Valaris wraps up rig sale and gets more work for its fleet as offshore drilling market tightens

Offshore drilling contractor Valaris has secured new contracts and extensions for its rig fleet in the UK, Brazil, and New Zealand. In addition, the rig owner brought a sale of one of its rigs to a close. While the offshore drilling market keeps tightening, the company records a strong performance during the first quarter of 2023, driven by rising rig demand and constrained supply.

Valaris revealed within its latest fleet status report on Tuesday, 2 May 2023, a batch of new contracts and extensions for its rig fleet, which were secured after its previous fleet status report on 21 February 2023, when the firm disclosed contract awards and extensions 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.

In the aftermath of the global energy crisis in 2022, the business side of the offshore drilling market has been booming, as demonstrated by Valaris and its rivals: Transocean, Vantage Drilling, Shelf Drilling, Diamond Offshore, and Noble, which are expecting a multi-year upcycle that will result in higher rig demand, increased day rates and fleet utilisation.

For the floater segment, Valaris confirmed a three-year contract with Petrobras for the Valaris DS-8 drillship, which was stacked in Spain. As a result of this deal, the rig is being reactivated. The total contract value is approximately $500 million, including a $30 million mobilisation fee.

The 2015-built Valaris DS-8 drillship is of Samsung GF12000 design. It was constructed at Samsung Heavy Industries, Geoje in South Korea. The rig is capable of operating in water depths of 12,000 ft and can accommodate 200 people. The drillship’s maximum drilling depth is 40,000 ft.

The company also got a 100-day contract with a TotalEnergies affiliate for the Valaris DS-12 drillship, which is expected to start in the second quarter of 2023, lasting from June to September 2023. This drillship has several jobs lined up. The rig’s gig in Angola, which started in March 2023 with an undisclosed operator, is anticipated to end in May 2023.

Afterwards, the drillship is slated to move to Egypt in October 2023 to start its job with BP, which is scheduled to end in August 2024. The 780-foot Valaris DS-12 drillship was built by DSME Okpo shipyard in Geoje, South Korea and can accommodate 200 people. The rig’s maximum operating water depth is 12,000 ft while its maximum drilling depth is 40,000 ft.

According to Valaris, a priced option has been exercised by TotalEnergies EP Brasil for the Valaris DS-15 drillship offshore Brazil. Following the exercise of this priced option, the rig is expected to be under contract through the second quarter of 2024. The operating day rate for the option period, which has an estimated duration of 100 days, is approximately $254,000 and there are no further options remaining under this contract.

The 2014-built Valaris DS-15 drillship is of GustoMSC P10000 design. It was constructed at Hyundai Heavy Industries. The rig is capable of operating in water depths of 12,000 ft and can accommodate 210 people. The drillship’s maximum drilling depth is 40,000 ft.

Regarding its jack-up segment, Valaris secured a two-year contract extension with Harbour Energy in the UK North Sea for the Valaris 92 standard duty jack-up rig, which is expected to begin in the first quarter of 2024 in direct continuation of the existing contract.

The operating day rate for the extension period is $95,000, during which the rig is expected to be exclusively undertaking plug and abandonment (P&A) work. The 1982-built Valaris 92 jack-up rig is of Marathon LeTourneau Technologies 116-C design. It can accommodate 90 people. The rig’s maximum drilling depth is 25,000 ft.

The firm’s Valaris 107 heavy-duty modern jack-up rig was awarded a 70-day contract by Beach Energy for work offshore New Zealand. The contract, with a total value of around $26 million, is slated to begin in the third quarter of 2023 and last from August until December 2023. The total contract value is approximately $26 million.

Currently, this rig is working for Eni in Australia. This deal is expected to end in May 2023 when the rig will move to its assignment with GB Energy, which is anticipated to last until July 2023. Afterwards, the rig is scheduled to work for an undisclosed operator in Australia until August 2023. The 2006-built Valaris 107 jack-up rig is of KFELS MOD V – Class B design. It can accommodate 112 people. The rig’s maximum drilling depth is 30,000 ft.

In addition, a one-well contract with NEO Energy in the UK North Sea has been secured for the Valaris Norway heavy-duty ultra-harsh environment jack-up rig. The contract, which is slated to start in July 2023, has an estimated duration of 20 days. The operating day rate is $105,000 and this contract is expected to end in August 2023.

The rig is working for Centrica Storage in the UK until June 2023. After completing the work for NEO Energy, the rig is scheduled to kick off its assignment with North Sea Natural Resources in August 2023. The 2011-built Valaris Norway jack-up rig is of KFELS N Class design. It can accommodate 130 people and its maximum drilling depth is 35,000 ft.

Meanwhile, Valaris has completed the sale of a 40-year-old Valaris 54 standard duty legacy jack-up rig for $28.5 million. The 1982-built rig can accommodate 96 people and its maximum drilling depth is 25,000 ft.

