Valaris Limited

Good day and welcome to the Valeris Third 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 this event is being recorded. I would now like to turn the conference over to Darren Gibbons, Vice President of Investor Relations and Treasurer. Please go ahead.

Welcome, everyone, to the Volaris third quarter 2022 conference call. With me today are President and CEO Anton Dibovitz, Senior Vice President and CFO Chris Weber, 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, yesterday we issued our most recent fleet status report, which provides details on contracts across our rig fleet. An updated investor presentation and aero drilling presentation will be available on our website after the call. Now, I'll turn the call over to Anton Dibovitz, President and CEO.

Thanks, Darren, and good morning and afternoon to everyone. During today's call, I will start by providing an overview of our performance during the quarter. I'll then provide commentary on the outlook for the offshore drilling market and discuss our strategy for maximizing shareholder value during the unfolding industry upcycle. After that, I'll hand the call over to Chris to discuss our financial results and guidance. We continue to deliver strong operational performance to our customers with revenue efficiency of 96% in the third quarter and 97% year to date. We are committed to maintaining high levels of safety performance, which is particularly important given increasing activity levels. Our safety performance is the result of the focus and dedication of the Valeris team in several programs that we have implemented. These include our bold leadership training courses that we run every other week, a behavior-based safety program where supervisors mentor and engage with junior crews to ensure that they understand and are adhering to our safe systems of work, and a new format for our basic training program in the U.S. Gulf of Mexico, utilizing one of our stack rigs in the U.S. Gulf. We believe that this format for basic training will help new employees, especially those who are new to the industry, to be better prepared for the offshore working and living environment and deployment on board our working rigs. Since its inception, we have averaged 18 new hire employees graduating every two weeks. I'm pleased that these efforts have been recognized by our customers, with Valeris recently being rated the number one offshore driller in Energy Point Research's 2022 Customer Satisfaction Survey. Valeris was number one in nine categories, including total satisfaction, health, safety and environment, and job quality. These awards are a testament to the exceptional work that our dedicated offshore crews and onshore support teams perform in partnership with our customers. And we are grateful to our customers for recognizing our performance. I'm extremely proud of the entire Volaris team for continuing to deliver high levels of operational performance during the challenging period for the industry and the organization. Since the beginning of the year, we have successfully executed four major floater reactivations, with all four rigs returning to work largely on time and within our reactivation cost guidance. This achievement speaks volumes about the operational execution capabilities of our organization and positions us well for future opportunities that require the reactivation of stack rigs. The return of these four floaters to the active fleet over the past several months has contributed to a meaningful improvement in our third quarter operating results, demonstrating the operational leverage inherent in our business. Adjusted EBITDA increased to $76 million from $29 million in the second quarter, and adjusted EBITDA, which adds back one-time reactivation costs, increased to $94 million from $54 million in the second quarter. Turning now to the market. The fundamental outlook for our industry remains highly constructive. A 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. A significant increase in investment will be required to rebuild global supplies, irrespective of near-term demand volatility. and offshore production is expected to continue to play an important role in meeting the world's need for secure and affordable energy. We believe that these factors and the significant reduction in the rig fleet, especially floaters, over the past several years lay the foundation for a sustained industry upcycle. Despite recent downward pressure on oil prices due to fears of a global economic recession and a strong U.S. dollar, commodity prices remain at levels that are highly supportive of continued investment in offshore oil and gas projects. Two-year Ford Brent crude prices are currently around $75 per barrel, and five-year Ford prices are just below $70 per barrel, levels at which almost all undeveloped offshore resources are expected to be profitable. As a result of the supportive commodity environment, capex for overall project approvals in 2023 and 2024 are expected to be at their highest levels in more than a decade. And these project approvals should help drive capital expenditures for several years to come. The constructive macro environment and increased upstream spending have led to an increase in both contracting and tendering activity across both floaters and jackups. On a trailing 12-month basis, rig years awarded for benign environment floaters are approximately 40% higher than the previous 12 months. In addition, rig years of open demand at tender or pre-tender stage, which represents visible custer demand, and custer demand that is expected to formally come to market soon, were approximately 40% and 25% higher than six months ago and 12 months ago, respectively. The increase in contracting and tendering activity has seen utilization for active drill ships sustained at around 90% for the past 12 months, which has led to meaningful improvements in day rates. Average day rates for drill ship fixtures signed in the third quarter 2022 were approximately $400,000 per day, with some leading edge rates in certain regions above this level. as compared to less than 200,000 per day in the fourth quarter 2020, when active utilization was around 75%. A meaningful portion of the recent increase in tendering activity was attributable to the recent Petrobras tender, which is expected to see seven rigs contracted for long-term work offshore Brazil commencing in 2023. Subsequently, Petrobras have launched a new RFI for up to three further ultra-deepwater rigs on the Búzios