Q2 2022 Valaris Limited Earnings Call

August 2, 2022

Operator: Good day, and welcome to the Valaris Q2 2022 Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Tim Richardson, Director of Investor Relations. Please go ahead, sir.

Good day and welcome to the Valero second quarter 2022 earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then.

Two please note that this event is being recorded I would now like to turn the conference over to Tim Richardson Director of Investor Relations. Please go ahead Sir.

Tim Richardson: Welcome, everyone, to the Valaris Q2 2022 conference call. With me today are 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 list 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.

Welcome everyone to the florist second quarter 2022 conference call with me today are president and CEO and from the previous interim CFO, and Vice President Investor Relations and Treasurer, Aaron given and other members of our executive management team.

We issued a press release, which is available on our website Valores Stockholm.

Any comments, we make today about expectations are forward looking statements.

Subject to risks and uncertainties many factors could cause actual results to differ materially from our expectations.

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

Please refer to our press release and SEC filings on our website that define forward looking statements and list risk factors and other events that could impact future results.

Please note the company undertakes no duty to update forward looking statements.

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

Please see the press release on our website for additional information and required reconciliations.

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

Linda last week, we issued on my recent fleet status report, which provides details on contracts across our rig fleet.

An updated investor presentation on our drilling presentation will be available on our website. After the call now I'll turn the call over to Anthony vivid President and CEO .

Anton Dibowitz: Thanks, Tim, and good morning and afternoon to everyone, and thank you for your interest in Valaris. During today's call, I will start by providing an overview of our operational and financial performance during the quarter. I will then provide an update on the outlook for the offshore drilling market, highlight some of our recent contract awards, and discuss our strategy for maximizing shareholder value during the unfolding industry upcycle. After that, I'll hand the call over to Darin to discuss our financial results and guidance. As always, our primary focus is on delivering safe, reliable, and efficient operations to our customers, and we celebrated notable safety achievements during the quarter, with several rigs reaching recordable-free milestones, including jackup Valaris 76, which has not had a recordable incident in four years.

Thanks, Tim and good morning, and afternoon to everyone and thank you for your interest in Polaris.

During today's call I'll start by providing an overview of our operational and financial performance during the quarter.

I will then provide an update on the outlook for the offshore drilling market.

Like some of our recent contract awards and discuss our strategy for maximizing shareholder value during the unfolding industry up cycle.

After that I'll hand, the call over to Darren to discuss our financial results and guidance.

As always our primary focus is on delivering safe reliable and efficient operations to our customers.

We celebrated notable safety achievements during the quarter several rigs, reaching recordable free milestones.

Clothing, Jackup Valero 76, which has not had a recordable incident in four years.

Anton Dibowitz: This is a fantastic accomplishment, and I congratulate the crews of the Valaris 76 and support teams on their dedication to working safely. In terms of operational efficiency, we continue our demonstrated track record of delivering strong performance to our customers, achieving 97% revenue efficiency during the quarter and 98% during H1. This is particularly impressive given the commencement of new contracts for several rigs during H1, following reactivations and shipyard projects. While operating and safety performance can be adversely impacted during periods of increasing activity with rig reactivations and contract startups, we remain committed to maintaining our high levels of performance by adhering to our safe systems of work and continuing to develop the expertise of our people.

This is a fantastic accomplishment and I congratulate the crews of the Polaris 76, and support teams and their dedication to working safely.

In terms of operational efficiency, we continue our demonstrated track record of delivering strong performance to our customers achieving 97% revenue efficiency during the quarter and 98% during the first half of the year.

This is particularly impressive given the commencement of new contracts for several rigs during the first half of the year, allowing reactivation and shipyard projects.

Well operating and safety performance can be adversely impacted during periods of increasing activity with rig reactivation and contract startups, we remain committed to maintaining our high levels of performance by adhering to our safety systems of work and continuing to develop the expertise of our people.

Anton Dibowitz: We've implemented additional onboarding programs, including a new hire training program in the US Gulf that utilizes one of our stacked rigs to introduce new personnel, especially those who are new to the industry, to the offshore working and living environment. Training and assessing foundational operational and safety protocols in an immersive offshore environment will help to better prepare these new employees for deployment on board our working rigs. These types of measures are particularly important given the ongoing and expected future increases in activity levels in the industry.

We've implemented additional on boarding programs, including a new hire training program in the U S. Gulf that utilizes one of our stacked rigs to introduce new personnel.

Especially those who are new to the industry to the offshore working and living environment.

Training and assessing foundational operational and safety protocols in an immersive offshore environment will help to better prepare these new employees for deployment onboard our working rigs.

These types of measures are particularly important given the ongoing unexpected future increases in activity levels in the industry.

Anton Dibowitz: As we stated previously, H1 2022 was a transitional period for us as we incurred reactivation costs to put 3 drillships and 1 semi-submersible back to work on multi-year contracts that were secured last year. I am proud of the entire Valaris team for successfully executing these major reactivations concurrently, particularly considering the many challenges faced over the past year. These 4 rigs have all now returned to work largely on time and within our prior reactivation cost guidance for these 4 projects, and will contribute to a meaningful increase in earnings in future periods. Turning now to the market. Despite the recent volatility in equity prices across the energy sector, the fundamental outlook for our industry remains highly constructive.

As we stated previously the first half of 2022 was a transitional period for us as we incurred reactivation costs to put three drillships and one semi submersible act work on multiyear contracts that were secured last year.

I'm proud of the entire Polaris team for successfully executing these major reactivation concurrently.

Considering the many challenges faced over the past year.

These four rigs have all now returned to work largely on time and within our prior reactivation cost guidance for these four projects and will contribute to a meaningful increase in earnings in future periods.

Turning now to the market.

Despite the recent volatility in equity prices across the energy sector.

The mental outlook for our industry remains highly constructive.

Anton Dibowitz: The lack of investment in new sources of production over the past several years has contributed to a tight supply picture that has been exacerbated by geopolitical instability and an increased focus on energy security. Against this backdrop, spot Brent crude prices have been above $100 per barrel for most of the past five months, and medium and longer-term commodity prices remain constructive for investment in offshore projects. Two-year forward Brent crude prices are currently above $80 per barrel, and five-year forward prices are above $70 per barrel, levels at which almost all undeveloped offshore resources are expected to be profitable.

The lack of investment in new sources of production over the past several years has contributed to a tight supply picture has been exacerbated by geopolitical instability and an increased focus on energy security.

Against this backdrop spot Brent crude prices have been above $100 per barrel for most of the past five months and medium and longer term commodity prices remain constructive for investment in offshore projects.

Two year forward Brent crude prices are currently above $80 per barrel.

Five year forward prices are above $70 per barrel levels at which almost all undeveloped offshore resources I expect it to be profitable.

Anton Dibowitz: As a result of the supportive commodity price environment, offshore upstream CapEx is expected to see double-digit growth over the next couple of years, and offshore project sanctioning is anticipated to increase meaningfully over the same period, with more FIDs expected in 2022 and 2023 than any other year since the start of the industry downturn in 2014, according to industry research. The constructive macro environment and increased upstream spending has led to an increase in both contracting and tendering activity across both floater and jackup markets. On a trailing-twelve-month basis, rig years awarded for benign environment floaters are approximately 75% higher than the previous twelve months, and rig years of open demand at tender or pre-tender stage as of the quarter end were approximately 65% and 40% higher than six months ago and twelve months ago, respectively.

As a result of the supportive commodity price environment offshore upstream Capex is expected to see double digit growth over the next couple of years.

Offshore project sanctioning is anticipated to increase meaningfully over the same period with more F. I D is expected in 2022, and 2023 and any other year since the start of the industry downturn in 2014, according to industry research.

The constructive macro environment and increased upstream spending has led to an increase in both contracting and tendering activity across both floater and Jackup markets.

On a trailing 12 month basis rig years awarded benign environment floaters are approximately 75% higher than the previous 12 months.

Rig years of open demand, a tender or pretend to stage as of quarter end were approximately 65% and 40% higher than six months ago 12 months ago, respectively.

Anton Dibowitz: A meaningful portion of this increase is attributable to the large Petrobras tender for up to eight rigs for long-term work offshore Brazil commencing in 2023. We anticipate that Brazil will be a significant driver of offshore demand over the next several years, and we are well-positioned to benefit by adding a third rig to this strategic basin, following our recent contract award for drillship Valaris DS-17. We continue to see a strong pipeline of tenders and inquiries from our customers in West Africa, where we have an excellent operating track record, with three drillships already operating in the region and a further three stacked drillships nearby in the Canary Islands.

