Q4 2022 Valaris Ltd Earnings Call
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Good day and welcome to <unk> fourth quarter 2022 results conference call.
All participants will be in listen only mode.
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After today's presentation there'll be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Danny Gibbons, Vice President of Investor Relations and Treasurer. Please go ahead.
Everyone to the Valores fourth quarter 2022 conference call with me today are president and CEO Anton Davitt.
Senior Vice President and C CEO , Matt line and other members of our executive management team.
We issued our press release, which is available on our website at Dolores dotcom.
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 S. T SEC filings on our website that define forward looking statements unless 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, this morning, we issued our most recent fleet status report, which provides details on contracts across our rig fleet and updated investor presentation, and Aero drilling presentation will be available on our website. After the call now I'll turn the call over to Anton Debits, President and CEO .
Thanks, Darren and good morning, and afternoon to everyone.
During today's call I'll start by providing an overview of our performance during the quarter.
I'll then provide commentary on the outlook for the offshore drilling market highlights. Some 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 Chris to discuss our financial results and guidance.
To start by acknowledging the focus and efforts of the entire Polaris team, which resulted in us continuing to deliver excellent operational performance achieving revenue efficiency of 98% in the fourth quarter and 97% for full year 2022.
This is commendable performance given we reactivated four floaters during the year. These.
These projects were quite a significant amount of internal resources and attention and we're extremely pleased to have maintained high levels of operational performance at our COO.
Customers expect from us under these circumstances.
The safety of our offshore crews and onshore personnel is at the core of what we do as an organization and we achieved some notable milestones during the quarter, including several rigs, reaching two years and I'll Broussard warehouse, achieving six years without a recordable incident.
These achievements are the results of our highly skilled and dedicated workforce. We believe that our people are the most important element about success and we recognize that a motivated engaged and diverse workforce is essential to delivering high performance.
As a result, we continue to invest in our people both onshore and offshore.
Bold leadership training for offshore Supervisors was attended by approximately 650 personnel in 2022.
We also recently completed two pilot workshops for our new onshore leadership program and we will be holding more of these courses in 2023 to develop senior leadership throughout the organization.
Development of our people is just one element of our ESG program.
We are committed to making progress on our sustainability journey and we have a strong framework in place to advance our efforts.
Our sustainability program is primarily focused on reducing emissions from our own operations and partnering with our customers on their ESG efforts.
We have already implemented several solutions on board our rigs to help lower emissions such as engine optimization and SCR systems, and we will continue to make targeted investments in our fleet, where it makes economic sense to do so.
During the fourth quarter, we issued our latest annual sustainability report, which was prepared in accordance with the sustainability accounting standards Board and we will be further enhancing our disclosures in the 2020 to report.
Following the released about 2021 sustainability report.
S. G rating was upgraded by both M. S C I and sustain the Lititz two of the leading ESG rating agencies.
As a result, we now have the highest ESG rating amongst offshore drillers with both MSCI and sustained Olympics.
Moving to our financial performance for the quarter.
We generated adjusted EBITDA of $54 million and adjusted EBITDAR, adding back one time reactivation costs of $75 million.
Adjusted EBITDA and EBITDAR were in line with and higher than our prior guidance, respectively, but were lower than the third quarter, primarily due to the ongoing weakness in the harsh environment jackup market, which I'll discuss in more detail in a moment.
During 2022 we successfully executed four major floater reactivation.
All four rigs returning to work largely on time and on budget.
We are currently reactivating Polaris Dia 17 for a contract with Ecuador offshore Brazil. Starting later this year and we're in advanced discussions regarding a further close ship reactivation for a multi year project expected to commence within the next 12 months.
The reactivation of Valores, Dia 17, and any additional reactivation will impact our financial results and cash flow in 2023, as we spend money to return rigs to the active fleet. However.
However, based on our contract profile, we believe that 'twenty 'twenty four will represent an inflection point for earnings with at least three drillships expected to complete legacy contracts and be available for re contracting at market rates, along with meaningful contributions from Dia 17, and any additional rigs that we begin to reactivate in 'twenty.
23.
We are optimistic about these repricing opportunities because the fundamental outlook for our industry remains constructive.
Despite the macroeconomic uncertainty.
Demand for hydrocarbons continues to increase the IEA forecast that oil and gas demand will increase by one 9 million barrels per day to approximately 102 million barrels per day in 2023 with nearly half the expected gain attributed to increased demand from China. Following the lifting of Covid restrictions.
Meanwhile, die a forecast supply growth to slow to 1 million barrels per day as compared to $4 7 million barrels per day in 2022 in part due to expected declines in output from Russia.
A lack of investment in new sources of production over the past several years has contributed to a tight supply picture while events over the past 12 months have brought the topic of energy security to the fore and highlighted the importance of oil and gas in meeting the world's need for secure and affordable energy.
A significant increase in investment will be required to rebuild global supplies with offshore production expected to continue playing an important role due to the scale provided by offshore reserves attractive breakeven prices for most offshore projects and lower carbon intensity as compared to onshore oil and gas extraction.
We believe that these factors along with a significant reduction in the global rig fleet, especially floaters over the past several years lay the foundation for sustained industry up cycle in which Valero is poised to thrive.
Commodity prices remain at levels that are highly supportive of continued investment in offshore oil and gas projects.
According to S&P global offshore exploration and production spending is expected to increase by 14% in 2023.
Following an estimated 18% increase in 2022.
In addition, offshore project approvals in 'twenty, 'twenty, three and 'twenty 'twenty four I expect it to be at their highest levels in more than a decade, which should help drive capital expenditures for several years to come.
The constructive macro environment and increased upstream spending have led to increases in contracting and tendering activity across both floaters and jackups.
