Valaris Limited — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Valaris provides offshore contract drilling services and reported a fleet of 52 rigs, plus a 50% interest in ARO, its Saudi Aramco joint venture. Valaris emerged from Chapter 11 in April 2021 and adopted fresh-start accounting; results before and after emergence are not directly comparable. The filing’s 2021 six-month comparison combines successor and predecessor periods and is expressly non-GAAP.
Financial performance and position
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Revenue | $413.3 million | $731.7 million |
| Operating income (loss) | $(15.6) million | $(65.5) million |
| Net income | $112.8 million | $73.0 million |
| Net income attributable to Valaris | $111.6 million; $1.49 diluted EPS | $73.0 million; $0.97 diluted EPS |
| Operating cash flow | Not separately stated in the provided text | $(114.1) million |
| Capital expenditures | Not separately stated in the provided text | $99.6 million |
Q2 revenue increased 30% from Q1 2022, mainly due to a $51.0 million VALARIS DS-11 termination fee and more operating days. Q2 operating loss was about 3.8% of revenue; six-month operating loss was about 9.0% of revenue. Net income included substantial asset-sale gains, so it does not represent operating profitability alone.
- Cash and liquidity: June 30 cash and cash equivalents were $553.5 million, down from $608.7 million at year-end 2021; restricted cash was $23.8 million. Current assets of $1,280.9 million exceeded current liabilities of $547.1 million.
- Cash flow: Six-month investing cash flow was positive $46.9 million, including $146.5 million of asset-disposition proceeds. Cash and restricted cash together declined $67.3 million during the period.
- Debt: Long-term debt carrying value was $545.7 million; principal outstanding was $550 million. The secured first-lien notes mature in 2028. The company reported no principal payments due before then. Interest may be paid at 8.25% in cash, 10.25% with half paid in kind, or 12% entirely in kind, at the company’s option.
- Operations: Q2 fleet utilization was 61%; average day rate was approximately $97,717. Floater utilization/day rate was 31%/$213,452 and jackup utilization/day rate was 67%/$93,851.
Changes versus prior periods
- Compared with Q1 2022, revenue rose $94.9 million, or 30%; operating loss narrowed from $49.9 million to $15.6 million. The Q2 result included the DS-11 fee and improved operating days, while contract drilling expense also rose $30.5 million.
- For the first half, revenue of $731.7 million was 22% above the company’s combined non-GAAP 2021 comparison of $600.2 million. Management cited increased operating days, the DS-11 fee, and higher reimbursable revenue; lower day rates partly offset the increase.
- Six-month operating cash use was $114.1 million. Management attributed it primarily to rig reactivation and mobilization for new contracts and tax payments.
- Six-month net income compared with a combined 2021 net loss of $4.47 billion, but the prior period included approximately $3.6 billion of reorganization items and $756.5 million of impairment charges. The 2022 period included $137.6 million of asset-sale gains and a $34.5 million impairment.
Outlook, material events and risks
- DS-11 termination: A customer terminated the planned eight-well Gulf of Mexico contract, previously representing about $428 million of backlog. Valaris recorded a $51.0 million early termination fee in revenue, collected in July 2022, and a $34.5 million non-cash impairment on customer-specific upgrades. Additional equipment-cancellation penalties and costs were recorded.
- Asset sales: Sales of VALARIS 113, 114 and 36, together with additional proceeds on a prior sale, generated about $135.5 million of Q2 gains. These gains materially contributed to reported earnings.
- Backlog: As of July 28, 2022, Valaris backlog was $2.3 billion, compared with $2.4 billion on February 21, 2022. ARO backlog was separately reported at $1.5 billion. Valaris backlog includes $144.1 million from rigs leased to ARO.
- Market and cost outlook: Management described offshore drilling demand, utilization and day rates as improving, particularly for drillships and Middle East jackups. It also cautioned that geopolitical volatility, recession concerns, COVID-19 uncertainty, inflation, supply constraints and customer investment decisions could interrupt the recovery. Rising labor and material costs are expected to pressure profitability; recovery of higher costs from customers is uncertain.
- Capital spending: Management estimated 2022 capital expenditures of approximately $200 million to $210 million, primarily for rig enhancement, reactivation and upgrades. The estimate was reduced after removal of expected DS-11 contract-specific upgrades.
- ARO exposure: Valaris’s ARO notes receivable had a $442.7 million principal amount and a $264.5 million carrying value, with maturities in 2027 and 2028. ARO has not distributed earnings to its partners since formation. Valaris may be required to contribute toward ARO newbuilds if ARO cannot fund them; the stated maximum aggregate commitment is up to $1.25 billion for each partner, subject to reductions as rigs are delivered.
- Contingencies: Outstanding letters of credit totaled $136.2 million, supported by $20.6 million of collateral. Valaris increased accruals for certain claims by approximately $25 million. The filing also describes an Indonesian well-control investigation and contested Australian tax assessments; management said it could not predict the investigation’s outcome and did not expect the tax matters to materially harm results.
- Other risks: Offshore drilling is cyclical and exposed to rig supply, day rates, utilization, contract cancellations, reactivation costs, operational incidents, regulation, foreign exchange and customer concentration. First-lien note covenants restrict additional debt, asset sales and other actions.
Investor verification points
- Separate recurring drilling performance and cash generation from the $51.0 million termination fee and Q2 asset-sale gains.
- Confirm collection of the DS-11 fee, the final costs of cancellation, and whether replacement work offsets the lost backlog.
- Track operating cash flow, working-capital movements, reactivation spending and delivery against the $200–$210 million 2022 capex estimate.
- Assess whether improving utilization and day rates can outpace inflation, operating costs and future reactivation requirements.
- Evaluate ARO’s ability to finance newbuilds and repay Valaris’s notes, and the potential timing and scale of any required funding contributions.
- Review the effect of the secured-note interest-payment options, covenant limits, claims and tax contingencies on available liquidity.