A meaningful portion of this increase is attributable to the large petrobras tender for up to eight rigs for long term work offshore Brazil commencing in 2023.

We anticipate that Brazil will be a significant driver of offshore demand over the next several years and we are well positioned to benefit by adding a third rig to the strategic basin well.

Following a recent contract award for Drillship Soliris D. S 17.

We continue to see a strong pipeline of tenders and inquiries from our customers in West Africa, where we have an excellent operating track record with three drillships already operating in the region and a further three stacked drillships nearby in the Canary Islands.

Anton Dibowitz: Finally, we also see several opportunities in the Gulf of Mexico, both on the US and Mexican side of the Gulf, with the US opportunities primarily requiring drillships, while the Mexican opportunities are well suited for our active semisubmersible in the region, Valaris DPS-5. It is worth noting that contracting lead times tend to be shorter, and therefore demand visibility is lower in the US Gulf as compared to South America and West Africa, and we could see incremental demand appear quickly if the market remains strong. On the jackup side of the business, we have seen a notable increase in activity since the start of the year, primarily driven by increased demand in the Middle East.

And finally, we also see several opportunities in the Gulf of Mexico, both on the U S and Mexican side of the Gulf with the U S opportunities, primarily requiring drillships, while the Mexican opportunities are well suited for our active semi submersible in the region Polaris D. P. S. Five.

It's worth noting the contracting lead times tend to be shorter and therefore demand visibility is lower in the U S Gulf as compared to South America, and West Africa, and we could see incremental demand quickly if the market remains strong.

On the Jackup side of the business, we have seen a notable increase in activity since the start of the year, primarily driven by increased demand in the middle East.

Anton Dibowitz: On a trailing-twelve-month basis, jackup rig years awarded are more than 70% higher than the previous twelve months, and rig years of open demand at tender or pre-tender stage as of the quarter end were approximately 10% and 30% higher than six months ago and twelve months ago, respectively. As a result, active utilization for jackups has increased to approximately 90%, and pricing and contract terms for modern benign environment jackups continue to improve. Recently, we were awarded a 4-year contract with Brunei Shell Petroleum for the Valaris 115, which represents the largest backlog award for a benign environment jackup outside of the Middle East this year.

On a trailing 12 month basis, Jackup rig years awarded a more than 70% higher than the previous 12 months and rig years of open demand tender or pretend to stage as of quarter end were approximately 10% and 30% higher than six months ago 12 months ago, respectively.

As a result active utilization for Jackups has increased to approximately 90%.

Pricing and contract terms for modern benign environment Jackups continued to improve.

Recently, we were awarded a four year contract with Brunei shell petroleum for the Polaris 115.

<unk> represents the largest backlog award for a benign environment jackups outside of the Middle East This year.

Anton Dibowitz: We've also been awarded a 1-year extension with BP Indonesia for VALARIS 106, and several shorter-term contracts for VALARIS 107 offshore Australia, and VALARIS 144 in the US Gulf, demonstrating the global nature of the recent pickup in activity. While the benign environment jackup market has improved meaningfully this year, we continue to see near-term softness in the harsh environment jackup market. We expect that this will continue into next year, and we may see some rigs go idle later this year as we enter the seasonally weaker winter months and rigs complete their current programs. However, we anticipate that an increase in project sanctioning expected offshore Norway later this year and a strong pipeline of activity in the UK North Sea for work commencing in mid-2023 and beyond will help to better balance the harsh environment jackup market in future years.

We've also been awarded a one year extension with D. P offshore Indonesia for Polaris 106, and several shorter term contracts will allow us to 107 offshore Australia and Valero is $1 44 in the U S Gulf.

Demonstrating the global nature of the recent pickup in activity.

While the benign environment Jackup market has improved meaningfully this year, we continued to see near term softness in the harsh environment Jackup market.

We expect that this will continue into next year and we may see some rigs go idle later this year as we enter the seasonally weaker winter months and rigs complete the current programs.

However, we anticipate that an increase in project sanctioning expected offshore Norway later, this year and a strong pipeline of activity in the U K North sea for work commencing in mid 2023, and beyond will help to better balance the harsh environment jackup market in future years.

Anton Dibowitz: Moving now to our fleet strategy. In 2021, we set out to build our contract backlog by reactivating our high-quality stacked rigs for long-term contracts at attractive economics. We achieved this goal by winning contracts for 4 of our preservation stacked floaters, which have all now been reactivated and returned to work largely on time and within our reactivation cost guidance range on average. Having secured this backlog and given greater demand for our high-quality rigs, we increased our hurdle rates for future investments. We'll remain disciplined in only returning additional stacked rigs to the active fleet for opportunities that provide meaningful returns, such as our recent contract award for Valaris DS-17.

Moving now to our fleet strategy.

2021 we set out to build our contract backlog by reactivating all high quality stack rigs with long term contracts at attractive economics.

We achieved this goal by winning contracts for four of our preservation stacked floaters, which have all now been reactivated and return to work largely on time and within our reactivation cost guidance range on average.

Having secured this backlog and given greater demand for our high quality rigs, we increased our hurdle rates for future investments and we will remain disciplined and only returning additional stacked rigs to the active fleet for opportunities that provide meaningful returns such as our recent contract award from Polaris Dia 17.

Anton Dibowitz: This 540-day contract with Equinor offshore Brazil has a total contract value of approximately $327 million, including an $86 million upfront payment to cover mobilization, capital upgrades, and a contribution towards our reactivation costs. We have proven our ability to win work and reactivate our preservation-stacked assets, and we still have 11 high-quality modern assets remaining, including three uncontracted high-spec drillships, Valaris DS-7, DS-8, and DS-11. These rigs are well suited for many of the attractive opportunities we see in the market today, but we will remain disciplined in exercising our operational leverage.

This 540 day contract with Ecuador offshore, Brazil is a total contract value of approximately $327 million, including an $86 million upfront payment to cover mobilization capital upgrades and contribution towards our reactivation costs.

We have proven our ability to win work and reactivate a preservation stacked assets and we still have 11 high quality modern assets remaining including three Uncontacted high spec Drillships <unk> DS seven D. S. Eight D. S 11.

These rigs are well suited for many of the attractive opportunities we see in the market today, but we will remain disciplined and exercising our operational leverage.

Anton Dibowitz: It is also worth noting that we have options to take delivery of new-build drillships Valaris DS-13 and DS-14 by year-end 2023 for a shipyard price of approximately $119 million and $218 million respectively, providing further operational leverage to the floater market. Scale is beneficial for a driller as it allows onshore support costs to be spread over a larger fleet. Adding Valaris DS-17 in Brazil will provide a critical mass of 3 active floaters at each point of the Golden Triangle, and is part of our strategy to focus our efforts on those basins that are expected to drive significant shares of future demand. We continue to regularly assess our fleet for retirement and divestiture candidates.

It is also worth noting that we have options to take delivery of Newbuild Drillships <unk> DS 13, and DS 14 by year end 'twenty 'twenty three for.

For a shipyard price of approximately 119 $218 million, respectively, providing further operational leverage to the Florida market.

Scale is beneficial for a driller.

<unk> onshore support costs to be spread over a larger fleet.

I think Polaris Dia 17 in Brazil will provide a critical mass of three active floaters at each point of the Golden triangle.

Part of our strategy to focus our efforts on those basins that are expected to drive significant shares of future demand.

We continue to regularly assess our fleet for retirement and divestiture candidates during the quarter, we recorded a gain on asset sales of $135 million.

Anton Dibowitz: During the quarter, we recorded a gain on asset sales of $135 million, primarily related to the sale of jackups VALARIS 113 and VALARIS 114, each of which had been stacked for more than six years for a combined $125 million. We will continue to evaluate our fleet, whether for acquisitions or divestitures, for opportunities to create shareholder value. Another source of shareholder value is ARO Drilling, our unconsolidated 50/50 joint venture with Saudi Aramco that owns and operates jackup drilling rigs in Saudi Arabia. Saudi Arabia is the largest market for jackup rigs in the world, with approximately 75 rigs either under contract or contracted for future work, and this number is expected to increase to more than 90 after completion of ongoing tenders, which would represent approximately 1 in 4 benign environment jackups currently contracted worldwide.

Primarily related to the sale of Jackups, Claris 113, and $1 14.

Each of which had been stacked for more than six years for a combined $125 million.

