Q2 2023 Valaris Limited Earnings Call

Good day and welcome to the Polaris second quarter 2023 results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays 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 from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Darin Gibbons, Vice President of Investor Relations and Treasurer. Please go ahead.

Yeah.

Welcome everyone to the Valores second quarter 2023 conference call with me today are president and CEO , Anton Davitt, Senior Vice President and CFO , Chris Weber and other members of our executive management team, we issued our press release, which is available on our website at Dolores Dot 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 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, yesterday, we issued our most recent fleet status report, which provides details on contracts across our rig fleet.

An 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 deposits 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, then I'll comment on the outlook for the offshore drilling market and our fleet strategy, including an update on our plans for Newbuild Drillships Polaris D. Its 13th and 14th.

Finally, I'll provide an update on our share repurchase program and reiterate our capital returns philosophy.

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

In the second quarter, we continued to deliver strong operational performance achieving revenue efficiency of 97%.

Our success as a company is driven by people and I want to thank the entire Valero has teeth offshore and onshore for their ongoing commitment and efforts in delivering excellent performance for our customers.

One of the hallmarks of allowances, our project execution and during the second quarter Valera Dia 17 depart. The shipyard ahead of its contract with Ecuador offshore, Brazil, which is expected to commence this month following customer acceptance.

This marks our fifth floater reactivation in the past 18 months and builds and a proven track record of project execution.

Polaris Dia 17, as one of our highest specification drillships in the global fleet today and will be the first rig to deploy an obese at some Archie X robotic system offshore reducing the need for personnel in the Red zone.

The lower C. 17 also became only the second rig in the world. After Polaris T is 12 to receive a b s's enhanced electrical system notation E. H S. Dashy the rigs electrical system is designed to optimize power plant performance, enabling operations on fewer generators and reducing emissions.

These targeted upgrades helped to improve the safety and efficiency of the rig and exemplify our company's purpose of providing responsible solutions that deliver energy to the world.

Now turning to our financial performance for the quarter, we generated adjusted EBITDA of $15 million and adjusted EBITDAR, adding back one time reactivation costs of $59 million.

Chris will provide further details on our financial results and guidance a little later.

Turning our attention to the market the outlook for our industry and Valero is remains very positive.

<unk> Brent crude has recently moved back above $80 per barrel and five year forward prices remain above $65 per barrel a level at which more than 80% of undeveloped offshore reserves are estimated to be profitable.

The supportive commodity price and attractive breakeven for most offshore projects provide customers with the confidence to invest in long cycle offshore projects and further growth in both offshore upstream Capex and offshore project sanctioning are expected in 2024.

The constructive macro environment and increased upstream spending have led to increases in contracting and tendering activity across both floaters and jackups.

Active utilization for sixth and seventh generation Drillships has on average exceeded 90% for more than 12 months.

Looking at for demand, we expect leading edge day rates to continue on an upward trajectory from the current levels in the mid to high four hundreds.

Recent fixtures in tenders with increased durations lead times and day rates provide further evidence that we are in a strong and sustainable up cycle.

Improvements in ultra deepwater demand continues to be a geographically widespread with new long term opportunities, appearing west Africa, the Mediterranean, Brazil, and the Gulf of Mexico over the past several months.

These include opportunities with durations of five plus years.

Also for the first time in many years some customers are seeking to secure offshore rigs beyond the scope of the currently sanctioned projects and our contracting rigs for start dates into 'twenty 'twenty six.

These are all positive signs that demonstrate both the confidence that our customers have and the economics of their offshore projects and a recognition of the increasing scarcity of high spec floaters.

Across the Golden Triangle East Africa, and the Mediterranean. We currently see 25 to 30 opportunities for ultra deepwater floaters with expected duration of greater than one year that are anticipated to commence over the next few years.

This represents an increase from the 20 to 25 opportunities we referenced on our first quarter call demonstrating the strong and growing pipeline of future demand.

We've seen recent opportunities appear in the Mediterranean West Africa for work commencing in 'twenty 'twenty, four 'twenty twenty-five that'll likely to require incremental rigs in.

In Brazil, there are three ongoing opportunities with Petrobras, each requiring multiple rigs and further visibility of future demand with I O sees.

We anticipate that this demand will result in several incremental additions to the rig fleet offshore Brazil.

In the Gulf of Mexico supply and demand continues to be balanced and we expect to see sufficient future demand to keep the rigs in this region occupied.

In total we anticipate that 12 to 15 of these opportunities will need to be met by either incremental reactivation of stacked and stranded newbuild rigs or active rigs moving regions, which we don't expect to see a lot of as many rigs due to complete contracts over the next few years will likely be retained by the existing customer.

While demand is increasing the pool of available rigs is shrinking and we believe that to be no more than 10 competitive rigs remaining amongst the stack drillship fleet.

There are a further eight newbuild drillships remaining at South Korean shipyards, including Valera D. S 13, and D. S 14, however.

However, three of these eight rigs are either contracted or have been selected for future work and I expect it to be contracted soon.

Further we currently believe it is highly unlikely that we will see another Florida newbuild cycle, given high build costs long lead times and limited shipyard availability.

In summary, the outlook for the ultra deepwater market is very positive with increasing demand and constrained supply tightening the market.