The number of contracted benign environment floaters has steadily increased from the lows in late 'twenty 'twenty and early 2021 and is nearly returned to pre COVID-19 levels.
Active utilization for Drillships is currently above 90% and has been above 85% for more than 12 months, which has led to meaningful improvements in day rates with leading edge day rates now pushing in the low to mid 400 thousands.
As of the end of 2022 rig years of open demand at tender pretend to stage four benign floaters were 14% higher than 12 months ago, and we continue to see new opportunities coming to market, particularly offshore Brazil.
Building on last year's eight rig tender Petrobras has been actively seeking rigs sports B M. S 11 enthusiasts fields and recently launched a new tender for up to four floaters on long term contracts commencing in 2024.
This is in keeping with reports that Brazil is 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.
We continue to see a mix of short term exploration that longer term development programs offshore West Africa, including in Namibia, which was estimated to have the world's largest offshore discovery in 2022.
The potential for this market is highlighted by the fact that one major IOC recently announced that 50% of the 20th twenty-three exploration budget is allocated to Namibia alone.
New discoveries along with a pickup in activity in other parts of West Africa could lead to increased rig demand for the Florida market going forward.
We have a strong footprint in the region and were recently awarded a 330 day extension with shell for Drillship Polaris T. S 10, which will keep the rig working through March 'twenty 'twenty, four and as the final priced option under the rigs current contract.
We're also in discussions to fill some of the available time in 'twenty twenty-three for Polaris T is 12.
We also see opportunities in the Gulf of Mexico, both on the U S and Mexican sides.
On the Jackup side of the business. The number of contracted Jackups has increased by more than 15% from lows in early 2021 and are at their highest level since mid 2015.
Most of this increase occurred over the past 12 months, primarily driven by demand from the middle East.
As a result active utilization for Jackups is above 90% and day rates continue to trend upwards as demonstrated by our most recent contract awards at $125000 per day or higher for work offshore Australia in Trinidad.
The outlook for Jackups continues to be constructive with rig years of open demand at tinder and pre tender stage, 20% higher at year end as compared to 12 months ago.
While the benign environment Jackup market has improved meaningfully over the past 12 months, the timing and pace of a recovery in the harsh environment Jackup market is uncertain.
As highlighted on our third quarter call, we do not expect opportunities to materialize in Norway until 'twenty 'twenty four.
In addition, the outlook for the rest of the North Sea has softened as we are now also seeing more projects delayed in the U K with customer, citing the uncertainty created by changes to fiscal policy related to windfall taxes.
Our three Keppel Fels N class rigs, which are capable of operating in Norway are all now located in the U K with only the Valero, Norway, partially contracted for the year ahead.
The Stavanger is currently undergoing a special periodic survey and we are actively marketing both the Stavanger and the Norway for projects in the North sea as well as further afield.
We do not see sufficient prospects over the next 12 to 18 months to keep all three of these rigs working and as a result, we're preservation stacking the Viking and done D to reduce costs, while the rig is idle.
This uncertainty is expected to have a negative impact on our business in 2023, particularly in the first half.
Based on customer discussions, we expect the market outside of Norway to begin improving in the second half of the year, although most of the opportunities. We see at present are short term in nature.
Moreover, given the role that hydrocarbon should play in ensuring European countries energy security, we expect that demand offshore, Norway. The U K and other sectors of the North Sea will improve in 'twenty 'twenty, four and create a more balanced harsh environment jackup market in future years.
Against this backdrop of a broadly constructive market environment and renewed optimism within our sector I'd like to spend a few moments discussing our fleet strategy as we navigate the unfolding industry up cycle.
We continue to employ a disciplined fleet management strategy with a focus on driving long term shareholder value.
Our priority is to ensure that the active fleet remains highly utilized while having a large fleet means that we can pursue a portfolio approach to contracting with a mix of longer and shorter duration contracts ideally with staggered rollovers.
We also continue to regularly assess our fleet for retirements and divestiture candidates.
As part of our fleet strategy, we aim to have a critical mass of rigs and priority basins to benefit from economies of scale.
Following the reactivation of hilarious Th 17, we will have three floaters operating at each point of the Golden triangle.
Our other two drillships in Brazil for Laurence D. S. Four and D. S. 15 are both expected to finish their current contracts in mid 'twenty, 'twenty, four leaving them well positioned to roll onto a higher day rate contracts in a region, where we expect to see continued growth.
We have proven our ability to win work for and reactivate a preservation stacked assets and we see attractive opportunities to commence reactivation of additional drillships in 2020 three.
We will remain disciplined and exercising our operational leverage by only returning additional stacked rigs to the active fleet for opportunities that provide meaningful returns over the initial contract.
Given the opportunities we see in the market today, we believe that investing enough fleet by reactivating our high specification stacked drillships is an attractive use of our available cash as we expect that these investments would generate significant returns for our shareholders. In addition to our stacked fleet, we have options to take delivery of Newbuild.
Dolores T. S 13, MTS 14th by year end 2023 for a shipyard price of approximately 119 and $218 million respectively.
Celerity is 13 is attractively priced compared to recent market transactions for similar assets. While he has 14 is in line with recent transactions.
Both drillships are amongst the highest specification assets in the global fleet and have to be Oh piece, which remains a preference for customers globally.
We will continue to evaluate our options regarding these rigs as we see the market evolve over the course of the year.
The pool of available supply shrinking as stacked rigs are absorbed into the active fleet when supported by demand.
Following the recent announcement by our competitor to utilize one of their stack drillships were non drilling activities, we count only 14 competitive drillships remaining on the sidelines 13 of which are owned by the Laris in two other major drilling contractors.