We will continue to evaluate our fleet, whether for acquisitions or divestitures for opportunities to create shareholder value.

Another source of shareholder value is Aro drilling our unconsolidated 50, 50 joint venture with Saudi Aramco, which owns and operates jackup drilling rigs in Saudi Arabia.

Saudi Arabia is the largest market for jackup rigs in the world with approximately 75 rigs either under contract contracted for future work.

And this number is expected to increase to more than 90 after completion of ongoing tenders, which would represent approximately one in four benign environment Jackups currently contracted worldwide.

Anton Dibowitz: We remain highly focused on highlighting what we believe is the significant value inherent in ARO, and we have potential catalysts approaching with new-build rigs 1 and 2 scheduled to be delivered in H1 next year and orders for new build 3 and 4 expected to be placed later this year. As a reminder, each of the new builds will be backed by an initial 8-year contract with Saudi Aramco at a day rate set to achieve a 6-year EBITDA payback on the total price of the rig. Following the initial contract, each new build will be contracted for at least 8 more years in aggregate, with pricing set every 3 years utilizing a market pricing mechanism. Given the economics of the initial contracts, the new-build rigs are expected to be financed by third-party financing and cash from ARO operations.

We remain highly focused on highlighting what we believe is a significant value inherent to narrow and we have potential catalysts approaching with newbuild rigs one and two scheduled to be delivered in the first half of next year and orders for Newbuild three and four are expected to be placed later this year.

As a reminder, each of the new builds will be backed by an initial eight year contract with Saudi Aramco at a day rate set to achieve a six year EBITDA payback on the total price of the rig.

Following the initial contract each newbuild will be contracted for at least eight more years in aggregate the pricing set every three years utilizing a market pricing mechanism.

Given the economics of the initial contracts Newbuild rigs are expected to be financed by third party financing and cash from Arrow operations.

Anton Dibowitz: ARO continues to actively explore financing options and expects financing to be secured prior to delivery of the first two new builds. We do not expect that either Valaris or Aramco will need to provide any additional financing to ARO to fund the new-build program. Further information on ARO can be found in a separate investor presentation on the Valaris website. I'll conclude my remarks by reiterating some of the key points. First, we remain focused on extending our demonstrated track record of delivering safe and efficient operations to our customers and are taking additional steps to maintain our high standards of safety and operating performance in light of increasing activity. Second, the fundamental outlook for our industry remains highly constructive, as evidenced by increasing contracting and tendering activity across both floaters and jackups. Third, we have proven our ability to contract and effectively reactivate our high-quality stacked rigs.

Our ROE continues to actively explore financing options and expect financing to be secured prior to delivery of the first two new builds.

We do not expect that either allow us or Ram co will need to provide any additional financing to arrow to fund the Newbuild program.

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

I'll conclude my remarks by reiterating some of the key points.

First we remain focused on extending our demonstrated track record of delivering safe and efficient operations to our customers not taking additional steps to maintain our high standards of safety and operating performance in light of increasing activity.

Second.

Fundamental outlook for our industry remains highly constructive as evidenced by increase in contracting and tendering activity across both floaters and jackups.

And third we have proven our ability to contract and effectively reactivate our high quality stack rigs, we retained significant operational leverage to the improving market and we will continue to reactivate further rigs for opportunities that provide meaningful returns on investment such as the recently announced contract for Polaris Dia 17.

Anton Dibowitz: We retain significant operational leverage to the improving market, and we will continue to reactivate further rigs for opportunities that provide meaningful returns on investment, such as the recently announced contract for VALARIS DS-17. In summary, Valaris is well-positioned to capitalize on opportunities that arise during an industry upcycle, and the Valaris management team and board are highly focused on maximizing earnings and driving meaningful free cash flow by following our strategy of being value-driven, focused, and responsible in our decision-making. I will now hand the call over to Darin to take you through the financials.

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In summary allow us is well positioned to capitalize on opportunities that arise during an industry up cycle and the <unk> management team and board are highly focused on maximizing earnings and driving meaningful free cash flow by following our strategy of being value driven focused and responsible in our decision.

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

Darin Gibbins: Thanks, Anton, and good morning and afternoon, everyone. In my prepared remarks today, I will provide an overview of Q2 results, our outlook for Q3, and updated guidance for full year 2022, and then briefly review our financial position. I would also highlight our Q2 results press release, which includes our trailing 5 quarters analysis for the income statement, balance sheet, and cash flows, as well as various supplemental data. Additionally, we published an updated fleet status report last week and recently began disclosing individual contract day rates and other forms of compensation. We will continue to publish day rate and other compensation information for all contracts and contract extensions on a go-forward basis where contractually allowed. As Anton mentioned earlier, the return of 4 reactivated floaters to the active fleet is expected to significantly improve our financial results in future periods.

Thanks, Anton and good morning, and afternoon everyone.

In my prepared remarks today I will provide an overview of second quarter results our outlook for the third quarter and updated guidance for full year 'twenty two.

And then briefly review our financial position.

I would also highlight our second quarter results press release, which includes our trailing five quarters analysis. The income statement balance sheet and cash flows as well as various supplemental data.

Additionally, we published an updated fleet status report last week, and recently began disclosing individual contracts day rates and other forms of compensation.

We will continue to publish day rate and other compensation information for all contracts and contract extensions on a go forward basis, we're contractually allowed.

As Anton mentioned earlier, the return of four reactivated floaters to the active fleet is expected to significantly improve our financial results in future periods, and we were pleased to announce a contract for one of our preservation stacked floaters Floris D. S 17 in early July .

Darin Gibbins: We were pleased to announce a fifth contract for one of our preservation stacked floaters, Valaris DS-17, in early July. As mentioned on our Q1 conference call, reactivation costs for our four floaters reactivated to date are expected to average $40 to 45 million per rig. This includes all costs to reactivate the rigs, but does not include mobilization costs or costs for contract or region-specific upgrades, for which we would generally expect to be compensated. We anticipate that future floater reactivations, including Valaris DS-17, will be in the range of $65 to 75 million on average. This estimate is higher than our reactivations to date, due largely to inflation, both personnel- and goods- and services-related, and the need for additional spare parts following the four reactivations already completed.

As mentioned on our first quarter conference call reactivation costs for the four floaters reactivated to date are expected to average $40 million to $45 million per rig.

This includes all costs to reactivate the rigs. It does not include mobilization costs or costs for contract a region specific upgrades for which we would generally expect to be compensated.

We anticipate that future floater reactivation, including Valores D. S 17 will be in the range of $65 million to $75 million on average.

This estimate is higher than our reactivation to date due largely to inflation, both personnel and goods and services related and the need for additional spare parts. Following the four reactivation is already completed. Additionally.

Darin Gibbins: Additionally, global supply chain issues are extending the time required to reactivate a floater to approximately 12 months versus 9 months previously, which is also contributing to an increase in expected reactivation costs. However, given the improving market and lack of available supply, the economics of returning a preservation stacked rig to work are meaningfully improved, as evidenced by the DS-17 contract, which has a total contract value of $327 million, including $86 million prior to contract commencement to cover mobilization and capital upgrades, as well as a portion of the reactivation costs. The initial contract alone on the DS-17 is expected to provide a meaningful return on our net reactivation spend, and we will continue to seek further attractive opportunities to return our 3 remaining uncontracted drillships, Valaris DS-7, DS-8, and DS-11, to the active fleet.

Additionally, global supply chain issues are extending the time required to reactivate a floater to approximately 12 months versus nine months previously which is also contributing to an increase in expected reactivation costs.

However, given the improving market and lack of available supply the economics of returning a preservation stacked rig to work are meaningfully improved as evidenced by the Dia 17 contract, which has a total contract value of $327 million, including $86 million prior to contract commencement cover mobilization in capital.

Grades as well as a portion of the reactivation costs.

The initial contract alone on the Dia 17 is expected to provide a meaningful return on our net reactivation span and we will continue to seek further attractive opportunities to return to our three remaining on contracted Drillships Valores D. S. Seven U S. A and D. S 11 to the active fleet.

Darin Gibbins: As a reminder, the majority of reactivation costs are recognized in our income statement, with the remainder recognized as capital expenditures. As we have done previously, we have presented our results on both an EBITDA and EBIDAR basis, as we believe reactivation expenses should be treated like growth capital expenditures, with the income statement portion backed out of EBITDA when analyzing our results. Moving now to the Q2 results. Adjusted EBITDA in Q2 was $29 million compared to -$31 million in the prior quarter, and adjusted EBIDAR, adding back one-time reactivation costs, was $54 million compared to $31 million in the prior quarter. While adjusted EBITDA for Q2 was slightly higher than our prior guidance of approximately $25 million, there were a few large one-off items that impacted our Q2 results that I will discuss shortly.