Further recent developments around increased contract duration lead times in day rates would point towards a strong and sustained upcycle.

On the Jackup side of the business demand continues to steadily increase in the number of contracted Jackups recently moved above 400 for the first time since mid 2015.

As a result active utilization for Jackups is above 90% with both average and leading edge day rates continuing to trend upwards as evidenced by our recent fixture offshore Australia at a rate of $180000 per day.

Over the past 18 months demand growth the benign environment Jackups is primarily being driven by the middle East with Saudi Arabia, Qatar and the UAE all increasing their rig counts.

More recently, we have also seen a return of longer duration opportunities in southeast Asia, including in Malaysia, Thailand, and Vietnam, which will help to absorb supply in this region.

While the outlook for benign environment Jackups continues to be strong the outlook for the harsh environment Jackup market in the North Sea continues to be challenging in the second half of this year and through the end of 'twenty 'twenty four.

In the U K, while regulators are looking at ways to make the current tax regime more appealing to operate as it has not yet been sufficient to promote an increase in activity and we continue to see opportunities being delayed.

Fortunately some of our north sea rigs such as flowers ninety-two, one 'twenty one 'twenty two are contracted into 'twenty 'twenty five and beyond.

We will continue to seek attractive opportunities for our high spec harsh environment Jackups in other regions such as our recent contract with Polaris two forty-seven offshore Australia.

Following completion of its current contract in the UK North Sea later this year the rig will mobilize to Australia for a two well contract undertaking of Ccs project that is expected to commence late in the first quarter of 'twenty 'twenty four.

The operating day rate for this contract is $180000 a day and we will receive a mobilization and demobilization fee that covers all the moving and operating costs, while the rig is in transit.

We see strong demand for high specification rigs such as the Bell hours to 47, and we anticipate there will be follow on work in the region beyond its initial contract.

Jackup opportunities in Norway continued to be very limited exemplified by a tender that was recently deferred into 'twenty twenty-five.

As a result, we do not expect any of our N class rigs to be working offshore Norway during 'twenty 'twenty four.

On the supply side, we believe that many of the Jackups are currently idle or not competitive either due to their age or length of time stocked.

One third of the current Jackup fleet is more than 30 years of age with limited useful lives remaining.

Out of the approximately 90 Jackups that are currently idle we count only 10 that are less than 30 years of age have been stacked for less than three years and are within the top half of global fleet rankings.

As a result, we believe that many of these stacked rigs will never returned to the active fleet.

Further excluding arrows Newbuild program. There are only 18 Newbuild jackups remaining at shipyards and 13 of these rigs are a Chinese shipyards, many of which are expected to enter the local supply in China.

In summary, we continue to see a strong and improving market for modern high specification jackups in regions, such as the Middle East Southeast Asia, and Latin America. However, the harsh environment Jackup market in the North Sea in Norway continues to disappoint and we do not expect to see any meaningful improvement in 'twenty 'twenty four.

Our fleet strategy remains unchanged and focused on driving long term shareholder value.

This week, we were proud to announce a new long term contract for Polaris T. S. Seven offshore West Africa, which is anticipated to be one of the key basins for floater demand over the next several years.

This most recent award represents the seventh contract awarded to one of our high quality stack floaters since mid 2021 and speaks volumes about our demonstrated track record of project execution, when reactivating rigs and delivering operational excellence for our customers.

We will continue to be disciplined and exercising our operational leverage by only returning stacked rigs to the active fleet for opportunities that provide meaningful returns over the initial firm contract.

The Valero D. S. Seven is a prime example of this approach and Chris will provide further details that highlight the compelling economics of this contract during his prepared remarks.

As part of our fleet strategy, we want to have a critical mass of rigs and priority basins to benefit from economies of scale.

Following the completion of our ongoing reactivation, we will have 11 floaters working across the Golden triangle with four offshore Brazil for offshore Africa, and three in the Gulf of Mexico.

At the beginning of the year I stated that I was optimistic about being able to secure contracts with two of our stack drillships in 'twenty 'twenty. Three we have now delivered on that seven months into the year and we see good opportunities for at least one more to be contracted by the end of the year.

Following the contract award to D. S. Seven we have only one on contracted drillship remaining the D. S 11.

Beyond this our operating leverage to the strong ultra deepwater floater market is through re contracting our existing active fleets and our attractive purchase options for Newbuild Drillships D. S 13, and D. S 14.

Based on our contracting progress and the current market view, we intend to exercise the options for both of these rigs.

Both D. S 13 N T. S 14 are amongst the highest specification assets in the global fleet and all the most technically capable drillship still available at South Korean shipyards per third party rig rankings.

That was the only remaining drillships available at the South Korean shipyards with two B O piece, and we estimate that it would cost approximately $50 million to add a second b O P to a ship that is only equipped with one.

We see strong customer interest in these rigs and based on our current market outlook. We believe that most if not all of the supply of stacked newbuild drillships in the global fleet will be needed to meet growing future demand.

Based on estimates by third party rig brokers shipyard clearing prices for the remaining rigs are likely to be $300 million or higher when including the cost of a second B O P.

By comparison shipyard prices of $119 million for the D. S 13, and $218 million for the D. S 14 of very attractive representing a discount of 60% and 30% respectively to the current market rate for comparable asset.