We believe that our demonstrated track record of successfully reactivating rigs leaves Valero is well positioned to benefit when the right opportunities present themselves.
There are a further eight newbuild drillships remaining at South Korean shipyards, including Polaris T. S 13, MTS 14th.
We expect these rigs to come to market in a staged manner when demand supports incremental supply and likely only if these rigs are in the hands of established international drilling contractors.
Importantly, we currently believe that it is unlikely that we will see another floater newbuild cycle, given high build costs long lead times and limited shipyard availability. Therefore.
Therefore, we anticipate that the current rig fleet will form the basis of supply for the foreseeable future a large portion of demand growth in the jackup market over the past 12 months has been driven by the middle East, particularly Saudi Arabia.
Valero has significant exposure to this market through Aro drilling our unconsolidated 50, 50 joint venture with Saudi Aramco.
In Aero was recently awarded multiyear contracts with Aramco for Larry 76, and one O eight which will be leased to arrow following completion of their existing contracts.
2023 is expected to be an important year in the growth of arrow with two newbuild rigs due to be delivered.
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 with pricing set every three years utilizing our market pricing mechanism.
We see significant appetite in the local market for financing the new builds and we expect funding to be secured prior to delivery.
Importantly, we do not expect that Polaris order remco will need to provide any additional financing to arrow to fund our Newbuild program. Furthermore, there was significant investor interest in the middle East for drilling businesses.
Last year, our local driller with both onshore and offshore rigs successfully completed its IPO raising more than $700 million and a substantially oversubscribed offering at an attractive valuation.
We remain focused on highlighting what we believe is the significant value inherent to narrow and recent asset transactions in ipos in the region helped to support this view.
I will conclude by reiterating some of the key points from my prepared remarks.
First we continued to deliver excellent operational performance as demonstrated by achieving 98% revenue efficiency in the fourth quarter and 97% for 2022.
Second the fundamental outlook for our industry remains highly constructive with offshore exploration and production spending expected to increase over the next several years, which is anticipated to drive increased demand for our services.
And third we will continue to exercise our operational leverage in a disciplined manner by returning a high quality stack rigs to the active fleet for opportunities that will generate meaningful returns.
We see attractive opportunities to commence reactivation of additional drillships and 2023, including one for which we are in advanced discussions.
In summary, we will continue executing our focused value driven and responsible strategy and we believe that our strategy will drive meaningful earnings and free cash flow during the unfolding industry up cycle.
I'll now hand, the call over to Chris to take you through the financials.
Thanks, Anton and good morning, and afternoon, everyone. In my prepared remarks today I will provide an overview of fourth quarter results as well as guidance for the first quarter and full year 2023.
In addition, I will briefly review, our financial position and capital structure.
I will also highlight our fourth quarter results press release, which includes our trailing five quarter results as well as various supplemental data in our latest fleet status report that we published this morning, moving now to the fourth quarter results.
Adjusted EBITDA was $54 million compared to $76 million in the prior quarter and adjusted EBITDAR, adding back one time reactivation costs with $75 million compared to $94 million in the prior quarter revenues were $434 million compared to $437 million.
In the prior quarter.
Excluding reimbursable items revenues decreased to $413 million from $416 million, primarily due to lower utilization and lower average day rates for the harsh environment Jackup fleet for PAH.
Largely offset by an increase in utilization for the floater fleet Jakob revenues decreased primarily due to the Laris dovey enger, completing its contract offshore, Norway and idle time between contracts for Valero is 123, $1 44 and $1 15.
This was partially offset by more operating days for Valero is 118 and ninety-two following their contract startup and a special periodic survey respectively. Floater revenues increased primarily due to higher revenue efficiency across the floater fleet and a full quarter of revenues for Valero D. S. Four and D S nine which commenced contra.
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Contract drilling expense was $353 million compared to $337 million in the prior quarter.
Excluding reimbursable items contract drilling expense increased to $333 million from $316 million, primarily due to an increase in operating days for the floater fleet, which have a higher per day operating cost as well as higher reactivation costs, which increased to $21 million from 18 million.
Moving to our shore based costs Jim.
General and administrative expense increased to $24 million from $19 million in the prior quarter, primarily due to higher personnel costs and professional fees.
Onshore support costs, which are included within contract drilling expense in the income statement.
<unk> increased to $33 million from $30 million, primarily due to higher personnel costs.
The sum of these two items provides our total onshore support costs, which increased to $57 million from $49 million in the prior quarter.
Depreciation expense increased marginally to $24 million from $23 million in the prior quarter.
Other expense was less than $1 million compared to other income of $30 million in the third quarter 2022.
Other expense in the fourth quarter included foreign currency exchange losses, primarily related to revaluation of balance sheet accounts of $13 million as compared to gains of $10 million in the third quarter third quarter. Other income also included noncash interest income of $15 million related to the write off.
<unk> of the discount attributable to the $40 million of shareholder notes receivable repaid by Arrow.
These items were partially offset by higher cash interest income and a small gain on sale associated with the rigs sold in a prior year.
Tax expense was $10 million compared to $14 million in the prior quarter.
Adjusted for discrete items tax expense increased to $13 million from $12 million.
Moving now to our first quarter 2023 outlook.
We expect total revenues will be in the range of $410 million to $420 million as compared to $434 million in the fourth quarter.
Revenues are expected to decrease primarily due to lower activity for harsh environment Jackups in the north sea in.
And planned out of service days for floaters, completing contract specific requirements N V O P recertification.
Regarding the North Sea, we expect five rigs to be idle for at least part of the first quarter.
The Polaris day Vangorden Viking have both been moved to the U K from Norway. Following completion of contracts in November and January respectively.
The Savannah is currently undergoing a special periodic survey in Dundee and is actively being marketed for work.
