Q3 2021 Valaris Ltd Earnings Call

November 2, 2021

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Good day, everyone and welcome to Valero is third quarter 2021 financial results Conference call. Please note that this event is being recorded I will now turn the call over to Mr. Tim Richardson director of Investor Relations, who will moderate the call. Please go ahead Sir.

Operator 2: Good day everyone, and welcome to Valaris' Q3 2021 Financial Results Conference Call. Please note that this event is being recorded. I will now turn the call over to Mr. Tim Richardson, Director of Investor Relations, who will moderate the call. Please go ahead, sir.

Operator: Good day everyone, and welcome to Valaris' Q3 2021 Financial Results Conference Call. Please note that this event is being recorded. I will now turn the call over to Mr. Tim Richardson, Director of Investor Relations, who will moderate the call. Please go ahead, sir.

Welcome everyone to the Valores.

Tim Richardson: Welcome everyone to the Valaris Q3 2021 conference call. With me today, our interim president and CEO, Anton Dibowitz, interim CFO and Vice President, Investor Relations and Treasurer, Darin Gibbins, and other members of our executive management team. We issued our press release, which is available on our website at valaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and lists risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations.

Tim Richardson: Welcome everyone to the Valaris Q3 2021 Conference Call. With me today, our interim president and CEO, Anton Dibowitz, interim CFO and Vice President, Investor Relations and Treasurer, Darin Gibbins, and other members of our executive management team. We issued our press release, which is available on our website at valaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and lists risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations.

Once it's once you own conference call with me today are president and CEO until the Covid.

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The members of our executive management team.

Issued a press release, which is available on our website of Polaris don't call.

Any comments, we make today about expectations are forward looking statements are subject to risks and uncertainties.

Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and our SEC filings on our website that define forward looking statements.

Risk factors and other events that could impact future results also please note the company undertakes no duty to update any forward looking statements.

During this call, we will refer to GAAP and non-GAAP financial measures.

See the press release on our website for additional information and required reconciliations as a reminder, we issued our most recent fleet status report, which provides details on contracts across our rig fleet on October one.

Tim Richardson: As a reminder, we issued our most recent fleet status report, which provides details on contracts across our rig fleet on October 27. An updated investor presentation will be available on our website after the call. Now I'll turn the call over to Anton Dibowitz, interim president and CEO.

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Thanks to the Investor presentation will be available on our website after the call.

Now I'll turn the call later on Jose Covid interim President and CEO.

Thanks, Tim and good morning, and afternoon to everyone.

Anton Dibowitz: Thanks, Tim, and good morning and afternoon to everyone. Welcome to the call, and thank you for your interest in Valaris. During today's call, I will start by providing a brief overview of Valaris, highlighting the key attributes that make Valaris the industry leader in offshore drilling. I'll then provide some commentary on the current state of the offshore drilling market and highlight some of our recent contract wins. I will also provide an update on ARO Drilling, a 50/50 joint venture with Saudi Aramco. Lastly, I will discuss some of our recent developments on sustainability. After that, I'll hand the call over to Darin for a financial update, including preliminary 2022 guidance. Valaris is the largest drilling contractor by fleet size, but more importantly, we have the highest quality fleet in the industry, as ranked by an independent third party.

To the cole and thank you for your interest in Belarus.

During today's call I'll start by providing a brief overview of Polaris highlighting the key attributes that make Polaris the industry leader in offshore drilling.

I'll then provide some commentary on the current state of the offshore drilling market and highlight some of our recent contract wins.

I will also provide an update on Aro drilling our 50 50 joint venture with Saudi Aramco last.

Lastly, I will discuss some of our recent developments on sustainability.

After that I'll hand, the call over to Darren for a financial update.

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Soliris is the largest drilling contractor fleet size, but more importantly, we have the highest quality fleets in the industry as ranked by an independent third party.

That fleet is managed by a best in class team who's guided by strong values and our purpose driven culture.

Anton Dibowitz: That fleet is managed by a best-in-class team that is guided by strong values and a purpose-driven culture. Our operations have unmatched scale and geographic reach, with a presence in virtually all major offshore regions and the most extensive customer base of any offshore driller. Those operations are delivered with an industry-leading cost structure built around a shared services model, which allows our cost structure to quickly adapt to changes in the market environment. We focus every day on delivering safe, reliable, and efficient operations to our customers, and I would like to take this opportunity to thank the Valaris team for continuing to deliver the strong performance that our customers have come to expect from us again during Q3.

Our operations have unmatched scale and geographic reach with a presence in virtually all major offshore regions. The most extensive customer base of any offshore driller.

And those operations are delivered with an industry, leading cost structure built around the shared services model, which allows our cost structure to quickly adapt to changes in the market environment.

We focus every day on delivering safe reliable and efficient operations to our customers and I would like to take this opportunity to thank the Polaris team for continuing to deliver the strong performance that our customers have come to expect from US again during the third quarter.

This performance is evidenced by the 99% revenue efficiency, both during the third quarter and year to date.

Anton Dibowitz: This performance is evidenced by the 99% revenue efficiency, both during Q3 and year to date, and our personal safety performance that has improved 25% year to date in 2021 as compared to our full year 2020 performance. This is particularly impressive considering the challenging working conditions faced by offshore crews and support teams during the ongoing pandemic. Valaris is an operationally leveraged play into a recovering market and one that is underpinned by the strongest balance sheet in the offshore drilling sector. Our balance sheet provides ample liquidity to fund operations and the flexibility to make disciplined decisions about bringing new capacity to the market when justified by the economics of new opportunities. Turning to the market. Spot Brent crude prices have recovered strongly in 2021 from the pullback in 2020, resulting from the COVID-19 pandemic.

Personal safety performance has improved 25% year to date in 2020, one as compared to our full year 'twenty 'twenty performance.

This is particularly impressive considering the challenging working conditions faced by our offshore crews and support teams during the ongoing pandemic.

Soliris is an operationally leverage play into a recovering market and <unk>.

One that is underpinned by the strongest balance sheets in the offshore drilling sector.

Our balance sheet provides ample liquidity to fund operations and the flexibility to make disciplined decisions about bringing new capacity to the market when justified by the economics of new opportunities.

Turning to the market.

Spot Brent crude prices have recovered strongly in 2021 from the pull back in 2020, resulting from the COVID-19 pandemic.

Given the long lead times for offshore projects, particularly those in deep water customers tend to be more focused on medium term commodity prices rather than what is happening in the spot market.

Anton Dibowitz: Given the long lead times for offshore projects, particularly those in deepwater, our customers tend to be more focused on medium-term commodity prices rather than what is happening in the spot market. Two-year forward Brent crude prices are currently around $70 per barrel, a level that is viewed as highly constructive for offshore project demand. Research from Rystad indicates that floater demand is expected to increase at a compound annual growth rate of approximately 6% between 2021 and 2025, and this growth is expected to be driven by both exploration and development drilling. This is a strong signal of our customers' conviction in the economics for deepwater projects and is positive for longer-term demand for these rigs, as new exploration activities will lead to future appraisal and development campaigns.

Two year forward Brent crude prices are currently around $70 per barrel a level that is viewed as highly constructive offshore project demand Reese.

Research from Rice that indicates that floater demand is expected to increase at a compound annual growth rate of approximately 6% between 2021 and 2025.

This growth is expected to be driven by both exploration and development drilling.

This is a strong signal about customers conviction in the economics for deepwater projects.

Positive for longer term demand for these rigs as new exploration activities will lead to future appraisal and development campaigns.

We are already seeing tangible evidence of this improvement in the number of awarded contracts inquiries and tenders as well as in discussions with our customers. We've seen several multiyear awards in Brazil during 2021 and there are a number of active tenders currently in progress.

Anton Dibowitz: We are already seeing tangible evidence of this improvement in the number of awarded contracts, inquiries, and tenders, as well as in discussions with our customers. We've seen several multiyear awards in Brazil during 2021, and there are a number of active tenders currently in progress. Brazil is reportedly seeking to double production by 2030, and with offshore resources that can deliver production at attractive economics, we anticipate that Brazil will be a significant driver of offshore demand over the next several years. US Gulf of Mexico operators have expedited rig selections this year in anticipation of a lack of supply, which has played a key role in pushing day rates in this market higher. We have also seen a noticeable increase in deepwater tendering in West Africa, where activity fell to an extremely low level in 2020.

Brazil is reportedly seeking double production by 2030.

Offshore resources that can deliver production at attractive economics, we anticipate that Brazil will be a significant driver of offshore demand over the next several years U S. Gulf of Mexico operators have expedited rigs elections. This year in anticipation of a lack of supply which has played a key role in pushing day rates in the <unk>.

