Valaris builds on ‘contracting success’ from 2022 with new floater and jack-up deals in 2023

Offshore drilling contractor Valaris has revealed a robust performance during the fourth quarter of 2022. The rig owner also kicked off 2023 with new contracts and extensions for its rig fleet in West Africa, the Middle East, Australia and Trinidad.

The oil and gas sector has recorded bumper profits during 2022, fuelled by higher energy prices and attempts to strengthen energy security amid the global energy crisis, which hit the world in the wake of the Ukraine crisis. This propelled the offshore drilling market to emerge faster from the slowdown imposed by the COVID-19 pandemic.

As a result, the demand for rigs ramped up and day rates increased, as countries and companies embarked on a search for more hydrocarbons. This is illustrated by the latest contract awards announced by Valaris’ rivals – Noble and Transocean – which show that the new contracts came with higher day rates.

Within its results for the fourth quarter of 2022 released on Tuesday, 21 February 2023, Valaris explained that it had delivered revenue efficiency of 98 per cent in the fourth quarter and 97 per cent for the full-year of 2022. The company was awarded new contracts and extensions with an associated contract backlog of more than $400 million during 4Q 2022, including floater contracts offshore Brazil and Egypt as well as jack-up contracts in the Middle East, the North Sea and the U.S. Gulf of Mexico.

Anton Dibowitz, Valaris’ President and Chief Executive Officer, remarked: “I would like to thank the entire Valaris team for continuing to deliver excellent operational performance, achieving revenue efficiency of 98 per cent during the fourth quarter.

“This strong operational performance has translated into continued contracting success, and we were awarded new contracts and extensions with associated contract backlog of more than $400 million during the fourth quarter.”

Valaris’ net income was $31 million in 4Q 2022, compared to $78 million in the third quarter of 2022. While adjusted EBITDA decreased to $54 million during the fourth quarter from $76 million in the third quarter, adjusted EBITDAR decreased to $75 million in the fourth quarter of 2022 from $94 million in the previous quarter.

The firm’s revenues decreased to $434 million in 4Q 2022 from $437 million in 3Q 2022, however, excluding reimbursable items, revenues decreased to $413 million in the fourth quarter from $416 million in the third quarter, primarily due to lower utilisation and lower average day rates for the harsh environment jack-up fleet, partially offset by an increase in utilisation for the floater fleet.

The company’s contract drilling expense increased to $353 million during the fourth quarter of 2022 from $337 million in the third quarter of 2022. On the other hand, contract drilling expenses increased to $333 million in the fourth quarter from $316 million in the third quarter, excluding reimbursable items, primarily due to an increase in operating days for the floater fleet and higher reactivation costs, which increased to $21 million from $18 million.

According to Valaris, depreciation expense increased marginally to $24 million in 4Q 2022 from $23 million in the third quarter of 2022 while general and administrative expense increased to $24 million from $19 million in the third quarter of 2022, primarily due to higher personnel costs and professional fees.

Furthermore, the firm’s other expense was less than $1 million in 4Q 2022 compared to other income of $30 million in the third quarter of 2022. The offshore drilling contractor explained that other expenses included foreign currency exchange losses of $13 million in 4Q 2022 compared to gains of $10 million in the third quarter.

In addition, the other income for 3Q 2022 included non-cash interest income of $15 million related to the write-off of the discount attributable to the $40 million of shareholder notes receivable repaid by ARO, partially offset by a $3 million increase in interest income during the fourth quarter of 2022.

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The company’s tax expense was $10 million in 4Q 2022 compared to $14 million in the third quarter of 2022. While the fourth quarter tax provision included $3 million of discrete tax benefit attributable to the resolution of prior period tax matters, the third quarter tax provision included $2 million of discrete tax expense primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years.

This was partially offset by discrete tax benefits attributable to the resolution of other prior period tax matters. Adjusted for discrete items, Valaris’ tax expense increased to $13 million in 4Q 2022 from $12 million in the third quarter of 2022.

Moreover, the firm’s total liquidity, which includes cash and cash equivalents, restricted cash and short-term investments, increased to $748 million as of 31 December 2022, from $644 million as of 30 September 2022, primarily due to cash flow generated from operations, including changes in working capital, of which $55 million was a refund payment from the IRS related to the CARES Act that was received in the fourth quarter of 2022. Valaris’ capital expenditures of $54 million in 4Q 2022 were in line with the third quarter of 2022.

“Last year was an important year for Valaris as we laid the foundation for continued success during the unfolding industry upcycle. We reactivated four floaters, all of which returned to work largely on time and on budget. Reactivation of a fifth floater, Valaris DS-17, is well underway and we are in advanced discussions for a multi-year opportunity for one of our stacked drillships that is expected to deliver meaningful returns,” added Dibowitz.