Given the uncertain near term outlook in Norway, and the rest of the North Sea. Our expectation is that the Valero Viking will be idle for at least 12 months and therefore, we are preservation stacking the rig in Dundee to reduce costs, while the rig is idle.
In addition, the Valero, Norway was idle for the first half of the quarter before it recently started its contract with Centrica.
Finally, flares 121, and 247 are undergoing special periodic survey work during the first quarter in advance of their next contracts.
We anticipate that contract drilling expense will be in the range of $380 million to $390 million as compared to $353 million in the fourth quarter.
The increase was primarily driven by three items.
First higher repair and maintenance costs as we expect to have four jackups undergoing special periodic survey projects in the first quarter.
As a point of comparison, we effectively had just one jackup undergo a special periodic survey during the fourth quarter.
Second higher offshore compensation costs, driven by wage adjustments that were implemented earlier this year.
And third higher reactivation costs, primarily due to the continued reactivation efforts on Polaris Dia 17 in advance of its contract commencement later this year.
Reactivation costs in the first quarter are expected to be approximately $25 million versus $21 million in the fourth quarter.
General and administrative expense is expected to increase to $25 million to $27 million from $24 million in the prior quarter, primarily due to higher professional fees and higher compensation costs.
Adjusted EBITDA is expected to range from breakeven to positive $5 million compared to $54 million in the fourth quarter and adjusted EBITDAR is expected to be $25 million to $30 million compared to $75 million in the fourth quarter.
I will now provide preliminary financial guidance for full year 2023.
Consistent with our past practice this guidance does not account for any incremental reactivation for contracts that have yet to be executed.
Therefore, it does not assume any additional contracted reactivation other than the completion of the Dia 17 project.
Based on reactivation lead times of approximately 12 months for floaters, if we were to reactivate additional drillships in 2023, it would have a negative impact on EBITDA and Capex, but would increase expected earnings and cash flow in future years too.
2023 revenues are expected to be 1.8 to 1.9 billion up from $1 6 billion in 2022.
We anticipate that revenues will increase primarily due to higher average day rates.
Soliris D. S 17 commencing its contract later this year following its reactivation and the full year impact of four floaters that were reactivated during 2022.
This was partially offset by lower utilization for harsh environment Jackups in the North Sea.
Contract drilling expense is anticipated to be $1.43 billion to $1.53 billion as compared to $1.38 billion in 2022.
This year on year increase is primarily due to more operating days for the floater fleet, resulting from a full year impact of 2022 reactivation and a partial year of D. S 17 operations.
Following the expected completion of its reactivation project mid year.
Higher compensation costs for offshore crews and associated support personnel and.
And higher planned repair and maintenance costs, driven by six special periodic survey projects for Jackups.
This is two times the number of projects completed in 2022.
Of the six projects planned in 2023 five are scheduled to occur in the first half of the year with four occurring in the first quarter and one in the second quarter.
The projects are frontloaded in the year in order to take advantage of idle time between contracts and due to class requirements and they will have an outsized cost impact on the first half of year financial results, especially the first quarter.
These increased costs versus the prior year are partially offset by lower reactivation spend resulting from fewer rigs returning to the active fleet in 2023 compared to last year moving to G&A expense, we expect $105 million to $110 million of costs for the year up from $81 million in 2022.
This increase is mainly due to the company transitioning into a more normal level of G&A costs as we build our corporate infrastructure. Following our re listing in May 2021.
In 2023, we will have a full year of a complete executive management team and an additional year of long term incentive plan awards that are granted annually.
Since these awards vest over three years. This component of compensation costs is expected to reach full run rate in the second half of 2023.
In addition, G&A will be impacted by a full year of our new sustainability and new energy function.
Higher compensation costs as we have reinstated some employee benefits that were eliminated in the last downturn and higher professional fees.
When combined with $135 million to $140 million of support costs included within contract drilling expense. This provides total onshore support costs of $240 million to $250 million.
So some of these items provides adjusted EBITDA of $240 million to $280 million and adjusted EBITDAR, which add backs onetime reactivation costs of $280 million to $320 million.
We expect first quarter EBITDA will be the low point for the year and for EBITDA to increase sequentially each quarter thereafter, with approximately 80% of 2023 EBITDA generated in the second half of the year.
Second quarter, EBITDA should improve relative to the first quarter as jackup rigs begin returning to work following their surveys or other idle periods floater utilization improved due to lower out of service days and reactivation expense moved lower as the Dia 17 project nears completion and.
In the second half of the year, we expect EBITDA to move materially higher as the D. S 17 starts its contract with <unk> in Brazil.
[noise] rigs complete legacy contracts enrolled higher day rates.
Utilization for our North Sea Jackups improves.
And we execute just one special periodic survey project versus five in the first half of the year.
Moving now to capital expenditures fourth quarter Capex of $53 million was in line with the prior quarter.
Fourth quarter Capex included $20 million for maintenance, Capex and $33 million for enhancements and upgrades primarily for reactivation contract specific upgrades on our reactivated rigs.
And steel replacement for the Valero is 92.
Full year 2023 capital expenditures are anticipated to be $260 million to $300 million compared to $207 million in 2022.
Maintenance Capex is expected to be $120 million to $130 million versus $69 million in 2022.
This increase is primarily due to an increase in the number of B O P re certifications and overhaul cost for drilling and well control equipment due to more floaters working during the year.
Plus an increase in the number of Jackup special periodic surveys that I mentioned earlier.
We are also restocking capital spares following several floater reactivation they have depleted our levels of long lead equipment.
Enhancement and upgrade spend is expected to be approximately $140 million to $170 million, including approximately $80 million to $90 million of reactivation and associated contract specific capex.
Primarily related to Valero Dia 17.
