Valaris plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Valaris provides offshore contract-drilling services. The 2019 comparison excludes Rowan, whose combination with Valaris closed in April 2019, so reported year-over-year changes are not fully comparable. The interim statements were reviewed by KPMG, not audited.
Financial performance and position
- Revenue: $456.6 million, up 12% from $405.9 million. Rowan-added rigs and ARO-related services contributed to the increase; fewer contracted days, asset sales and the DS-8 interruption offset some growth.
- Profitability: Operating loss was $3.052 billion versus $81.3 million. Net loss attributable to Valaris was $3.006 billion, or $15.19 per share, compared with $190.4 million, or $1.75 per share. The 2020 result included a $2.808 billion non-cash impairment charge. The impaired assets’ measured fair value was $72.3 million.
- Operating indicators: Total fleet utilization was 59% versus 60%; floater utilization was 38% versus 43%, and jackup utilization was 61% versus 68%. Average day rate for Valaris was $94,784 versus $118,733; comparisons are affected by the Rowan transaction and fleet changes.
- Cash flow and liquidity: Operating cash outflow was $204.4 million, versus $24.4 million a year earlier. Capital expenditures were $36.3 million. Cash ended the quarter at $184.9 million, up from $97.2 million at year-end, principally supported by credit-facility borrowing. Reported total liquidity was $1.475 billion, including $1.290 billion of available facility capacity; working capital was $220.4 million and the current ratio was 1.2.
- Debt and equity: Total debt principal was approximately $6.844 billion, or 52.1% of total capitalization, compared with 41.2% at year-end. Balance-sheet debt was $6.373 billion. Total equity declined to $6.296 billion from $9.310 billion, primarily reflecting the quarter’s loss and impairment.
- Interest and taxes: Net interest expense was $113.2 million versus $81.0 million. The company recorded a $152.0 million income-tax benefit, including $164.4 million of discrete tax benefits; tax benefits do not eliminate the underlying operating and liquidity pressures.
Material changes and significant events
- Backlog fell to $1.9 billion from $2.5 billion at December 31, 2019, reflecting cancellations, customer concessions and revenue earned, partly offset by awards and extensions.
- The company recorded a fleet-wide impairment after COVID-19, oil-market disruption and weaker expected day rates and utilization triggered recoverability testing. Brent crude was approximately $20 per barrel in mid-April, compared with approximately $60 at year-end 2019.
- Valaris DS-8’s contract was terminated after a March BOP incident offshore Angola, reducing backlog by approximately $150 million. No injuries, pollution or third-party damage were reported. Loss-of-hire insurance provides $602,500 per day after a 45-day waiting period; recovery and timing are uncertain.
- Valaris DS-7’s Ghana contract was terminated in April; other contracts were terminated early, deferred or renegotiated at reduced rates. Management reported additional rig stacking, workforce reductions and operating costs related to pandemic mitigation.
- ARO ordered two jackup newbuilds in January for $176 million each, with delivery scheduled in 2022. Valaris and Saudi Aramco may each be required to contribute up to $1.25 billion over the broader ARO newbuild program if operating cash and third-party financing are insufficient.
Outlook, liquidity risks and contingencies
- Management expected 2020 to be challenging and the contracting environment to remain difficult through at least 2021. It expected negative operating cash flow in the near term and approximately $85 million of capital expenditures for the remainder of 2020, including about $11 million expected to be reimbursed by customers.
- Management said cash and available facility funds were expected to cover liquidity needs for at least 12 months. However, Valaris disclosed projected negative cash flows in 2020, limited capital-market access and discussions with lenders and bondholders regarding a potential comprehensive debt restructuring. A restructuring could reduce debt but cause substantial shareholder dilution or loss.
- The revolving credit facility limits the debt-to-capitalization ratio to 60%; the reported ratio was 52.1%. Management estimated that additional impairments or losses of approximately $1.7 billion could cause noncompliance. A breach could block further borrowing and permit acceleration of facility debt and approximately $2.1 billion of senior notes. Facility terms generally cap available cash at $200 million absent all-lender consent for certain draws.
- The credit-facility agent reserved the right to assert a material adverse effect related to oil-market changes and company incidents, including DS-8. Valaris said it did not believe such an effect had occurred, but could not assure lenders would not deny borrowing requests on that basis.
- On April 15, 2020, the NYSE notified Valaris that its average share price had been below $1 for 30 consecutive trading days. The company had until late December 2020 to regain compliance. Delisting without a concurrent Nasdaq listing could give holders of the 2024 convertible notes a right to require repayment of principal plus accrued interest.
- Other material matters include a UMB Bank lawsuit alleging, among other claims, improper intercompany transfers and seeking to undo certain transactions; an Indonesian well-control investigation; and contested Australian tax assessments. The company said it could not predict the UMB case outcome or estimate resulting exposure.
- Valaris stated it was in covenant compliance at March 31 and expected to remain compliant over the next 12 months, while emphasizing that the pandemic and oil-price decline made future results and liquidity uncertain.
Most important facts for investors to verify
- Whether cash burn, backlog reductions and contract concessions exceed the company’s liquidity assumptions, and whether the $1.290 billion of facility availability remains accessible.
- Quarterly covenant headroom and the impact of further asset impairments, operating losses or lender assertions of a material adverse effect.
- Progress and terms of any debt restructuring or refinancing, including potential equity dilution, debt acceleration and debt maturities.
- Actual contract status, day rates, utilization and insurance recoveries, particularly for DS-8 and other terminated or renegotiated contracts.
- NYSE minimum-price compliance and any resulting rights under the 2024 convertible notes.
- Potential cash commitments to ARO’s newbuild program and developments in the UMB litigation and tax matters.