As a result, we believe the purchase options for both DSV with gene and T. S 14 represent compelling investment opportunities that will generate attractive returns over their lives.

That being said, we will continue to be disciplined in our approach to reactivating rigs and will only reactivate. The D. S 13, and D. S 14, four contracts that are expected to generate a meaningful return on our reactivation costs over the initial firm term.

Moving now to an update on Aro drilling our unconsolidated 50, 50 joint venture with Saudi Aramco, we expect that Newbuild rig one will be delivered in September with contract start up expected by the end of October Newbuild rig to is it still expected to be delivered before year end with contract startup anticipated in the first quarter of <unk>.

'twenty 'twenty four.

Aero continues to progress to financing for the new builds which we expect to be in place prior to delivery of both rigs.

Saudi Arabia is an attractive growing and sustainable market and arrow is well positioned with its 20 rig Newbuild program.

The delivery and startup of the first two new builds will mark an important milestone in the growth story of Arrow.

Moving now to an update on our share repurchase program in May we announced an increase in our share repurchase authorization to $300 million nine tend to repurchase $150 million of shares by year end 2023.

We began the repurchase program in May and to date, we have repurchased $94 million of shares at an average price of $62.

As a result of the recent contract awarded to Polaris D. S. Seven which includes a meaningful upfront payment and a continued commitment to returning capital to shareholders. We have increased our 20th twenty-three share repurchase target from $150 million to $200 million.

We expect to achieve significant earnings growth and generate meaningful and sustained free cash flow over the next few years as rigs transition from legacy day rate contracts to higher market rates and reactivated rigs returned to work on attractive contracts.

Our philosophy on what to do with this future free cash flow is simple we intend to return at all to shareholders unless there is a better or more value accretive use for it.

This philosophy is consistent with our value driven approach to capital allocation and our goal of maximizing long term shareholder returns.

I'll conclude by reiterating some of the key points from my prepared remarks first we continued to deliver excellent operational performance evidenced by achieving 97% revenue efficiency in the second quarter and 98% through the first half of the year.

Second the outlook for our industry and Valero remain very positive with increasing demand and constrained supply tightening the market.

Further we continue to see increases in contract duration lead times and day rates, all of which point towards a strong and sustained upcycle.

And finally due to the positive market outlook and strong customer interest in these high spec assets, we intend to exercise the purchase options on Newbuild Drillships Polaris D. S 13, and D. S 14, as we believe that these investments will generate attractive returns.

As we look ahead, we will continue to be disciplined and exercising our operational leverage and laser focused on maximizing long term shareholder value.

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

Thanks, Anton and good morning, and afternoon everyone.

Before reviewing our financial results for the second quarter I would like to take a moment to explain our recent change we've made to our adjusted EBITDA and adjusted EBITDAR calculations to better reflect the earnings profile of our operations and more closely align with the calculation methodology used by our closest offshore drilling peers.

Adjusted EBITDA and adjusted EBITDAR now include amortization associated with deferred mobilization and contract preparation revenues and costs and deferred capital upgrade revenues.

We adjusted the calculation methodology in the second quarter and have restated all comparative periods in our second quarter results press release, using the new methodology.

Moving now to review of our second quarter results.

Adjusted EBITDA was $15 million compared to $28 million in the prior quarter and adjusted EBITDAR was $59 million compared to $55 million in the prior quarter.

The impact of the calculation change on both adjusted EBITDA and adjusted EBITDAR was negative $2 million in the second quarter and positive $4 million in the first quarter, excluding reimbursable items revenues decreased to $390 million from $408 million primarily due.

To fewer operating days for the Jackup fleet, and lower mobilization and demobilization revenues.

These were partially offset by an increase in the average day rate for both floaters and Jackups.

[noise] Jackup revenues decreased primarily due to fewer operating days and lower mobilization and demobilization revenues for the Valero is 249, which completed its contract offshore New Zealand late in the first quarter and was in transit to its next contract offshore Trinidad during the second quarter.

In addition, the layers 54 was sold following the completion of its contract late in the first quarter and Valero is 108 spent most of the second quarter undergoing contract preparation work ahead of his upcoming three year bareboat charter to arrow drilling.

These decreases were partially offset by more operating days for Valero $1 15, and $2 47, as both rigs commenced new contracts after idle periods in the first quarter for contract preparation work and a five year survey respectively.

Floater revenues increased due to more operating days and a higher average day rate primarily related to Valero D. S 12.

Which commenced a new higher day rate contract in the second quarter after spending part of the first quarter mobilizing for more attachment to Angola.

Excluding reimbursable items contract drilling expense decreased to $348 million from $356 million, primarily due to lower costs for rigs that were idle or between contracts in the second quarter and lower repair and maintenance costs associated with special periodic surveys and contract.

Can work.

These were partially offset by higher reactivation expense, which increased to $44 million from $26 million in the prior quarter.

The increase in reactivation expense was due to the commencement late in the first quarter of a reactivation project for Valero D. S. Eight ahead of a three year contract offshore Brazil.

This was partially offset by lower reactivation costs for Valero D. S 17, which is expected to commence operations this month offshore Brazil.

