Business context and reporting period
Valaris plc’s Form 10-K covers the fiscal year ended December 31, 2019. The company provides offshore contract drilling services globally. Its April 11, 2019 combination with Rowan materially expanded the fleet; Rowan’s results are included from the transaction date, so year-over-year comparisons are not like-for-like. Valaris reported a fleet of 74 operating rigs, excluding two under construction and a rig designated for retirement and held for sale.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $2.053 billion | $1.705 billion |
| Operating loss | $668.0 million | $235.9 million |
| Net loss | $192.2 million | $636.6 million |
| Net loss attributable to Valaris | $198.0 million | $639.7 million |
| Operating cash flow from continuing operations | $(276.9) million | $(55.7) million |
| Capital expenditures | $227.0 million | $426.7 million |
| Cash and cash equivalents at year-end | $97.2 million | $275.1 million |
| Working capital | $233.7 million | $781.2 million |
| Total liquidity, including undrawn credit capacity | $1.719 billion | $2.604 billion |
2019 operating margin was approximately negative 32.5%, compared with negative 13.8% in 2018. Higher revenue largely reflected Rowan and ARO-related activity, while contract drilling expense rose 37% to $1.806 billion and depreciation rose to $609.7 million. Average day rates fell for floaters; total fleet utilization increased to 63% from 56%, including the contribution of acquired rigs and ARO-related activity.
Principal debt outstanding was $6.528 billion at year-end, equal to 41.2% of total capitalization, versus $5.161 billion and 38.9% in 2018. The balance sheet reported debt carrying value of $6.048 billion, including $124.8 million of current maturities. Interest expense, net, increased to $428.3 million from $282.7 million. The revolving credit facility had $1.6 billion of undrawn capacity and no borrowings at year-end; $90 million was drawn by January 31, 2020. The current ratio fell to 1.3 from 2.5.
Material changes versus the prior period
- Revenue increased 20%, principally due to Rowan’s inclusion from April 2019, ARO-related arrangements, and commencement of several rig contracts. The combined company also incurred higher operating costs, interest expense and transaction/integration costs.
- Operating loss widened despite the increase in revenue. Fleet utilization improved, but floater day rates and margins remained pressured; management said new awards, particularly for floaters, were often low-margin.
- Net loss narrowed, but 2019 results included substantial unusual gains: a $637.0 million Rowan bargain-purchase gain, a $200.0 million Samsung Heavy Industries (SHI) settlement gain and a $194.1 million gain on debt extinguishment. These gains helped offset the operating loss and interest expense.
- Backlog increased to $2.453 billion from $2.182 billion. Of the 2019 backlog, $1.638 billion was scheduled for 2020 and $637.7 million for 2021; backlog is contractual and may not be fully realized.
- Year-end cash and total liquidity declined substantially. Operating cash outflow increased, although capital spending fell from 2018.
Outlook, risks and unusual items
- Management expected significant negative annual cash flow in 2020; it said meaningful demand and day-rate recovery would be needed for annual cash flow to turn positive in 2021 and beyond. Planned 2020 capital expenditures were approximately $160 million, excluding integration-related capital expenditures; approximately $30 million was expected to be customer-reimbursable.
- Management cited gradual improvement in jackup demand and utilization, but a slower floater recovery, short contract durations, modest pricing improvement and continued excess rig supply. It cautioned that results could decline as above-market contracts expire and are replaced at lower rates.
- Debt, near-term maturities, weak cash generation, downgraded credit ratings and restricted capital-market access create refinancing and liquidity risks. Principal maturities included $122.9 million in 2020, $113.5 million in 2021 and $620.8 million in 2022. The company reported covenant compliance at year-end and expected to remain compliant in 2020.
- Two uncontracted drillships under construction were deferred to expected delivery in 2021 and 2022. Remaining fixed-price construction commitments were $248.9 million, with final payments and interest estimated at approximately $313.3 million if taken on the revised delivery dates; shipyard financing options were described.
- ARO may require additional partner funding for its newbuild program, up to a maximum aggregate contribution of $1.25 billion from Valaris. ARO ordered its first two newbuild jackups in January 2020.
- Valaris received Luxembourg and Australian tax assessments; it contested them and recorded a $119 million liability. It had paid approximately $29 million to Australian authorities to litigate part of the assessment. Unfavorable outcomes could affect liquidity.
- A July 2019 well-control event offshore Indonesia led to suspended drilling and a preliminary authority investigation; termination for cause could reduce backlog by about $8.5 million, and potential penalties or liabilities remain uncertain.
- Valaris retained windstorm risk on four jackups and eight floaters in the U.S. Gulf of Mexico because it did not purchase windstorm insurance for those rigs. Other key risks include customer cancellations or renegotiations, impairments, regulatory and environmental exposure, geopolitical events and cyber incidents.
- The board discontinued the regular quarterly dividend beginning in the second quarter of 2019. A shareholder securities class action concerning statements about ultra-deepwater performance was pending; the company said it intended to defend the claims.
Important facts for investors to verify
- Assess liquidity runway against projected 2020 negative cash flow, debt service, the $1.6 billion credit facility, covenant terms and upcoming maturities.
- Separate underlying operating performance from the Rowan bargain gain, SHI settlement and debt-extinguishment gain; review cash and non-cash effects and integration costs.
- Track actual utilization, day rates, contract margins, contract commencements and cancellations against the $2.453 billion backlog and its realization schedule.
- Verify the status, financing and final cost of the two deferred drillships, and any potential Valaris contributions to ARO.
- Monitor resolution of the tax assessments, Indonesian well-control investigation, shareholder litigation and any related cash or liability developments.