Valaris Limited

Good day, everyone, and welcome to Volaris' third quarter 2021 financial results conference call. Please note that this event is being recorded. I will now turn the call over to Mr. Tim Richardson, Director of Investor Relations, who will moderate the call. Please go ahead, sir.

Welcome, everyone, to the Volaris third quarter 2021 conference call. With me today, our interim president and CEO, Anton Dibovic. Interim CFO and Vice President, Investor Relations and Treasurer, Darren Gibbons, and other members of our executive management team. We issued our press release, which is available on our website at velaris.com. Any comments we made 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 RIC fleet on October 27th. An updated investor presentation will be available on our website after the call. Now, I'll turn the call over to Anton Dibovic, Interim President and CEO.

Thanks, Tim, and good morning and afternoon to everyone. Welcome to the call, and thank you for your interest in Valeris. During today's call, I will start by providing a brief overview of Polaris, highlighting the key attributes that make Polaris the industry leader in offshore drilling. I'll then provide some commentary on the current state of the offshore drilling market and highlight some of our recent contract wins. I'll also provide an update on Arrow Drilling, a 50-50 joint venture with Saudi Aramco. Lastly, I will discuss some of our recent developments on sustainability. After that, I'll hand the call over to Darren for a financial update, including preliminary 2022 guidance. Velaris is the largest drilling contractor by fleet size, but more importantly, we have the highest quality fleet in the industry, as ranked by an independent third party. That fleet is managed by a best-in-class team that is guided by strong values and a purpose-driven culture. Our 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. And those operations are delivered with an industry leading cost structure built around the shared services model, which allows our cost structure to quickly adapt to changes in the market environment. We focus every day on delivering safe, reliable, and efficient operations to our customers. And I would like to take this opportunity to thank the Valera's team for continuing to deliver the strong performance that our customers have come to expect from us, again during the third quarter. This performance is evidenced by the 99% revenue efficiency, both during the third quarter and year to date, and our personal safety performance that has improved 25% year to date in 2021 as compared to our full year 2020 performance. This is particularly impressive considering the challenging working conditions faced by offshore crews and support teams during the ongoing pandemic. Valaris is an operationally leveraged play into a recovering market and one that is underpinned by the strongest balance sheet in the offshore drilling sector. A balance sheet provides ample liquidity to fund operations and the flexibility to make disciplined decisions about bringing new capacity to the market when justified by the economics of new opportunities. Turning to the market. Spot Brent crude prices have recovered strongly in 2021 from the pullback in 2020, resulting from the COVID-19 pandemic. Given the long lead times for offshore projects, particularly those in deep water, our customers tend to be more focused on medium-term commodity prices rather than what is happening in the spot market. Two-year forward Brent crude prices are currently around $70 per barrel, the level that is viewed as highly constructive for offshore project demand. Research from RISTAD indicates that floater demand is expected to increase at a compound annual growth rate of approximately 6% between 2021 and 2025, and this growth is expected to be driven by both exploration and development drilling. This is a strong signal of our customer's conviction in the economics for deepwater projects and is positive for longer-term demand for these rigs, as new exploration activities will lead to future appraisal and development campaigns. We are already seeing tangible evidence of this improvement in the number of awarded contracts, inquiries, and tenders, as well as in discussions with our customers. We've seen several multi-year awards in Brazil during 2021. and there are a number of active tenders currently in progress. Brazil is reportedly seeking to double production by 2030, and with offshore resources that can deliver production at attractive economics, we anticipate that Brazil will be a significant driver of offshore demand over the next several years. U.S. Gulf of Mexico operators have expedited rig selections this year in anticipation of a lack of supply, which has played a key role in pushing day rates in this market higher. We have also seen a noticeable increase in deepwater tendering in West Africa, where activity fell to an extremely low level in 2020. Growth in the jackup market is expected to be more muted than for floaters. This is not surprising given that jackup demand was more resilient during the downturn, with a significant portion of demand driven by infill drilling and a large portion of the customer base being national oil companies, which are more likely to maintain activity during low parts of the cycle state production and fiscal budget targets. The recent rise in commodity prices has, however, driven an increase in tendering activity, particularly in Southeast Asia and the Middle East, and there are ongoing tenders that could result in a significant number of incremental