General and administrative expense increased to $26 million from $24 million, primarily due to higher personnel costs and depreciation expense increased to $25 million from $23 million in the prior quarter.

Other income decreased to $7 million from $13 million in the prior quarter.

This was primarily due to a 29 million dollar loss recognized on our refinancing transaction completed in April .

And a $6 million increase in interest expense associated with the refinancing transaction.

Which increase the principal amount of notes outstanding to $700 million from $550 million.

These were partially offset by $27 million pre tax gain recognized in the second quarter on the sale of the layers 54.

We had tax expense of $25 million compared to a tax benefit of $28 million in the prior quarter.

The first quarter tax provision included $44 million of discreet tax benefit primarily attributable to the favorable resolution of uncertain tax positions relating to prior years.

Adjusted for discrete items tax expense increased to $18 million from $16 million in the prior quarter.

I want to finish my review of second quarter results by commenting on our second quarter performance relative to prior guidance.

Our second quarter EBITDA was better than our prior guidance, primarily due to higher than expected utilization as well as lower rig operating expenses, which benefited from lower crew costs and repair and maintenance expense.

Before I get into details of our go forward guidance I want to flag that our third quarter and full year 2023 guidance is impacted by two discrete items one the change to our EBITDA calculation methodology and to the recently announced contract for Valero D S seven and associated <unk>.

<unk> nation cost that falls into this calendar year.

To help folks isolate the impact of these two changes we've added a slide to the appendix of our investor presentation that lays out the impact of these items on third quarter and full year 2023 EBITDA EBIT Dar and Capex.

The investor presentation will be available on our website. Shortly after the end of today's call.

A key thing to note is that but for the impact of these discrete changes the midpoint of our full year 2023 adjusted EBITDA guidance would have been unchanged and the midpoint of our full year adjusted EBITDAR guidance would've increased by $15 million.

For third quarter 2023 we expect total revenues to range from $475 million to $485 million as compared to $415 million in the second quarter.

Revenues are expected to increase primarily due to contract startups for Valero Dia 17, 121, and 249, which were all idle during the second quarter and higher average day rate for both floaters and Jackups as several rigs commenced new contracts.

We expect that contract drilling expense will be $395 million to $405 million as compared to $374 million in the second quarter, primarily due to Valero Dia 17 commencing its contract.

More operating days for the Jackup fleet and an increase in reactivation expense.

[noise] reactivation expense is expected to increase to approximately $55 million from $44 million in the prior quarter, primarily due to the commencement of the Valeric D. S. Seven reactivation in a ramp up in spend associated with the D. S. Eight reactivation project.

Partially offset by the wind down of the Valero Dia 17 reactivation project.

The D. S. Seven reactivation is expected to account for approximately $20 million of reactivation expense in the third quarter.

General and administrative expense is expected to be approximately $27 million up slightly from $26 million in the prior quarter, mostly due to higher personnel costs.

The change in EBITDA calculation methodology is expected to have a $10 million positive impact on adjusted EBITDA and adjusted EBITDAR in the third quarter.

Taking these items together adjusted EBITDA is expected to increase to $50 million to $55 million compared to $15 million in the second quarter and adjusted EBITDAR is expected to be $105 million to $110 million compared to $59 million in the second quarter.

Moving now to an update on our full year 2023 guidance.

We currently expect revenues to be $1.8 billion to $1.83 billion, which is at the lower end of our previously provided guidance range.

This is primarily due to the continued softness we are seeing for harsh environment jackups in the North Sea.

Fewer operating days.

For Valero Dia 17, which is expected to commence its contract a little later than previously anticipated following its reactivation.

And fewer operating days for Valero D. P. S. Five following the change in a customer's drilling program that will lead to some time spin off rate as the rig moves between customers and operating locations.

While we are expecting lower revenue on the D. P S five versus our prior guidance. The fact that we were able to fill most of the rigs availability in the second half of the year on short notice with two separate contracts from the U S. Gulf is a real testament to the strength of the market and our strong customer relationships.

Contract drilling expense is expected to be in the range of $1.52 billion to $1.54 billion, which is in line with our prior guidance. Despite our current revenue guidance coming down a bit.

This result is due to an expected increase in reactivation expense of approximately $55 million.

With approximately $40 million due to the reactivation of hilarious D S seven and the remainder due to slightly higher than anticipated costs on Volare Dia 17 in D. S. Eight.

These incremental reactivation costs are expected to be offset by lower operating expenses across the fleet due to fewer rig operating days, particularly in the north sea as well as lower crew and repair and maintenance expense.

General and administrative expense is expected to be approximately $105 million, which is at the low end of our prior guidance range. The change in the EBITDA calculation methodology is expected to have a benefit of approximately $25 million on full year EBITDA and EBITDAR taken together these items move full year guidance.

Slightly lower for adjusted EBITDA to a range of $175 million to $195 million and higher for adjusted EBITDAR to a range of $330 million to $350 million moving now to capital expenditures.

Quarter, Capex was $71 million compared to $56 million in the prior quarter.

Second quarter Capex included $44 million for maintenance, Capex enhancements and upgrades and $27 million for reactivation and contract specific capex for Valero D. S eight and Dia 17.

