Valaris Limited

Good day, everyone, and welcome to Valeris' second quarter 2021 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your questions, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Darren Gibbons, Vice President of Investor Relations and Treasurer, who will moderate the call. Please go ahead, sir.

Welcome, everyone, to the Volaris Second Quarter 2021 Conference Call. With me today are President and CEO Tom Burke, Executive Vice President and CFO John Boxt, and other members of our Executive Management Team. We issued our press release, which is available on our website at volaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations. As a reminder, we issued our most recent fleet status report, which provides details on contracts across our rig fleet on August 2nd. An updated investor presentation is also available on our website. Now, I'll turn the call over to Tom Burke, President and CEO.

Thanks, Darren, and good morning, everyone. Welcome to the call and thank you for your interest in Volaris. Today is the first quarterly earnings conference call for Volaris Limited. As you know, the company emerged from financial restructuring a little over three months ago. During today's call, I will provide a brief overview of Volaris and then provide some commentary on the current state of the offshore drilling market. I will then discuss recent Volaris contract wins, rig reactivations, our joint venture with Saudi Aramco, and then comment on the overall industry landscape. At the end of my comments, I will hand the call over to John Botch, our CFO, for a financial update. Volaris emerged from financial restructuring early this year on April the 30th, and it's been more than 15 months since our last quarterly conference call. Therefore, I will take a few moments to provide an overview of the company and to highlight why Volaris represents a compelling investment opportunity. Volaris has the largest fleet of rigs in the offshore drilling business. More importantly, the company has the highest quality fleet in the industry. a statement supported by independent third-party rig rankings with half of our fleet of 60 rigs ranked in the top quartile of assets globally. In addition, Volaris has an industry-leading operational platform underpinned by strong values and a purpose-driven culture. Volaris focuses on delivering operational excellence to its customers achieved through the three elements of our operational excellence framework, safety, reliability, and efficiency. Volaris' operations have unmatched scale and geographic reach, with a presence in virtually all major offshore regions and the most extensive customer base of any offshore driller, including major IOCs, NOCs, and independents. Since the merger more than two years ago, the company's organizational structure has transformed. As a result, Volaris now has an industry-leading cost structure that can quickly adapt to changes in the market environment. Finally, we have the strongest balance sheet in the offshore drilling sector. Volaris is the only major offshore driller with a net cash position. John will provide more details on our capital structure in his prepared remarks. The combination of these strengths leave Volaris well positioned to benefit from improving market conditions and capitalize on opportunities as they arise. Now, a brief operations update. To reiterate, at Volaris, we're highly focused on delivering safe, reliable, and efficient operations to our customers. As I'm sure you can imagine, the logistics of operating a global company during a pandemic is exceptionally challenging. I want to acknowledge the hard work and the resiliency of our offshore crews and support teams operating in this complex changing environment. Our personal safety performance has improved 23% in the first half of 2021 when compared to our 2020 full year performance. And we've not experienced any significant process safety events over the past 12 months. Our downtime performance has been strong so far in 2021. Our revenue efficiency for both our floater and jack up fleets is 99% year to date. I'd now like to take a few moments to discuss the broader market conditions that affect our industry and more specific commentary on the offshore drilling sector. Spot Brent crude prices have recovered strongly in 2021 from the pullback in 2020 resulting from the COVID-19 pandemic. Prices have moved higher due to a healthy rebound in demand for hydrocarbons, OPEC Plus supply agreements, and a focus on capital discipline by U.S. onshore E&Ps. While we acknowledge there have been some recent volatility in commodity prices due to an increasing concerns around the COVID Delta variant coupled with July's OPEC Plus agreement to increase output gradually, we are seeing clear evidence that the constructive oil price environment is driving the early stages of a recovery in demand for offshore drilling. Given the long lead times for offshore projects, particularly those in deep water, customers tend to be more focused on median term commodity prices rather than what is happening in the spot market. Two year forward Brent crude prices are currently well above $60 per barrel, a level that is viewed as constructive for offshore project demand. As a result, according to third party research, E&P offshore capital expenditures are expected to increase by approximately 8% in 2022 and 12% in 2023, aided by record levels of free cash flow for these operators. We are already seeing evidence of this improvement in contracting and tendering activity in 2021 as compared to 2020. According to third party contracting data, The nine floater rig years awarded in the first half of 2021 are already double that in the first half of 2020, and jack-up rig years awarded increased by 15% over the same period. This increase in activity is particularly evident for high specification drill ships, especially in the Golden Triangle of the Gulf of Mexico, South America, and West Africa. U.S. Gulf operators have expedited drill ship selections this year in anticipation of a lack of supply in early 2022, which has played a key role in pushing day rates in this market higher. We've also