Valaris Limited

Good day, everyone, and welcome to the Volaris Fourth Quarter 2021 Results Conference Call. As a reminder, this call is being recorded. I would now like to 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 Fourth Quarter 2021 Conference Call. With me today are 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 at 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, yesterday we issued our most recent fleet status report which provides details on contracts across our rig fleet. An updated investor presentation and our drilling presentation will be available on our website after the call. Now, I'll turn the call over to Anton Dibivits, President and CEO.

Thanks, Tim. Good morning and afternoon to everyone, and thank you for your interest in Volaris. During today's call, I will start by highlighting some of our major accomplishments in 2021. Next, I will provide some commentary on the current state of the offshore drilling market and discuss how we're managing our fleet and our business to position ourselves for success. Finally, I'll provide an update on Arrow Drilling, our 50-50 joint venture with Saudi Aramco. After that, I'll hand the call over to Darren to discuss our financial results and updated 2022 guidance. 2021 was an important year for Valeris. We relisted on the New York Stock Exchange with the strongest balance sheet in the offshore drilling sector, providing the company with the best possible platform to thrive as we entered the early stages of an industry upcycle. In order to succeed in this business, a solid financial foundation needs to be coupled with excellent operational performance. and we focus every day on delivering safe, reliable, and efficient operations to our customers. I would like to thank the Valaris team for continuing to deliver the strong performance that our customers have come to expect from us. This performance resulted in us achieving over 98% revenue efficiency over the course of 2021 and improving our personal safety performance by 25% as compared to 2020. This is particularly impressive considering the challenging working conditions faced by our offshore crews and support teams during the ongoing pandemic. Our strong operational performance translated into contracting success during 2021, with Volaris's total contract backlog increasing to more than $2.4 billion from just over $1 billion at the beginning of 2021. And I congratulate the marketing team and the myriad of folks across the organization who support them in these efforts on their collective achievements. These backlog additions have enhanced our earnings visibility and, importantly, have been added at increasing day rates, laying the foundation for improved financial performance as we put several reactivated rigs back to work on long-term contracts during the first half of this year. We currently have reactivation projects ongoing for three drill ships and one semi submersible, as well as a special periodic survey project for another semi submersible. These are significant projects during normal conditions and are even more challenging considering global supply chain and personnel mobility issues arising from the pandemic. Our operations, engineering, and supply chain teams are working together and with great effort to ensure that these projects are delivered on time and on budget. We are in the midst of a transitional period that will extend into the second quarter of this year, as we incur significant reactivation costs to put four rigs back to work. However, we anticipate that financial results will improve meaningfully as these reactivations are completed. Finally, we continue to advance our sustainability efforts, and we made some notable progress on this journey in 2021. Belarus now has a dedicated ESG board committee and is building an internal sustainability function that will direct our path forward. Last year, we released our sixth annual sustainability report, as well as an ESG position statement outlining the values and commitments supporting our purpose of providing responsible solutions that deliver energy to the world. We are committed to reducing emissions from our drilling operations and have implemented several solutions to help achieve this. To highlight just a couple of these, Grillship DS-12 became the first vessel in the world to receive the ABS Enhanced Electrical System Notation, EHS-E, with respect to the vessel's ability to optimize its power plant performance, enabling operations on fewer generators and thereby reducing emissions. Also, Jackup Volaris 123 was upgraded with a selective catalytic reduction, or SCR system, prior to working on a CO2 transport and storage project. When in operation, the SCR system is designed to eliminate almost all NOx emissions from the rig. Solaris now has SCR systems fitted on four drill ships and one jack-up. We will continue to make progress on our sustainability journey in 2022, with focus on reducing emissions from our operations and partnering with our customers on their ESG efforts. Turning now to the markets. While renewable energy sources will continue to gain market share, the transition from fossil fuels to new sources of energy will be a protracted process, and we expect oil and gas production will be required for many years to come, both to meet global energy demand and to help fund the transition to renewable sources. According to third-party research, peak oil demand is expected to occur in the late 2020s and peak gas demand in the late 2030s. Current sources of production will not be enough to meet this demand, and therefore new exploration and production from unsanctioned projects will be required. Demand for hydrocarbons has rebounded strongly from the impact of COVID-19 and is forecast to exceed 2019 levels by late 2022. In recent years, E&P companies have generally prioritized shareholder returns and deleveraging balance sheets over investment in new sources of production. resulting in OECD oil stocks well below the five-year average. In addition, OPEC-plus supply-side measures and heightened geopolitical tensions have combined to drive oil prices higher, creating a constructive environment for investment in new offshore projects. Offshore upstream capex is expected to see double-digit growth over the next couple of years, and offshore project sanctioning is expected to increase meaningfully over the same period. with more FIDs expected in 2022 and 2023 than any other year since the start of the industry downturn. Increased upstream spending will lead to more demand for offshore drilling services. Research from RISDAT indicates that floater demand is expected to increase at a compound annual growth rate of 7% over the next five years, and this growth is expected to be driven by both exploration and development drilling. This is a strong signal of our customers conviction in the economics of deep water projects and is positive for longer term demand for these rigs as new exploration activities will lead to future appraisal and development campaigns. We have seen tangible evidence of this improvement over the past 12 months as rig years awarded for benign environment floaters in 2021 more than double that in 2020. and we continue to see a strong pipeline of tenders and inquiries from our customers across each of the major deepwater basins in South America, West Africa, and the Gulf of Mexico. Flooded day rates have increased meaningfully over the past 12 months, particularly for high-specification drill ships. Active utilization for drill ships is currently around 90%. and we see