Third quarter, Capex is expected to be $100 million to $110 million with roughly half going towards maintenance capex enhancements and upgrades and the other half going toward reactivation and associated contract specific capex, including $10 million for D. S. Seven.

We anticipate that our full year capex will be in the range of $310 million to $350 million.

This is at the lower end of our previously guided range, primarily due to timing of reactivation and enhancement spin that is expected to push from the fourth quarter ended 2024.

Partially offset by an additional $20 million related to the D. S. Seven reactivation project. This capex guidance does not include assumed expenditures for exercising our options to purchase Drillships Valera D. S 13 N D. S 14.

[noise] exercising the options on both rigs would increase 2023 capex by approximately $370 million.

The incremental Capex covers the purchase price of the rigs and cost to prepare the rig to be moved from South Korea to Las Palmas, where they would be stacked alongside Valera D. S 11.

I would now like to take a moment to provide further details around our recently awarded contract for Valero D. S. Seven this.

This is a great contract win for Polaris, providing an opportunity to return whenever high quality stack Drillships to work offshore West Africa, which is expected to be one of the key basins for floater demand over the next several years.

The economics for this contract are compelling and we expect to generate a meaningful return on our reactivation costs over the initial contract term.

The total contract value of $364 million, which includes a meaningful upfront payment due at contract commencement implies an effective day rate of $428000 per day.

It is worth noting that this contract does not include the provision of any additional services or M. P D, which typically increase daily operating costs by approximately 40000 to $60000 per day.

In addition, our our operating costs in West Africa are generally at least $20000 per day lower than in other areas of the Golden triangle.

As a result, we expect that this contract will generate rig level annualized EBITDA of $95 million to $100 million and it will contribute meaningfully to our expected earnings growth in 2024 and beyond.

Reactivation cost for malaria D. A seven is expected to be approximately $90 million plus approximately $10 million of additional contract specific and other upgrades for total project cost of roughly $100 million.

The $90 million of reactivation cost is higher than our previously guided cost range, primarily because we need to purchase more capital equipment in inventory compared to our prior reactivation.

This is due to us consuming most of our excess capital spares and inventory on completed and ongoing reactivation projects given the attractive drilling contract, which includes the meaningful upfront payment I mentioned earlier, we expect a payback on the reactivation project costs, including the contract specific upgrades to be less than one year.

We also expect to earn a very attractive internal rate of return over the firm contract period.

Now I'll move to a brief overview of Aero Drillings financials. As a reminder, arrow is not consolidated in the financial results of <unk>.

Aero EBITDA decreased to $17 million from $28 million in the prior quarter, primarily due to out of service time and increased costs associated with planned maintenance on one of arrows owned rigs.

<unk> third quarter EBITDA is expected to increase to $20 million to $22 million from $17 million in the second quarter, primarily due to Valero 108, commencing its three year lease contract and fewer out of service days.

[noise] arrows full year 2023 EBITDA is expected to be approximately $100 million to $110 million, which is $10 million lower than prior guidance, primarily due to two delayed startups for newbuild rigs one into.

Moving now to our financial position and capital structure at the end of the second quarter, we had cash and cash equivalents of $787 million plus restricted cash of $18 million, providing a total cash balance of $805 million.

Our total cash balance decreased by $39 million during the quarter, primarily due to payments for share repurchases net capital expenditures and an increase in working capital partially offset by net proceeds from our refinancing transaction completed in April .

The increase in working capital was primarily due to two large invoices outstanding at quarter end for capital upgrades on Valera Dia 17, and mobilization for Blair is 249.

Both of which have now been received as discussed on our first quarter conference call. We completed a refinancing transaction in April resulting in the private placement of $700 million of senior secured second lien notes due in 2030 with a coupon of eight and three eighths. We used a portion of the net proceeds to fund the redemption of all of our <unk>.

$550 million of senior secured first lien notes due 2028. In addition, we secured a five year revolving credit facility permitting borrowings of up to $375 million, which is secured on a first lien basis by the same assets that secure the new second lien notes.

The revolver was undrawn as of June 32023 to conclude my prepared remarks.

I want to make a few comments on our capital allocation framework that is focused on three priorities first we want to maintain a conservative balance sheet with low leverage and our recent refinancing and revolving credit facility transaction enhanced our capital structure and provided us greater flexibility around capital allocation.

Second we will continue to pursue attractive investments in strategic growth opportunities, including investments in our fleet such as our recent and ongoing drillship reactivation that are intended to generate meaningful returns and maximize future earnings and free cash flow.

To be clear, we will continue to be disciplined and exercising our operational leverage and will only reactivate rigs for opportunities that are expected to provide a meaningful return over the initial contract term.

And third we are committed to returning capital to shareholders as demonstrated by the increase in our 2023 share repurchase target from $150 million to $200 million that we announced in conjunction with the Dia seven contract Award.

D S. Seven drilling contract includes a meaningful upfront payment and requires a low level of contract specific upgrades and the reactivation scope.

These positive factors increase our flexibility to return capital to shareholders and we are acting on it.

As we look to the future our business should begin generating meaningful and sustained free cash flow as rigs under legacy contracts are re contracted at current market rates reactivated rigs go on contract and reactivation spin ramps down.

To reiterate and Tom's earlier comments, our philosophy and what to do with his future free cash flow is simple.

