Valaris Limited (NYSE: VAL) — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022. This is an annual filing, not a Q4-only report. Valaris emerged from Chapter 11 on April 30, 2021 and adopted fresh start accounting; accordingly, 2022 and 2021 reported periods are not directly comparable. Where used below, the company’s combined 2021 comparison is non-GAAP.
Business context and key financial metrics
Valaris provides offshore contract drilling services across six continents. At year-end it owned 52 rigs and held a 50% interest in ARO, its Saudi Aramco joint venture, which owned seven additional rigs. Revenue is primarily earned under day-rate drilling contracts.
| Metric | FY 2022 | Comparison / context |
|---|---|---|
| Revenue | $1.603 billion | Up $370.1 million, or 30%, versus combined 2021 non-GAAP results of $1.232 billion |
| Operating income | $37.2 million | Versus a combined 2021 operating loss of $897.4 million; 2021 included $756.5 million of impairment losses |
| Net income attributable to Valaris | $176.5 million | Versus a combined 2021 loss attributable to Valaris of $4.494 billion; 2021 included substantial Chapter 11 and fresh start accounting items |
| Operating cash flow | $127.5 million | Compared with cash used of $66.0 million across the separate 2021 successor and predecessor periods |
| Capital expenditures | $207.0 million | Compared with $58.9 million across those 2021 periods |
| Cash and cash equivalents | $724.1 million | Up from $608.7 million at December 31, 2021 |
| Debt | $550.0 million principal; $542.4 million carrying value | First Lien Notes mature April 30, 2028; no principal payments due before 2028 |
Calculated from reported figures, operating margin was approximately 2.3% and net income attributable to Valaris was approximately 11.0% of revenue. The net result included $141.2 million of gains on asset sales and $65.5 million of interest income, so it was not solely reflective of drilling operations. Interest expense was $45.3 million. The balance sheet reported $1.346 billion of current assets and $504.4 million of current liabilities.
Changes versus the prior comparable period
- Revenue increased mainly due to more operating days ($227.8 million), the $51.0 million VALARIS DS-11 termination fee, increased amortization of deferred mobilization and upgrade revenue, and higher reimbursable revenue and day rates.
- Contract drilling expense rose $315.3 million, primarily as rigs returned to work, reactivation activity increased, and certain claims and reimbursable costs rose. Inflation in labor, materials and services also pressured costs.
- Floater utilization increased to 45% from 29%, and average day rate rose to about $213,000 from $193,000. Jackup utilization increased to 66% from 54%, while average day rate declined slightly to about $94,000 from $95,000.
- Valaris recorded a $34.5 million non-cash impairment for DS-11 customer-specific upgrades after the customer terminated its contract. It received a $51.0 million early termination fee.
- The company sold four jackups in 2022 and recorded $130.5 million of related pretax gains. Total net proceeds from asset dispositions were $150.3 million.
- Fresh start accounting and the non-GAAP construction of the combined 2021 comparison limit year-over-year comparability, including for depreciation and reported earnings.
Outlook, risks, contingencies and unusual items
- Management described offshore drilling conditions as improved, with higher utilization and day rates, particularly for drillships. It cautioned that the recovery’s durability is uncertain amid recession concerns, commodity-price volatility, inflation and geopolitical risk.
- Valaris expected 2023 capital expenditures of approximately $260 million to $300 million, including $120 million to $130 million for maintenance and $140 million to $170 million for enhancements and upgrades. The forecast includes about $80 million to $90 million for reactivation and related contract-specific spending.
- The company had options, exercisable on or before December 31, 2023, to purchase two drillships for estimated prices of $119.1 million and $218.3 million. Exercising either option would increase capital spending above the stated forecast.
- Contract backlog was approximately $2.46 billion as of February 21, 2023, versus $2.44 billion a year earlier. Backlog is not guaranteed revenue and may be affected by downtime, renegotiations, termination or customer nonperformance. The DS-11 cancellation removed approximately $428 million of previously reported backlog.
- Valaris reported $724.1 million of cash and expected to fund near-term needs from cash and operating cash flow. Its First Lien Notes bear interest at the company’s option at 8.25% cash, 10.25% with half paid in kind, or 12% paid in kind; the notes are secured and restrictive covenants limit certain financing, investment, asset-sale and shareholder-return actions.
- ARO may require additional funding for its jackup newbuild program if operating cash and third-party financing are insufficient. Valaris’s potential aggregate contribution commitment is up to $1.25 billion, subject to the agreement’s terms. ARO had not distributed earnings to its partners since formation.
- Five customers accounted for 43% of 2022 consolidated revenue; BP accounted for 15%. The company also faces offshore drilling cyclicality, rig reactivation and cost-overrun risk, supply-chain and labor constraints, and significant international, regulatory, tax and currency exposures.
- Insurance and customer indemnities may not cover all losses. Valaris does not carry loss-of-hire insurance and has limited or no named-windstorm hull coverage for certain rigs in the U.S. Gulf of Mexico.
- At year-end, the balance sheet included $275.0 million of unrecognized tax benefits, inclusive of interest and penalties. The company is contesting tax assessments, including Australian assessments, and disclosed a pending Transocean patent-license arbitration for which exposure could not be estimated; management did not expect the disclosed matters to have a material adverse effect.
- Valaris reported effective internal control over financial reporting and received unqualified audit opinions on its financial statements and internal controls.
Important facts for investors to verify
- Whether backlog converts to revenue on schedule, especially as contracts expire and rigs undergo reactivation, maintenance or downtime.
- Actual 2023 capital spending and whether the DS-13 or DS-14 purchase options are exercised, including the resulting liquidity impact.
- Operating cash generation and margins after reactivation costs, inflation and other cost increases.
- Cash versus payment-in-kind interest elected on the First Lien Notes, covenant headroom and compliance.
- ARO’s newbuild financing, any required Valaris contributions, repayment of notes receivable and prospects for cash distributions.
- Developments in material tax assessments, the patent arbitration and other contingencies, together with any changes in expected exposure.
- The effect of customer concentration, contract cancellations and offshore market conditions on utilization, day rates and cash flow.