In a separate statement, Valaris reported the results for the first quarter of 2023, highlighting new contracts and extensions with an associated contract backlog of approximately $820 million. This increased the offshore drilling player’s total contract backlog to $2.8 billion. The firm’s net income was $49 million in 1Q 2023, compared to $31 million in the fourth quarter of 2022.

The company’s adjusted EBITDA decreased to $24 million in 1Q 2023 from $54 million in the fourth quarter of 2022, primarily due to increased repair and maintenance costs associated with special periodic surveys. In line with this, the rig owner’s adjusted EBITDAR decreased to $51 million during the first quarter of 2023 from $75 million in 4Q 2022 for the same reason.

Furthermore, Valaris delivered revenue efficiency of 99 per cent in 1Q 2023, compared to 98 per cent in the fourth quarter of 2022 and 97 per cent for the full-year of 2022. The firm worked on bringing enhanced capital structure and liquidity to life through refinancing in April 2023, including the addition of a $375 million revolving credit facility. The company also published its 2022 Sustainability Report in April 2023, announcing a Scope 1 carbon emissions intensity reduction target by 2030.

Anton Dibowitz, Valaris’ President and Chief Executive Officer, commented: “In the first quarter, we achieved strong revenue efficiency of 99 per cent and won new contracts and extensions with associated contract backlog of approximately $820 million, including a three-year contract offshore Brazil for which we will reactivate drillship Valaris DS-8.

“On our fourth quarter conference call we outlined a goal to enhance our capital structure, and we achieved this objective through our recently completed refinancing transaction, including the addition of a revolving credit facility. The refinancing increased our liquidity by almost $500 million, enhancing our capital allocation flexibility including our ability to return capital to shareholders.”

Based on the company’s statement, revenues decreased to $430 million in 1Q 2023 from $434 million in the fourth quarter of 2022. However, excluding reimbursable items, revenues decreased to $408 million in the first quarter of 2023 from $413 million in 4Q 2022, primarily due to lower utilisation for the harsh environment jack-up fleet, partially offset by a higher average day rate for the floater fleet.

Moreover, the firm’s contract drilling expense increased to $377 million in 1Q 2023 from $353 million in the fourth quarter of 2022. On the other hand, contract drilling expenses increased to $356 million in 1Q 2023 from $333 million in 4Q 2022 – excluding reimbursable items – primarily due to increased repair and maintenance costs associated with special periodic surveys and higher reactivation costs, which increased to $26 million from $21 million.

Valaris points out that depreciation expense decreased to $23 million in 1Q 2023 from $24 million in the fourth quarter of 2022 while the general and administrative expense of $24 million was in line with the fourth quarter 2022.

The offshore drilling contractor’s other income was $13 million in 1Q 2023 compared to other expense of less than $1 million in the fourth quarter of 2022, primarily due to foreign currency exchange gains compared to losses in the fourth quarter and an increase in interest income due to a higher interest rate on the ARO shareholder notes receivable as well as an increase in interest from short-term deposits.

Meanwhile, the firm’s tax benefit was $28 million in 1Q 2023, compared to tax expense of $10 million in the fourth quarter of 2022. While the first quarter tax provision included $44 million of discrete tax benefit primarily attributable to changes in liabilities for unrecognised tax benefits associated with tax positions taken in prior years, the fourth quarter tax provision included $3 million of discrete tax benefit attributable to the resolution of prior period tax matters. The tax expense increased to $16 million in 1Q 2023 – adjusted for discrete items – from $13 million in the fourth quarter of 2022.

Valaris’ total liquidity, which includes cash and cash equivalents and restricted cash, increased to $844 million as of 31 March 2023 from $749 million as of 31 December 2022. The increase was primarily due to cash flow generated from operations, including changes in working capital of which $46 million was a refund payment from the IRS related to the CARES Act. These were partially offset by capital expenditures, which increased to $56 million in 1Q 2023 from $54 million in 4Q 2022.

Valaris emphasised that the floater revenues increased to $215 million in 1Q 2023 from $211 million in the fourth quarter of 2022. When reimbursable items are excluded, revenues increased to $207 million in 1Q 2023 from $203 million in the previous quarter, primarily due to higher day rates for the Valaris DPS-5 and DS-12 rigs, which started new contracts during the first quarter.

The rig owner underscored that the increase was partially offset by lower utilisation, primarily related to the Valaris DS-12 drillship, which mobilised from Mauritania to Angola during the first quarter, prior to beginning operations for another customer.

The company’s contract drilling expense for floaters increased to $175 million in 1Q 2023 from $173 million in the fourth quarter of 2022. Excluding reimbursable items, contract drilling expense increased marginally to $166 million in the first quarter of 2023 from $165 million in the previous quarter.

Valaris underlined that the jack-up revenues decreased to $170 million in 1Q 2023 from $182 million in the fourth quarter of 2022. While the revenues decreased to $162 million in 1Q 2023 from $176 million in the previous quarter – excluding reimbursable items – primarily due to lower utilisation for the harsh environment jack-up fleet, including idle time for all three of the firm’s N-Class jack-ups as well as the Valaris 121 and 247 rigs.