Market higher.

We have also seen a noticeable increase in deepwater tendering in West Africa, where activity fell to an extremely low level in 2020.

Growth in the Jackup market is expected to be more muted than the floaters. This is not surprising given that jackup demand was more resilient during the downturn with a significant portion of demand driven by infill drilling and a large portion of the customer base being national oil companies, which are more likely to maintain activity during low parts of the cycle.

Anton Dibowitz: Growth in the jackup market is expected to be more muted than for floaters. This is not surprising given that jackup demand was more resilient during the downturn, with a significant portion of demand driven by infill drilling and a large portion of the customer base being national oil companies, which are more likely to maintain activity during low parts of the cycle to meet state production and fiscal budget targets. The recent rise in commodity prices has, however, driven an increase in tendering activity, particularly in Southeast Asia and the Middle East, and there are ongoing tenders that could result in a significant number of incremental rigs being contracted.

To meet state production in fiscal budget targets. The recent rise in commodity prices has however, driven an increase in tendering activity, particularly in southeast Asia and the middle East and there are ongoing tenders that could result in a significant number of incremental rigs being contracted.

We see limited near term opportunities in the harsh environment Jackup market on the Norwegian Continental shelf through the end of 2022.

Anton Dibowitz: We see limited near-term opportunities in the harsh environments jackup market on the Norwegian Continental Shelf through the end of 2022. Consequently, some of the rigs ending their contracts in Norway are now actively competing for work in other sectors of the North Sea, which has increased competition in those markets. We anticipate this will be a transitory issue, with the Norwegian market expected to improve in 2023. Against this market backdrop, we will continue to actively manage our fleet and contracting activities to position Valaris for success. In response to the decline in demand for hydrocarbons and offshore drilling services during 2020, we carefully preservation stacked a large portion of our floater fleet to help preserve cash in the near term while maintaining option value on their future cash flows in a market recovery.

Consequently, some of the rigs ending their contracts in Norway. We're now actively competing for work in other sectors of the North Sea, which is increased competition in those markets.

We anticipate this will be a transitory issue with the Norwegian market expected to improve in 2023.

Against this market backdrop, we will continue to actively manage our fleet.

<unk> activities to position Valero for success.

In response to the decline in demand for hydrocarbons and offshore drilling services. During 2020, we carefully preservation stacked a large portion of our floater fleet to help preserve cash in the near term, while maintaining option value on their future cash flows in a market recovery.

The quality of these rigs are detailed rig specific reactivation procedures strong customer relationships and operational track record gave us confidence that the laris rigs would be at the front of the queue when demand support reactivating stacked assets.

Anton Dibowitz: The quality of these rigs, our detailed rig-specific reactivation procedures, strong customer relationships, and operational track record gave us confidence that Valaris rigs would be at the front of the queue when demand supported reactivating stacked assets. We are now seeing this play out. Over the past few months, we have secured long-term contracts with important repeat customers for 4 of our 7 preservation stacked drillships. We will continue to take a disciplined approach to fleet management and contracting. Now that we have improved earnings visibility with 8 of our 11 drillships currently or future contracted, we have increased the economic hurdle rate for both follow-on contracts and future reactivations. We continually review our fleet for divestiture and retirement candidates.

And we are now seeing this play out.

Over the past few months, we have secured long term contracts with important deepwater customers for about seven preservation stacked drillships.

We will continue to take a disciplined approach to fleet management and contracting.

Now that we have improved earnings visibility with eight of our 11 Drillships currently or future contracted we have increased the economic hurdle rate both follow on contracts and future reactivation.

We continually review our fleet for divestiture and retirement candidates.

Since the last conference call, we sold one of our preservation stacked Jackups, Larry it's $1 42 to an operator with specific use restrictions to ensure that it will not compete against their own rates. We also retired a further two legacy jackups.

Anton Dibowitz: Since the last conference call, we sold one of our preservation stacked jackups, VALARIS 142, to an operator with specific use restrictions to ensure that it will not compete against our own rigs. We also retired a further two legacy jackups. We have now retired 18 rigs since the beginning of last year and more than 50 since the beginning of the downturn. We will continue to take a disciplined, returns-focused approach to fleet management as we position Valaris to maximize earnings and cash flows during the market recovery. Moving now to our recent contracting success. Our high-quality fleet, deep customer relationships, and demonstrated track record of operational performance have enabled us to continue translating our operational leverage into meaningful backlog additions, with approximately $330 million added in the past three months and more than $2.1 billion added year-to-date.

We have now retired 18 rigs since the beginning of last year and more than 50 since the beginning of the downturn. We will continue to take disciplined returns focused approach to fleet management as we position Valero to maximize earnings and cash flows during the market recovery moving now to our recent contracting success.

Our high quality fleet deep customer relationships and demonstrated track record of operational performance have enabled us to continue translating our operational leverage into meaningful backlog additions with approximately $330 million added in the past three months and more than $2.1 billion added year to date.

As a result of these new contracts lyricist total contract backlog has increased to more than $2 $3 billion just over $1 billion at the beginning of the year.

Anton Dibowitz: As a result of these new contracts, Valaris' total contract backlog has increased to more than $2.3 billion from just over $1 billion at the beginning of the year. These backlog additions have enhanced our earnings visibility and importantly, have been added at higher day rates, which will help to lay the foundation for improved financial performance in 2022 and beyond. More than $1.7 billion of the backlog added year-to-date has been for our floater fleet, including several multiyear drillship contracts. As a result of these contracts, the average day rate within our floater backlog has increased by 25% year-to-date to $235,000 a day. It is also worth noting that approximately 75% of the backlog added year-to-date is with majors and large international oil companies, the primary users of high-specification floaters.

These backlog additions have enhanced our earnings visibility and importantly have been added at higher day rates, which will help to lay the foundation for improved financial performance in 2022 and beyond.

More than $1.7 billion of the backlog added year to date has been for a floater fleet, including several multiyear drillship contracts.

As a result of these contracts the average day rate within our floater backlog has increased by 25% year to date to $235000 a day.

It is also worth noting that approximately 75% of the backlog added year to date is with majors and large international oil companies. The primary uses of high specification floaters.

Our contract wins year to date represent an outsized share of those awarded in the market.

Anton Dibowitz: Our contract wins year-to-date represent an outsized share of those awarded in the market. Valaris owns approximately 8% of the global fleet, but has won 15% of total fixtures and 13% of total rig years awarded. I'd like to take the opportunity to recognize all the Valaris teams that have contributed to our contracting success over the past several months. We've been particularly successful securing work for our drillship fleet, winning several multiyear contracts over the past few months. On the prior quarter conference call, we announced contracts for Valaris DS-11, DS-16, and DS-18, all for work in the US Gulf of Mexico. More recently, we've been awarded contracts for Valaris DS-4 offshore Brazil, as well as DS-9 and DS-10 offshore West Africa, enhancing our presence in each region of the Golden Triangle.

Flowers owns approximately 8% of the global fleet, but it was 115% of total fixtures and 13% of total rig years awarded.

I'd like to take the opportunity to recognize all the Polaris teams that have contributed to our contracting success over the past several months.

We've been particularly successful securing work for our drillship fleet, winning several multiyear contracts over the past few months on the prior quarter Conference call, we announced contracts for Polaris D. S 11, the a 16 and D. S 18 awful work in the U S Gulf of Mexico.

More recently, we've been awarded contracts for Polaris T. S. Four offshore, Brazil, as well as DS nine and DS 10 offshore West Africa, enhancing our presence in each region of the Golden triangle.

<unk> four was recently awarded a contract with Petrobras for a minimum term of 548 days.

Anton Dibowitz: Valaris DS-4 was recently awarded a contract with Petrobras for a minimum term of 548 days. The rig was previously preservation stacked in the UK and just recently arrived in the Canary Islands, where it will be reactivated and then mobilized to Brazil. The contract is anticipated to commence by early Q2 2022. We are very pleased to place another rig in Brazil with the largest customer in that market, as we expect Brazil will be one of the primary drivers of incremental floater demand over the next few years. We have also recently been awarded a 2-year contract for Valaris DS-9 with Esso Exploration Angola, which is expected to commence in Q2 2022. DS-9 is currently preservation stacked in the Canary Islands and will be reactivated and mobilized to Angola for this project.

Rig was previously preservation stacked in the U K just recently arrived in the Canary Islands, where it will be reactivated and then mobilize to Brazil.

Contract is anticipated to commence by early second quarter 2022.

We're very pleased to place another rig in Brazil, with our largest customer in that market.

