Valaris plc — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The interim financial statements were reviewed by KPMG, not audited. The filing was signed July 30, 2020.
Business context
Valaris provides offshore contract drilling services. Its results were pressured by the COVID-19 pandemic, falling oil demand and prices, customer cutbacks, and an oversupplied drilling market. Management said the resulting decline in demand and day rates materially harmed liquidity and the company’s financial outlook.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $388.8 million | $583.9 million | $845.4 million | $989.8 million |
| Operating loss | $1,019.2 million | $157.4 million | $4,071.0 million | $238.7 million |
| Net income (loss) | $(1,108.8) million | $407.3 million | $(4,116.5) million | $219.3 million |
| Net loss attributable to Valaris | $(1,107.4) million | $405.5 million | $(4,113.7) million | $215.1 million |
| Cash used in operating activities | Six months: $(381.1) million | Prior-year six months: $(293.4) million |
- Q2 revenue fell 33% year over year; first-half revenue fell 15%. Q2 basic and diluted loss per share was $5.58; first-half loss per share was $20.75.
- Non-cash impairment charges were $838.0 million in Q2 and $3.646 billion in the first half, largely reflecting lower expected asset values amid deteriorating market conditions.
- At June 30, cash was $202.0 million; total reported liquidity was $1.235 billion, including $1.033 billion of available revolving-credit capacity. Access to that capacity was subject to waivers, covenants, lender actions and other conditions.
- Working capital was negative $2.002 billion; the current ratio was 0.3. Total debt principal was approximately $7.1 billion, including $551 million of revolving-credit borrowings. $2.518 billion of debt was classified as current.
- Debt to total capitalization was 57.7%, against a 60% covenant limit. Management said roughly $500 million of additional impairments or losses could cause a covenant breach at then-current debt levels.
- Contract backlog declined to $1.6 billion from $2.5 billion at December 31, 2019, due to cancellations, concessions and revenue realized.
Material changes and operating trends
- Utilization declined year over year: total Valaris utilization was 53% in Q2 versus 65%; floaters were 32% versus 53%, and jackups 53% versus 69%. Average day rate for the total fleet fell to $83,912 from $110,063.
- Q2 floater revenue fell 45% year over year, while jackup revenue fell 19%. Customer terminations, fewer contracted days, asset sales and reduced activity weighed on revenue; termination fees partly offset the decline.
- Operating cash use increased by $87.7 million versus the first half of 2019, primarily due to declining margins. First-half capital expenditures were $67.1 million, down from $134.8 million.
- Cash increased from $97.2 million at year-end 2019, primarily because Valaris borrowed $551 million net under its credit facility; this did not resolve the underlying cash burn or debt stress.
Outlook, risks and unusual items
- Going concern: Management and the independent accountant identified substantial doubt about Valaris’s ability to continue as a going concern within one year. The statements nevertheless use going-concern accounting and do not reflect potential adjustments if the company cannot continue operating.
- Defaults and restructuring: Valaris did not pay approximately $58.5 million of interest due in June and July on certain notes, with approximately $2.1 billion outstanding under the affected notes. Waivers and noteholder forbearance were scheduled to expire automatically August 3, 2020, subject to earlier termination events. Management said a comprehensive restructuring was under negotiation and was likely to be implemented imminently through Chapter 11 proceedings; it warned existing shareholders could receive little or no recovery.
- The company also disclosed substantial uncertainty about paying $79.2 million of other note interest and $122.9 million principal due August 15, 2020. A covenant breach or acceleration could make revolving-credit borrowings and additional notes immediately due.
- Management expected negative operating cash flow in the near term, a challenging contracting environment through at least 2021, and approximately $40 million of capital expenditures for the remainder of 2020. It was pursuing cost reductions, lower discretionary spending, reduced capital expenditures and debt restructuring.
- COVID-19 and low oil prices led customers to cancel, defer or renegotiate programs and seek concessions. Management reported limited pandemic-related operational downtime to date but higher personnel, housing and logistics costs.
- The VALARIS DS-8 BOP incident offshore Angola led to contract termination and an estimated $150 million reduction in backlog. Valaris was seeking insurance proceeds, but timing and recovery were uncertain.
- Other matters include a lawsuit by UMB Bank alleging, among other things, breach of fiduciary duty and fraudulent transfers; an Indonesian well-control investigation; and contested Australian tax assessments. The filing does not provide a clear estimate of potential exposure for the UMB lawsuit.
Most important facts for investors to verify
- Whether the August 3, 2020 waivers and forbearance were extended, replaced or terminated, and the status and terms of any restructuring or Chapter 11 process.
- Cash availability, actual borrowing capacity under the revolving facility, covenant compliance, and near-term debt and interest payments.
- Whether Valaris received insurance proceeds for the DS-8 incident and how much backlog and revenue were subsequently lost to cancellations or concessions.
- Changes in utilization, day rates, contract backlog and cash burn, including whether forecast capital spending was reduced.
- Potential shareholder dilution or cancellation in restructuring, and material developments in the UMB lawsuit and tax disputes.