seen a noticeable acceleration of deepwater tendering in West Africa, where activity fell to an all-time low in 2020. Volaris' fleet of 11 drill ships includes some of the highest quality assets in the industry. I believe our team has done a great job securing new contracts for some of these rigs which I will discuss in more detail shortly. While the recovery in the jacket market is more muted than floaters, we are seeing active tendering in Southeast Asia, the Middle East, Northwest Europe, and Latin America, which could lead to further improvements in this segment of the market. I would now like to take some time to explain our fleet strategy, particularly our approach to retiring, stacking, and more recently, reactivating rigs. In early 2020, we saw a sudden and unforeseen decline in demand for offshore drilling rigs as the impact of the COVID-19 pandemic on demand for hydrocarbons led to contract terminations, suspensions, and project delays. Given the uncertain outlook at the time and the oil price of around $40 per barrel or lower for much of the year, we made the decision to retire 16 assets in 2020, including three sixth-generation drill ships, all built within the last 10 years, and six semi-subs, four of which were aged 12 years or less. Retiring such modern assets was not an easy decision to make. However, when we objectively reviewed our fleet against the outlook for global demand, we determined that some of these assets may not work again for several years, if at all. Therefore, we felt it prudent not to invest any further cash in keeping these rigs stacked. In addition to retirements, we carefully preservation stacked a large portion of the remaining floated fleet to help preserve cash in the near term while maintaining option value on their future cash flows in a market recovery. We currently have 19 rigs within our stacked fleet comprised of nine floaters and 10 jackups. These rigs are mostly high quality modern assets with a significant useful life remaining, including four drill ships ranked in the top quartile of global floaters and five jackups ranked in the top quartile of global jackups. The quality of these rigs and our detailed rig specific reactivation procedures gives us confidence that Volaris rigs will be at the front of the queue when demand supports bringing back stack rigs, and we're beginning to see evidence of this with some of our recent contract awards. We'll continue to take a disciplined approach to reactivations, with stack rigs only returned to the active fleet when there is visibility into work at Attractive Economics. In most cases, we expect the initial contract to pay for the reactivation costs and have solid prospects for longer-term work. We anticipate that it will cost in the range of 30 to 45 million to reactivate each of our preservation stack floaters and 10 to 20 million to reactivate each of our preservation stacks jackups. Most of this cost will be operating expense recognized in the income statement related to depreservation activities, including reinstalling key pieces of equipment and crewing up the rigs. Any customer-required capital upgrades would be incremental to these estimates, and we would expect to be compensated for these customer-specific enhancements. I'll now spend a few minutes talking about our recent contracting activity. During the three months since emergence, Volaris was awarded 21 new contracts or contract extensions that amount to a contracted backlog of over 1.3 billion. To put that in perspective, our total contract backlog at the end of the first quarter was 1.1 billion. As a result of these new contracts, Volaris's total contract backlog as of August 2nd was $2.2 billion. In addition, Arrow Drilling, our joint venture with Saudi Aramco, has total contract backlog of more than $950 million, including contract backlog for its own rigs of approximately $820 million. If we look at our backlog on a combined basis, including a 50% share of Arrow's own rigs, our adjusted backlog totals $2.6 billion. These contract awards further demonstrate our strong customer relationships across a broad range of IOCs, NOCs, and independents, as well as our constant focus on operational excellence. I'd like to take the opportunity to recognize all the Volaris teams that have contributed to this expanding contracting success over the past few months. We've been particularly successful securing work for our drill ship fleet, winning seven new contracts, totaling approximately $1 billion in contract backlog across five different rigs. The Volaris DS11 was recently awarded an estimated three and a half year contract by Total E&P USA Inc. to execute the high pressure North Platte development drilling campaign. This is an important contract for Volaris that really showcases our technical capabilities. I'm delighted how our technical, operations, and marketing teams have worked so closely with this important customer for over 24 months to understand their requirements and to develop an efficient and effective solution to help develop the North Platte field. The drilling phase of this contract is expected to commence in mid-2024, and we're eager to see the project pass FID by the customer. The DS-11 is currently preservation stacked in the Canary Islands and will be reactivated and mobilized to the U.S. Gulf of Mexico for this program. Before mobilization, the DS-11 will undergo significant upgrades in preparation for this work, including the installation of 20,000 PSI well control equipment. A substantial portion of these cost upgrades and associated equipment purchases will be collected prior to mobilizing the rig for the drilling phase of the program. I would note that these upfront payments are not included in the average day rates or contract backlog figures disclosed in our recent fleet status report. and John will give more details on this contract in his comments. Once these upgrades are complete, the DS-11 will be one of only three drill ships in the global fleet capable of drilling in 20,000 PSI pressure environments. We've also recently been awarded a two-year contract for the Volaris DS-16 by Occidental in the US Gulf of Mexico. which