As a reminder, majority of reactivation costs are recognized in our income statement with the remainder recognized as capital expenditures as we have done previously we presented our results on both an EBITDA and EBITDAR basis, as we believe reactivation expenses should be treated like growth capital expenditures with the income statement portion.

<unk> Act out of EBITDA when analyzing our results.

Moving now to the second quarter results.

Adjusted EBITDA in the second quarter was $29 million compared to negative $31 million in the prior quarter and adjusted EBITDAR, adding back one time reactivation costs was $54 million compared to $31 million in the prior quarter.

Adjusted EBITDA for the second quarter was slightly higher than our prior guidance of approximately $25 million. There were a few large one off items that impacted our second quarter results and I will discuss shortly.

Darin Gibbins: Revenues for Q2 were $413 million compared to $318 million in the prior quarter. Excluding reimbursable items, revenues increased to $385 million from $291 million, primarily due to a $51 million fee related to the termination of the VALARIS DS-11 contract, as well as higher utilization and average day rates for both the floater and jackup fleets. Aside from the DS-11 termination fee, floater revenues increased due to VALARIS DPS-1 and DS-16 returning to work following reactivation projects, and VALARIS DPS-5 returning to work following a Special Periodic Survey. This was partially offset by idle time between contracts for VALARIS MS-1 and mobilization time for VALARIS DS-12, which moved from its previous contract offshore Angola to its current operating location offshore Mauritania in Senegal in April.

Revenues for the second quarter were $413 million compared to $318 million in the prior quarter excluding.

Excluding reimbursable items revenues increased to $385 million from $291 million, primarily due to a $51 million fee related to the termination of the Valores D. S 11 contract as well as higher utilization and average day rates for both the floater and Jackup fleets.

Aside from the D. S 11 termination fee floater revenues increased due to valores Dps one D. S 16, returning to work following reactivation projects.

<unk> D. P. S. Five returning to work following a special periodic survey.

This was partially offset by idle time between contracts for Valores M. S. One and mobilization time for Laurence D. S 12, which moved from its previous contract offshore Angola to its current operating location offshore Mauritania and Senegal in April .

Darin Gibbins: Jackup revenues increased primarily due to more operating days for VALARIS 249, which commenced a contract offshore New Zealand during Q1. This was partially offset by VALARIS 141 rolling off contract in April prior to commencement of a 3-year bareboat charter agreement with ARO Drilling that is expected to begin later this month. Contract drilling expense for Q2 was $362 million compared to $331 million in the prior quarter. Excluding reimbursable items, contract drilling expense increased to $334 million from $305 million, primarily due to more operating days for the floater fleet, increased costs related to certain claims, and costs associated with the VALARIS DS-11 contract termination.

Jackup revenues increased primarily due to more operating days for Valero is $2 49, which commenced a contract offshore New Zealand during the first quarter.

This was partially offset by Valero is $1 41 rolling off contract in April prior to commencement of a three year Bareboat charter agreement with Arrow drilling that is expected to begin later this month.

Contract drilling expense for the second quarter was $362 million compared to 331 million in the prior quarter.

Excluding reimbursable items contract drilling expense increased to $334 million from $305 million, primarily due to more operating days for the floater fleet.

Increased costs related to certain claims and costs associated with the Valores D. S 11 contract termination.

Darin Gibbins: This was partially offset by lower rig reactivation costs, which decreased to $24 million in Q2 from $61 million in Q1 as reactivated rigs returned to work. As of quarter-end, we increased our accrual with respect to certain litigation claims by approximately $25 million to reflect the change in the projected value of these claims against us. We also incurred one-time costs due to the termination of the Valaris DS-11 contract and recognized an impairment charge of $35 million related to capital expenditures incurred to date on the DS-11 upgrade project. Moving to our shore-based costs. General and administrative expense of $19 million was in line with the prior quarter. Onshore support costs, which are included within contract drilling expense in the income statement, increased slightly to $30 million from $29 million.

This was partially offset by lower rig reactivation costs, which decreased to $24 million in the second quarter with 61 million in the first quarter as reactivated rigs returned to work.

As of quarter end, we increased our accrual with respect to certain litigation claims by approximately $25 million to reflect the change in the projected value of these claims against us.

We also incurred one time costs due to the termination of the Valores D. S 11 contract and recognized an impairment charge of $35 million related to capital expenditures incurred to date on the D. S 11 upgrade project.

Moving to our shore based costs general and administrative expense of $19 million was in line with the prior quarter and onshore support costs, which are included within contract drilling expense in the income statement increased slightly to $30 million from $29 million.

Darin Gibbins: The sum of these two categories provides our total onshore support costs, which increased modestly to $49 million in Q2 from $48 million in the prior quarter. Depreciation expense decreased marginally to $22 million from $23 million in the prior quarter. Other income increased to $149 million in Q2 from $9 million in the prior quarter. Q2 other income included a gain on sale of assets of $135 million, primarily related to the sale of jackups Valaris 113, 114, and 36, as well as additional proceeds received in Q2 on the sale of a rig in a prior year, compared to a $2 million gain on sale of assets related to the sale of jackup Valaris 67 in the prior quarter.

The sum of these two categories provides our total onshore support costs, which increased modestly to $49 million in the second quarter from $48 million in the prior quarter.

Depreciation expense decreased marginally to $22 million from $23 million in the prior quarter.

Other income increased to $149 million in the second quarter from $9 million in the prior quarter.

Second quarter. Other income included a gain on sale of assets of $135 million, primarily related to the sale of Jackups Laurus 113 on 14, and 36 as well as additional proceeds received in the second quarter on the sale of a rig and a prior year compared to a $2 million gain.

On sale of assets related to the sale of Jackup Valores 67 in the prior quarter.

Darin Gibbins: Tax expense was $20 million in Q2 compared to a tax benefit of $1 million in Q1. The Q2 tax provision included $6 million of discrete tax expense, primarily related to income from the VALARIS DS-11 contract termination. The Q1 tax provision included $15 million of discrete tax benefit, primarily related to a reduction in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Adjusted for discrete items, tax expense of $14 million in Q2 was in line with Q1. By way of an update, we still expect to receive a tax refund of $97 million related to the CARES Act, though the timing of this receipt remains uncertain. Moving now to our Q3 2022 outlook.

Tax expense was $20 million in the second quarter compared to a tax benefit of $1 million in the first quarter.

The second quarter tax provision included $6 million of discreet tax expense primarily related to income from the D. S 11 contract termination.

The first quarter tax provision included $15 million of discreet tax benefit primarily related to a reduction in liabilities for unrecognized tax benefits associated with tax positions taken in prior years.

Adjusted for discrete items tax expense of $14 million in the second quarter was in line with the first quarter.

By way of an update we still expect to receive a tax refund of $97 million related to the cares Act. So the timing of this receipt remains uncertain.

Moving now to our third quarter 2022 outlook.

Darin Gibbins: We expect total revenues will be in the range of $430 to 440 million as compared to $413 million in Q2. Q3 revenues are anticipated to benefit from a full quarter of revenue for reactivated rigs Valaris DPS-1 and DS-16, and a partial quarter for Valaris DS-4 and DS-9, which commenced their contracts in July with ExxonMobil offshore Angola and Petrobras offshore Brazil, respectively. As a result of these contract startups, total and active utilization for the floater fleet is anticipated to increase meaningfully in Q3 and beyond. We anticipate that Q3 contract drilling expense will be in the range of $335 to 345 million as compared to $362 million in Q2, including approximately $31 million of onshore support costs.

We expect total revenues will be in the range of $430 million to $440 million as compared to $413 million in the second quarter.

Third quarter revenues are anticipated to benefit from a full quarter of revenue reactivated rigs Valores D. P. S. One and D. S 16, and a partial quarter for Valores D. S. Four and D. S nine which commenced their contracts in July with Exxon offshore Angola, and Petrobras offshore Brazil, respectively.

As a result of these contract startups total and active utilization for the floater fleet is anticipated to increase meaningfully in the third quarter and beyond.

We anticipate that third quarter contract drilling expense will be in the range of $335 million to $345 million as compared to $362 million in the second quarter, including approximately $31 million of onshore support costs.

