Valaris Limited — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Valaris provides offshore contract drilling services and reported 53 owned rigs, plus a 50% interest in ARO, which owns seven rigs. The company emerged from Chapter 11 in April 2021 and adopted fresh-start accounting; accordingly, Q1 2022 Successor results are not directly comparable with Q1 2021 Predecessor results.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $318.4 million | $307.1 million |
| Operating loss | $49.9 million | $847.5 million |
| Net loss attributable to Valaris | $38.6 million | $910.0 million |
| Loss per share | $0.51 | $4.56 |
| Operating cash flow | $0.5 million | $(31.7) million |
| Capital expenditures | $38.5 million | $6.0 million |
Revenue increased 4% year over year, reflecting more operating days and reimbursable revenue, partly offset by lower average day rates. Contract drilling expense rose 31% to $331.3 million, mainly due to rig reactivations, reimbursable costs, personnel and mobilization. Q1 2022 operating margin was approximately negative 15.7%. The prior-year loss included a $756.5 million non-cash impairment; lower depreciation in 2022 also reflects fresh-start accounting, so comparisons require caution.
At March 31, 2022, cash and cash equivalents were $578.2 million, restricted cash was $30.0 million, and total current assets and liabilities were $1.17 billion and $523.3 million, respectively. Long-term debt was $545.5 million carrying value ($550 million principal), consisting of senior secured first-lien notes due April 2028. The notes permit interest elections of 8.25% cash, 10.25% with half paid in kind, or 12% paid in kind. No debt principal payments are due before 2028.
Changes and business developments
- Compared with Q4 2021, revenue rose 4%, but operating loss widened from $24.7 million to $49.9 million, primarily as reactivation costs increased by $24.3 million and personnel costs increased by $8.3 million.
- Floater utilization was 25% and average day rate approximately $197,000; jackup utilization was 63% and average day rate approximately $89,000. Jackup utilization improved from Q4, while floater utilization declined.
- Valaris sold VALARIS 67 during Q1, recording a $2.0 million gain. Subsequent to quarter-end, it agreed to sell VALARIS 113 and 114, expecting an approximately $120 million pre-tax gain in Q2.
- Backlog was $2.5 billion as of May 2, 2022, excluding ARO backlog; ARO backlog was $1.5 billion. Backlog figures include assumptions about awarded contracts and remain subject to contract terms and execution.
Outlook, risks and contingencies
Management expected 2022 capital expenditures of approximately $225 million to $250 million for rig enhancements, reactivations and upgrades, with customers expected to reimburse a significant portion. About $70 million related to the VALARIS DS-11 project. After the original customer withdrew when the project was not sanctioned, the contract was novated to a project partner; termination provisions remain, and management stated contractual termination fees and reimbursements would more than cover incurred expenses and commitments.
Management described improving offshore contracting activity and day rates, particularly for drillships, but emphasized uncertainty from oil-price volatility, geopolitical tensions, COVID-19 impacts and inflation. Rising personnel and operating costs could pressure profitability, and recovery of cost increases from customers is uncertain. Reactivation spending, rig downtime, contract delays or cancellations, and newbuild supply are additional risks.
Valaris has potential funding obligations for ARO newbuilds if ARO cannot finance them from operations or third-party debt; each partner’s stated maximum aggregate contribution is $1.25 billion, subject to reductions as rigs are delivered. Other matters include an Indonesian well-control investigation, contested Australian tax assessments, and Brazilian environmental assessments; management did not expect these matters to have a material adverse effect, but outcomes are uncertain. Letters of credit totaled $33.6 million, supported by $27.1 million of collateral deposits.
Investor verification priorities
- Assess the sustainability of improving utilization, day rates and backlog, and the extent to which backlog converts to revenue and cash.
- Track reactivation costs and the pace and customer reimbursement of the planned 2022 capital program.
- Verify the VALARIS DS-11 contract’s FID and termination protections, and completion and proceeds from the announced asset sales.
- Review liquidity available after restricted cash, the cash-versus-payment-in-kind interest election, and covenant limits on additional debt and asset sales.
- Monitor ARO’s financing and newbuild commitments, cash distributions and repayment of shareholder notes receivable.
- Consider the fresh-start accounting comparability limitation and the effect of tax items, asset-sale gains and other unusual items on reported results.