We intend to return at all to shareholders, unless theres, a better or more value accretive use for it.

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

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

Youre using a speakerphone please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

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

The first question is from Eddie Kim of Barclays. Please go ahead.

Hi, good morning.

On the comments around your intention to emphasize booth.

On the deal 13, 14 was obviously very strong on our confidence in the market outlook.

Clear about not reactivating these rigs while securing attractive contract forum.

Based on the conversations you're having now is it possible we could see one of these rigs securing a contract and begin and beginning the reactivation process. Even later this year or do you expect the reactivation for both these brands.

Would be more of a 2024 of them.

Hi, Eddie Thanks, I think you've got it exactly right, we'll make a clear distinction about compelling value of taking these assets given where with similar assets.

Especially given that they have to be Oh peas are trading versus what we've been very clear about us being disciplined about reactivating a rig.

D S 11, which is our only remaining a drillship.

That is stacked right now that would put the market is a very very similar assets to the 13th and 14th say. These all you know almost sister rigs similar specifications ultimately the decision as to which to put to work first is going to come down to a combination of what the customers looking for <unk>.

Everything else being equal, let's say given given the fact that the investment we're making in the 13 and 14 would like to put one of those rigs to work earlier, but we're just going to need to see what the opportunity is where it is in the world have the discussions with customers. We have had customers visit these rigs already they are in fantastic shape I'm always out there looking at them.

Myself recently.

Recently, so we'll just have to see how it how it plays out.

Okay, Okay understood.

And then just my follow up.

I mean, just with the Dia, Kevin reactivation, because now you're seven floater reactivation and your Formula I guess available capacity than you did 18 months ago.

So in that context could you just update us on your latest thoughts on M&A Weatherford specific assets or even a corporate acquisition or is this something youre still considering or are you content at this point with finding good contract for the D. S 11, 13 and D. S fortunate as you mentioned.

Yeah.

Absolutely I mean, I think you've been very clear that this is an industry that needs to continue to consolidate.

Continually look at the market about consolidation opportunities, we're very comfortable with having a high specification fleet gives us competitive advantage and we wouldn't want to see that being diluted if.

If there is an M&A opportunity that makes sense based on the synergies that can be generated from that transaction. We would absolutely look at it but we also have plenty of opportunity to grow our business I think we put a slide in our investor deck that'll be coming out in our first focus is rolling out our high spec fleet.

<unk> that we have on the water.

We have three reactivation that are coming to coming tomorrow, and we'll be earning day rates over the you know before the middle of next year, we have three legacy contracts in the next 12 months that we need to roll from legacy contracts to market clearing rates and then some beyond that so I'd say, it's a combination of the ball.

We're we're very comfortable with call it organic.

Organic growth, taking 13, and 14 and growing our business that way, but if there are.

Opportunities that make sense on the M&A side, we will absolutely execute on those.

Got it got it that makes sense great. Thanks for the color and tunnel I'll turn it back.

Thanks, Ed.

The next question is from David Smith of Pickering.

Please go ahead.

Hey, good morning, and thank you for taking my questions.

Good morning.

Congratulations on the contract.

Yes.

Yes.

Wanted to switch over to the Jackups.

Strong jackup right.

Multiple regions.

Including a couple of years.

Just wanted to call it.

Multiple.

That's right leading edge rates for the model.

Bundled mobile duty fleets.

Yeah, I think you have that right I mean, obviously the north sea has been we've been.

Probably pretty forthright and transparent about that the north sea it, especially in the U K side continues to disappoint, but we have a high spec fleet that at.

And find opportunities other places and we're actively doing that leading edge rates on the jackup market in Israel is more geographically diverse or different markets operate operate slightly differently. We're.

We're obviously very proud to see the $2 47 going to going to work in Australia on a on a Ccs project, which is a growing part of our business and will be a growing part of our business going forward at a leading edge rate of 180, Oh, we have a couple of additional contracts in Australia at $1 50 and above.

I you know southeast Asia is starting to catch up a little bit so I think you're definitely well into the hundreds.

You know not not going to sit here and say that every every contract that signed is gonna be at those leading edge rates. So there is there is a there was a range depending on what market you're in which is also dependent on kind of operating costs and kind of what the local supply demand.

<unk> is in those markets, but well into the hundreds.

Certainly the price of oil.

A lot of them are.

Over the last year.

Yes.

We think a little further Rob Walker will jackups lead.

Overall.

<unk>.

Spire late 'twenty four.

25.

Jack.

Okay.

Options.

Sure.

Right now.

How should we think about the relationship between local control.

First of all.

Okay, I think Saudi Arabia is a long term sustainable market with with long term work. So so there is a there is a balance to be had I.

I think there's plenty of work to be done in Saudi through through those lease dregs and Saudi rates have continued to increase as have the as have the other rates around the world. So we're a little way away from from talking about the future of those rigs.

But I think there are attractive opportunities in Saudi it is you know I'm the largest jackup market for high spec jackups in the world sorts of the market.

Many people say well drilled the last well in the world. So having a strong presence says we have through arrow both through the owned leased the owned rigs at least rigs and the point to rig Newbuild program is a great position for us to be and so we'll look at the opportunities and and you know Andrew as we do find find what makes sense.