rigs being contracted. We see limited near-term opportunities in the harsh environments jack-up market on the Norwegian continental shelf through the end of 2022. Consequently, some of the rigs ending their contracts in Norway are now actively competing for work in other sectors of the North Sea, which has increased competition in those markets. We anticipate this will be a transitory issue with the Norwegian market expected to improve in 2023. Against this market backdrop, we will continue to actively manage our fleet and contracting activities to position Volaris for success. In response to the decline in demand for hydrocarbons and offshore drilling services during 2020, we carefully preservation stacked a large portion of our floater fleet to help preserve cash in the near term while maintaining option value on their future cash flows in a market recovery. The quality of these rigs are detailed rig-specific reactivation procedures, strong customer relationships, and operational track record gave us confidence that Volaris rigs would be at the front of the queue when demand supported reactivating stacked assets. And we are now seeing this play out. Over the past few months, we have secured long-term contracts with important Deepwater customers for four of our seven preservation stack drill ships. We will continue to take a disciplined approach to fleet management and contracting. Now that we have improved earnings visibility, eight of our 11 drill ships currently or future contracted, we have increased the economic hurdle rate for both follow-on contracts and future reactivations. We continually review our fleet for divestiture and retirement candidates. Since the last conference call, we sold one of our preservation stack jackups, Polaris 142, to an operator with specific use restrictions to ensure that it will not compete against our own rigs. We also retired a further two legacy jackups. We have now retired 18 rigs since the beginning of last year and more than 50 since the beginning of the downturn. We will continue to take a disciplined, returns-focused approach to fleet management as we position Volaris to maximize earnings and cash flows during the market recovery. Moving now to our recent contracting success. Our high-quality fleet, deep customer relationships, and demonstrated track record of operational performance have enabled us to continue translating our operational leverage into meaningful backlog additions, with approximately $330 million added in the past three months and more than $2.1 billion added year-to-date. As a result of these new contracts, Polaris' total contract backlog has increased to more than $2.3 billion, from just over $1 billion at the beginning of the year. These backlog additions have enhanced our earnings visibility and importantly have been added at higher day rates, which will help to lay the foundation for improved financial performance in 2022 and beyond. More than $1.7 billion of the backlog added year to date has been for our floater fleet, including several multi-year drill ship contracts. As a result of these contracts, the average day rate within our floater backlog has increased by 25% year to date to $235,000 a day. It is also worth noting that approximately 75% of the backlog added year to date is with majors and large international oil companies, the primary users of high specification floaters. Our contract wins year to date represent an outsized share of those awarded in the market. Valeris owns approximately 8% of the global fleet, but has won 15% of total fixtures and 13% of total rig years awarded. I'd like to take the opportunity to recognize all the Valeris teams that have contributed to our contracting success over the past several months. We've been particularly successful securing work for our drill ship fleet, winning several multi-year contracts over the past few months. On the prior quarter conference call, we announced contracts for Volaris DS11, DS16, and DS18, all for work in the U.S. Gulf of Mexico. More recently, we have been awarded contracts for Volaris DS4 offshore Brazil, as well as DS9 and DS10 offshore West Africa, enhancing our presence in each region of the Golden Triangle. Volaris DS4 was recently awarded a contract with Petrobras for a minimum term of 548 days. The rig was previously preservation stacked in the UK and just recently arrived in the Canary Islands where it will be reactivated and then mobilized to Brazil. The contract is anticipated to commence by early second quarter 2022. We're very pleased to place another rig in Brazil with the largest customer in that market as we expect Brazil will be one of the primary drivers of incremental floater demand over the next few years. We have also recently been awarded a two-year contract for Valeris DS9 with Exxon offshore Angola, which is expected to commence in the second quarter of 2022. DS9 is currently preservation stacked in the Canary Islands and will be reactivated and mobilized to Angola for this project. DS9 is one of the most technically capable assets in the global fleet, and we look forward to getting her back to work. We also recently won another short-term contract for semi-submersible Volaris MS1 Offshore Australia and are in advanced discussions for a further short-term follow-on job. Importantly, these contracts help to bridge a gap in the rig schedule before it is due to start a longer-term campaign in the second quarter of 2022 and should keep the rig almost continuously utilized through the middle of 2023. We now have both the DPS-1 and MS-1 contracted on longer-term projects