Darin Gibbins: The expected decrease is primarily driven by one-time costs incurred in Q2 and lower reactivation costs, which are anticipated to be partially offset by higher operating costs reflecting higher activity levels, particularly for the floater fleet. Finally, Q3 general and administrative expense is expected to be $21 to 23 million compared to $19 million in the prior quarter. Adjusted EBITDA for Q3 is expected to be $70 to 75 million compared to $29 million in Q2, and adjusted EBITDA is expected to be $80 to 85 million compared to $54 million in Q2. Reactivation costs in Q3 relate primarily to the beginning of the DS-17 reactivation project. Moving now to capital expenditures. Q2 CapEx was $61 million, of which $15 million was maintenance CapEx and $46 million related to enhancements and upgrades.

The expected decrease is primarily driven by one time costs incurred in the second quarter and lower reactivation costs, which are anticipated to be partially offset by higher operating costs, reflecting higher activity levels, particularly for the floater fleet.

Finally, third quarter general and administrative expense is expected to be 21% to $23 million compared to $19 million in the prior quarter.

Adjusted EBITDA for the third quarter is expected to be $70 million to $75 million compared with $29 million in the second quarter.

<unk> adjusted EBITDAR is expected to be $80 million to $85 million compared to $54 million in the second quarter.

Reactivation costs in the third quarter relate primarily to the beginning of the DS 17 reactivation project.

Moving now to capital expenditures.

Second quarter, Capex was $61 million of which 15 million was maintenance capex and $46 million related to enhancements and upgrades.

Darin Gibbins: The enhancements and upgrades include $8 million of reactivation costs and $38 million of contract or region-specific upgrades, including $22 million for Valaris DS-11, which was impaired following the contract termination. Q3 CapEx is expected to be $50 to 55 million, of which $25 to 30 million is expected to be maintenance CapEx, and the remainder is expected for enhancements and upgrades. The enhancements and upgrades are primarily related to completion of the Valaris DS-4 and DS-9 reactivation projects. Moving now to full year 2022 guidance. Revenues are expected to be $1.57 to 1.6 billion. Contract drilling expense is anticipated to be $1.35 to 1.38 billion, inclusive of $105 to 110 million of reactivation expense.

Enhancements and upgrades include $8 million of reactivation costs and $38 million of contract or region specific upgrades, including $22 million for Valores S 11, which was impaired following the contract termination.

Third quarter, Capex is expected to be $50 million to $55 million of which $25 million to $30 million is expected to be maintenance capex and the remainder is expected for enhancements and upgrades.

Enhancements and upgrades are primarily related to completion of the Dolores D. S. Four and D S not in reactivation projects.

Moving now to full year 2022 guidance.

Revenues are expected to be 1.57 to $1 $6 billion.

Contract drilling expense is anticipated to be 1.35 to $1 three $8 billion inclusive of $105 million to $110 million of reactivation expense approximately $20 million of which is anticipated in the second half of the year primarily related to the reactivation of <unk> 17.

Darin Gibbins: Approximately $20 million of which is anticipated in H2, primarily related to the reactivation of Valaris DS-17. We continue to estimate G&A expense of $80 to 85 million, which combined with $120 to 125 million of support costs included within contract drilling expense, provides total onshore support costs of approximately $200 to 210 million in 2022, unchanged from our prior guidance. The sum of these items provides adjusted EBITDA of $130 to 150 million and adjusted EBITDA of $240 to 260 million for full year 2022. Adjusted EBITDA for H2 is expected to be $135 to 155 million as compared to -$2 million in H1.

We continue to estimate G&A expense of $80 million to $85 million, which combined with $120 million to $125 million of support costs included within contract drilling expense provides total onshore support costs of approximately $200 million to $210 million in 2022 unchanged from our prior guidance.

The sum of these items provides adjusted EBITDA of $130 million to $150 million and adjusted EBITDAR of $240 million to $260 million for full year 2022.

Adjusted EBITDA for the second half of the year is expected to be $135 million to $155 million as compared to negative $2 million in the first half and adjusted EBITDAR for the second half of the year is expected to be $155 million to $175 million as compared to $84 million in the first half.

Darin Gibbins: Adjusted EBITDA for H2 of the year is expected to be $155 to 175 million as compared to $84 million in H1, demonstrating the expected improvement in financial performance in H2 of the year and beyond, following a transitional period in which we incurred reactivation costs to put several rigs back to work. Our 2022 adjusted EBITDA guidance is lower than our prior guidance of $160 to 190 million, primarily due to increased costs related to certain claims, reactivation costs for Valaris DS-17, which was not contemplated in our prior guidance, and delayed contract commencements, partially offset by the net impact of the Valaris DS-11 contract termination.

Demonstrating the expected improvement in financial performance in the second half of the year and beyond following a transitional period in which we incurred reactivation costs to put several rigs back to work.

Our 2022, adjusted EBITDA guidance is lower than our prior guidance of $160 million to $190 million, primarily due to increased costs related to certain claims reactivation costs for valores, <unk> 17, which was not contemplated in our prior guidance and delayed contract commencements, partially offset by the net.

Impact of the Valores D S 11 contract termination.

Darin Gibbins: In terms of our value drivers, our updated guidance translates to expected full year 2022 operating margin, exclusive of onshore support and G&A expense of $300 to 320 million for the active fleet, $410 to 430 million when adjusting for one-time reactivation costs of $105 to 110 million. Operating margin for our leased and managed rigs is expected to be $75 to 80 million, and we expect carrying costs of approximately $45 million for the stacked fleet.

In terms of our value drivers are updated guidance translates to expected full year 2022 operating margin exclusive of onshore support and G&A expense of $300 million to $320 million for the active fleet or 410 to 430 million when adjusting for onetime reactivation costs of 105 to 110 million.

Yeah.

Operating margin for our leased and managed rigs is expected to be $75 million to $80 million and we expect carrying costs of approximately $45 million for the stacked fleet.

Darin Gibbins: We expect that 2022 capital expenditures will be $200 to 210 million, which is lower than our prior guidance of $225 to 250 million, primarily due to the removal of any remaining CapEx for the Valaris DS-11 20K upgrade following the contract termination, partially offset by CapEx for Valaris DS-17 as we reactivate the rig for a contract that is expected to start in mid-2023. Capital expenditures for H2 2022 are expected to be $100 to 110 million, including approximately $55 to 60 million of maintenance CapEx and $45 to 50 million of enhancements and upgrades. The enhancements and upgrades include remaining costs for reactivated drillships Valaris DS-4, DS-9, and DS-16, as well as costs for Valaris DS-17.

We expect the 2022 capital expenditures will be $200 million to $210 million, which is lower than our prior guidance of $225 million to $250 million, primarily due to the removal of any remaining capex for the Valores D. S. 11, 20, K upgrade following the contract termination partially offset by Capex.

For Florida D. S 17, as we reactivate the rigs for a contract that is expected to start in mid 2023.

Capital expenditures for the second half of 2022.

<unk> to be $100 million to $110 million, including approximately $55 million to $60 million of maintenance, capex and $45 million to $50 million of enhancements and upgrades.

Enhancements and upgrades include.

Remaining costs for reactivated Drillships Floris DS four DS nine and DS 16, as well as costs for Floris Dia 17.

Darin Gibbins: We anticipate the capital upgrades exclusive of capitalized reactivation costs for Valaris DS-17 will total approximately $55 million. These upgrades will be fully reimbursed by the customer and include the addition of managed pressure drilling, as well as upgrades to the choke and kill line and riser tensioner equipment. Approximately $10 million is expected to be incurred in 2022, with the remainder in H1 2023. Our guidance continues to assume reactivations announced to date, but does not include any potential incremental reactivations for the rest of the stacked fleet. While H2 2022 CapEx is expected to be in the range of $100 to 110 million, we anticipate receiving approximately $90 million in upfront payments from customers over the remainder of the year related to capital reimbursements and mobilization fees.

We anticipate the capital upgrades exclusive of capitalized reactivation costs for Valores D. S 17.

It'll approximately $55 million.

These upgrades will be fully reimbursed by the customer and include. The addition of managed pressure drilling as well as upgrades to the choke and kill wine and riser pensionary equipment.

Approximately $10 million is expected to be incurred in 2022 with the remainder in the first half of 2023.

Our guidance continues to assume reactivation announced to date, but does not include any potential incremental reactivation for the rest of the stacked fleet.