I'm not talking about.

The next question is from Harry of Benchmark. Please go ahead.

Hey, good morning, everybody.

Good morning, Kurt more Gert.

Thanks for all that great detail really appreciate it.

So yes.

One of your one of your larger competitor yesterday talk about the prospect for leading edge rates for.

Six seven Gen drillships getting into the high $500000 a day sometime in 2024, obviously youre in a very good position to potentially capture that with those two two drillships plus the <unk>.

The fact that you have so I was wondering if you can kind of.

Give everybody here on the call.

Some insight as to how you think about pricing strategy going forward.

And what how you think your assets are potentially position.

Due to get kind of being that leading edge rate discussion.

Oh I think we have we have on average.

Our high spec fleet.

Lot of high spec fleets in the 50% in the in the top quartile of especially when you look on the ship side and the 13 and 14, we exercise those options will will add to that.

You know the floater in drillship market continues to move higher I think I appreciate the comments on the D. S. Seven I think it's important for people to remember that not not all markets. The same and not all contracts are the same so the D. S. Seven is already a high spec rig it doesn't require any significant upgrades.

For this rig to go to work in West Africa is generally a low cost operating jurisdiction and you know as many tenders in West Africa are these all kind of long cycle long duration tenders. You know these rigs that rig was bid kind of in January of this year and was at a leading edge rate at the time it was bad but rates continue.

Turning to extend you know I've said on my prepared remarks, I think day rates are in that kind of mid to high four hundreds and as the supply demand continues to tighten up I think it's going to continue to progress from there.

The pacing of that as always you know somewhat debatable, but we've seen a clear progression in day rates you know through the three hundreds into the four hundreds and low four hundreds earlier in the year in the mid to high.

Four hundreds where we are now and we see most it's going out and I think we'll continue to to progress higher as the supply demand balance tightens.

But yes I appreciate that so maybe in a different context Friday to get the DS 13, and DS 14, and you've got a reference yellow the prospects of getting very.

Positive.

Economic returns on those assets.

What sort of day rate would you need.

Over what duration to to get those objectives that you think you need to get.

Look I think that's about right, where we run our fleet as a portfolio and I'll reference I think it was to Ed's question earlier about having rigs rolling off to be able to leverage into a into an upmarket, but there needs to be some balance it's great to see increasing durations in this market and for us taking some.

Balance between now some very long term opportunities that are out there and building a base load of long term backlog is important. So you know not every not every rig on the euro is needs to be treated equally and having a significant fleet. One of the advantages of scale is being able to take our promotional approach where you get some long term.

Some contracts at what today are very attractive rates generating north of $90 million of EBITDA on a on a on a rig a year and balance that with some opportunism. If you want to call it that and having some assets available to us to really kind of cherry picked and set at leading edge rates. So you know what.

We're just going to we have the 11 and now we're looking at 13 on the 14th of wave three more opportunities plus the rigs that were rolling and we will take a portfolio approach.

I think that's all all I want to say about that.

Okay, that's fair enough so.

Just one more if I may right. So your reference yet.

It was 12 to 15.

Incremental rig demand in a number of these rigs are going to require.

Acquisition of.

Idle assets or potentially some of the stranded newbuild, so kind of a way when you roll through that dynamic right.

You know what.

How many idle assets do you think that incremental demand will wind up absorbing.

I always say 12 to 15 I mean, you know we've talked about the number of rigs that are still attractive you know at the yards.

You know we may see some rigs rolling from one part of the world to another although that's not how we see the market playing out yeah. Most rigs that are on contract with a customer or working in a basin continues to be to be extended and I think we as as most of our competitors will look at.

Obviously, one of the considerations is not to have significant white space. We you know we try to minimize the time between contracts because there is a you know an economic cost to moving a rig from a Martin region, even if you're being compensated apportion switching contract. So we balance that between the alternative opportunities that are available.

Two two to.

Two to move the rig.

So definitely there is a demand as we see it right now and what the projections say four as demand continues to increase I think we you know we went from 15 to 2020 to 25 25 to 30 opportunities that you know that we're tracking right now that's kind of five incremental opportunities on the upside and the downside in that.

Since our first quarter call and that number continues to increase so demand continues to increase.

You know that the market continues to tighten and I think there's a there's a a good projection that you know all of the attractive high spec ships like you know the 11, the 13 and 14 and some portion of the you know realistically reactivate a bowl or at at.

At a at an economic cost need to come to market to meet the future demand from our customers.

Got it okay. Thanks, so much I appreciate it.

Thanks.

And our final question today is from biotech center of Clarksons Securities. Please go ahead.

Anton Chris and team Hope you are well.

And thanks for all the color today, so far.

Wanted to circle.

Back to the <unk>.

Jakob.

To finish it up here.

It seems like the North sea market is quite.

She did both this year and the next.

You said that the <unk> class.

Expect that to work in Norway and in 2019 foreign companies.

The Columbia brand.

In the same region into the floaters, we have definitely seen.

Tightening that now would be very.

Large part of the fleet.

Out of the REIT.

So I guess kind of like my my my question is twofold first.

Now that there.

Seems to be.

The shortage of semi subs in Norway and in at least 25.

<unk>.