We expect Brazil will be one of the primary drivers of incremental floater demand over the next few years.

We have also recently been awarded a two year contract Soliris D. S. Nine with Exxon offshore Angola, which is expected to commence in the second quarter of 2022.

<unk> nine is currently preservation stacked in the Canary Islands, and will be reactivated and mobilized to Angola for this project is known as one of the most technically capable assets in the global fleet and we look forward to getting her back to work.

Anton Dibowitz: DS-9 is one of the most technically capable assets in the global fleet, and we look forward to getting her back to work. We also recently won another short-term contract for semi-submersible Valaris MS-1 offshore Australia, and are in advanced discussions for a further short-term follow-on job. Importantly, these contracts help to bridge a gap in the rig schedule before it is due to start a longer-term campaign in Q2 2022, and should keep the rig almost continuously utilized through the middle of 2023. We now have both the DPS-1 and MS-1 contracted on longer-term projects offshore Australia. This is the market that these rigs were built for and where they have a successful operating history. Finally, we also have won several new contracts for our jackup fleet since the Q2 call.

We also recently won another short term contract for semi submersible Polaris M. S. One offshore Australia, nor in advanced discussions for further short term follow on job.

Importantly, these contracts helped to bridge a gap in the rig schedule before it is jus to start our longer term campaign in the second quarter of 2022 and should keep the rig almost continuously utilized through the middle of 2023.

We now have both the D. P S. One and M. S. One contracted on longer term projects offshore Australia. This.

Is the market that these rigs were built for and where they have a successful operating history.

Finally, we also have won several new contracts for our Jackup fleets since the second quarter call.

These include projects in the U K, the Netherlands U S Gulf of Mexico, Southeast Asia and Australia.

Anton Dibowitz: These include projects in the UK, the Netherlands, the US Gulf of Mexico, Southeast Asia, and Australia. We were also awarded a 7-month extension for Valaris JU-36, one of our rigs leased to ARO Drilling in Saudi Arabia. As a reminder, ARO Drilling is a 50/50 joint venture with Saudi Aramco. We view ARO as an important strategic asset since it places us in a privileged position with the largest customer of offshore drilling rigs in the world, with ARO and Valaris combined holding nearly a 40% share of Saudi Aramco's offshore drilling rigs currently under contract. Since ARO is an unconsolidated joint venture, we believe that many investors and analysts do not fully appreciate the value of ARO to Valaris. ARO owns a fleet of 7 jackup rigs operating under contracts with Saudi Aramco, with a contract backlog of more than $750 million.

We were also awarded a seven month extension for Valero is 36, one of our rigs leased to Aro drilling in Saudi Arabia.

As a reminder, Aro drilling is a 50 50 joint venture with Saudi Aramco.

We view arrow as an important strategic asset since it places us in a privileged position with the largest customer of offshore drilling rigs in the world.

But our own Polaris combined holding nearly a 40% share Saudi aramco offshore drilling rigs currently under contract.

Since Arrow is an unconsolidated joint venture, we believe that many investors and analysts do not fully appreciate the value of arrow to virus era owns a fleet of seven jackup rigs operating under contracts with Saudi Aramco, the contract backlog of more than $750 million.

Our releases, an additional seven jackup rigs from Polaris through bareboat charter arrangements. Each also operating under contracts with Saudi Aramco.

Anton Dibowitz: ARO leases an additional 7 jackup rigs from Valaris through bareboat charter arrangements, each also operating under contracts with Saudi Aramco. ARO recently signed a short-term extension for one of the leased rigs, and negotiations are ongoing related to longer-term extensions for most of these assets. Substantially all operating costs for the leased rigs are incurred by ARO, meaning the lease revenue represents nearly 100% margin for Valaris. Finally, ARO intends to build 20 jackups over the next decade, with the first 2 scheduled to be delivered in H2 2022. Each of the new builds are backed by long-term contracts with Saudi Aramco at attractive economics. Given these economics, the new-build rigs are expected to be financed by cash from ARO operations and third-party financing.

Our recently signed a short term extension for one of the least rigs and negotiations are ongoing related to longer term extensions for most of these assets.

Substantially all operating costs for the leased rigs are incurred by arrow, meaning the lease revenue represents nearly 100% margin for Polaris.

Finally arrow intends to build 20 jackups over the next decade with the first two scheduled to be delivered in the second half of 2020 to each of the new builds are backed by long term contracts with Saudi Aramco at attractive economics.

Given these economics the newbuild rigs are expected to be financed by cash from our operations and third party financing.

We do not expect that the laterals or aramco will need to provide any additional financing to arrow to fund the Newbuild program.

Anton Dibowitz: We do not expect that Valaris or Aramco will need to provide any additional financing to Arrow to fund the new-build program. Further information on Arrow can be found in a separate investor presentation on the Valaris website. I would now like to spend a few moments talking about offshore drilling and its place within the energy transition, as well as specifically what Valaris is doing from an ESG perspective. Many of our customers have set goals to lower or eliminate net greenhouse gas emissions. A recent WoodMac study on emissions intensity highlighted that offshore oil and gas production has among the lowest carbon emissions of all the types of production. As a result, we expect some operators with exposure to multiple sources of production to shift focus to lower-intensity sources, such as offshore, to meet their emissions targets.

Further information on Arrow can be found in a separate investor presentation on the allowance website.

I would now like to spend a few moments talking about offshore drilling and its place within the energy transition as well as specifically what Valera just doing from an ESG perspective, many of our customers have set goals to lower or eliminate net greenhouse gas emissions.

Recent woodmac study on emissions intensity highlighted the offshore oil and gas production has amongst the lowest carbon emissions of all the types of production.

As a result, we expect some operators with exposure to multiple sources of production to shift focus to lower intensity sources, such as offshore to meet their emissions targets.

As a part of the value chain that delivers reliable and affordable energy, we recognize the importance of producing that energy responsibly.

Anton Dibowitz: As a part of the value chain that delivers reliable and affordable energy, we recognize the importance of producing that energy responsibly. The emissions from our drilling rigs currently represent the largest contributor of atmospheric CO2 in our business, and therefore, decarbonizing our own operations are the initial focus in our sustainability efforts. Recent developments on this front include harsh environment jackup VALARIS JU-123 being upgraded with a selective catalytic reduction, or SCR system, in advance of preparation of a wellbore for the Porthos CO2 transport and storage project. Valaris now has an SCR system fitted on four drillships and one jackup. When in operation, the SCR system is designed to eliminate almost all NOx and SOx emissions from the rig. In addition, drillship VALARIS DS-12 recently became the first vessel in the world to receive the ABS Enhanced Electrical System Notation, EHS-E.

Emissions from out drilling rigs currently represent the largest contributor of atmospheric C. O two in our business and therefore decarbonising our own operations are the initial focus in our sustainability efforts.

Recent developments on this front include harsh environment, Jackup, Polaris 123, and upgraded with selective catalytic reduction or SCR system in advance of preparation of a wellbore for the path of C O two transport and storage project Valero.

Soliris now has an SCR system on four Drillships and one jackup.

When in operation. The SCR system is designed to eliminate almost all Nox and Sox emissions from the rate. In addition, drillship flourish D. S. 12 recently became the first vessel in the world to receive the a b S enhanced electrical system notation E. H S dashy.

This system is designed to allow the vessels optimizes power plant performance, enabling operations on fewer generators and thereby reducing emissions.

Anton Dibowitz: This system is designed to allow the vessel to optimize its power plant performance, enabling operations on fewer generators and thereby reducing emissions. The system may have both environmental and financial benefits as we expect to share the financial gain of any fuel savings with our customer. On a similar note, Valaris Viking, an ultra-harsh environment jackup operating offshore Norway, recently achieved a fuel incentive award from its customer. This was achieved through implementation of an energy management plan that helped the rig to avoid nearly 200 metric tons of CO2 equivalent emissions over a two-month period. We're pleased that our efforts in the ESG area are being recognized by our customers, with Valaris recently being ranked best performer for drilling rigs in Eni's 2021 HSE and Sustainability Awards. I'd like to conclude by reiterating some of the key points and priorities from my prepared remarks.

The system May have both environmental and financial benefits as we expect to share the financial gain of any fuel savings with our customer.

On a similar note flowers Viking and ultra harsh environment Jackup operating offshore, Norway recently achieved the fuel incentive award from its customer.

This was achieved through implementation of an energy management plan that helped the rig to avoid nearly 200 metric tons of C. O two equivalent emissions over two month period.

We're pleased that our efforts in the ESG area are being recognized by our customers. The Polaris recently being ranked as pro forma for drilling rigs and Eni <unk> 2021 HFC and sustainability awards.

