Valaris Limited

Good day and welcome to the Velar second quarter 2022 earnings 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 your touchtone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Tim Richardson, Director of Investor Relations. Please go ahead, sir.

Welcome, everyone, to the Volaris Second Quarter 2022 Conference Call. With me today are President and CEO Anton Dibovic, Interim CFO and Vice President, Investor Relations and Treasurer, Aaron 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 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, last week, 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, and 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. I will then provide an update on the outlook for the offshore drilling market, highlight some of our recent contract awards, and discuss our strategy for maximizing shareholder value during the unfolding industry upcycle. After that, I'll hand the call over to Darren to discuss our financial results and guidance. As always, our primary focus is on delivering safe, reliable, and efficient operations to our customers, and we celebrated notable safety achievements during the quarter, with several rigs reaching recordable free milestones, including Jacob Valera 76, which has not had a recordable incident in four years. This is a fantastic accomplishment, and I congratulate the crews of the Valera 76 and support teams on their dedication to working safely. In terms of operational efficiency, we continue our demonstrated track record of delivering strong performance to our customers, achieving 97% revenue efficiency during the quarter and 98% during the first half of the year. This is particularly impressive given the commencement of new contracts for several rigs during the first half of the year, allowing reactivations and shipyard projects. While operating and safety performance can be adversely impacted during periods of increasing activity with rig reactivations and contract startups, we remain committed to maintaining our high levels of performance by adhering to our safe systems of work and continuing to develop the expertise of our people. We've implemented additional onboarding programs, including a new hire training program in the U.S. Gulf that utilizes one of our stack rigs to introduce new personnel especially those who are new to the industry, to the offshore working and living environment. Training and assessing foundational operational and safety protocols in an immersive offshore environment will help to better prepare these new employees for deployment onboard our working rigs. These types of measures are particularly important given the ongoing and expected future increases in activity levels in the industry. As we stated previously, the first half of 2022 was a transitional period for us, as we incurred reactivation costs to put three drill ships and one semi-submersible back to work on multi-year contracts that were secured last year. I am proud of the entire Valeris team for successfully executing these major reactivations concurrently, particularly considering the many challenges faced over the past year. These four rigs have all now returned to work largely on time and within our prior reactivation cost guidance for these four projects and will contribute to a meaningful increase in earnings in future periods. Turning now to the market. Despite the recent volatility in equity prices across the energy sector, the fundamental outlook for our industry remains highly constructive. The lack of investment in new sources of production over the past several years has contributed to a tight supply picture that has been exacerbated by geopolitical instability and an increased focus on energy security. Against this backdrop, spot Brent crude prices have been above $100 per barrel for most of the past five months, and medium and longer-term commodity prices remain constructive for investment in offshore projects. Two-year forward Brent crude prices are currently above $80 per barrel, and five-year forward prices are above $70 per barrel, levels at which almost all undeveloped offshore resources are expected to be profitable. As a result of the supportive commodity price environment, offshore upstream capex is expected to see double-digit growth over the next couple of years, and offshore project sanctioning is anticipated 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. The constructive macro environment and increased upstream spending has led to an increase in both contracting and tendering activity across both floater and jack-up markets. On a trailing 12-month basis, rig years awarded for benign environment floaters are approximately 75% higher than the previous 12 months. Rig years of open demand at tender or pre-tender stage, as of the quarter end, were approximately 65% and 40% higher than six months ago and 12 months ago, respectively. A meaningful portion of this increase is attributable to the large Petrobras tender for up to eight rigs for long-term work offshore Brazil commencing in 2023. We anticipate that Brazil will be a significant driver of offshore demand over the next several years, and we are well positioned to benefit by adding a third rig to the strategic basin following our recent contract award for drill ship Valaris DS-17. We continue to see a strong pipeline of tenders and inquiries from our customers in West Africa, where we have an excellent operating track record, with three drill ships already operating in the region and a further three stacked drill ships nearby in the Canary Islands. And finally, we also see several opportunities in the Gulf of Mexico, both on the US and Mexican side of the Gulf, with the US opportunities primarily requiring drill ships. while the Mexican opportunities are well-suited for our active semi-submersible in the region, Polaris DPS5. It is worth noting that contracts and lead times tend to be shorter, and therefore demand visibility is lower in the U.S. Gulf as compared to South America and West Africa, and we could see incremental demand appear quickly if the market remains strong. On the jack-up