While second half 2022 capex is expected to be in the range of $100 million to $110 million, we anticipate receiving approximately $90 million in upfront payments from customers over the remainder of the year related to capital reimbursements and mobilization fees to.

Darin Gibbins: To be clear, this is in addition to the $51 million termination fee received in July related to DS-11. As a reminder, these and any other upfront customer payments and the related revenues are not included in the contract backlog, average day rates, or adjusted EBITDA reported in our quarterly filings. For some of our contracts, these represent a meaningful portion of the total contract value. While we anticipate that financial results will improve meaningfully in H2 of this year, there may still be some volatility in earnings over the next several quarters, depending on the timing of reactivation costs for Valaris DS-17, reactivation costs for any additional rigs we may reactivate, and whether we find work for some of our harsh environment jackup rigs that are set to roll off contract later this year.

To be clear. This is in addition to the $51 million termination fee received in July related to D. S 11.

As a reminder, these and any other upfront customer payments and the related revenues are not included in the contract backlog average day rates or adjusted EBITDA reported in our quarterly filings for some of our contracts. These represent a meaningful portion of the total contract value.

While we anticipate that financial results will improve meaningfully in the second half of this year there may still be some volatility in earnings over the next several quarters, depending on the timing of reactivation costs for <unk> 17, reactivation costs for any additional rigs we may reactivate.

And whether we find work for some of our harsh environment Jackup rigs that are set to roll off contract later this year.

Darin Gibbins: Now, I'll move to Q2 results as well as the Q3 and full year 2022 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 increased to $31 million in the Q2 from $22 million in the prior quarter, primarily due to an increase in utilization in the Q2. ARO's Q3 2022 EBITDA is expected to decrease to $16 to 18 million, primarily due to lower revenues as a result of out-of-service days related to planned maintenance for certain rigs and higher contract drilling expenses associated with this maintenance. ARO's full year 2022 EBITDA is expected to be in the range of $85 to 95 million. Finally, I will provide a brief overview of our financial position.

Now I'll move to the second quarter results as well as the third quarter and full year 2022 outlook for Aero drilling our 50 50 joint venture with Saudi Aramco as a reminder, arrow is not consolidated in the financial results of Lars.

Aero EBITDA increased to $31 million in the second quarter from $22 million in the prior quarter, primarily due to an increase in utilization in the second quarter.

<unk> third quarter 2022, EBITDA is expected to decrease to $16 million to $18 million, primarily due to lower revenues as a result of out of service days related to planned maintenance for certain rigs and higher contract drilling expense associated with this maintenance.

<unk> full year 2022, EBITDA is expected to be in the range of $85 million to $95 million.

Finally, I will provide a brief overview of our financial position.

Darin Gibbins: As of quarter end, we had cash and cash equivalents of $554 million, plus $24 million of restricted cash, representing a $31 million decrease during the quarter. This was primarily due to an increase in net working capital and $61 million of capital expenditures in the quarter. The increase in net working capital was due primarily to a ramp-up in operating activities and the $51 million DS-11 termination fee that was in accounts receivable at quarter end and subsequently collected in July. These were partially offset by $145 million of net proceeds from the sale of assets, primarily related to jackups VALARIS 113 and VALARIS 114. In closing, we will continue to be highly disciplined in exercising our operational leverage by judiciously returning our high-quality stacked rigs to the active fleet only for opportunities that provide meaningful returns.

As of quarter end, we had cash and cash equivalents of $554 million plus $24 million of restricted cash.

Presenting a $31 million decreased during the quarter.

This was primarily due to an increase in networking capital and $61 million of capital expenditures in the quarter.

The increase in networking capital was due primarily to a ramp up in operating activities in the $51 million D. S. 11 termination fee that was in accounts receivable at quarter end and subsequently collected in July .

These were partially offset by a $145 million of net proceeds from the sale of assets primarily related to Jackups, Florida, $1 13, and $1 14.

In closing, we will continue to be highly disciplined and exercising our operational leverage judiciously, returning our high quality stack rigs to the active fleet only for opportunities that provide meaningful returns.

Darin Gibbins: Our recent contract award for Valaris DS-17 demonstrates the strength of contract economics for our high-quality rigs in the current market and provides a glimpse of the future earnings potential of the Valaris fleet. We remain focused on executing on our key priorities of, first, winning additional backlogs for the active fleet, and second, reactivating our high-quality stacked rigs for opportunities that provide meaningful returns. We will also look to act opportunistically to create shareholder value through M&A or additional asset transactions if they make sense. We will maintain our focus on having an industry-leading cost structure and strong balance sheet. By executing on these priorities, we will maximize earnings, drive meaningful free cash flow as the market recovers, and employ a disciplined approach to capital allocation, including returns to shareholders when free cash flow generation supports them. We've now reached the end of our prepared remarks.

A recent contract award for a large Dia 17 demonstrates the strength of contract economics for our high quality rigs and the current market and provides a glimpse of the future earnings potential of the Valores fleet.

We remain focused on executing on our key priorities. The first winning additional backlog for the active fleet and second reactivating, our high quality stack rigs for opportunities to provide meaningful returns.

We will also look to act opportunistically to create shareholder value through M&A or additional asset transactions, if they make sense.

And we will maintain our focus on having an industry, leading cost structure and strong balance sheet.

Executing on these priorities, we will maximize earnings drive meaningful free cash flow as the market recovers and employ a disciplined approach to capital allocation, including returns to shareholders when free cash flow generation supports them.

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

Darin Gibbins: Operator, please open the line for questions.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. Our first question today will come from Greg Lewis with BTIG. Please go ahead.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble the roster.

And our first question today will come from Greg Lewis with B T. I G. Please go ahead.

Greg Lewis: Yeah. Hi. Thank you, and good morning, everybody, and thank you for taking my questions. You know-

Yes, hi, Thank you and good morning, everybody and thank you for taking my questions.

Anton Dibowitz: Sure, Greg.

Anton Dibowitz: I was hoping to talk a little bit about those. It looks like we have about 3 rigs that are rolling off in the spring of 2023. You know, I guess a couple questions there. One is do any of those rigs have existing options that's gonna keep them working beyond that? And then as we look at the opportunities, I guess those rigs are in West Africa and Brazil. As we think about the opportunities for those rigs, any kind of color you can give us around, you know, I don't know, duration and/or.

And in fact, I was hoping I was hoping to talk a little bit about.

It looks like we have about three rigs that are rolling off.

In the spring of 2023.

You know I guess a couple questions. There one is do any of those rigs have existing options, that's going to keep them working beyond that and then as we look at the opportunities I guess those rigs are in West Africa and Brazil.

As we think about the opportunities for those rigs any kind of color you can give us around.

And I don't know duration.

<unk>.

Greg Lewis: You know, I don't expect you to give us pricing, but really any kind of color you could give us around how we should directionally think about those rigs, knowing that they've been on contract for a little while here and rates have moved higher.

Yes, I don't I don't expect you to give us pricing, but really in any kind of color you could give us around how we should directionally think about those rigs knowing that they've been on contract for a little while here and rates have moved higher.

Anton Dibowitz: Hey, Greg. Good question. I think we're talking about floaters here. The DS-15 and,

Hey, Greg Good question I think we were talking about floaters, yet so the D S.

Greg Lewis: Yeah, just the drillships, not even the semi.

The drillships not even not even the static.

Anton Dibowitz: Yeah. DS-15 in Brazil does have some options on it. You know, obviously, we have a, there's a price. We have a high expectation that given the activity levels in Brazil, that rig will continue with Total. The rigs in West Africa, there are a lot of interesting opportunities, as we said, there's a strong pipeline of tenders coming out in West Africa. For us, the focus is making sure we find the right opportunity for those rigs to roll on. There's certainly plenty of work. It's an attractive time to have rigs available for the market and making a bit of a balance between the right longer term program.

Yeah, Yeah. It's 15 in Brazil does does have some options on it and obviously we have a.

Those are price, we have a high expectation that given the activity levels in Brazil that rig will continue with total.

The rigs in West Africa, there are a lot of interesting opportunities as we said there's a there's a strong pipeline of tenders coming out in West Africa. So for US. The focus is is making sure we.

We find the right opportunity for those rigs to roll on this theres certainly plenty of work, it's an attractive time to have rigs available for the market and making a bit of a balance between the rights longer term program I think recent fixtures that we've seen by us and others in the kind of 18 months two year range is.