I'd like to conclude by reiterating some of the key points and priorities from my prepared remarks.

First the size and quality of the Polaris fleet and demonstrated operational track record coupled with our industry, leading cost structure provide significant earnings potential in a market recovery.

Anton Dibowitz: First, the size and quality of the Valaris fleet and demonstrated operational track record, coupled with our industry-leading cost structure, provide significant earnings potential in a market recovery. The Valaris management team and board are laser-focused on maximizing earnings to drive meaningful free cash flow as the market recovers. To achieve these objectives, we are focused on the following. First, exercising our operational leverage in a disciplined manner with respect to contracting both our active fleet and also when further reactivations may be warranted. Second, continuing to take a rational approach to fleet management, including continually reviewing our fleet for further retirements when economics don't justify holding them. Third, maintaining an industry-leading and adaptable cost structure.

This allows management team and board are laser focused on maximizing earnings to drive meaningful free cash flow as the market recovers to achieve these objectives. We are focused on the following first exercising our operational leverage in a disciplined manner with respect to contract in both our active fleet and <unk>.

Also went further reactivation may be warranted.

Second continuing to take a rational approach to fleet management, including continually reviewing our fleet for further retirements when economics don't justify holding them.

Third maintaining an industry, leading and adaptable cost structure, and finally, highlighting the significant inherent value and arrow.

Anton Dibowitz: Finally, highlighting the significant inherent value in ARO. In summary, we believe that Valaris is well-positioned to benefit from the opportunities we see in the market today, and we will continue to focus on delivering against the priorities I just mentioned. I'll now hand the call over to Darren to take you through the financials.

In summary, we believe that Valero is well positioned to benefit from the opportunities we see in the market today, and we will continue to focus on delivering against the priorities I just mentioned.

I'll now hand, the call over to Darren to take you through the financials.

Thanks, Anton and good morning, everyone.

Darin Gibbins: Thanks, Anton, and good morning, everyone. I'm excited to be speaking to you all today on my first conference call at a time when we are seeing tangible signs of a market recovery. The volume of recent contract awards and associated backlog, particularly for the floater fleet, has provided greater visibility into future earnings. As a result, I will be providing preliminary 2022 guidance on today's call. In our most recent fleet status report published last week, you can see an encouraging view for floater day rate progression over the next few years, with average day rates increasing meaningfully each year. In my prepared remarks today, I will provide an overview of Q3 results, our outlook for the Q4 and full year 2021, and provide preliminary guidance for 2022. In addition, I will briefly review our financial position and capital structure.

I'm excited to be speaking to you all today on my first conference call at a time when we are seeing tangible signs of a market recovery.

The volume of recent contract awards and associated backlog, particularly for the floater fleet has provided greater visibility into future earnings.

As a result, I won't be providing preliminary 2022 guidance on today's call.

And our most recent fleet status report published last week, you can see an encouraging view for floater day rate progression over the next few years with average day rates increasing meaningfully each year.

In my prepared remarks today I will provide an overview of third quarter results our outlook for the fourth quarter and full year 2021, and provide preliminary guidance for 2022.

In addition, I will briefly review, our financial position and capital structure.

I would also like to highlight our third quarter results press release.

Darin Gibbins: I would also like to highlight our Q3 results press release. Beginning last quarter, we significantly enhanced the level of disclosure in our press release to provide additional transparency. You'll continue to see a trailing five-quarter analysis for the income statement, balance sheet, and cash flows, as well as supplemental data by asset category for revenues, contract backlog, average day rates, utilization, revenue efficiency, rig numbers, and available and operating days. You will also see offshore gross margins by asset category and onshore support costs that are incurred supporting rig operations. As a reminder, these costs are included within contract drilling expense on a consolidated basis and include non-G&A items such as our regional support bases. As Anton mentioned earlier, we have been successful in winning contracts for several of our preservation stacked assets.

Last quarter, we significantly enhanced the level of disclosure in our press release to provide additional transparency.

We continue to see a trailing five quarter analysis for the income statement balance sheet and cash flows as well as supplemental data asset category for revenues contracted backlog average day rates utilization revenue efficiency rig numbers and available and operating days.

You will also see offshore gross margins by asset category and onshore support costs that are incurred supporting rig operations.

As a reminder, these costs are included within contract drilling expense on a consolidated basis and include non G&A items, such as our regional support basis.

As Anton mentioned earlier, we have been successful in winning contracts for several of our preservation stacked assets.

As a result, we will be incurring onetime reactivation costs to put these rigs back to work.

Darin Gibbins: As a result, we will be incurring one-time reactivation costs to put these rigs back to work. We estimate it will cost in the range of $30 to 45 million to reactivate the preservation stacked floater and $10 to 20 million to reactivate a preservation stacked jackup. These estimates include all costs to reactivate the rig, but do not include mobilization costs or costs for contract or region-specific upgrades, for which we would generally expect to be compensated. These reactivation costs will have a negative impact on earnings and cash flows in the period they are incurred. However, by returning these rigs to the active fleet, we expect to benefit from increased earnings and cash flows in the future. The majority of these costs are recognized in our income statement, with the remainder recognized as capital expenditures.

We estimate it will cost in the range of $30 million to $45 million to reactivate preservation stacked floater and $10 million to $20 million to reactivate a preservation stacked jackup.

These estimates include all costs to reactivate the rig.

Not include mobilization costs are costs for contract a region specific upgrades for which we would generally expect to be compensated.

These reactivation costs will have a negative impact on earnings and cash flows in the period. They are incurred however are returning these rigs to the active fleet, we expect to benefit from increased earnings and cash flows in the future.

The majority of these costs are recognized in our income statement with the remainder recognized as capital expenditures.

We believe that investors should consider these like growth capital expenditures and back to the income statement portion out of EBITDA.

Darin Gibbins: We believe that investors should consider these like growth capital expenditures and back the income statement portion out of EBITDA. As such, we have presented results on both an EBITDA and EBIDAR basis, which strips out these reactivation costs. We believe that Valaris has a compelling value proposition built on our four key elements, and that the best way to value Valaris is on a sum of the parts basis. As a result, we have also presented analysis in the press release broken out by these four value drivers. First, the active fleet of 31 rigs that is generating positive cash flow today. Second, our leased and managed rigs comprised of seven rigs we leased to ARO Drilling under bareboat charter agreements, with the Valaris 37 recently coming off contract, and two rigs that we manage on behalf of a customer in the US Gulf of Mexico.

As such we have presented results on both an EBITDA and EBITDAR basis, which strips out these reactivation costs.

We believe that Polaris has a compelling value proposition built on our four key elements and that the best way to valuable Auris is on a sum of the parts basis.

As a result, we have also presented analysis in the press release broken out by these four value drivers first the active fleet 31 rigs it is generating positive cash flow today.

Second our leased and managed rigs comprised of seven rigs, we leased to Aro drilling under bareboat charter agreements with Valores 37 recently coming off contract.

Two rigs that we manage on behalf of a customer in the U S Gulf of Mexico.

Third the stacked fleet, which includes many high specification assets, which we have already demonstrated the ability to win work for them.

Darin Gibbins: Third, the stacked fleet, which includes many high-specification assets, which we have already demonstrated the ability to win work for. Finally, ARO Drilling, our unconsolidated 50/50 joint venture with Saudi Aramco, which is a cash-generative business with significant growth plans. Because we emerged from financial restructuring at the end of April, the Q2 results include one month related to the predecessor company and two months for the successor company. During my review, I will compare the Q3 with combined Q2 results, which are non-GAAP, as I believe that this comparison provides the most meaningful basis to analyze our results. Reconciliations between non-GAAP combined numbers and GAAP numbers for the predecessor and successor periods are provided in our quarterly results press release, and are more fully described in our Q3 10-Q filing. Moving now to the Q3 results.

And finally Aero drilling are unconsolidated 50, 50 joint venture with Saudi Aramco, which is a cash generative business with significant growth plans.

Because we emerged from financial restructuring at the end of April.

Quarter results include one month related to the predecessor company and two months for the successor company.

During my review I will compare the third quarter with combined second quarter results, which are non-GAAP as I believe that this comparison provides the most meaningful basis to analyze our results.

Reconciliations between non-GAAP combined numbers and GAAP numbers for the predecessor and successor periods provided in our quarterly results press release and are more fully described in our third quarter 10-Q filing.

Moving now to the third quarter results adjusted.

Adjusted EBITDA was $30 million compared to $17 million and the combined prior quarter and adjusted EBITDAR, which as a reminder, added back onetime reactivation costs was $49 million compared to $41 million and the combined prior quarter.

