Valaris Limited

And welcome to the VERARIS first quarter 2022 earnings call. All participants will be in 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 your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tim Richardson, Director of Investor Relations. Please go ahead.

Welcome, everyone, to the Volaris First Quarter 2022 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 volaris.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, yesterday we issued our most recent fleet status report, which provides details on contracts across our rig fleet. An updated investor presentation and arrow drilling presentation will be available on our website after the call. Now, I'll turn the call over to Anton Divovits, President and CEO.

Thanks, Tim. Good morning and afternoon to everyone, and thank you for your interest in Valeris. During today's call, I will start by providing an overview of our operational and financial performance during the quarter. Next, I'll provide some commentary on the current state of the offshore drilling market and discuss how we're managing our fleet and our business to maximize shareholder value. 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 2022 guidance. The heart of our business and our primary focus every day is on delivering safe, reliable, and efficient operations to our customers. We celebrated a few notable safety milestones during the quarter, with three rigs achieving three years without a recordable incident. and another two rigs reaching this milestone since quarter end. We also recognize that the recent IADC North Sea Chapter Safety Awards receiving the best safety performance award for jackups in 2021. Winning this award was particularly gratifying considering some of the additional challenges faced last year, including rig reactivations and the impact of the pandemic. On the operations efficiency side, I'd like to thank the Volaris team for continuing to deliver the strong performance that our customers have come to expect from us, achieving 99% revenue efficiency during the quarter. This is a fantastic effort and continues our excellent operational track record, having achieved more than 98% revenue efficiency over the course of 2021. These results are the product of our dedicated offshore crews, robust systems and processes, and a culture that is underpinned by our values, including safety and excellence. We are committed to maintaining these high levels of performance, and to this end, we continue to develop and implement additional technologies that enhance our ability to monitor and manage performance across the fleet. These include the Valeris operating system, our in-house digital platform that interfaces with our personnel management and training systems, a licensed drill application, which provides real-time monitoring of the training, competency, and performance of our drillers, and the Valaris Intelligence Platform, which allows us to aggregate, stream, and visualize rig equipment sensor data, enabling our remote technical support center to monitor the performance of critical rig equipment. We also remain focused on developing expertise in our people and have stepped up these efforts. with additional onboarding and leadership training programs for our offshore crews. These are particularly important given the ongoing and expected future increases in activity levels in the industry. As we have mentioned previously, the first half of 2022 is a transitional period for us, as we incur reactivation costs to put three drill ships and one semi-submersible back to work on long-term contracts that were secured last year. I'm proud of the entire Volaris team for the progress that has been made in executing these major projects concurrently, particularly considering the pandemic, personnel, and global supply chain challenges. I'm pleased to report that the Volaris DPS-1 completed its reactivation and mobilization project and returned to work last week. We continue to expect that the remaining three floaters will be on contract by the middle of the year. We are now a substantial way through these reactivation projects and anticipate that financial results will improve meaningfully once they are completed. These four regs are expected to generate a combined annualized EBITDA of more than $100 million based on contractual day rates, which were set around 12 months ago. Importantly, as I will discuss in a few moments, we retain significant operational leverage to the improving market through our remaining high-quality stacked assets. Turning now to the market, demand for hydrocarbons has rebounded strongly from the impact of COVID-19 and is forecast to exceed 2019 levels by early 2023. 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 inventories well below their 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 projects. While the conflict in Ukraine has led to increased volatility in spot oil prices, given the longer lead times for offshore projects, our customers tend to be more focused on medium and longer-term commodity prices than what is happening in the spot market. Two-year Ford Brent crude prices are currently above $80 per barrel, and five-year Ford prices are around $70 per barrel, levels that are highly constructive for offshore project demand. Research from RISDAT indicates that virtually all undeveloped offshore resources are profitable at $70 per barrel, and almost 80% are profitable at $50 per barrel. As a result of the constructive commodity price environment, 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 in 2014, according to industry research. Increased upstream spending is expected to lead to more demand for offshore drilling services, and we have already seen a meaningful improvement in utilization and day rates over the past 12 months, particularly in the floater market. Several recently announced contract awards have been made at or above $300,000 per day. While many of these have been for shorter-term programs in the U.S. Gulf, more recently we have seen day rates at these levels offshore Australia, South America, and West Africa. Very recently, we were awarded a two-well contract with a major operator offshore Angola in the Republic of Congo for drill ship Filaris DS-12, The new contract, as further detailed in our recently updated Fleet Status Report, is anticipated to take place during the first quarter of 2023, in direct continuation of its current contract, and has a total contract value of $26.2 million. The day rate under this contract, at a level not seen in the past seven years for drill ship work offshore West Africa, is a testament to the demonstrated operational track record of the DS-12 and provides further evidence of the improvement in floated day rates across geographies. Looking forward, we continue to see a strong pipeline of tenders and inquiries from our customers across each of the major deepwater regions in South America, West Africa, and the Gulf of Mexico. This includes the recently announced tender from Petrobras for up to eight rigs for long-term work offshore Brazil commencing in 2023, which we expect will include some rigs that are incremental to its currently contracted fleet. This is in keeping with reports that Brazil is 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. On the jack-up side of the business, we've seen a notable increase in activity since the start of the year. Rig years awarded for the first quarter of 2022 were more than 50% higher than during the same period last year. And expected rig years of work at tender or pre-tender stage are approximately 75% higher than 12 months ago. Increased demand in the Middle East is