side of the business, we have seen a notable increase in activity since the start of the year. primarily driven by increased demand in the Middle East. On a trailing 12-month basis, jack-up rig years awarded are more than 70% higher than the previous 12 months, and rig years of open demand at tender or pre-tender stage as of the quarter end were approximately 10% and 30% higher than 6 months ago and 12 months ago, respectively. As a result, active utilization for jack-ups has increased to approximately 90%. and pricing and contract terms for modern benign environment jackups continue to improve. Recently, we were awarded a four-year contract with Brunei Shell Petroleum for the Volaris 115, which represents the largest backlog award for a benign environment jackup outside of the Middle East this year. We've also been awarded a one-year extension with BP Offshore Indonesia for Volaris 106, and several shorter-term contracts for Volaris 107 offshore Australia and Volaris 144 in the U.S. Gulf, demonstrating the global nature of the region pickup inactivity. While the benign environment jack-up market has improved meaningfully this year, we continue to see near-term softness in the harsh environment jack-up market. We expect that this will continue into next year, and we may see some rigs go idle later this year as we enter the seasonally weaker winter months and rigs complete the current programs. However, we anticipate that an increase in project sanctioning expected offshore Norway later this year and a strong pipeline of activity in the UK North Sea for work commencing in mid-2023 and beyond will help to better balance the harsh environment jack-up market in future years. Moving now to our fleet strategy. In 2021, we set out to build our contract backlog by reactivating our high-quality stack rigs for long-term contracts at Attractive Economics. We achieved this goal by winning contracts for four of our preservation stack floaters, which have all now been reactivated and returned to work largely on time and within our reactivation cost guidance range on average. Having secured this backlog and given greater demand for our high-quality rigs, we increased our hurdle rates for future investments and will remain disciplined in only returning additional stacked rigs to the active fleet for opportunities that provide meaningful returns, such as our recent contract award for Volaris DS17. This 540-day contract with Equinor Offshore Brazil has a total contract value of approximately $327 million. including an $86 million upfront payment to cover mobilization, capital upgrades, and a contribution towards our reactivation costs. We have proven our ability to win work and reactivate our preservation-stacked assets, and we still have 11 high-quality modern assets remaining, including three uncontracted high-spec drillships, Polaris DS-7, DS-8, and DS-11. These rigs are well-suited for many of the attractive opportunities we see in the market today, but we will remain disciplined in exercising our operational leverage. It is also worth noting that we have options to take delivery of new-build drill ships for Larus 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. Scale is beneficial for a driller, as it allows onshore support costs to be spread over a larger fleet. Adding Velaris DS17 in Brazil will provide a critical mass of three active floaters at each point of the Golden Triangle, and is part of our strategy to focus our efforts on those basins that are expected to drive significant shares of future demand. We continue to regularly assess our fleet for retirement and divestiture candidates. During the quarter, we recorded a gain on asset sales of $135 million, primarily related to the sale of Jacobs Polaris 113 and 114, each of which had been stacked for more than six years for a combined $125 million. We will continue to evaluate our fleet, whether for acquisitions or divestitures, for opportunities to create shareholder value. Another source of shareholder value is Arrow Drilling. our unconsolidated 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 rigs in the world, with approximately 75 rigs either under contract or contracted for future work. And this number is expected to increase to more than 90 after completion of ongoing tenders, which would represent approximately one in four benign environment jackups currently contracted worldwide. We remain highly focused on highlighting what we believe is a significant value inherent in Arrow, and we have potential catalysts approaching with new build rigs one and two scheduled to be delivered in the first half of next year and orders for new build three and four expected to be placed later this year. As a reminder, each of the new builds will be backed by an initial eight-year contract with SideA Ramco 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 third-party financing and cash from Arrow operations. Arrow continues to actively explore financing options and expects financing to be secured prior to delivery of the first two new builds. We do not expect that either 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. I'll conclude my remarks by reiterating some of the key points. First, we remain focused on extending our demonstrated track record of delivering safe and efficient operations to our customers. and are taking additional steps to maintain our high standards of safety and operating performance in light of increasing activity. Second, the fundamental outlook for our industry remains highly constructive, as evidenced by increasing contracting and tendering activity across both floaters and jackups. And third, we have proven our ability to contract and effectively reactivate our high-quality stack rigs. We retain significant operational leverage to the improving market, and we will continue to reactivate further rigs for opportunities that provide meaningful returns on investment, such as the recently announced contract for Volaris DS17. In summary, Volaris 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. We'll now hand the call over to Darren to take you through the financials.