Darin Gibbins: Adjusted EBITDA was $30 million compared to $17 million in the combined prior quarter, and adjusted EBIDAR, which as a reminder, adds back one-time reactivation costs, was $49 million compared to $41 million in the combined prior quarter. Revenues for Q3 were $327 million compared to $293 million in the combined prior quarter. Excluding reimbursable items, revenues increased to $293 million from $261 million, primarily due to higher utilization for the floater fleet as drillships VALARIS DS-15 and DS-12 started new contracts with TotalEnergies in June and July, respectively. DS-15 is currently working offshore Brazil, and DS-12 is working in West Africa offshore Ivory Coast.

Revenues for the third quarter were $327 million compared to $293 million in epic combined prior quarter.

Excluding reimbursable items revenues increased to $293 million from $261 million, primarily due to higher utilization for the floater fleet is drillships Valores D. S 15, and D. S 12 started new contracts with Socal energies in June and July respectively.

E. S. 15 is currently working offshore Brazil, India 12 is working in West Africa offshore Ivory Coast.

So semi submersible valores M. S. One commenced a contract with Santos offshore Australia in May and benefited from a full quarter of revenue in the third quarter.

Darin Gibbins: Semisubmersible Valaris MS-1 commenced a contract with Santos offshore Australia in May and benefited from a full quarter of revenue in Q3. Contract drilling expense for Q3 was $274 million compared to $254 million in the combined prior quarter. Excluding reimbursable items, contract drilling expense increased to $255 million from $236 million, primarily due to additional operating days for the three rigs I just mentioned. This increase was partially offset by rig reactivation costs, which declined to $19 million in Q3 from $24 million in the combined prior quarter. Q3 reactivation costs primarily related to the reactivation of jackups VALARIS 249 and VALARIS 117 from preservation stack and warm stack respectively.

Contract drilling expense for the third quarter was $274 million compared to $254 million and the combined prior quarter excluding.

Excluding reimbursable items contract drilling expense increased to $255 million and $236 million, primarily due to additional operating days for the three rigs I just mentioned.

This increase was partially offset by rig reactivation costs, which declined to $19 million in the third quarter from $24 million and the combined prior quarter.

Third quarter reactivation costs, primarily related to the reactivation of Jackups flowers to 49, and $1 17 from preservation stacked and warm stack respectively.

Floris 249 is currently mobilizing to New Zealand and the U K for a 400 day contract with O M D, which is expected to commence early in the first quarter of 2022, and Polaris 117 recently commenced a two year contract with Eni offshore Mexico.

Darin Gibbins: Valaris 249 is currently mobilizing to New Zealand from the UK for a 400-day contract with OMV, which is expected to commence early in Q1 2022, and Valaris 117 recently commenced a 2-year contract with Eni offshore Mexico. General and administrative expense increased to $27 million from $19 million in the combined prior quarter, primarily due to severance costs related to the departure of certain senior executives. Onshore support costs, which are included within contract drilling expense in the income statement, declined to $27 million from $29 million. The sum of these two categories provides our total onshore support costs, which increased to $54 million in Q3 from $48 million in the combined prior quarter.

General and administrative expense increased to $27 million from $19 million and the combined prior quarter, primarily due to severance costs related to the departure of certain senior executives.

Onshore support costs, which are included within contract drilling expense in the income statement declined to $27 million from $29 million.

Some of these two categories provides our total onshore support costs, which increased to $54 million in the third quarter from $48 million from the combined prior quarter.

Depreciation expense declined to $24 million from $54 million and the combined prior year quarter due to a full quarter impact of fresh start accounting adjustments, which significantly reduced the carrying value of property and equipment on the balance sheet.

Darin Gibbins: Depreciation expense declined to $24 million from $54 million in the combined prior quarter due to a full quarter impact of fresh start accounting adjustments, which significantly reduced the carrying value of property and equipment on the balance sheet. Other expense was $3 million in Q3 compared to $3.5 billion in the combined prior quarter, due to reorganization items and fresh start accounting adjustments in the predecessor period of Q2. Please refer to our Q3 2021 Form 10-Q filing that can be found on the Investors page of the Valaris website for further details regarding reorganization items and fresh start accounting. Tax expense of $53 million in Q3 2021 compared to a tax benefit of less than $1 million in the combined prior quarter.

Other expense was $3 million in the third quarter compared to three and a half billion dollars and the combined to prior quarter due to reorganization items and fresh start accounting adjustments in the predecessor period of the second quarter.

Please refer to our third quarter 2021 Form 10-Q filing it can be found on the investors page of the Valores website for further details regarding reorganization items and fresh start accounting.

Tax expense of $53 million in the third quarter of 2021 compared to a tax benefit of less than $1 million and the combined prior quarter.

Third quarter tax provision included $39 million of discrete tax expense primarily related to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years.

Darin Gibbins: The Q3 tax provision included $39 million of discrete tax expense, primarily related to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. The combined prior quarter tax provision included $13 million of discrete tax benefit, primarily related to fresh start accounting adjustments. Adjusted for discrete items, tax expense of $14 million in the Q3 compared with tax expense of $12 million in the combined prior quarter. Notably, we anticipate a tax refund of $97 million related to the CARES Act, though the timing of this receipt is uncertain and may or may not occur prior to the end of this year. Now, moving to our Q4 2021 outlook.

The combined prior quarter tax provision included $13 million of discreet tax benefit primarily related to fresh start accounting adjustments.

Adjusted for discrete items tax expense of $14 million in the third quarter compared with tax expense of $12 million and the combined prior quarter.

Notably, we anticipate a tax refund of $97 million related to the cares act. So the timing of this receipt is uncertain and may or may not occur prior to the end of this year.

Now moving to our fourth quarter 2021 outlook.

We expect total revenues will be in the range of $310 million to $320 million as compared to $327 million in the third quarter.

Darin Gibbins: We expect total revenues will be in the range of $310 to 320 million as compared to $327 million in Q3. The sequential quarter decline is primarily expected to be driven by lower revenues from the jackup fleet, resulting from the softness we are currently seeing in the harsh environment jackup market, as the VALARIS Norway has moved from a drilling contract offshore Norway to accommodation work in the UK at a significantly lower day rate, and the VALARIS Viking is expected to have some idle time in Q4 after completion of its current contract.

Quarter decline is primarily expected to be driven by lower revenues from the Jackup fleet, resulting from the softness we are currently seeing in the harsh environment Jackup market.

Polaris, Norway has moved from a drilling contract offshore Norway, two a combination work in the U K at a significantly lower day rate.

And the Valores spiking is expected to have some idle time in the fourth quarter after completion of its current contract.

We anticipate that fourth quarter contract drilling expense will be in the range of $275 million to $285 million as compared to $274 million in the third quarter, primarily due to higher reactivation costs, which are expected to increase to approximately $30 million in the fourth quarter from $19 million in the <unk>.

Darin Gibbins: We anticipate that Q4 contract drilling expense will be in the range of $275 to 285 million as compared to $274 million in Q3, primarily due to higher reactivation costs, which are expected to increase to approximately $30 million in Q4 from $19 million in Q3. Reactivation costs in Q4 primarily relate to floaters VALARIS DS-4, VALARIS DS-16, and VALARIS DPS-1, which are scheduled to commence new contracts in Q1 and Q2 of 2022. Finally, general and administrative expense is anticipated to decline to approximately $20 million in Q4 from $27 million in Q3, primarily due to executive severance costs incurred in Q3.

Third quarter <unk>.

The activation costs in the fourth quarter, primarily relate to floaters, Florida D. S. Four D. S 16, and D. P. S. One which are scheduled to commence new contracts in the first and second quarters of 2022.

Finally general and administrative expense is anticipated to decline to approximately $20 million in the fourth quarter from $27 million in the third quarter, primarily due to executive severance costs incurred in the third quarter.

As a result, EBITDA for the fourth quarter is expected to decline to approximately $15 million from $30 million in the third quarter. Adjusted EBITDAR is expected to be approximately $45 million in the fourth quarter compared to $49 million in the third quarter.

Darin Gibbins: As a result, EBITDA for Q4 is expected to decline to approximately $15 million from $30 million in Q3. Adjusted EBITDAR is expected to be approximately $45 million in Q4 compared to $49 million in Q3. Adjusted EBITDA and adjusted EBITDAR for full year 2021 are anticipated to be approximately $90 million and $175 million, respectively.

Adjusted EBITDA and adjusted EBITDAR for full year, 2021 are anticipated to be approximately $90 million and $175 million respectively.