The remaining enhancement and upgrade costs in 2023 are largely related to life and he has to work for Valero 72 before continuing its contract with Eni.
Well control and drilling equipment upgrades on Valero 76 ahead of its five year bareboat charter with Arrow and the purchase of an M. P D kit.
We expect to receive customer reimbursements for capital expenditures of approximately $27 million in 2023 related to customer specific upgrades on Valera Dia 17.
This represents the second customer reimbursement for capital expenditures on this project as we previously received $27 million at the end of last year.
This capex guidance does not include any assumed expenditures for exercising our options to purchase Drillships Valero <unk> DS 13, and DS 14.
As a reminder, we have the option to purchase theory, these rigs for $119 million and $218 million, respectively through the end of 2023.
Given recent drillship contract economics, and COO comparable asset transactions D. S. 13 is a very attractive option and D. S. 14 is priced in line with recent transactions for comparable assets.
First quarter Capex is expected to be $65 million to $75 million comprised of $25 million to $30 million for maintenance, capex and $40 million to $45 million for enhancements and upgrades, including $25 million to $30 million of reactivation and associated contract specific capex primarily related to the <unk>.
Harris Dia 17.
The remaining spend on enhancements and upgrades is primarily related to contract preparation costs for Polaris 115 in advance of the rig commencing a multi year contract with shell in Brunei as well as the Valero is 72 life enhancement work.
Now I'll move to the fourth quarter results as well as the first quarter and full year 2023 outlook for Aero drilling our 50 50 joint venture with Saudi Aramco.
As a reminder, arrow is not consolidated in the financial results of Valero.
<unk> EBITDA increased to $29 million from $17 million in the prior quarter, primarily due to higher utilization of certain rigs returned to work following out of service days for planned maintenance.
Arrows first quarter EBITDA is expected to decrease to 21% to $23 million from $29 million in the fourth quarter.
Largely due to higher planned maintenance costs and higher expected bareboat charter expense in the first quarter.
<unk> full year 2023, EBITDA is expected to be approximately $110 million to $120 million as compared to $99 million in 2022.
The expected EBITDA increase is largely due to the startup of Newbuild rigs, one and two which are expected to be delivered this year at.
As Anton mentioned earlier, we expect both rigs to receive financing prior to their delivery and we do not expect to provide additional financing to arrow to fund the Newbuild program.
I'll now provide a brief overview of our of our financial position and capital structure at the end of the fourth quarter, we had cash and cash equivalents of $724 million plus restricted cash of $24 million.
Our total liquidity increased by $104 million during the quarter, primarily due to positive cash flow from operations of $155 million, partially offset by capex of $59 million.
Included in cash flow from operations was $55 million refund payment from the IRS related to the cares Act.
In January we received an additional $45 million payment related to the cares Act and we still have a further $19 million outstanding. However, the timing of this receipt receipt is uncertain.
On a full year 2022 basis, our total liquidity also increased by $104 million, primarily due to positive cash flow from operations of $128 million, which included the $55 million Cares Act refund I just mentioned.
Net asset sale proceeds of $150 million, primarily from the sale of Jackups Valeric 113 and 114.
And the $40 million of shareholder note receivable repaid by Arrow.
Partially offsetting these positive cash inflows was $207 million of Capex, which included 117 million of reactivation and associated contract specific capex.
Looking to 2023, we expect to be cash flow positive assuming no further reactivation and no spend on the DS 13, or DS 14 Newbuild options.
Regarding our capital structure, we have only one tranche of debt or $550 million senior secured notes due in 2028 that has a first call in April 2023.
As a reminder, the cash in our balance sheet is our only source of liquidity as we do not currently have a revolving credit facility.
Ideally, we would like to implement a new capital structure that includes our revolver and a more regular way high yield note.
Putting in place a revolver with her attractive terms would improve the cost and efficiency of our capital structure, while the extra liquidity will allow us to hold less cash on the balance sheet over time and give us more flexibility when making capital allocation decisions.
However, in contrast to many of our offshore drilling peers. We are in the fortunate position of not having to do something we plan to be opportunistic and only execute our revolver interest refinancing of our existing note. If the size pricing and terms are attractive and do not significantly impact our <unk>.
Operational and strategic flexibility in both strong and weak market environments.
Now I'll hand, it over to Anton will make a few closing remarks.
Thanks, Chris.
I wanted to wrap up the call with a few comments on capital allocation priorities, including shareholder returns.
We have ongoing discussions regarding capital allocation as a management team and with our board and we are all aligned on the priorities for our cash.
The first of these priorities being to execute the operational leverage in our business in a disciplined manner in order to create long term shareholder value.
We have three stacked drillships and purchase options with two Newbuild Drillships and we are currently actively pursuing contracting opportunities for these rigs.
With drillship day rates in the $400000 per day range, we're able to generate meaningful returns on the reactivation investment over just the initial contract and we're able to generate significant earnings and cash flow.
We are constructive on the market. However, we cannot predict with precision the timing or terms of new contracts.
We could have several reactivation projects in one year, while they could be spread over a longer period of time.
Similarly, we may enter into contracts, where material portion of upgrades and reactivation costs are reimbursed upfront or contracts, where a more significant portion of the upgrades and reactivation costs are recouped in the day rate over the initial term, but which are nonetheless attractive opportunities.
These variables lead us to be somewhat conservative from a cash planning and capital allocation perspective today, because most importantly, we want to be able to execute on all attractive contract opportunities.
The second priority for our cash is pursuing strategic growth opportunities.
The offshore drilling industry has benefited from the efficiencies enabled by prior combinations and Valero has been a major driver of those efforts. However.