attracting rigs from other regions. and is expected to help improve the overall supply and demand balance for benign environment jackups going forwards. Active utilization for benign environment jackups has increased to approximately 85%, and we are seeing pricing continue to improve, albeit at a slower pace than high specification floaters, due to the highly fragmented nature of supply and competition from local contractors in a number of markets. Just recently, we added two additional contracts that improved day rates on the Volaris 107, which is operating in Australia, taking this rig's work program out to the fourth quarter of this year. We continue to see some softness in the harsh environment jack-up market. While current utilization rates for harsh environment jack-ups are in the mid-80s, contract durations continue to be relatively short, resulting in a competitive bidding environment. We anticipate that an increase in project sanctioning expected offshore Norway in 2022 and a strong pipeline of activity in the UK North Sea for work commencing in the mid 2023 will help balance the harsh environment jack up market in future years. Moving now to our fleet strategy. We will continue to actively manage our fleet and our contracting activities to position Volaris for success. In 2021, we set out to build our contract backlog, first by securing additional work for our active rigs, and then by reactivating some of our high-quality stack fleet for long-term contracts at Attractive Economics. We achieved this goal, and as of our most recent fleet status report, have increased our contract backlog to more than $2.4 billion from just over $1 billion at the beginning of 2021. These backlog additions have added to our earnings visibility, laying the foundation for increased earnings in the future. Having secured this backlog and given constructive developments in demand for the high-quality assets that we operate, we further increased our hurdle rates and will remain disciplined in only returning additional stack rigs to the active fleet for opportunities that provide meaningful returns. We have proven our ability to win work for preservation stacked assets, and we still have 11 high-quality modern assets remaining, including three uncontracted high-spec drill ships, Valeris DS-7, DS-8, and DS-17. These rigs provide operational leverage to an improving market, and we are currently pursuing a number of attractive opportunities which would allow us to contract and begin reactivation of at least one of these rigs in the near term. It is also worth noting that we have options to take delivery of new-build drill ships Valaris DS-13 and DS-14 by year-end 2023 for a shipyard price of approximately $119 and $218 million, respectively, providing further operational leverage to the floater market. We highlighted in our last quarterly earnings call that 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. In February, Total Energies decided not to sanction and therefore withdraw from the North Platte Project. Since our last call, the contract has been novated to Equinor, which is the partner on the project. No material changes to the contract resulted from the novation, including with respect to the termination provisions, in the event the project does not receive FID. If the contract were to be terminated, the early termination fee and contractual reimbursements would be more than sufficient to cover expenses incurred and commitments made by the LARIS. Further, given that commencement of operations is not scheduled until mid-2024, we expect 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 continue to take a rational approach to fleet management, including regularly assessing our fleet for retirement and divestiture candidates. In this regard, we recently sold two jackups, Valeris 113 and 114, to ATIS for a total of $125 million, a value which is highly accretive to our shareholders. Each of these rigs had been stacked for more than six years and would have required meaningful capital to reactivate. We have also sold legacy jackup Valeris 67, which will be responsibly retired from the offshore drilling fleet. We now have only four legacy jackups remaining in our fleet. Moving now to Arrow Drilling, our 50-50 joint venture with Saudi Aramco that owns and operates jackup drilling rigs in Saudi Arabia. Saudi Arabia is the largest market for jackup drilling rigs in the world, and Arrow and Valeris combined hold nearly a 40% share of Saudi Aramco's offshore rigs currently under contract. Arrow is an important strategic asset for Valeris. 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 unconsolidated, we believe the value inherent in Arrow is not fully reflected in our enterprise value. As a reminder, Arrow owns a fleet of seven jack-up rigs operating under long-term contracts with Sadia Ramco that have an associated contract backlog of approximately $1 billion. These rigs are guaranteed high levels of utilization for life, so long as they meet Aramco's specification requirements. Arrow also leases eight jack-up rigs from Valeris through bare boat charter arrangements, each also operating under contracts with Saudi Aramco. Substantially, all operating costs for the leased rigs are incurred by Arrow, meaning the lease revenue represents nearly a 100% margin for Valeris. Finally, Arrow intends to add 20 new-build jackups to its fleet over the next decade. New-build rigs 1 and 2 are scheduled to be delivered in the first or second quarter of next year, and Arrow is expected to place orders for new-build rigs 3 and 4 later this year. Each of these new-builds will be backed by an initial eight-year contract with Saudi Aramco at a day rate set to achieve a six-year EBITDA payback on the total price of the rig. Following the initial contract, each new build will be contracted for at least eight more years in aggregate, with pricing set every three years utilizing a market pricing mechanism. Given the economics of the initial contracts, 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 new build rigs one and two. We do not expect that Valeris 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 Valeris website. I will conclude my remarks by reiterating some of the key points. First, we remain focused on our core business, which is safely delivering our services to our customers. Amidst the challenging environment, the Valaris team continues to deliver both operations and projects at an exceptionally high level. Second, we entered the year in a transitional period, with four major reactivation projects ongoing. The first is now completed, and the remaining three are making excellent progress. We continue to anticipate that our financial results will improve meaningfully as these reactivation projects are completed and the RIGs commence their long-term contracts. Third, we retain significant operational leverage to the improving market through our high-quality stack fleet, and we will only reactivate RIGs for opportunities that provide meaningful returns on investment. And lastly, we will continue to assess the fleet for retirement and divestiture candidates, and will act opportunistically to divest assets if the transaction makes economic sense and is accretive to shareholders. In summary, Valaris is well-positioned to capitalize on opportunities that arise during an industry upcycle, and the Valaris management team and board are highly focused on maximizing earnings and driving meaningful free cash flow by following our strategy of being value-driven, focused, and responsible in our decision-making. I'll now hand the call over to Darren to take you through the financials.