limited available supply for many of the opportunities that are scheduled to commence in late 2022 and early 2023. As a result, we expect continued improvement in day rates for most drill ship opportunities commencing during this time period. Jackup demand also improved in 2021, albeit at a slower pace than floaters, with rig years awarded up by more than 20% year-over-year. While we have seen a recent increase in opportunities for modern benign environment jackups, primarily in the Middle East and Southeast Asia, pricing power remains more limited versus high specification floaters due to the highly fragmented nature of supply and competition from local contractors in many of these markets. We continue to see some softness in the harsh environment jackup market. However, we anticipate this will be a transitory issue. with an increase in project sanctioning expected offshore Norway in 2022 that will help to balance the harsh environment jack-up market in future years. Against this market backdrop, we will continue to actively manage our fleet and contracting activities to best position Valeris for success. In 2021, we set out to build our contract backlog, first by securing additional work for our active rigs. and second, by reactivating some of our high-quality stacked fleet for long-term contracts. We achieved this goal, and as a result, have increased our contract backlog to more than $2.4 billion from just over $1 billion at the beginning of 2021. Though we are currently incurring reactivation costs to put several rigs back to work, the earnings power of our fleet will increase as these rigs commence new contracts before the end of the second quarter. Drill ships DS-4, DS-9, and DS-16 and semi-submersible DPS-1 are expected to contribute combined annualized EBITDA of more than $100 million once they commence their new contracts. In addition, we expect to receive upfront payments of approximately $60 million associated with these contracts that will be amortized over the contract period and will not be recognized in EBITDA. Included in our backlog is approximately $428 million related to an eight-well contract awarded by Total Energies to Drill Ship DS-11 for work on the North Platte Deepwater Project in the U.S. Gulf of Mexico. Earlier this month, Total Energies decided not to sanction and therefore withdraw from the North Platte Project. We are in constructive discussions with Total Energies and its partner on the project, Equinor, to determine next steps. To be clear, Total Energies has not terminated the drilling contract. Should it choose to do so, the early termination fee and contractual reimbursements would be more than sufficient to cover expenses incurred and commitments made by Valeris. Further, given that the commencement of operations was not scheduled until mid-2024, we are confident that there would be other attractive projects for a high-specification drill ship like DS-11 based on the opportunities and day rates we are seeing in the market today. We have proven our ability to win work for preservation-stacked assets with four long-term drill ship contracts awarded in the second half of 2021. And we still have 13 high-quality modern assets remaining, including three uncontracted high-specification drill ships, DS-7, DS-8, and DS-17, that provide operational leverage to this improving market. These rigs are stacked in clusters to minimize holding costs and maximize the option value on future cash flows. We will be disciplined in exercising this leverage and will only return these assets to the active fleet for opportunities that provide meaningful returns. It is also worth noting that we have options to take delivery of new-built drill ships DS-13 and DS-14 by year-end 2023 for a purchase price of approximately $119 and $218 million, respectively, providing further operational leverage to the floater market. We will continue to take a rational approach to fleet management, including regularly assessing the stacked fleet for retirement and divestiture candidates. where we believe the future option value does not merit incurring further holding costs. In this regard, we have retired one additional jack-up since the third quarter call, bringing to 18 the total number of rigs retired since the beginning of 2020. Lastly, I'll touch on Arrow Drilling, our 50-50 joint venture with Saudi Aramco that owns and operates jack-up drilling rigs in Saudi Arabia. Saudi Arabia is the largest market for jack-up drilling rigs in the world, and Arrow and Volaris combined hold nearly a 40% share of Saudi Aramco's offshore rigs currently under contract. Arrow is an important strategic asset for Volaris. We not only have a 50% equity interest in the joint venture, but also have notes receivable totaling $443 million from Arrow. However, since it is an unconsolidated joint venture, we believe that many investors and analysts do not fully appreciate the value inherent in Arrow. Arrow owns a fleet of seven jack-up rigs operating under long-term contracts with Saadia Ramco that have associated contract backlog of more than $1 billion. Two of these rigs were recently awarded five-year contract extensions. and all seven owned rigs are now contracted into 2026. Arrow currently leases an additional seven jackups from Volaris through bare boat charter arrangements, each also operating under contracts with Saudi Aramco. Arrow recently signed three-year extensions for four of these rigs, and Volaris 140 will be added to the Arrow leased fleet in the first quarter. while legacy jack-up Valeris 36 is expected to be returned to Valeris and retired upon completion of its current contract in March. 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 add 20 new-build jack-ups to its fleet over the next decade. The first of these new build rigs is scheduled to be delivered in the fourth quarter of this year, with the second rig expected either late in the fourth quarter or in the first quarter of next year. Good progress continues to be made on construction of the new maritime yard in Saudi, where each of the subsequent new builds will be built, and Arrow is expected to place orders for new build rigs three and four later this year. Each of the new builds will be 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. Arrow is actively exploring financing options for the new builds, and financing is expected to be secured prior to delivery of the first rig later this year. We do not expect that Volaris 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. In conclusion, I'd like to reiterate some of the key points from my prepared remarks. First, our best-in-class operational track record and solid financial foundation provide Volaris with a great platform to thrive during the industry upcycle. Second, Volaris meaningfully increased contract backlog in 2021, but still retains significant operational leverage to capitalize on the improving flow to market. Third, while we currently are in the midst of a transitional period as we reactivate stacked rigs, we expect financial results will improve meaningfully as those reactivations are completed. And finally, 2022 is expected to be a significant year in the history of our joint venture, Arrow Drilling, with the expected delivery of at least one and possibly two new builds, orders placed for a further two rigs, and financing secured to fund the growth of Arrow. In summary, Volaris is well-positioned to capitalize on opportunities that arise as we enter the beginning of an industry upcycle. I now hand the call over to Darren to take you through the financials.