Valaris Limited — Q1 2023 Form 10-Q
Business context and reporting period. Valaris provides offshore contract drilling services and reports for the three months ended March 31, 2023. It operates floater and jackup rigs and holds a 50% interest in ARO, its Saudi Aramco joint venture. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Revenue | $430.1 million | $318.4 million in Q1 2022; $433.6 million in Q4 2022 |
| Operating income (loss) | $8.5 million | $(49.9) million in Q1 2022; $41.1 million in Q4 2022 |
| Net income (loss) attributable to Valaris | $46.7 million; diluted EPS $0.61 | $(38.6) million and $(0.51) in Q1 2022 |
| Operating cash flow | $151.7 million | $0.8 million in Q1 2022 |
| Capital expenditures | $56.3 million | $38.5 million in Q1 2022 |
| Cash and cash equivalents | $822.5 million | $724.1 million at December 31, 2022 |
| Long-term debt | $542.8 million | $542.4 million at December 31, 2022 |
Operating margin was approximately 2.0% (operating income divided by revenue), versus a loss in Q1 2022 and approximately 9.5% in Q4 2022. Q1 2023 net income included a $27.6 million total income tax benefit, including a $43.8 million discrete tax benefit primarily related to changes in liabilities for prior-year tax positions; reported earnings therefore benefited materially from tax items. Operating cash flow also benefited from a $45.9 million tax refund and working-capital changes. Cash flow less capital expenditures was approximately $95.4 million.
Material changes and operating trends
- Revenue rose 35% year over year, primarily from more operating days as rigs returned from reactivations or surveys, higher deferred revenue amortization, and improved day rates. Sequentially, revenue declined 1%, mainly due to fewer operating days, partly offset by higher day rates.
- Contract drilling expense increased 14% year over year and 7% sequentially. Higher costs included repairs and, versus Q4, rig reactivations. General and administrative expense rose 30% year over year, principally from professional fees and incentive compensation.
- Floater revenue more than doubled year over year, reflecting rigs returning to work; floater average day rate was approximately $228,000 versus $197,000 a year earlier. Jackup revenue declined 6% year over year, largely due to fewer operating days. Active-fleet utilization was 82% for floaters and 81% for jackups.
- Backlog was $2.8 billion as of May 1, 2023, compared with $2.5 billion on February 21, 2023. ARO backlog was $1.6 billion and is not included in Valaris’s backlog; Valaris’s backlog includes contract backlog from rigs leased to ARO.
Outlook, financing, and risks
- Management expects 2023 capital expenditures of approximately $320 million to $360 million, excluding potential purchases of VALARIS DS-13 and DS-14. Purchase prices at the stated December 31, 2023 delivery assumption were $119.1 million and $218.3 million, respectively; Valaris may elect not to purchase either rig.
- In April 2023, Valaris issued $700 million of 8.375% senior secured second-lien notes due 2030, with approximately $685 million in net proceeds, and used part of the proceeds to redeem its $550 million first-lien notes at 104% of principal plus accrued interest. It also established a secured revolving facility with commitments of up to $375 million, including a $150 million letter-of-credit sublimit. These are post-quarter transactions.
- The board increased the share repurchase authorization from $100 million to $300 million in April. Management expected to repurchase approximately $150 million of shares by year-end 2023; no shares were repurchased in Q1.
- Management described improving offshore drilling demand and day rates, particularly for drillships, but cited inflation in labor and operating costs, market and commodity-price volatility, recession concerns, rig reactivation and repair costs, contract delays or cancellations, and supply-chain constraints. The filing gives no specific revenue or earnings guidance.
- ARO may require partner funding for its newbuild program if it lacks operating cash or third-party financing; each partner’s potential aggregate contribution is capped at $1.25 billion, subject to reductions as rigs are delivered. Valaris also noted $140.9 million of outstanding letters of credit and pending legal and tax matters, including an Australian tax assessment dispute and patent arbitration; management does not expect these matters to materially affect results, but outcomes are uncertain.
Important facts for investors to verify
- Whether revenue growth and improved floater rates translate into sustained operating profitability after repair, reactivation, and inflation-related costs.
- The repeatability of cash generation, given the Q1 tax refund and working-capital contribution, and progress against the $320 million to $360 million capital expenditure outlook.
- The cost and implications of the April refinancing, including the higher 8.375% coupon, collateral and covenant restrictions, and actual revolver usage.
- Whether planned share repurchases proceed as stated alongside rig investment, potential drillship purchases, and possible ARO funding needs.
- Backlog conversion, contract commencements, utilization, and the financial contribution of ARO, including the collectability and repayment timing of its notes receivable.