Valaris Limited — 2023 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2023; it is not a standalone fourth-quarter report. Valaris provides offshore contract drilling services on a day-rate basis and operates globally. At year-end, it owned 53 rigs and held a 50% interest in ARO, its unconsolidated joint venture with Saudi Aramco, which owned eight rigs. Comparisons below are with 2022 unless noted.
Valaris emerged from Chapter 11 in April 2021 and adopted fresh-start accounting. Financial statements after emergence are not comparable with predecessor periods before that date; the 2023 and 2022 successor-year figures are the primary comparable periods here.
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $1,784.2 million | $1,602.5 million |
| Operating income | $53.5 million | $37.2 million |
| Operating margin | 3.0% | 2.3% |
| Net income | $866.8 million | $181.8 million |
| Net cash from operating activities | $267.5 million | $127.0 million |
| Capital expenditures | $696.1 million | $207.0 million |
- Revenue rose 11%, while operating expenses increased 10%. Operating income improved 44%. Contract drilling expenses were $1,543.6 million, or about 86% of revenue.
- Net income included a $782.6 million income tax benefit, principally a $799.5 million deferred tax benefit from releasing part of the valuation allowance. Consequently, reported net income and net margin are not a clear measure of recurring operating performance.
- Cash and cash equivalents were $620.5 million at year-end, down from $724.1 million. Long-term debt was $1,079.3 million; no debt principal payments are due before 2030. The company reported $375 million of revolver availability as of February 16, 2024, with no revolver borrowings at year-end. Current assets were $1,272.2 million and current liabilities $744.3 million.
- Operating cash flow less capital expenditures was negative $428.6 million. Capital spending included $337.0 million for two newbuild drillships and $359.1 million for rig maintenance, upgrades and reactivations.
- The company issued $1.1 billion of 8.375% second-lien notes due 2030, used part of the proceeds to redeem its $550 million first-lien notes, and recognized a $29.2 million debt-extinguishment loss. Interest expense, net, increased to $68.9 million from $45.3 million.
- Fleet utilization was 66% on a total-fleet basis in both years; active-fleet utilization declined from 85% to 83%. Average daily revenue increased from $109,000 to $130,000. Floater utilization and average daily revenue improved, while jackup revenue fell 11% amid fewer operating days.
Material changes and outlook
- Contract backlog increased to approximately $3.9 billion as of February 15, 2024, from $2.5 billion a year earlier. ARO’s separately presented backlog was $2.1 billion; it is not consolidated revenue backlog for Valaris. Backlog is subject to downtime, termination, renegotiation and other risks.
- Management described the offshore drilling outlook as positive, citing higher industry utilization and day rates, improved tendering, and a smaller available rig fleet. It noted ongoing inflation in labor, goods and services, and uncertainty about recovering cost increases from customers.
- Two newbuild drillships were purchased for approximately $337 million in December 2023 and were uncontracted at the time described in the filing. Management expects 2024 capital expenditures of approximately $390–$430 million and customer upfront payments of approximately $55 million.
- Valaris repurchased 3.0 million shares for $200 million in 2023, at an average price of $66.77. The repurchase authorization was increased to $600 million in February 2024; future purchases remain discretionary and subject to financing restrictions. The company has not paid or declared dividends.
Risks, contingencies and unusual items
- Results remain exposed to the cyclical offshore drilling market, commodity-price-driven customer spending, competition, contract cancellation or renegotiation, rig downtime, reactivation costs, inflation, labor availability and supply-chain constraints. Five customers represented 40% of 2023 revenue; BP accounted for 11%.
- Tax matters are a significant uncertainty. Valaris recorded a $66 million liability related to Luxembourg assessments; a revised tax demand was approximately €60 million, which the company is contesting. A Malaysian tax case could require payment of approximately $26 million to continue contesting the assessment; no liability was recorded for it at year-end. The filing also identifies Australian assessments under dispute.
- ARO may require further capital contributions to finance its newbuild program, up to a stated maximum aggregate commitment of $1.25 billion from Valaris. ARO’s notes payable to Valaris are subordinated to ARO’s term loan, and repayment enforcement is subject to significant limitations. ARO has not distributed earnings to its partners since formation.
- A Brazil administrative proceeding seeks approximately BRL 601 million (about $124 million) jointly from Valaris, Samsung Heavy Industries and others; the company said it could not estimate its potential exposure and intends to contest the claim. It also contests a patent-license arbitration and Brazilian environmental assessments; a $0.4 million liability was recorded for the latter.
- Insurance may not cover all offshore, pollution, storm, cyber or other operational losses. Climate regulation and energy-transition trends could increase compliance costs or reduce demand. Management reported no material cybersecurity incident as of the filing date; management and the auditor concluded internal control over financial reporting was effective, and the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- How much of reported earnings and future tax benefits depend on taxable-income forecasts and the valuation-allowance release.
- Whether the backlog converts to revenue as expected, including contract commencement, utilization, day rates and customer options.
- Contracting and deployment plans for the uncontracted newbuild drillships, and whether planned 2024 capital spending yields adequate returns.
- Cash generation after capital expenditures, debt-service costs, revolver availability and compliance with debt covenants.
- Potential cash requirements and recovery risks involving ARO, including newbuild funding and repayment of shareholder notes.
- Developments in Luxembourg, Malaysia, Australia and Brazil tax matters, and the Brazil administrative proceeding.