However, there are opportunities for additional consolidation whether it is at the corporate Jurassic level and we want to help drive it further as long as the transaction is value enhancing and accretive to our shareholders.
We believe having cash available to fund all or a portion of a transaction dependent on its size is valuable.
Our priority for any excess cash is returning it to shareholders with a positive long term market outlook ahead of US we are focused on transitioning valero us into a consistent cash generating and yielding investment for our shareholders.
While our first priority is putting a stacked rigs to work for attractive returns there may still be catalysts for opportunistic return of capital like value accretive rig sales, where a significant dislocation in our stock price.
Looking forward, we expect 'twenty 'twenty four to represent an inflection point in our results as legacy drillship contracts roll to market rates, we get a full year benefit of the Dia 17 contract unexpected recovery in the North Sea takes hold.
Rig reactivation is dependent on the timing could further improve our results in 2024 or beyond.
We expect that as we complete reactivation and the active fleet has rolled to market rates, we will generate meaningful free cash flow, providing the ability for us to shift from an opportunistic to a consistent and structured return of capital program.
In conclusion I remain excited about the outlook for Polaris, We will continue executing our strategy of being focused value driven and responsible and believe that our strategy will drive increased earnings and meaningful free cash flow during the unfolding industry up cycle.
We've now reached the end of our prepared remarks, operator, please open the line for questions.
Thank you we will now begin the question and answer session.
To ask a question in my Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And today's first question comes from Greg Lewis with <unk>. Please go ahead.
Yes, Thank you and good afternoon, and good morning, everybody.
And Anthony and thanks, a lot for the prepared remarks Super helpful. But I was hoping to get just a little bit more color around the rig reactivation in the new builds and your comments around capital allocation.
You know I I guess I'll just ask a few questions at once.
As we think about the ability to reactivate rigs realizing that there's a lot of customer demand as we think about recertification and supply chain and growing is that more of the hindrance and realizing that.
The market looks pretty firm and there could be opportunities.
Reactivate and take delivery of the Newbuild.
Breast window is that really.
Is that possible given all of the things I just mentioned.
Good question, absolutely, Greg look what I will say, it's one of the true.
<unk> of this organization is the ability to effectively reactivate rigs has a demonstrated track record we reactivated four rigs last year and as importantly is bringing those rigs to market largely.
On time and on budget.
On average is the fact that that as an organization, we delivered 97% revenue efficiency over the year. So it's as important to execute the reactivation project as it is to have those rigs operate at the same level as the rest of the active fleet when they get back to work.
We have extended the.
The duration that we expect the new reactivation. So on this on the 17 for example.
That project is a year versus nine months before.
But this is an organization that has great control of executing operational delivery for us. It's more you know if I go back to the strategy of being focused and disciplined it's about finding the right opportunities as as the constructive market continues in those incremental demand comes to market to find the right opportunity to bring those <unk>.
Back in a in a measured pace and we see that those opportunities are there I think we had made some comments about being in advanced discussions for at least one more drillship to to go back and I'm optimistic about 2023 in general.
There will be additional opportunities. So it's not I wouldn't say, there's a there's a constraint because of the project I think it's more about being focused and disciplined in finding the right timing and the right opportunities to bring those rigs back.
Okay, Great Super helpful. And then realizing that the focus has been on the focus of that conversation is around the floaters.
And realizing and understanding that one of the N class rigs has been idled.
As I guess, we look around our other basins like West Africa on let's say, the Golden triangle area and even in Asia.
<unk> do have some.
Some stacked jackups.
As we think about as we think about the next 12 or 18 months do you see a scenario, where we could see some of those rigs go back to work or at least in the near term. The focus really is on just bringing floaters that are on the sidelines back into the working fleet.
Well, there's certainly be.
And improvements in a more constructive benign.
Benign jackup market driven largely by what's happened in the middle East with that.
A lot of rigs being relocated to Saudi in particular, there are opportunities for jackups, but again for us it's about the capital allocation decision and if you call. It the investment return we get on those reactivation economics. So today, given the fact that floater day rates. If you look at <unk>.
Drillships of in essence doubled from two hundreds to the 400. So over the last couple of years Jackups have improved from the seventies north of a 100.
We've executed some contracts in certain markets about 125, but on the absolute you know looking at it on a capital allocation basis, the economics of allocating capital to a reactivation of a drillship is superior to that of doing a jackup today, that's not to say that those opportunities aren't there and we continue to.
Look for attractive opportunities for our Jackups and if we find one well absolutely execute on those.
It sounds great.
Where we get the best returns.
Okay understood. Thank you for the time and have a great day.
Thanks, I appreciate the questions.
And our next question today comes from David Smith of Pickering <unk>.
Energy Advisors. Please go ahead.
Hey, good morning, and thank you for taking my questions.
One in April .
In your prepared remarks, you mentioned that there may be a catalyst for opportunistic returns of capital.
Mentioned red cells as a potential catalyst when you consider the cares act refunds to be a catalyst for opportunistic returns.
Yeah, Let me, let Chris start there just kind of update everybody on where we are in our cares Act refunds and then I'll come back and cover your question. After yes. So from a from a cardiac rehab perspective, we got the $85 million in the fourth quarter, we got $45 million in January and we've got $19 million remaining.
As we think about these cares act refunds. These arent surprises to US. These obviously, we've been waiting for a long time for them. They have been in our in our planning models. So we don't necessarily consider them. Our catalysts are found money from that perspective.
Yeah.
Great reiterate some of my prepared remarks, I mean, we have you know.
Ongoing discussions and the management team and with our board about about capital allocation and I'll focus again is following the strategy of being focused and disciplined and investing capital to create long term shareholder value and for us today, including that cares Act refund, it's about allocating cash.
<unk> two attractive economics on reactivation, particularly of our Drillships.