Seeing any kind of new inquiries from your customers or projects that could as you know.

Our either use a large jackup or semi but thats the first part.

And secondly are you able to give them.

More color broadly on.

Where you potentially see the most opportunities for your North Sea Jackup fleet outside of the North Sea and in other words, where do you think you could potentially move some of your assets to.

So it keeps them reduce cycle time.

Thanks, Good questions look I'll I'll start with some some overall comment I mean, we've been you know quite quite transparent that the north sea continues to be challenging second half of this year and through the end of 'twenty four.

The U K in the U K, especially regulators are looking for ways to make the current tax regime more appealing to operators, but it really hasnt been sufficient to do kind of promote getting back to work that being said, we do have a number of rigs the 90 to $1 20, and 122 that are contracted well into 2020.

There is work available, but it's generally.

Short term.

There is growing Ccs work in the North Sea I mean, we worked on our northern endurance and office in the Netherlands, and I think recently, you've seen some announcements in the U K back in two additional large scale Ccs projects Acorn in Viking, which is attractive for that that market long term.

Times, when when people see rigs, leaving leaving the area and heading over the horizon to better pastures. It does store some of that.

You know between regulators and industry that something needs to be done to to retain assets. So there.

And there was plenty of work to be done in the area. We just have to see how it plays out you know, obviously, Australia with high spec rigs is one good opportunity for kind of a high spec assets that we operate to cooperate there's work in the middle East, where they generally like high spec assets, where we could look at and Clos or other.

Our high spec rigs those all of those harsh environment rigs and worth benign environment. It's just a question of finding the right opportunity and in a commercial deal.

Where the customers willing to you know as was the case with the $2 47, and compensate for the mobilization and South East Asia is now kind of coming back and you know picking up demand longer durations high day rates, there, which which add that to the mix so pretty widespread satchel.

Opportunities and we will look at you know what we see in the near term market versus you know what's available elsewhere in the world and try to try to balance that out.

As far as kind of a high spec Jackups you know in that in the <unk>.

During some of the work that was done by <unk>.

Is a crossover there if theres a potential crossover in water depths between the two especially for kind of like the shallow water harsh environment, we haven't seen a huge amount of that coming through to the jackup market yet.

You know lets see how that.

As you say the semi sub market continues to be extremely title under supplied.

You know that that may be a fact that we see coming through as we go forward and I had even just when we think about moving rigs outside the north Sea I mean, it's been great to see with the one that we're moving to Australia to be able to get that covers not just on the mode. There, but on the MAU back and that's definitely something that we.

We think about as part of the it's part of the move.

Which I will say, we take us downside protection, because we believe that great opportunities for the $2 47 to continue in Australia, but you know if that doesn't pan out the way. We expect we do have that that downside protection.

Moving back to the to the North Sea, if we see a recovery there.

Okay Super helpful and that's actually one.

Just circling back to your.

The filters on contracting strategy, which are partially touched on but.

As you say, what the dealers have enough to seven three years, you've taken out now in a relatively short amount of time.

So.

Call it.

The overhang of Optionality of your stack.

You can.

Are you you have become more and more comfortable with the cash flow.

Right.

Rigs that you've already reactivate that so I guess, one thing when it comes to reactivation et cetera. So you need to get your cost covered et cetera, and it needs to be a good economic decision on.

A project basis, but if I guess you can also.

Regardless of whether it's that these 11 13 or 14 that to take a part you can afford and ought to be.

You know a bit more reading the rain in the way you approached off have you have you.

The way that Youre going to get these three.

And has anything changed there in terms of.

I'm holding out for better rates.

Look we've been very clear from the beginning even even you know when we were talking about bringing in four out of couple of years ago that we you know.

We wanted to cover reactivation costs right now as day rates have moved up and we put additional of these rigs to work we have let's call. It increased our hurdle rates, we've what we've expected to see a better return on each successive contract become if you want us colloquial say a little more choosy on the contra.

Rack that we that we're looking for and being more willing to be more patient on finding the right contracting and I think you've seen that that I.

I think you've seen that action from us as we've continued to put rigs to work and yes. You are quite correct now with 11 being the you know the only remaining rigged.

From a cold stack fleet that still available we will you know if necessary be patient and wait for the right opportunity because we do strongly believe in a in a constructive market.

But I think there are great opportunities with our balance off of opportunistic and having rigs that can roll in a few years and some potential very long term opportunities that are attractive and we have seen interest from customers on these rigs.

And our criteria for turning these on.

Forces us to be choosy, right, which is we've got to earn a meaningful return over that initial firm contract.

So we're only we're only turning these on when when we passed by those criteria and will wait until we can.

So we talk about just the discipline of reactivating them and making sure that we you know we get a meaningful return on that but as the combined good commercial practices as the market gets stronger and we see increasing opportunities that we have an increasing expectation of what it takes to turn to turn these rigs and put them back into the active fleet.

Alright. Thank you both for the color I appreciate it.

And I wish you both a good day.

Thanks sure. Thanks answer question.

This concludes our question and answer session I would like to turn the conference back over to Darren Gibbons for closing remarks.

Thanks, Kate and thank you to everyone on the call for your interest in Florida as we look forward to speaking with you again, when we report our third quarter 2023 results have a great rest of your day.

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