offshore Australia. This is the market that these rigs were built for and where they have a successful operating history. Finally, we also have won several new contracts for our jack-up fleet since the second quarter call. These include projects in the UK, the Netherlands, the US Gulf of Mexico, Southeast Asia, and Australia. We were also awarded a seven-month extension for Valeras 36, one of our rigs leased to Arrow Drilling in Saudi Arabia. As a reminder, Arrow Drilling is a 50-50 joint venture with Saudi Aramco. We view Arrow as an important strategic asset since it places us in a privileged position with the largest customer of offshore drilling rigs in the world, with Arrow and Valeras combined holding nearly a 40% share Saadia Ramco's offshore drilling rigs currently under contract. Since Arrow is an unconsolidated joint venture, we believe that many investors and analysts do not fully appreciate the value of Arrow to Valeris. Arrow owns a fleet of seven jack-up rigs operating under contracts with Saadia Ramco with a contract backlog of more than $750 million. Arrow leases an additional seven jack-up rigs from Valeris through bare boat charter arrangements each also operating under contracts with Saudi Aramco. Arrow recently signed a short-term extension for one 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, meaning the lease revenue represents nearly 100% margin for Valeris. Finally, Arrow intends to build 20 jackups over the next decade. with the first two scheduled to be delivered in the second half of 2022. Each of the new builds are backed by long-term contracts with Saudi Aramco at Attractive Economics. Given these economics, the new build rigs are expected to be financed by cash from Arrow Operations and third-party financing. We do not expect that Belarus or Aramco will need to provide any additional financing to Arrow to fund the new build program. Further information on Arrow can be found in a separate investor presentation on the Volaris website. I would now like to spend a few moments talking about offshore drilling and its place within the energy transition, as well as specifically what Volaris is doing from an ESG perspective. Many of our customers have set goals to lower or eliminate net greenhouse gas emissions. A recent Woodmax study on emissions intensity highlighted that offshore oil and gas production has amongst the lowest carbon emissions of all the types of production. As a result, we expect some operators with exposure to multiple sources of production to shift focus to lower intensity sources, such as offshore, to meet their emissions targets. As a part of the value chain that delivers reliable and affordable energy, we recognize the importance of producing that energy responsibly. The emissions from our drilling rigs currently represent the largest contributor of atmospheric CO2 in our business, and therefore, decarbonizing our own operations are the initial focus in our sustainability efforts. Recent developments on this front include harsh environment jack-up for Larus-123 being upgraded with a selective catalytic reduction, or SCR, system in advance of preparation of a wellbore for the Portas CO2 transport and storage project. Volaris now has an SCR system fitted on four drill ships and one jack-up. When in operation, the SCR system is designed to eliminate almost all NOx and SOx emissions from the rig. In addition, drill ship Volaris DS12 recently became the first vessel in the world to receive the ABS Enhanced Electrical System Notation, EHS-E. This system is designed to allow the vessel to optimize its power plant performance enabling operations on fewer generators and thereby reducing emissions. The system may have both environmental and financial benefits, as we expect to share the financial gain of any fuel savings with our customer. On a similar note, Valeris Viking, an ultra-harsh environment jackup operating offshore Norway, recently achieved a fuel incentive award from its customer. This was achieved through implementation of an energy management plan that helped the rig to avoid nearly 200 metric tons of CO2 equivalent emissions over a two-month period. We're pleased that our efforts in the ESG area are being recognized by our customers, with Filaris recently being ranked Best Performer for Drilling Rigs in ENI's 2021 HSE and Sustainability Awards. I'd like to conclude by reiterating some of the key points and priorities from my prepared remarks. First, the size and quality of the Valeris fleet and demonstrated operational track record, coupled with our industry-leading cost structure, provide significant earnings potential in a market recovery. The Valeris management team and board are laser-focused on maximizing earnings to drive meaningful free cash flow as the market recovers. To achieve these objectives, we are focused on the following. First, exercising our operational leverage in a disciplined manner with respect to contracting both our active fleet and also when further reactivations may be warranted. Second, continuing to take a rational approach to fleet management, including continually reviewing our fleet for further retirements when economics don't justify holding them. maintaining an industry-leading and adaptable cost structure, and finally, highlighting the significant inherent value in Arrow. In summary, we believe that Valeris is well-positioned to benefit from the opportunities we see in the market today, and we will continue to focus on delivering against the priorities I just mentioned. I'll now hand the call over to Darren to take you through the financials.