Anton Dibowitz: I think recent fixtures that we've seen by us and others in the kinda 18-month, 2-year range is about where the market is on floater term fixtures, some a little bit longer, including in Brazil, stretching out to 3 and 4 years. It may be a combination of taking some short-term work to bridge to the right long-term opportunity. Obviously, we'd prefer to just roll into the next long-term opportunity, but we're just gonna have to see how that plays out. There's definitely interest. They're attractive rigs. They have a great operational track record. The customers who have them like them, and we'll just have to see how that market plays out.

About where the market is on <unk>.

On floater term fixtures, some a little bit longer including in Brazil stretching out to three and four years, but it may be a combination of taking some short term work to bridge to the right long term opportunity. Obviously, we would prefer to just roll into the next long term opportunity, but we're just gonna have to see how that plays out but there's definitely.

Definitely interest there they're attractive rigs they are a great operational track record.

As you have them like them and we will step to see how that market plays out.

Greg Lewis: Okay, great.

Okay, Great and then.

Darin Gibbins: I would add.

Greg Lewis: Okay, go ahead.

Darin Gibbins: Greg, I would just quickly, I would add, you know, we have started disclosing options in the fleet status report, so you can see both DS-10 and DS-15 do have options.

Okay, Greg I would just quickly I would add we have started disclosing options in the fleet status report. So you can see both D. S 10, India <unk> do have do have options.

Greg Lewis: Okay. Then the other question I wanted to ask you is, you touched on it around reactivations. You know, I guess lead times are upwards of 12 months, and so I mean, I guess at this point, that almost is pushing reactivations out into 2024. You know, I guess my question is, have conversations started yet, you know, whether it's Valaris or, I know that people talk across the industry.

Okay and then the other question I wanted to ask is and you touched on it around reactivation.

Lead times are upwards of 12 months.

So I mean I guess at this point that almost is pushing reactivation is out into 2024.

I guess my question is how have conversations.

Have conversations started yet.

Whether it's <unk> or I know that I know that people talk across the industry or are we starting to see are there starting to be conversations from rig off from customers about potentially.

Greg Lewis: Are we starting to see conversations from rig operators, from customers about potentially, you know, doing those long-term contracts for work in 2024 and beyond, that could actually see announcements of reactivations here over the next couple quarters, or are we still kind of in early days on reactivations of rigs?

Yes.

Doing those long term contracts for work in 'twenty four and beyond.

That could actually see announcements of reactivation here over the next couple of quarters or are we still kind of in early days.

On reactivation of rigs.

Anton Dibowitz: No, I would say that, you know, we're having discussions about term contracts that include reactivation. Just for perspective, when we reactivated the 4 major reactivations last year, we were planning on the order of 9 months for those reactivations. You know, as I said in my remarks, very proud of the team for actually delivering on time and on budget on, you know, overall on those projects, because this is an industry that's replete with horror stories when it comes to reactivating rigs. There's one thing this organization does extremely well is deliver rigs and operational prowess to deliver those rigs back to the market. Right now, we're planning on about 12 months. That's what we're planning on for the DS-17, given longer lead times, supply chain challenges.

No I would say that we're having discussions about term contracts that include reactivation.

Perspective, when we reactivated the four major reactivation.

Last year, we were planning on the order of nine months, while those reactivation.

And as I said in my prepared remarks, very proud of the team for actually delivering.

On time and on budget on overall on those projects. Because this is an industry. That's that's replete with horror stories when it comes to reactivate and Greg's was one thing. This organization does extremely well as is deliver rigs and operational prowess to deliver those rigs back to the market right now we're planning on about 12 months. So that's what we're planning on for the D. S.

17, given longer lead times and supply chain challenges.

Anton Dibowitz: The opportunities that we're having discussions with customers, obviously, as you said, we have some short-term rigs rolling off, you know, during 2023, and we're looking at those. A number of the opportunities that we're bidding and tendering are, you know, all the way through 2023. For example, if you look at where the Petrobras tenders are, and there are a number of opportunities that people are already talking about for late 2023 and moving into 2024. There's a range, and I think our customers are well aware of, you know, from our discussions with them with the lead times that it is gonna take to bring additional capacity back to market, and they're planning accordingly.

The opportunities that we're having discussions with customers. Obviously as you said, we have some short term rigs rolling off.

During during 'twenty, three and we're looking at those but a number of the opportunities we're bidding in tendering or all the way through 'twenty. Three for example, if you look at where the Petrobras tenders are and there are a number of opportunities that people are already talking about the late 'twenty three and moving into 'twenty four so there's a range and I think our customers are well aware of.

From our discussions with them with the lead times that it's going to take to bring additional capacity off the market and there they are planning accordingly.

Greg Lewis: Okay, super helpful. Thank you very much.

Okay Super helpful. Thank you very much.

Anton Dibowitz: Sure. Thanks, Greg.

Thanks, Greg.

Operator: Our next question will come from Fredrik Stene with Clarksons Platou Securities. Please go ahead.

And our next question will come from Fredrikstad with Clarksons Plateau Securities. Please go ahead.

Fredrik Stene: Hey, guys, and congratulations on another quarter. Hope you've had a nice summer as well. My question relates to how we should think about your remaining stacked assets and also the two new builds that you have at the yard. I think maybe even more so if this is something that should be viewed in conjunction with what's going on in Brazil right now. Obviously, your comment is quite forward-looking in terms of how that region is going to contribute to demand going forward. I was wondering if you, call it, had any preferences around how you would bid in these stacked assets and are you already looking at opportunities for those two rigs at yard?

Hey, guys. Congratulations on another quarter of you've had a nice summer as well.

So.

My question relates to or how we should think about your remaining stacked assets and also the two new builds that you have at yard and I think maybe even more so it is something that should be viewed in conjunction with what's going on in Brazil right. Now obviously your comments it is quite.

Forward, leading in terms of how.

Region is going to contribute to demand going forward.

So I was wondering if you.

Call It had any preferences around how you would bid in this deck assets and.

Are you already looking at opportunities for those two rigs at yard. If you are do you have any idea of how long it would take them to get them colleague ready to drill before there are after they are delivered and do you have any flexibility on that delivery date et cetera anything that you could just kind of give me on that front would be super.

Fredrik Stene: If you are, do you have any idea of how long it would take them to get them, call it, ready to drill, before they're or after they're delivered? Do you have any flexibility on that delivery date, et cetera? Anything that you could kind of give me on that front would be super helpful.

Very helpful.

Anton Dibowitz: Sure, Fredrik. Thanks for the question. Look, let me take a step back for a second. Look, our priority is always to make sure that we have a high degree of utilization on the active fleet, to the question we just had, which is making sure we don't have significant gaps or trying our best to make sure we don't have significant gaps on rigs that are active on water on the fleet and to roll those first. You know, after that, we start looking at the stacked rigs, which we've demonstrated ability to bring back to market. DS-7, DS-8, DS-11, and looking for work for those, and I'd say that DS-13 and DS-14, as new builds come after that.

Sure perfect.

Thanks for the question.

Let me, let me take a take a step back for a second look our priority is always to make sure that we have a high degree of utilization on the active fleet.

So the question, we've just had which is making sure. We don't have significant gaps. So trying up estimate sure. We don't have significant gaps in rigs that are active on water on the fleet and to roll. Those first after that we start looking at at the stacked rigs, which we've demonstrated ability to bring back to market. So yes, seven DSA DSA 11.

And looking for work for those and I would say that DS 13, and DS 14.

As new builds come out to that we have until the end of 2023 in order to make those decisions I think in order of timing you are looking.

Anton Dibowitz: We have until the end of 2023 in order to make those decisions. I think in order of timing, you're looking, you know, on par with a reactivation of a cold stacked rig to bring that rig back to market. There have been some discussions with customers. You know, some customers would like to take out a new build or have some very specific contracts or technical requirements. But, you know, as far as we look through our priority list, it's about being disciplined about when we take rigs out, when new opportunities, making sure that they're attractive opportunities and generate significant cash. It does start with rolling the active fleet and going to the attractive, you know, stacked rigs and then looking at the new build options.

On par with a reactivation of a cold stacked rig to bring that rig back to market. There have been some discussions with customers. Some customers would like to take out of new builds will have some very specific.

Contract with technical requirements, but as far as all as we look through our priority list. It's it's about being disciplined about when we take rigs out when you're opportunities, making sure that they're attractive opportunities and generate significant cash and it does start with rolling the active fleet and go into the attractive kind of stacked rigs and I'm looking at.