In terms of our value drivers is translated this translates to expected full year 2021 operating margin exclusive of onshore support and G&A expense of $260 million to $270 million for the active fleet of $345 million to $355 million when adjusting for onetime reactivation.

Darin Gibbins: In terms of our value drivers, this translates to expected full year 2021 operating margin, exclusive of onshore support and G&A expense of $260 to 270 million for the active fleet, or $345 to 355 million when adjusting for one-time reactivation costs of approximately $85 million, $80 to 85 million for our leased and managed rigs, and carrying costs of $60 to 65 million for the stacked fleet. Now, I'll move to Q3 results and Q4 outlook for ARO Drilling, our 50/50 joint venture with Saudi Aramco. As a reminder, ARO is not consolidated in the financial results of Valaris. ARO EBITDA was $18 million in the Q3 compared to $28 million in the prior quarter.

Costs of approximately $85 million.

$80 million to $85 million for our leased and managed rigs.

And carrying costs of $60 million to $65 million the stacked fleet.

Now I'll move to third quarter results and fourth quarter outlook for Aro drilling our 50 50 joint venture with Saudi Aramco.

As a reminder, arrow is not consolidated in the financial results of Laurus.

Aero EBITDA was $18 million in the third quarter compared to $28 million in the prior quarter. This was primarily due to a decline in revenues is one of arrows owned rigs was out of service for a special periodic survey if a large twenty-two completed its lease contract with arrow drilling during the third quarter after which the rig was returned.

Darin Gibbins: This was primarily due to a decline in revenues as one of ARO's owned rigs was out of service for a special periodic survey, and VALARIS 22 completed its lease contract with ARO Drilling during Q3, after which the rig was returned to Valaris and subsequently retired. ARO's Q4 EBITDA is expected to be approximately $20 million, providing full year 2021 EBITDA of approximately $100 million. Moving now to capital expenditures. Q4 CapEx is anticipated to be $30 to 35 million, approximately $10 million of which is for maintenance CapEx and the remainder for enhancements and upgrades, a portion of which is reimbursed by customers.

Polaris and subsequently retired.

Arrows fourth quarter EBITDA is expected to be approximately $20 million, providing full year 2021, EBITDA of approximately $100 million.

Moving now to capital expenditures.

Fourth quarter Capex is anticipated to be 30 million to $35 million approximately $10 million of which is for maintenance capex and the remainder for enhancements and upgrades portion of which is reimbursed by customers.

As a result total capital expenditures for full year 2021 are expected to be $62 million to $67 million, which is lower than our prior guidance of $85 million to $95 million, primarily due to the deferral of certain cost to next year.

Darin Gibbins: As a result, total capital expenditures for full year 2021 are expected to be $62 to 67 million, which is lower than our prior guidance of $85 to 95 million, primarily due to the deferral of certain costs to next year. Our recent contract awards have provided greater visibility into future earnings. As a result, I will now provide some preliminary financial guidance for 2022. This preliminary guidance assumes reactivations announced to date, but does not include any potential incremental contract awards for the rest of the stacked fleet. As Anton noted, we will be highly disciplined when evaluating opportunities for future reactivations. Based on current contract lead times, particularly for floaters, if we were to reactivate additional rigs in 2022, it would likely have a negative impact on 2022 EBITDA and CapEx, but would increase expected earnings and cash flow in future years.

Our recent contract awards have provided greater visibility into future earnings and as a result, I will now provide some preliminary financial guidance for 2022.

This preliminary guidance assumes reactivation has announced to date does not include any potential incremental contract awards for the rest of the stacked fleet.

As Anton noted, we will be highly disciplined when evaluating opportunities for future reactivation.

Based on current contracts lead times, particularly for floaters, we worked to reactivate additional rigs in 2022, it would likely have a negative impact on 2022, EBITDA and Capex would increase expected earnings and cash flow in future years.

I'd also note that our 2022 budget process is still ongoing and I expect to further refined 2022 guidance on the fourth quarter conference call.

Darin Gibbins: I would also note that our 2022 budget process is still ongoing, and I expect to further refine 2022 guidance on the Q4 conference call. Revenues are expected to be $1.3 to $1.5 billion, up from approximately $1.24 billion in 2021. Revenues are anticipated to increase primarily due to a combination of higher utilization and higher day rates from the floater fleet. Contract drilling expense is anticipated to be $1.1 to $1.25 billion, inclusive of approximately $70 to $80 million of reactivation expense. The vast majority of these costs are expected to be incurred in the H1 of the year, related to the reactivation of drillships VALARIS DS-4, DS-9, and DS-16, as well as semisubmersible VALARIS DPS-1.

Revenues are expected to be one three to $1 $5 billion up from approximately $1 two $4 billion in 2021 Rep.

Revenues are anticipated to increase primarily due to a combination of higher utilization and higher day rates from the floater fleet.

Contract drilling expense is anticipated to be 1.1 to 1.25 billion.

Loose of approximately $70 million to $80 million of reactivation expense.

The majority of these costs are expected to be incurred in the first half of the year related to the reactivation of Drillships Valores D. S for E. S. Nine D F 16, as well as semi submersible Valores EPS one.

Contract drilling expense also includes $35 million to $40 million of costs related to the stacked fleet down from $60 to $65 million in 2021 due to winning contracts for several of our high quality stack rigs in recent months and disposing of assets, where we cannot justify the carrying costs of holding them.

Darin Gibbins: Contract drilling expense also includes $35 to 40 million of costs related to the stacked fleet, down from $60 to 65 million in 2021 due to winning contracts for several of our high-quality stacked rigs in recent months and disposing of assets where we could not justify the carrying costs of holding them. G&A expense is anticipated to be $80 to 90 million, which, combined with $115 to 125 million of support costs included within contract drilling expense, provides total onshore support costs of approximately $195 to 210 million in 2022. The sum of these items provides adjusted EBITDA of $135 to 175 million and adjusted EBITDAR, which adds back one-time reactivation costs of $210 to 250 million.

G&A expense is anticipated to be $80 million to $90 million.

Combined with $115 million to $125 million of support costs included within contract drilling expense.

Provides total onshore support costs of approximately $195 million to $210 million in 2022.

The sum of these items provides adjusted EBITDA of $135 million to $175 million and adjusted EBITDAR, which adds back onetime reactivation costs of $210 million to $250 million.

Full year 2022, Capex is expected to be in the range of $200 million to $250 million.

Darin Gibbins: Full year 2022 CapEx is expected to be in the range of $200 to 250 million. The year-over-year increase is primarily due to the 20K upgrades to VALARIS DS-11, which are being reimbursed by the customer, the three drillship reactivations I just mentioned, including certain customer or region-specific modifications, and higher activity levels, particularly for our floater fleet. In total, we anticipate receiving approximately $155 million in upfront payments from customers in 2022 related to capital reimbursements and mobilization fees. It is worth noting that these and any other upfront customer payments, whether in the form of capital reimbursements or mobilization fees, are not included in our contract backlog or average day rates reported in our quarterly filings. For some of our recently awarded contracts, these represent a meaningful portion of the total contract value.

The year over year increase is primarily due to the 20 K upgrades to Valores D. S 11, sure being reimbursed by the customer the three drillship reactivation as I, just mentioned, including certain customer or region specific modifications.

And higher activity levels, particularly for our floater fleet.

In total we anticipate receiving approximately $155 million in upfront payments from customers in 2022 related to capital reimbursements and mobilization fees.

It is worth noting to ease and any other upfront customer payments, whether in the form of capital reimbursements or mobilization fees are not included in our contract backlog or average day rates reported in our quarterly filings for some of our recently awarded contracts. These represent a meaningful portion of the total contract value.

Based on this guidance and our current market outlook, we expect to generate free cash flow in the second half of 2022. After completing several re activations in the first half of the year that are expected to increase future earnings power of our active fleet of.

Darin Gibbins: Based on this guidance and our current market outlook, we expect to generate free cash flow in H2 2022 after completing several reactivations in H1 2022 that are expected to increase the future earnings power of our active fleet. Of course, we will continue to look at opportunities to put the remainder of our stacked fleet back to work on attractive contracts. Depending on the time of those reactivations, it could impact cash flows in H2 next year. We will remain disciplined in our deployment of capital as we look at these opportunities and would expect that any reactivation spend is recovered, including a return on that spend over the initial contract. Finally, I will provide a brief overview of our capital structure. Valaris has the strongest balance sheet in the offshore drilling sector.

Of course, we will continue to look at opportunities to put the remainder of our stacked fleet back to work on attractive contracts and depending on the time of those reactivation it could impact cash flows in the second half of next year.