Valaris underlined that floater revenues increased to $211 million in 4Q 2022 from $202 million in the third quarter of 2022. Excluding reimbursable items, revenues in the fourth quarter of 2022 increased to $203 million from $192 million in 3Q 2022, primarily due to higher revenue efficiency across the floater fleet and a full quarter of revenues for Valaris DS-4 and DS-9, which started contracts early in the third quarter of 2022.

The company elaborated that contract drilling expenses increased to $173 million in 4Q 2022 from $161 million in the third quarter of 2022. However, contract drilling expenses, excluding reimbursable items, increased to $165 million in 4Q 2022 from $151 million in the previous quarter. The increase was primarily due to more operating days across the floater fleet and higher reactivation costs, mostly for Valaris DS-17, which is expected to start a contract later this year.

Valaris outlined that jack-up revenues decreased to $182 million in 4Q 2022 from $196 million in the third quarter of 2022. Excluding reimbursable items, revenues decreased to $176 million in the fourth quarter of 2022 from $190 million in 3Q 2022, primarily due to Valaris Stavanger completing its contract offshore Norway and idle time between contracts for Valaris 123, 144 and 115, partially offset by more operating days for Valaris 118 and 92, following a contract start-up and a special periodic survey, respectively.

The offshore drilling contractor’s contract drilling expense increased to $130 million in 4Q 2022 from $128 million in the third quarter of 2022, however, contract drilling expense, excluding reimbursable items, increased marginally to $124 million in 4Q 2022 from $123 million in the third quarter of 2022.

Valaris underscored that revenues increased to $120 million in 4Q 2022 from $111 million in the third quarter of 2022, primarily due to higher utilisation as certain rigs returned to work following out-of-service periods for planned maintenance. Additionally, contract drilling expenses decreased to $86 million in 4Q 2022 from $90 million in 3Q 2022, primarily due to higher planned maintenance costs in the third quarter.

Moreover, the offshore drilling contractor also secured additional contracts awards and extensions in 2023 to date, with an associated contract backlog of approximately $230 million, including a floater contract offshore West Africa and jack-up contracts in the Middle East, Australia and Trinidad.

Based on Valaris’ new fleet status report, a 330-day priced option was exercised by Shell Nigeria Exploration and Production Company (SNEPCo) offshore Nigeria for the Valaris DS-10 drillship. Following the exercise of this option, the rig is under contract through March 2024. The operating day rate for the option period is $231,000.

The 2017-built drillship has been working for Shell in Africa since November 2021. The rig first worked in Namibia until April 2022, when it moved to Nigeria. During its assignment in Namibia, the drillship made an oil discovery for Shell in the Graff-1 well located in Block 2913A in the Orange Basin. The well was drilled to a total depth of 5,376 meters in water depths of approximately 2,000 meters in the PEL-39 license area, which covers a total area of 12,299 km2.

The rig owner further disclosed that a one-year contract with an undisclosed operator offshore Trinidad was secured for Valaris 249 heavy-duty ultra-harsh environment jack-up rig. The contract is expected to start late in the second quarter or early in the third quarter of 2023 under a day rate of $125,000. Valaris says that it will receive a mobilisation fee of $8.5 million, plus a daily rate of $64,000 while the rig is in transit from New Zealand to Trinidad. Currently, the 2002-built rig is working for OMV and this deal is slated to end in March 2023.

A one-well option was exercised by Eni offshore Australia for the Valaris 107 heavy-duty modern jack-up rig and the option period began in February 2023 in direct continuation of the existing contract. The operating day rate for the option period is $126,500. The rig started its contract with Eni in November 2022.

The 2006-built Valaris 107 jack-up rig has lined up two more jobs and will move to its assignment with GB Energy in April 2023 after finishing its work for Eni. Afterwards, the rig is also expected to carry out work for an undisclosed operator in Australia from June to September 2023 under a day rate of $120,000.

Aside from this, Valaris won long-term contracts in Saudi Arabia for two jack-up rigs and intends to bareboat the charters of these rigs to ARO Drilling, a 50/50 joint venture between Saudi Aramco and Valaris.

Based on Valaris’ statement, a five-year contract was secured offshore Saudi Arabia for the Valaris 76 standard duty modern jack-up rig. This contract is expected to commence in the first quarter of 2024. Additionally, the Valaris 108 heavy-duty modern jack-up rig got a three-year contract offshore Saudi Arabia, which is scheduled to begin in the third quarter of 2023.

“We remain intent on executing our strategy of being focused, value-driven and responsible in our decision making and we believe that our strategy will drive increased earnings and significant free cash flow over time,” concluded Dibowitz.

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