valaris said it expected negative near-term operating cash flow and noted that credit ratings were below investment grade. Its credit facility included restrictive covenants; the company reported compliance at quarter-end. It also had $90 million of outstanding letters of credit and surety bonds.
- Management said disclosure controls were effective. Rowan was still being integrated, and the company stated that Rowan could be excluded from the year-end internal-control assessment to the extent it had not yet been integrated.
Important facts for investors to verify
- How much of reported earnings and cash movement reflects Rowan acquisition accounting, bargain-purchase and debt-extinguishment gains, and integration costs rather than ongoing operations.
- Whether liquidity, available credit, and future financing can cover operating cash use, debt maturities, capital expenditures, and drillship commitments.
- Progress in fleet utilization, day rates, contract awards, and backlog conversion, especially as higher-rate contracts expire.
- Outcomes and cash consequences of the Luxembourg and Australian tax assessments, the SHI award and appeal, the Middle East lawsuit, and the Indonesian investigation.
- Potential funding needs and expected returns for ARO, including any Valaris capital contributions and the timing of distributions or repayment of notes receivable.