We will remain disciplined in our deployment of capital as we look at these opportunities and would expect that any reactivation spend is recovered including a return on that spend over the initial contract.

Finally, I will provide a brief overview of our capital structure.

Maurice has the strongest balance sheet in the offshore drilling sector.

As of September 30th 2021, we had cash and cash equivalents of $621 million, a $34 million of restricted cash.

Darin Gibbins: As of 30 September 2021, we had cash and cash equivalents of $621 million, with $34 million of restricted cash. Our capital structure is simple, with only one tranche of debt in the form of a senior secured note due in 2028, with a principal value of $550 million. The coupon for the note is 8.25% if paid in cash, 10.25% if paid half cash, half PIK, and 12% if we elect to PIK the entire interest payment. Interest payments are due semiannually on 1 May and 1 November, and we must decide the interest payment option 30 days prior to the beginning of the interest payment period.

Our capital structure is simple with only one tranche of debt in the form of a senior secured note due in 2028 with the principal value of $550 million.

The coupon for the note is 8.25% eight in cash 10.25% paid half cash half Pik and 12% we elect to pick the entire interest payment.

Interest payments are due semi annually on may 1st November one and we must decide the interest payment option 30 days prior to the beginning of the interest payment period.

The first interest payment of $23 million was paid in cash and we will pay the next installment in cash in may of next year.

Darin Gibbins: The first interest payment of $23 million was paid in cash, and we will pay the next installment in cash in May of next year. The note provides a pari passu debt basket of $275 million and junior secured debt capacity of the greater of $200 million or 8% of total assets. Finally, our note allows for the flexibility to contribute all of our floating rigs to an unrestricted subsidiary and release their liens, subject to meeting a 2x pro forma adjusted interest coverage ratio, providing additional financial flexibility. With the strongest balance sheet in the industry and the flexibility provided in our senior secured notes, we are well-positioned to take advantage of contracting and strategic opportunities as they arise.

The note provides a perry best food basket $275 million and junior secured debt capacity, the greater of $200 million or 8% total assets.

Finally, our note allows for flexibility to contribute all of our floating rigs to an unrestricted subsidiary released their liens subject to meeting at two times pro forma adjusted interest coverage ratio, providing additional financial flexibility.

With the strongest balance sheet in the industry and the flexibility provided in our senior secured notes.

We are well positioned to take advantage of contracting and strategic opportunities as they arise. However.

However, we will continue to be disciplined in our allocation of capital because we focus on driving increased earnings and cash flow that the market continues to recover.

Darin Gibbins: However, we will continue to be disciplined in our allocation of capital as we focus on driving increased earnings and cash flow as the market continues to recover. We've now reached the end of our prepared remarks. Operator, please open the line for questions.

We've now reached the end of our prepared remarks, operator, please open the line for questions.

We will now begin the question and answer session to ask a question Press Star then one on a touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.

Operator 2: We will now begin the question-and-answer session. To ask a question, press star then one on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Fredrik Stene with Clarksons Platou Securities. Please go ahead.

Operator: We will now begin the question-and-answer session. To ask a question, press star then one on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Fredrik Stene with Clarksons Platou Securities. Please go ahead.

If you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Yeah.

And the first question comes from Fredrik Stene with Clarksons Plateau Securities. Please go ahead.

Hey, guys Fredric from from Clarksons here.

Fredrik Stene: Hey, guys. Fredrik Stene from Clarksons Platou Securities here. Congratulations on the first full quarter as a restructured entity. I wanted to touch upon the recent reactivations because that's been a discussion point with several of our clients here, around, you know, how you have approached this with your clients or in discussions with the clients. I'm thinking, you know, the rate levels that would justify these reactivations. As a side comment, I believe you're in a bit of a different position than some of your peers, as several of these assets have been stacked for a shorter amount of time.

Congratulations on the first.

Full quarter as a restructured entity.

I wanted to touch upon the recent reactivation that because that's been a discussion point with the several of our clients here.

Around the.

How have you how we have approached this with your or in discussions with the clients.

Clients and I'm thinking the rate levels that would.

Would justify the reactivation.

And as a side comment I believe you're in a bit of a different position than some of your peers have several of these assets have been stacked for a shorter amount of time. So I was wondering the way you bid in these assets.

Fredrik Stene: I was wondering, the way you've bid in these assets, the theories that you have been comfortable with and potentially the upfront fees or mobilization fees that you received for them, have you bid in call it the lowest hanging fruits now? Or has it been more of a bilateral discussion with clients based on asset capabilities, et cetera? And then do you expect that the rest of your stacked floater fleet in particular can be reactivated economically at the same level as you've done so far?

Day rates that you have been comfortable with potentially these upfront fees are mobilization fees that you've received for them have you.

Have you been.

Lowest hanging fruits now or has it been more.

Bilateral discussion with clients based on asset capabilities et cetera, and then do you expect that the.

The rest of your stacked floater fleet in particular can be reactivated economically at the same levels as you've done so far.

Okay.

Hi, Frederic.

Anton Dibowitz: Hi, Fredrik. Thanks for the question. I think there are a couple of questions there that let me walk through them in series. I mean, obviously the market has developed significantly since the start of the year. Generally, the way that we look at it is that, you know, for every job that we look at, it needs to be justified, including the reactivation. We obviously have quite an advantage over the general fleet. The average stacked period of our stacked rigs has been in preservation stacked for less than 2 years when talking about floaters now, where the average fleet stacked period is approaching 4 years, around 3.5. For us, it's relatively easy a project to reactivate a rig.

Thanks for the question I think there are a couple of questions there, but let me let me walk through them.

Theories I mean, obviously the market has developed significantly since our since the start of the year, but generally the way that that we look at it is that you know for every job that we looked at it needs to be justified, including the reactivation. We obviously have quite an advantage over the general fleet.

The average period of stacked rigs have been in preservation stack for less than two years.

When talking about floaters, now where the average fleet stock period is approaching four years around three and a half.

So for us, it's a relatively easy a project to to reactivate a rig and I know there's been debate about the numbers that various folks have have pegged on reactivation costs, but what we standby costs.

Anton Dibowitz: I know there's been debate about numbers that various folks have pegged on reactivation costs, but we stand by our costs. The way we look at it is that, you know, especially for our rigs, the reactivation cost needs to be reimbursed or significantly reimbursed by the customer. That obviously can take, you know, a couple of different forms, upfront within the mobilization payment, part of it reimbursed based on the contract value, or a combination of the two. You know, as I said, the market has significantly improved. The spot market and clearing day rates that we see, you know, today are significantly ahead of where they were eight months ago.

The way we look at it is that you know, especially for for our rigs the reactivation cost needs to be reimbursed or significantly reimbursed by the customer.

That obviously can can take you know a couple of different forms upfront within the mobilization payments part of it reimbursed based on the contract value.

Or a combination of the two but you know as I said the market has significantly improved the.

Spot market clearing day rates that we see today are are significantly ahead of where they were eight months ago and as I said in my prepared remarks, the hurdle rates that that we're going to consider when we look at future reactivation needs to move commensurately with that that would apply both to follow on.

Anton Dibowitz: As I said in my prepared remarks, you know, the hurdle rates that we're going to consider when we look at future reactivations need to move commensurately with that. That would apply both to follow-on contracts, but definitely before we take additional capacity out onto the market. Look, to be frank, you know, we're in a position at the start of the year where 4 out of our 11 drillships were active and on the market. We've taken a great effort and a great job's been done by the team in order to get capacity out onto the market to have some earnings visibility. The average backlog in our floater fleet has improved from around 8 months at the start of the year to around 20 months, where it sits right now.

Contract, but definitely before we take additional capacity out onto the market.

Frank you know we're in a position at the start of the year, where all right out or out of our 11, Drillships, where we're active in on the market.

And we've taken a great effort great great job has been done by the team in order to get capacity out onto the market to have some earnings visibility. The average backlog enough floater fleet has improved from around eight months at the start of the year to around 20 months, where it sits right now, but we still.

Have three great assets left floaters that we can bring back to the market when it makes sense and we will be we will be diligent in what opportunities. We put them on so I think I think that probably covers most of your questions.

Anton Dibowitz: We still have three great assets left, floaters, that we can bring back to the market when it makes sense, and we'll be diligent in what opportunities we put them on. I think that probably covers most of your questions.

Yeah. Thank you that's very helpful and I am starting to why I put those question belt and a bit of a mess away, but definitely touched up on the key points here just a follow up on the assets that you haven't reactivated at this point on the floater side that also actually on the Jackup side are you in active discussions.

