Valaris plc — 2020 Form 10-K
Business context and reporting period
Valaris provides offshore contract drilling services on a day-rate basis. This annual report covers the fiscal year ended December 31, 2020; the company filed it on March 2, 2021. Its fleet comprised 61 rigs, plus a 50% interest in ARO, a joint venture with Saudi Aramco that owned seven rigs. Results reflect the COVID-19 shock, the sharp 2020 oil-price decline, weaker customer spending and Valaris’s Chapter 11 filing on August 19, 2020.
Key financial metrics
| Metric | 2020 | 2019 | Change or context |
|---|---|---|---|
| Revenue | $1,427.2 million | $2,053.2 million | Down $626.0 million, or 30% |
| Operating loss | $(4,322.7) million | $(668.0) million | Includes $3,646.2 million of impairment charges |
| Net loss attributable to Valaris | $(4,855.5) million | $(198.0) million | Basic and diluted loss per share: $(24.42), versus $(1.14) |
| Operating cash flow | $(251.7) million | $(276.9) million | Continuing operations |
| Capital expenditures | $93.8 million | $227.0 million | Continuing operations |
| Cash and total liquidity | $325.8 million cash; $825.8 million total liquidity | $97.2 million cash; $1,719.4 million total liquidity | 2020 liquidity includes $500 million of undrawn DIP capacity |
| Total debt | $7,096.3 million | $6,048.3 million | 2020 debt was classified as subject to compromise in Chapter 11 |
| Contract backlog | $1,205.3 million | $2,452.8 million | Down about 51%; $884.6 million was expected in 2021 |
| Utilization / average day rate | 54% / $83,845 | 63% / $108,313 | Floater utilization fell to 29% from 47% |
The filing does not provide a clear adjusted-profit or EBITDA figure in the supplied text. The reported operating loss reflects impairment and should not be read as a cash operating measure. The stated 2.7 current ratio excludes debt and related interest stayed in Chapter 11, so it does not represent the full contractual obligations picture.
Material changes versus the prior comparable period
- Revenue fell primarily because of fewer contracted rig days, asset sales, contract cancellations and the termination of the VALARIS DS-8 contract; $46.3 million of contract termination fees partly offset the decline.
- Utilization decreased across Valaris’s fleet, while average day rates declined for floaters and increased for jackups. Backlog fell across floaters, jackups and other activities as revenue was recognized and customers cancelled, suspended or renegotiated work.
- Valaris recorded $3.6 billion of non-cash impairments in 2020, compared with $104.0 million in 2019, reflecting lower expected utilization and day rates and weaker market assumptions.
- Cash operating outflow improved by $25.2 million year over year, but remained negative. Lower capital spending and lower interest payments contributed; the company stopped accruing interest on pre-petition debt after its bankruptcy filing.
- The 2020 net loss includes $527.6 million of Chapter 11 reorganization items. It also includes a $259.4 million income tax benefit, including discrete items and CARES Act benefits.
Outlook, restructuring, risks and unusual items
- Chapter 11 and going concern: The company reported substantial doubt about its ability to continue as a going concern and said management’s plans did not alleviate that doubt for the year following issuance of the financial statements. Its financial statements remain prepared on a going-concern basis.
- Proposed restructuring: The February 2021 amended restructuring support agreement contemplated $550 million of new secured notes, creditor recoveries in new equity and other specified treatments. Existing shares could be cancelled; eligible shareholders could instead receive warrants for up to 7% of reorganized equity, subject to conditions and dilution. The plan required court approval and was not assured. The agreement set an emergence milestone of June 15, 2021, potentially extendable by 60 days.
- Liquidity and debt: The $500 million DIP facility had no borrowings outstanding at year-end and was subject to budget and other covenants. The $6.5 billion of senior notes and $581 million of revolving-credit borrowings were in default and classified as liabilities subject to compromise; enforcement was stayed. The proposed rights offering was expected to provide exit financing, but completion and adequacy were uncertain.
- Management outlook: Valaris expected negative annual cash flow in 2021 and projected 2021 capital expenditures of approximately $42.5 million. Management described contracting conditions as challenging through 2021 and into 2022 or potentially longer, and said improved demand or lower rig supply would be needed for meaningful utilization and day-rate recovery.
- Rig construction: Amended agreements signed February 26, 2021 gave Valaris the option, rather than obligation, to take delivery of either or both uncontracted drillships by December 31, 2023. Estimated prices at that delivery date were $119.1 million for DS-13 and $218.3 million for DS-14.
- Unusual operating item: Following the DS-8 incident offshore Angola, the customer terminated its contract; Valaris recognized $118.1 million of loss-of-hire insurance recoveries. The filing reports no injuries, pollution or third-party damage from the incident.
- Other material risks: Further customer cancellations or concessions, additional impairments, COVID-related operating disruption, uninsured Gulf of Mexico hurricane losses, dependence on ARO and its Saudi Aramco customer, litigation and contested tax assessments could affect results and liquidity. Valaris reported $442.7 million of notes receivable from ARO and potential ARO funding commitments, subject to the joint-venture terms and bankruptcy process.
- Equity trading: Shares were delisted from the NYSE in September 2020 and traded on the OTC Pink Open Market as VALPQ. The filing cautions that trading is speculative and existing equity could be extinguished.
Most important facts for investors to verify
- Whether the Chapter 11 plan was confirmed and completed, and the final treatment of existing shares, creditors, warrants and new equity.
- Actual cash use, remaining DIP availability, exit financing proceeds and liquidity needs compared with the company’s projections.
- Whether 2021 negative cash flow, $42.5 million planned capital expenditure and the reported backlog translated into realized results and cash collections.
- Contract awards, renewals, day rates, utilization, cancellations and the concentration and credit quality of major customers.
- Final economics and delivery decisions for DS-13 and DS-14, as well as any required contributions to ARO and recoverability of ARO-related receivables.
- Potential additional impairments, claim outcomes and tax exposures; KPMG issued an unqualified opinion on the financial statements but highlighted going-concern uncertainty and identified rig-impairment valuation as a critical audit matter.