Some opportunity for M&A, and we want to have cash available if those attractive opportunities.
You know are available.
I already is to return any excess cash to shareholders today that means.
Today that means being opportunistic in the case of dislocation in stock price or.
Or if we do have some opportunistic rig cells and that's largely driven by the fact that our first priority being return of Drillships to the market for attractive economics I can't tell you exactly what those contracts are going to look like.
Maybe you could sort of in the.
High class scenario, we have multiple reactivation of our remaining drillships all going on this year right heading to that increasing that inflection point in 'twenty 'twenty four we're generating even more significant cash and return it can get to a structural return.
Scenario of returning cash if the market has as it develops this year becomes.
A little more spread out and those reactivation or over a greater period of time and or we have to enter into contracts, where we're recovering those reactivation economics over the term of the contract, but it's still a great attractive opportunity. So we need a couple of those pieces to fall in place for us to.
To get to that place a structural return, but the cares act kind of just goes into our into our basic numbers and we'll see how the rest of the year as some of these pieces fall in place.
Very much appreciate it and if I can ask a quick follow up.
Sure, Chris going back to your comments.
Yeah about Paul.
<unk>.
And also any new capital structure a revolver.
Wanted to taking a gauge.
Our optimism and outlook for.
Capable yet this year or what do you need to see kind of often before.
<unk>.
To get complaints.
Yes.
We've been pretty vocal for a while talking about our desire to get a regular way capital structure in place which includes a revolver.
And then obviously to do that we need to refinance the note.
The terms of a node and so.
That's been on the table for a long time, we'd like to be able to execute that this year.
There could be opportunities to do that.
We are talking to our bank our banks about that.
But I think it's really important for US is that we don't have to do that and so if we we don't like the terms the size of the pricing that we see we don't have to do it and so for US. This is opportunistic if we can.
Find something that allows us to do that.
We want to be able to execute on that but again it needs to be on size pricing terms that make sense for us and doesn't overly restrict us from an operational or strategic perspective.
Appreciate it that's it for me.
Thank you and our next question today comes from refrigerant, starting with Clarksons <unk> Securities. Please go ahead.
Hi, Anthony and the team and thanks for the comprehensive.
Our remarks today Super helpful.
I think a few of my questions have been answered already but I wanted to.
A bit into arrow on your plans there.
You mentioned.
Financing of the two new builds with the local money.
Nope ample up needs.
And then you talked about.
The holes that have been done in the middle East for these.
Local drillers so.
I think right now you know arrow.
Both story on for some time, maybe the markets.
That's kind of neat.
What could happen there.
So I was wondering if you and ambition.
Going the route up on <unk>.
So with that.
With that asset.
Do you have any.
Timeline in mind do you have any kind of.
<unk> been that would need to happen before you do something like that.
If you do so.
Some sort of IPO or strategic divestment on that side, what do you think will happen with the rigs that you believe in a row.
Would that likely that those will be part of such a transaction or do you think you will continue to.
Lease them into that.
You're kind of fully letting it go so so any thoughts that you can spare would be super helpful.
Absolutely a priority. It's a great question, because I think I think the value of arrow as a strategic asset to allowances somewhat underappreciated.
By by many people because we don't consolidate it.
Real estate at a high and macro level. This is a 50 50 joint venture with the biggest user of non jackups in the world in a market, where you know some could say colloquial over the last well in the world will be drilled.
15 rigs operating today.
We recently announced two contracts of rigs that will transition plus two new builds. This year. This will be 1919 rigs operating once once that process happens I think there are some I'm not going to get into details of what the thinking is it arrow, but I think there are some natural kind of timing points, where it may make sense to look.
At most strategic options for arrow as far as you know.
Value realization and that is you know.
The two new builds.
Newbuild story with 20 rigs being built.
In Aero in the last 18 in Kingdom as it is an important part of Arrow's growth story and what those first two rigs being delivered this year getting on contract demonstrating that contract model with the first contract eight years with six year, EBITDA payback and along with that committing to.
The additional rigs in the Newbuild cycle is an important milestone for arrow in the venture and I think you know.
Although we continue to have discussions at the board level and Arrow is that would be a natural point for us to start looking at what's next.
I don't want I don't want to comment more than that.
That's very helpful.
Thank you so much.
That's it for me.
Thanks, Brian next question today comes from.
Barclays. Please go ahead.
Okay.
Hi, good morning.
And so just regarding the pulp that path that you are in advanced discussions on reactivating. You noted this was our fourth program expected to commence within the next 12 months.
<unk> from N O V that it would take around that wall to complete our reactivation and I believe you also mentioned one of them.
Lead times in your prepared remarks now.
But your confidence level in being able to reactivate at Reed in time for the.
Contracts, a commencement date and separately what would be your estimate of the reactivation costs and this particular co packed.
Gotcha.
Yep Okay.
You know I think I answered in one of the earlier questions Eddie.
One thing this organization has a demonstrated track record of with four in the last year and the 17.
Project going on which is on pace and largely on budget is the ability to reactivate rigs on the timing and on the on the budgetary numbers that we say we're going to do it. So we are in advanced discussions that I'm confidence in the team that they can execute that project and have that rig.
Activated in the timeframe that we need it to be and as expected by the customer as far as the budgetary estimate.
We were in a discussion and a very optimistic and constructive in us closing out that contract here in the near future and when we do we will update the market, including the adjustments to our numbers as a result of adding an additional reactivation.
No. We said 65 to 75 million for the Dia 17, I think you can be looking at numbers towards the top end of that range. If we're looking at additional reactivation is today, but we will certainly update the market as.
So as we go through that process.
Got it understood.
We'll be looking forward.
More about that.