The Newbuild options, you know that being said.

Anton Dibowitz: You know, that being said, you know, just north of $119 million to DS-13 is certainly, you know, a remaining purchase price that you would say was in the money, and likely you could look at DS-14 the same way. Everything else being equal, those are probably, you know, later downstream for us.

North of $119 million the DSO Athene is certainly.

Remaining purchase price that you would say it was in the money and likely you can look at <unk>, the same way, but everything else being equal those those all probably later on on the stream for us.

Fredrik Stene: Thank you. I had a bit of trouble with the line. I'm not sure if that's on my side or not. You were a bit choppy, but I'll see if the US line maybe work better on the transcript there. If not, we can just revert back later, so I get the full story.

Thank you I had.

Seem to be a bit troubled with a line I'm not sure any thoughts on my side.

So you were a bit.

Choppy, but oh I'll see if the the U S line, maybe work better on the transcript there and if not we can just.

We've worked.

Later, so I can get the full story.

Anton Dibowitz: Sure. Well, happy to follow up offline.

Happy to happy to follow up offline.

Fredrik Stene: Yeah. Thanks.

Yes.

Thanks.

Okay.

Anton Dibowitz: Thanks, Fredrik.

Thanks Robert.

Operator: Our next question will come from David Smith with Pickering Energy Partners. Please go ahead.

And our next question will come from David Smith, with Pickering Energy Partners. Please go ahead.

David Smith: Good morning. Thank you for taking my questions.

Well good morning, Thank you for taking my questions.

Anton Dibowitz: David.

Good.

David Smith: So-

Anton Dibowitz: Morning, David.

Morning, David.

David Smith: Seeing something on the floater side, it feels like we haven't seen in a while, which is, you know, longer contract terms at higher and higher leading edge day rates. It seems clear that there is more demand for deepwater turn from operators. I'm curious, from what you're seeing, if that's a greater mix of demand for multi-well development programs, or is it a shift where, you know, turn demand is coming more from operators that, you know, they're seeing forward availability shrink, and they're locking in rigs to ensure, you know, that they have the availability to execute plans for 2023 and 2024?

On the floater side it feels like we havent seen in a while which is.

Longer contract terms at higher and higher leading edge day rates.

It seems clear that there there is more.

Demand for deepwater churn from operators.

Curious from what Youre, saying.

Mix of demand for multi well development programs.

This shift where demand is coming more from operators that.

They're seeing port availability shrink.

They're locking in rigs to ensure that they have the availability to execute plans for 'twenty three and 'twenty four.

Anton Dibowitz: That's a good question, David. I think what we have seen is, you know, there is an increasing activity level. You know, there is a tender pipeline. But what we have not seen is overall a significant increase in contract durations. I think everybody, you know, including on the customer side, has been quite thoughtful about, you know, making long-term commitments, although they have work and they see it in their pipeline. Other than the Petrobras tender that's out right now, one of the longest for four-year contracts is about the longest contract terms we've seen, you know, really that folks are looking for.

Good question Guy, but I think what we have seen is.

There is an increasing activity level that you know there is a.

A tender pipeline, but what we have not seen is overall a significant increase in contract durations I think everybody.

Including on the customer side has been quite thoughtful about making long term commitments although they.

Have work and they see it in their pipelines. So we other than so the Petrobras tenders thats out right now one of the losses for four year contracts is about.

The.

The longest contract terms we've seen.

Really that folks are looking for but.

Anton Dibowitz: You know, even on you know, kind of step up developments and those development programs, you know, deep water, you know, ultra-deep rigs are more in the order of two years plus options or, you know, three years. So I think that's fairly indicative of where the market is, and we haven't reached a place in the market where folks are securing beyond that in order to lock down their rigs. I think part of that's because there are still some attractive, including our stacked rigs that are available and can be brought back to the market. I think part of it is also after, you know, let's say a very difficult seven years, people being a little more cautious about making very long-term commitments on rig programs.

Even on on kind of step up developments and those development programs.

Deepwater ultra deep rigs are are more in the order of two years plus options or <unk>.

Three years.

That's fairly indicative of where the market is and we havent reached the place in the market, where where folks are securing beyond that in order to lock down locked down their rigs and I think part of that.

Because they are still some attractive including our stacked rigs that are available and can be brought back to the market and I think part of it is also after.

It's let's say very difficult seven years people being being a little more cautious about making very long term commitments on rig programs.

Anton Dibowitz: That doesn't take away from the fundamentals and the overall strength that we see in the market. You know, I was looking at some data this morning, for example, about, you know, the mix between exploration and development. If you talk about an order of, you know, round numbers, 90 ultra-deepwater floaters are in the market. About 30 of those are working on exploration programs. Now, they're not all rank exploration by this data, and some of them are step outs, but the fact that exploration is happening is another good sign for us in the market.

That doesn't take away from that from the fundamentals and the overall strength that we see in the market.

Looking at some data. This morning for example, about the mix between exploration and development and if you talk about an order of round numbers 90, ultra deepwater floaters are in the market about 30 of those are working on exploration programs now they're not all rank exploration.

This data and some of them are step outs.

With that exploration is happening is another good sign for us in the market, but but yes, you're very correct in Europe Sabbatian that the your overall contract terms are are lengthened durations are not where they were at the height of the last market cycles.

Anton Dibowitz: Yes, you're very correct in your observation that the overall contract terms are length and durations are not where they were at the height of kind of the last market cycles. We're still getting into a developing growing market, so let's see how that plays out.

We're still getting into developing growing market. So, let's see how that plays out.

David Smith: Yeah. Appreciate it. The follow-up is, you know, in the past, when we've seen visible demand grow while forward availability shrinks, we tend to see more demand come through direct negotiations versus the tender process. I'm curious about what you're seeing in the mix of your conversations, you know, if it's predominantly been, you know, tenders or if you're seeing a greater mix of, you know, direct negotiations.

Yeah, I appreciate it and a follow up as you know in the past.

We've seen visible demand grow while Florida availability shrinks.

Tend to see more demand come through direct negotiations there since the tender process.

I'm curious about what youre seeing in the mix of your conversations.

Eminently bidding tenders or if youre seeing a greater mix of.

Direct negotiations.

Anton Dibowitz: There's definitely been more discussion in and around tenders about, you know, direct negotiations. I think there's also a geographic component to it, and I think we did make some statements in the prepared remarks. In more regulated environments, for example, in Brazil and especially, you know, West Africa, if you look at Angola, Nigeria, you know, the tender processes are required. When you look at the Gulf of Mexico, there's much shorter term visibility just because direct negotiations are much more prevalent. You don't have the same regulatory environment. It is somewhere, as we said, where we can see, you know, while in discussions you can see the additional demand and folks have a need for the rigs, you may see additional demand and more direct negotiations.

There's definitely be more more discussion in and around tenders about <unk>.

Direct negotiations I think there's also a geographic component to it and I think we did make some statements in the prepared remarks so.

More regulated environments for example, in Brazil, and especially West Africa, If you look at Angola and Nigeria.

The tender processes are required.

When you look at the Gulf of Mexico.

There's much shorter term visibility just because direct negotiations are much more much more prevalent you don't have the same regulatory environment. So it is somewhere as we said where we can see.

While in discussions you can see the additional demand and folks have a need for the rigs you may see additional demand and more direct negotiations historically they have been and they will be more direct negotiations. So I think there's a real geographic component as well do it.

Anton Dibowitz: Historically, they have been, and they will be more direct negotiations. I think there's a real geographic component as well to it.

David Smith: For sure. Appreciate it. I'll circle back in the queue.

I appreciate it I'll circle back in the queue.

Anton Dibowitz: Okay.

Okay.

David Smith: Thanks.

Thanks.

Operator: There are no further questions at this time, so this will conclude the question and answer session. I'd like to turn the conference back over to Tim Richardson for any closing remarks.

And there are no further questions at this time. So this will conclude the question and answer session I would like to turn the conference back over to Tim Richardson for any closing remarks.

Anton Dibowitz: Thanks, Cole, 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 Q3 results. Have a good day.

Tim Richardson: Thanks, Cole, 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 Q3 results. Have a good day.

Thanks, Cole and thank you to everyone on the call your interest in <unk>, we look forward to speaking with you again, when we report our third quarter results have a good day.

Operator: Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

And ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

Yeah.

[music].

Yes.

[music].

Yeah.

[music].

Q2 2022 Valaris Limited Earnings Call

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