The rig owner’s contract drilling expense increased to $149 million in 1Q 2023 from $130 million in the fourth quarter of 2022. Excluding reimbursable items, the company claims that contract drilling expense increased to $142 million in 1Q 2023 from $124 million in the previous quarter, primarily due to higher repair and maintenance costs associated with special periodic surveys.

Valaris outlined that revenues for ARO Drilling, its 50/50 joint venture with Saudi Aramco, increased to $124 million in 1Q 2023 from $120 million in the fourth quarter of 2022, primarily due to a higher average day rate following the start of three-year contract extensions for the Valaris 147 and 148 rigs in December 2022 and February 2023, respectively. In lieu of this, the contract drilling expense increased to $91 million in 1Q 2023 from $86 million in the previous quarter, primarily due to higher bareboat charter expense.

Meanwhile, ARO Drilling has appointed Mohamed Hegazi as its Chief Executive Officer (CEO), effective immediately, to replace Derek Kent, who will be retiring following a handover period. Hegazi previously served as Chief Executive Officer of TGT Diagnostics, a provider of wellbore integrity measurement solutions to the oil and gas industry.

“I am delighted to welcome Mohamed to ARO Drilling. Mohamed brings to the role strong leadership skills, oilfield service and capital markets experience as well as extensive knowledge of working in the Middle East. ARO is attractively positioned with its 20 rig newbuild programme to help meet increasing rig demand offshore Saudi Arabia, and I look forward to working with Mohamed as we chart its next chapter of growth and value creation,” said Dibowitz.

Prior to being appointed as TGT Diagnostics’ CEO in 2015, Hegazi served as Chief Operating Officer and Managing Director from 2012 to 2014. Before joining TGT Diagnostics, Hegazi held various senior leadership positions at SLB (formerly Schlumberger).

“I would also like to thank Derek for his significant contributions to ARO since 2020, as well as Valaris and predecessor companies during his 25 year career, which spanned numerous geographies and leadership positions. We wish Derek the very best for his retirement,” stated Dibowitz.

Currently, Valaris has two drillships stacked in Spain. These are the 2013-built Valaris DS-11 of the DSME 12000 design and the 2013-built Valaris DS-7 of the Samsung 96K design. The rig owner also has two stacked semi-submersible rigs in the U.S. Gulf of Mexico: the 2012-built Valaris DPS-6 of the ENSCO 8500 Series design and the 2010-built Valaris DPS-3 rig.

One heavy-duty ultra-harsh environment jack-up rig – the 2010-built Valaris Viking of the KFELS N Class design – is stacked just like another heavy-duty harsh environment jack-up rig – the 2002-built Valaris 102 of the KFELS MOD V-A design – which is stacked in the U.S. Gulf of Mexico along with two standard-duty modern jack-up rigs: the 1999-built Valaris 75 of the LT Super 116-C design and the 2010-built Valaris 145 of the LT Super 116-E design.

Aside from these, three heavy-duty modern jack-up rigs – the 2003-built Valaris 111 of the KFELS MOD V-B design, the 2008-built Valaris 109 of the KFELS MOD V-Super B design, and the 2002-built Valaris 104 of the KFELS MOD V-B design – are stacked in Croatia, Namibia and the UAE, respectively.

The offshore drilling player still has the option to purchase two drillships – Valaris DS-13 and Valaris DS-14 – by year-end 2023. Back in March 2021, Valaris announced that it had reached an agreement with Daewoo Shipbuilding & Marine Engineering to amend its two newbuild drillship contracts to delay the delivery of the rigs.

Both of these drillships are of the DSME 12000 design. The final payments for the Valaris DS-13 and Valaris DS-14 are estimated to be approximately $119 million and $218 million, respectively, assuming a 31 December 2023 delivery.

The offshore drilling giant underlines that its first quarter 2023 results were better than prior guidance, primarily due to the timing of anticipated projects moving from the first quarter to subsequent quarters. However, the firm’s full-year 2023 guidance remains unchanged. Therefore, the company’s revenues for the full-year 2023 are anticipated to be $1.8 – $1.9 billion while the contract drilling expense is expected to increase by approximately $60 million to $1.49 – $1.59 billion.

In light of this, Valaris’ adjusted EBITDA for full-year 2023 is expected to decrease by around $60 million to $180 – $220 million while adjusted EBITDAR, which adds back one-time reactivation expense, is anticipated to be $280 million to $320 million. The company’s capital expenditures are expected to increase by $60 million to $320 – $360 million.

“We continue to be highly constructive on the outlook for the industry and our business, with increasing demand and constrained supply continuing to tighten the market. As a result of our strong business outlook and commitment to returning capital to shareholders, the Valaris board of directors has increased our share repurchase authorization to $300 million, and we intend to repurchase $150 million of shares by the end of the year,” concluded Dibowitz.