Fredrik Stene: Yeah. Thank you. That's very helpful. I am sure I put those questions out in a bit of a messy way, but we definitely touched upon the key points here. Just to follow up on the assets that you haven't reactivated at this point, on the floater side and also actually on the jackup side, are you in active discussions for work for any of those assets?

Core work for any of those assets.

We will you know obviously, we bed, where we have attractive opportunities. So you know where the rigs are R. R.

Anton Dibowitz: You know, we obviously bid where we have attractive opportunities. You know, where the rigs are. Or, you know, the way we consider it, active rigs are rigs that are, you know, moving to contract. We bid rigs beyond the rigs that are, you know, in the active fleet and working or on their way to a contract. You know, the economics need to be justified. There is definitely additional work available. I mean, we're seeing, you know, additional work in the Gulf of Mexico. Obviously, we talked about Brazil and what's happening there. You know, ongoing tenders, but we expect there to be more.

The way, we consider it active rigs or rigs that at all.

Moving to contract so we bid rigs beyond our beyond the rigs that are.

In the active fleet and working or on their way to a contract.

No the economics need to be a need to be justified.

So there there is definitely additional work available I mean, we're seeing additional work in the Gulf of Mexico, Obviously, we talked about Brazil, and and what's happening there.

You know ongoing tenders, but we expect there to be more and and West Africa as I mentioned, you know out of the lows that it.

Anton Dibowitz: West Africa, as I mentioned, you know, out of the lows that they were in last year, there's additional work scopes that are, you know, under tender there. We definitely see opportunities, increasing opportunities.

Were in last year as additional work scopes that are under under tender there. So we.

We definitely see opportunities increasing opportunities.

Thank you very helpful and again congratulations on the quarter, that's all for me.

Fredrik Stene: Thank you. Very helpful. Again, congratulations on the quarter. That's all for me. Bye.

Anton Dibowitz: Bye.

Again, if you would like to ask a question press Star then one to join the queue.

Operator 2: Again, if you would like to ask a question, press star then one to join the queue. The next question comes from Greg Lewis with BTIG. Please go ahead.

Operator: Again, if you would like to ask a question, press star then one to join the queue. The next question comes from Greg Lewis with BTIG. Please go ahead.

Okay.

The next question comes from Greg Lewis with <unk>. Please go ahead.

Yes, Thank you and good morning, good afternoon everybody.

Greg Lewis: Yeah, thank you, and good morning. Good afternoon, everybody. I just had a question on the ARO fleet. Not for the JV-owned rigs, but for the leased assets. Just trying to understand, you know, obviously the two new builds, the 2005, 2006 are gonna be delivering in next year.

I was I just had a question on the on the Arrow fleet.

For the not for the JV or invest beyond rigs, but for the beliefs the.

The leased assets.

And just trying to understand.

Obviously, the two Newbuild 2005, 2006 are going to be delivering.

In 2000 and next year.

But as we look as we look at the existing lease.

Greg Lewis: As we look at the existing leased-in rig fleet at ARO, is there any kind of way that we should be thinking about, you know, the evolution of ARO, i.e., is the fleet gonna kinda be flattish to higher from here, or could we see it, you know, I guess, as the new build program is changed, could we actually potentially see it maybe dip down in the medium term before it then accelerates growing in the outer years?

Rig fleet at Arrow is there any kind of way that we should be thinking about.

The evolution of Arrow I E.

It is the fleet kind of kind of be flattish to higher from here or could we see it.

I guess just the Newbuild program is change could we actually potentially see it maybe dip down in the medium term before it then accelerates growing in the outer years.

Well I think take a step back.

Anton Dibowitz: Look, I think. Sorry, take a step back from ARO specifically for a second and look at the Saudi market in general. Saudi Aramco has a significant drive to increase rigs and, in fact, bring rigs from out of country to add to their drilling programs. You know, obviously ARO itself has the new build program, you know, 7 rigs owned by ARO and 7 rigs leased in. We are in discussions for additional lease extensions on a number of the leased rigs, so I think it's fair to expect them to carry on within ARO, operated by ARO. There's also definitely capacity given Saudi Aramco's plans to increase the number of rigs that ARO is operating in the Kingdom.

I'll take a step back from Arrow, specifically for a second and look at the Saudi market in General Saudi Aramco has a significant drive to increase rigs and in fact bring rigs from out of country to ads to their drilling programs.

You know obviously arrow itself has the Newbuild program, but you know seven rigs owned by Arrow and seven rigs lease than we are in discussions for additional lease extensions on a number of the lease rates. So I think it's fair to expect them to carry on.

With a narrow operated by arrow, but there's also definitely capacity given Saudi Aramco has plans to AR to increase.

The number of rigs that arrow is operating.

In the Kingdom.

And Greg I'd just dominant.

Darin Gibbins: Greg, I just-

Anton Dibowitz: Greg, I just-

Greg Lewis: Okay.

There are two there are two legacy jackups at Arrow leased the arrow those or if they are extended or more likely.

Darin Gibbins: A comment.

Anton Dibowitz: A comment.

Greg Lewis: Yeah.

Darin Gibbins: There are two legacy jackups at ARO, leased to ARO. Those, if they aren't extended, are more likely, you know, retirement candidates.

Anton Dibowitz: There are two legacy jackups at ARO, leased to ARO. Those, if they aren't extended, are more likely, you know, retirement candidates.

Retirement candidates.

Okay, great, but we do have do have other assets, we do have other assets around the fleet and obviously, we're actively tendering in the in the tenders that are going in and are in.

Greg Lewis: Okay, great.

Anton Dibowitz: We do have other assets around the fleet, and obviously we're actively tendering in the tenders that are going in the Kingdom with our stacked assets and working assets, and you know, we'll just have to see how it develops.

In the Kingdom.

With our stacked assets and working assets and we'll just have to see how it develops.

Okay, and then just as I think about maybe some of those rigs that are either in Asia or.

Greg Lewis: Okay. Just as I think about maybe some of those rigs that are either in Asia or, you know, I guess we have, you know, a couple in the Atlantic Basin. Are there any limitations or upgrades that would be required on any of those rigs, or pretty much as we think about the rigs that are, you know, idle, that you know, could be marketed to Saudi? Are those rigs basically plug and play, or would they need some upgrades, you know, to be able to get in country to work for ARO?

I guess, we have a couple of a couple of them.

The Atlantic base and are there any limitations or upgrades that would.

Be required on any of those rigs are pretty much as we think about.

The rigs that are.

Idle.

You know it could be marketed.

Saudi are those rigs basically plug and play here or would they need some upgrades.

To be able to get in country.

Work for our own.

Saudi Aramco has had some very specific and very high standards on how they want their their assets to operate very specific configurations.

Anton Dibowitz: Saudi Aramco has some very specific and very high standards on how they want their assets to operate. Very specific configurations, API monogrammed well control equipment. They're continually upgrading and extending their well control manual. I think it's true to say of our rigs and of pretty much any rig in the world that's going into Saudi Arabia, that there is a fairly material CapEx upgrade program required in order to operate. Which is part of the reason why rigs that go in there generally work, not only because of the stable work streams that Saudi Aramco has, but also because of that CapEx barrier to entry in order to get into the Kingdom.

<unk> API monogrammed, well control equipment they continually.

Upgrading and extending their their well control manual so I think it's true to say of our rigs and all pretty much any rig in the world that's going into Saudi Arabia that there is a fairly material.

Capex upgrade program required in order to operate.

Which is part of the reason why rigs that go in there generally work not only because of the stable work work streams that Saudi Aramco has but also because of that that capex barriers to entry in order to to to get into the kingdom.

Okay perfect Hey, Thank you for the time.

Greg Lewis: Okay. Perfect. Hey, thank you for the time.

No problem. Thanks for the question.

Anton Dibowitz: No problem. Thanks for the question.

We still have time for questions.

Operator 2: We still have time for questions. Star then one to join the question queue. It looks like we have no further questions, so this concludes our question and answer session. I'll now turn the conference back over to Tim Richardson for any closing remarks.

Operator: We still have time for questions. Star then one to join the question queue. It looks like we have no further questions, so this concludes our question and answer session. I'll now turn the conference back over to Tim Richardson for any closing remarks.

Star then one to join the question queue.

Yeah.

And it looks like we have no further questions. So this concludes our question and answer session I'll now turn the conference back over to Tim Richardson for any closing remarks.

Thanks, Tom and thank you so over on the call for your interest in <unk>. We look forward to speaking with you again, when we report our fourth quarter results have a good day.

Tim Richardson: Thanks, Tom, and thank you to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our Q4 results. Have a good day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator 2: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

[music].

Okay.

[music].

Q3 2021 Valaris Ltd Earnings Call

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