And secondly, you mentioned eight newbuild drillships, calling stranded in Green shipyard at.
These weird to come to market.
<unk> manner.
What headline day rate do you think would be required to bring one of those drillships out is at 500 or 550 or would you argue we're even close to it now in the mid four hundreds depending on the contract structure.
And what and when might you expect to see an announcement about one of those rigs.
Coming into the supply stack.
Quite a few discussions going on.
The market and incremental demand that keeps that.
Coming to market. This is making it more realistic for those rigs what I will say.
Expect them largely to to come to market in the hands in some way shape or form of kind of establish prudent drillers.
When you look I don't want get into through day rate speculation on what others may do but I will say you know with market clearing prices to take out.
We have two options one out of 119, the other of $218 million that.
The clearing price on those rigs is north of $200 million today, you need to think that on top of that you would have another reactivation type expense.
Plus a mobilization.
So call it another maybe.
$80 million to $100 million all in in order to do that project that there needs to be a kind of.
A robust day rate both in contract term and day rates in order to justify those those economics and I'd say it would be at that at the right levels, we're seeing today or north of those rate levels, but I think the most folks prior.
Priority and definitely aus is too to take priority to our active fleet to make sure that that is highly utilized you know.
For us.
Secondly to look at our reactive.
Cold stacked preservation stacked chips and return those and then to look at you know kind of Newbuild options after that and I think most folks in the market see it the same way.
Great. Thanks, I'll turn it back.
Yeah.
And our next question today comes from Kurt how are you ever with benchmark. Please go ahead.
Hi, good morning, everybody.
Alright, great.
I appreciate the.
Color.
I'm kind of curious here right.
At the.
The market tightness for the Drillships you mentioned that there were 14.
Idle assets with 13 of those split for you.
Companies, obviously five of those being yours or at least three of those U K north excuse me not including the potential drillships.
So when you think about your balance sheet. When you think about protecting your cash what do you think about the demand factor for these.
These rates being activated.
You mentioned, some some upfront costs.
Being borne by the customer base.
Order of magnitude of $27 million it seems like a very low percentage given still the capital risk in the balance sheet strength that your customers have so long winded way of getting around to my question, which is how are the discussions going with your customer base about them, putting up more capital upfront to bring these at the tip of the mall.
Because at the end of the day again, there are limited hands.
Not so much competition out there had been and you guys just should be preserving capital and making the customer base pay for it. So I'm just kind of curious on how those discussions are evolving if they've evolved and if you had some greater leverage.
Going forward.
Well I mean, you can see what we did on the Dia 17 contract, but not all customers all the same right as a great variety in customer and appetite.
And ability and there's a there's ultimately there's a there's a tradeoff and in one way shape or form there's a market clearing price that are at a rig can be re contracted at and there are certainly some customers that we have discussions with who are more apt or two to pay more capital upfront towards the reactivation.
In some manner that that can be offset by the day rates that youre going to get under the contract, but they're all the contracts.
More to kind of national oil companies, let's say, where they have a very prescribed upfront mobilization or upfront payment mechanism because it's a very regimented contract structure and then you know.
Job is to make sure that we look at the economics and the ability to recoup those reactivation economics over the term of the contract what I will say is the contracts that are available in the market.
Whatever flavor they are whether it's recouping more of the.
Recouping more of that those economics over the term of the contract with day rates north of $400000 a day and.
And contract tenders in the in the three year range, it's an attractive opportunity that generates cash under the initial contract whichever form of contract that youre looking at so for us when we can.
Your question about balance sheet and cash management, it's about understanding how those contracts will stack up as we re contract those rigs. So what is the timing of our liquidity and cash needs, but we've been very very clear in being focused and disciplined and for US disciplined means you know not taking off.
Contracts, where we are not generating return over the initial contract that is what is most important to us.
That's great I appreciate that.
And my follow up is on the North Sea market and you mentioned you expect.
Next year is that.
Is that kind of your teams kind of.
Forecast, our perspective or is that coming from your customer base that basically saying 23 is going to be what it is but you know 24 will be in a much better position and we plan to move forward on projects I was just wondering if it's customer driven or just kind of more a year.
Neither neither answers wrong I'm, just trying to gauge whether it's coming from the customer coming from your internal team.
Yeah, Let me, let me, let Matt start up with that question because he's having a lot of the customer discussions and maybe I'll cover off afterwards that give you some more color on the on the North Sea.
Sure.
Hi, Anthony.
So I think if we dial back the clock and you look at where we felt in 2022 regarding twenty-three opportunities. We felt quite good about what the north sea was bringing to the table on demand.
It was obviously the physical change with respect to the windfall tax that added some headwinds to where operators have to take pause to think about how they view going forward with projects. What I would highlight is that it's less about going forward are more about possibly delaying well digest the new economics.
I think that's what we're starting to benefit from and what we see visible demand in the second half of 'twenty three 'twenty, four where a number of those projects that likely had short term delays are now being stacked into the into the next 12 to 18 months and giving us a better outlook and a more positive outcome for that for that market.
So to answer your question, it's largely driven by what we see demand coming from customer conversations.
On the ground in the North sea. So so far what we see is more a question of timing. These are not programs that have been taken off the table.
It's a question of.
Look re looking at their capital allocation and the timing of them doing those projects.
Snowplow and stuff moving to the to the backend 'twenty three and into 'twenty.
Okay. That's great really appreciate that color that's it for me.
Thank you.
This concludes today's question and answer session I'd like to turn the conference back over to John Gibbons for any closing remarks.
Thanks, Rocco and thank you to everyone on the call for your interest in Polaris, We look forward to speaking with you again, when we report our first quarter 2023 results have a great rest of your day.
Thank you.
France has now concluded we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.