is expected to commence in the second quarter of 2022. The rig is also preservation stacked in the Canary Islands and will be reactivated and mobilized to the US Gulf of Mexico for the project. The fact that we were able to secure this contract for one of our preservation stack rigs ahead of one rig from competitors speaks volumes about our detailed preservation and reactivation procedures, as well as the strength of Volaris operations. We have proven our capability to successfully reactivate rigs from preservation stacks and return them to high levels of operational performance, including most recently the MS1. And I have no doubt that we will demonstrate this again with the DS16. We were also awarded a three-year contract for the Volaris DS18 with Chevron in the US Gulf of Mexico during the quarter. This project is expected to commence in the first quarter of 2022 in direct continuation to the rig's existing contract with the same customer. This contract award is a testament to the technical capabilities of the rig and the excellent operational and safety performance of its crew and secures long-term work with a major customer in an important deepwater market. The four other drill ship contracts have been awarded to the Volaris DS10 and Volaris DS12 in West Africa. The DS10 has secured additional work with Shell and Total Energies in Nigeria where our joint venture with a local drilling contractor, OES, puts us in a strong position in this market. The DS-12 is scheduled to work in the Ivory Coast for Total Energies, as well as in Angola, Mauritania, and Senegal for BP over the next six quarters. We've won three new contracts or extensions for our semi-sub fleet over the past three months, totaling more than 150 million in contract backlog. The Volaris DPS-1 has been awarded two contracts with Woodside Offshore Australia with a combined duration of approximately two years. The rig will mobilize to Australia in the first quarter of 2022 to execute the Enfield P&A program and then move on to the Scarborough development, which we anticipate will receive FID approval soon. Finally, we have also been awarded 11 new contracts or extensions for our jack-up fleet over the past three months. This includes projects in Norway, Thailand, and the Middle East, including a three-year contract for Polaris 110 with North Oil Company Offshore Qatar, and several contract extensions with Saudi Aramco, both for rigs we operate directly, as well as rigs leased to Arrow Drilling. I'll now provide a brief update on Arrow Drilling. As a reminder, Arrow Drilling is a 50-50 joint venture with Saudi Aramco, the largest customer for jackups in the world. Arrow Drilling owns a fleet of seven jackups operating under contracts with Saudi Aramco, with contract backlog of approximately $820 million. Arrow Drilling also leases nine jack-up rigs from Volaris through bare-boat charter arrangements, each operating under contracts with Saudi Aramco. Arrow Drilling recently signed short-term extensions for two of the leased rigs and negotiations are ongoing related to longer-term extensions for most of these assets. Substantially, all operating costs for the leased rigs are incurred by Arrow Drilling, meaning that the leased revenue represents nearly 100% margin for Volaris. Finally, Arrow Drilling intends to build 20 jackups over the next decade, with the first two scheduled to be delivered in the second half of 2022. The first two jackups are being built in the UAE, and thereafter, new rigs will be built at the King Salman Global Maritime Industries Complex in Saudi Arabia. Each of the new builds are backed by long-term contracts with Saudi Aramco and attractive economics. Further information on arrow drilling can be found in an investor presentation that we posted on the Volaris website in conjunction with our earnings press release. I'd now like to spend a few moments talking about offshore drilling and its place within the energy transition. We operate in a heavily regulated marine environment and have had a significant focus on sustainability for several years, publishing our first sustainability report in 2016. and will soon be issuing our latest sustainability reports along with an ESG position statement. This is a topic that Volaris takes seriously and we now have a dedicated board ESG committee as well as an internal cross-functional green sustainability group that is focused on advancing green solutions within our operations. For example, we have a selective catalytic reduction or SCR system installed in our four R-class drill ships, Volaris DS15 through DS18. When in operation, the SCR system would eliminate almost all NOx and SOx emissions from these rigs. Additionally, we're exploring adding this system to one of our jack-ups in conjunction with a potential transport and carbon capture storage project. The following topic I'd like to address in my prepared remarks is the landscape for offshore drillers. One of the most common questions from investors over the past couple of months has been whether we expect to see further consolidation. Whether or not Volaris pays a part, we view consolidation in the industry as positive for several reasons. One of the most evident benefits is cost savings. For example, in the period between closing the Volaris merger in April 2019 and year end 2020, we achieved annualized cost savings of more than $365 million. Given our track record of M&A and successfully integrating companies, we already benefit from scale being the largest offshore driller in the industry. That said, we're highly focused on driving shareholder value and it would explore any opportunities to do so. In summary, we believe that Volaris is well positioned to benefit from the opportunities we see in the market today. We will continue to focus on winning work for our active fleet and returning some of our high quality stack rigs to work as and when attractive opportunities arise. I'm incredibly proud of what Volaris has achieved during our restructuring and in the three months since emergence from Chapter 11. I'm really excited to see what the future holds for the company. And with that, I'll hand the call over to John.