Valaris Limited — Q3 2022 Form 10-Q
Business context and reporting period. Valaris provides offshore contract drilling services, operating 52 rigs, and owns a 50% interest in ARO, its Saudi Aramco joint venture. This filing covers the quarter and nine months ended September 30, 2022. Valaris adopted fresh-start accounting upon emerging from Chapter 11 in April 2021, so comparisons across the Predecessor and Successor periods are not directly comparable; the company’s combined nine-month 2021 comparison is non-GAAP.
Key financial results
| Metric | Q3 2022 | Q3 2021 |
|---|---|---|
| Operating revenue | $437.2 million | $326.7 million |
| Operating income | $61.6 million | $3.1 million |
| Net income (loss) attributable to Valaris | $74.3 million | $(54.5) million |
| Diluted EPS | $0.98 | $(0.73) |
- Revenue rose 34% year over year. Operating margin was approximately 14.1%, compared with 0.9% in Q3 2021.
- Revenue growth reflected more operating days, higher floater day rates, and deferred contract revenue amortization. Operating income improved substantially, while net income also included interest and other income.
- For the first nine months, revenue was $1.169 billion and Valaris-attributable net income was $147.3 million. Operating loss was $3.9 million, including a $34.5 million noncash impairment. The company’s non-GAAP combined 2021 comparison showed revenue of $926.9 million and a $4.528 billion attributable loss, largely reflecting bankruptcy-related reorganization items and prior impairments.
- Nine-month operating cash flow was $(27.0) million; capital expenditures were $153.1 million. Investing cash outflow was $186.3 million, and cash, cash equivalents and restricted cash fell by $220.4 million.
- At September 30, cash and cash equivalents were $406.0 million and short-term investments were $220.0 million. Long-term debt was $541.8 million carrying value ($550 million principal), with no principal payments due before 2028. Current assets were $1.343 billion and current liabilities $519.1 million.
Changes, outlook and notable items
- Floater utilization increased to 48% from 31% in Q2; average day rate rose to about $221,600 from $213,500. Jackup utilization was 67%, with average day rate of about $100,400, up from $93,900.
- Management described improving offshore drilling demand and tendering, particularly for drillships and Middle East jackups. It cautioned that the outlook depends on sustained constructive oil prices, improving demand, or further rig-supply rationalization.
- Backlog was $2.3 billion as of October 31, 2022, excluding ARO backlog; ARO reported $1.3 billion. Valaris said its backlog decline from February reflected revenue recognized and termination of the VALARIS DS-11 contract, partly offset by awards and extensions.
- The customer terminated VALARIS DS-11’s planned Gulf of Mexico contract in June. Valaris recorded a $51 million termination fee as revenue, a $34.5 million noncash impairment on customer-specific upgrades, and additional cancellation costs.
- Management forecast 2022 capital expenditures of approximately $205–$210 million. It noted reactivation, labor and materials costs are rising and may pressure profitability; recovery of higher costs under contract provisions is uncertain.
- Valaris recorded $137.7 million of nine-month gains on asset disposals, including sales of VALARIS 113, 114, 36 and 67. It agreed to sell VALARIS 54 after its current contract ends in March 2023 and expects a pre-tax gain of about $28 million in the first half of 2023, subject to closing conditions.
- In September, the board authorized a share repurchase program of up to $100 million; no shares had been repurchased by September 30. An August consent solicitation amended certain restricted-payment and investment baskets under the First Lien Notes indenture.
- Key exposures include inflation and operating-cost increases, oil-demand and commodity-price volatility, contract cancellations, rig reactivation and execution costs, geopolitical and COVID-related disruptions, foreign-exchange movements, and changing tax and environmental regulation.
Contingencies and other matters
- Valaris may be required to contribute to ARO’s newbuild program if ARO cannot fund it through operations or third-party financing; each partner’s stated maximum aggregate commitment is $1.25 billion, subject to reductions as rigs are delivered.
- ARO’s two newbuild jackups, originally expected in 2022, are now expected to be delivered in 2023. Valaris also has options to acquire two drillships by December 31, 2023, at estimated prices of $119.1 million and $218.3 million; it has no further shipyard obligation if it declines.
- Letters of credit outstanding were $130.4 million, supported by $15.7 million of collateral deposits. The company reported an ongoing Indonesian well-control investigation and contested Australian tax assessments; it did not expect these matters to materially affect results, while noting outcomes are uncertain.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Separate recurring operating performance from the DS-11 termination fee, asset-sale gains, and noncash ARO note discount accretion included in income.
- Check cash conversion, working-capital needs, and the remaining reactivation and capital-spending requirements against the 2022 capex outlook.
- Track backlog conversion, contract awards, utilization and day rates, particularly in floaters, and any further contract cancellations.
- Assess whether ARO can finance its newbuild program and repay Valaris’s notes; distributions from ARO are discretionary and none had been made since formation.
- Review the terms and constraints of the $100 million repurchase authorization alongside liquidity needs, debt covenants and potential ARO funding obligations.