development, starting in late 2023 or early 2024. We continue to expect that Brazil will be a significant driver of floater demand over the next several years, and we are well positioned to benefit, given our presence in the country with Velaris DS4 and DS15 already working offshore Brazil for Petrobras and Total Energies, respectively, and Velaris DS17 currently being reactivated to work on Equinor's Bacalao project, beginning in the middle of 2023. We continue to see a mix of shorter-term exploration and longer-term development programs offshore West Africa, including in Ivory Coast and Namibia, which have both seen large commercial discoveries this year that could lead to increased rig demand for the floater market going forwards. We have a strong footprint in the region, with three drillships currently operating offshore Angola, Nigeria, and Mauritania, and a further three stacked drillships nearby in the Canary Islands. We also see several opportunities in the Gulf of Mexico, both on the U.S. and Mexican side. The U.S. opportunities primarily require drill ships, while the Mexican opportunities are well-suited for our active semi-submersible in the region, Valeris DPS-5, which was awarded a three-well contract with ENI Mexico in the third quarter at an attractive day rate. On the jack-up side of the business, we have seen a meaningful increase in activity since the start of the year. primarily driven by increased demand in the Middle East. On a trailing 12-month basis, jackup rig years awarded are more than double the previous 12 months. And rig years of open demand at tender or pre-tender stage, as of the quarter end, were approximately 20% and 45% higher than six months ago and 12 months ago, respectively. As a result, active utilization for jackups reached approximately 90% at the beginning of the third quarter. Day rates also continue to trend upwards, with average day rates for benign environment jack-up fixtures signed in the third quarter of 2022 of nearly $100,000 per day, with several recent fixtures above $120,000, as compared to approximately $70,000 per day in the fourth quarter 2020, when active utilization was below 80%. Recently, we were awarded jack-up contracts or extensions in the Middle East, the North Sea, Latin America, Australia, and New Zealand, highlighting the increase in activity we are seeing across most regions in which we operate. While the benign environment jackup market has improved meaningfully this year, the harsh environment jackup market in Norway continues to show little sign of recovery in the near term. Our harsh environment jackup fleet includes three Keppelfeld N class rigs capable of operating in Norway. We already have one of these rigs operating in the UK North Sea and expect to relocate a second rig outside Norway following completion of its current contract in the fourth quarter. Our third rig operating offshore Norway is expected to end its existing contract in the first quarter of next year, and prospects for follow-on work in Norway are limited. We expect some rigs working in the North Sea outside of Norway to go idle later this year as we enter the seasonally weaker winter months. and rigs complete their current programs. While utilization during the first half of 2023 may be somewhat challenging, we see an improving pipeline of activity in the UK North Sea for work commencing in the second half of the year. This coupled with an expected improvement in demand offshore Norway in 2024 leaves us hopeful for a more balanced harsh environment jackup market in future years. Moving now to our fleet strategy. We will continue to employ a disciplined fleet management strategy with a focus on driving long-term shareholder value. Our first priority is to ensure that the active fleet remains highly utilized, while having a large fleet means that we can pursue a portfolio approach to contracting with a mix of longer and shorter duration contracts, ideally with staggered rollovers. We also aim to have a critical mass of rigs in priority basins, to benefit from economies of scale. For example, once we have reactivated Velaris DS17 for its contract offshore Brazil, we will have three active floaters at each point of the Golden Triangle. A second priority is the reactivation of our high-quality stacked fleet. We have proven our ability to win work for and reactivate our preservation stacked assets, and we still have 11 high-quality modern assets remaining, including three uncontracted high-spec drillships, Valeris DS7, DS8, and DS11. 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 by only returning additional stack rigs to the active fleet for opportunities that provide meaningful returns. Based on current day rates, reactivation economics are highly attractive. The remaining supply of modern stacked drill ships is largely held by Valeris and two of our competitors, and we anticipate that stacked rigs will only be reactivated for opportunities that provide strong returns. In addition to our stacked fleet, we have options to take delivery of new-built drill ships Valeris DS-13 and DS-14 by year-end 2023 for a shipyard price of approximately $119 million and $218 million, respectively. compared to recent market transactions and broker NAVs for similar assets in the high 200s to mid 350s. We will continue to evaluate our options regarding these rigs as we see the market evolve over the next 12 months. Importantly, we believe it is unlikely that we will see another flow to new build cycle, given high build costs, long lead times, and limited shipyard availability. Therefore, we anticipate that the current rig fleet will form the basis of supply for the foreseeable future. As part of our fleet strategy, we continue to actively assess our fleet for retirement and divestiture candidates. Recently, we executed a sales agreement on 40-year-old jackup Volaris 54 for $28.5 million, which is expected to close in March 2023 upon completion of its existing contract. Valaris 54 is approaching a special survey and would have required meaningful capital investment in the near term. This value accreted sale will provide capital that can be deployed on opportunities with more attractive return profiles. We will continue to take a disciplined approach to fleet management and capital allocation to maximize long-term shareholder value. Another important part of the Valaris value proposition is arrow drilling. our unconsolidated 50-50 joint venture with Saudi Aramco. Arrow is an important strategic asset for Valeris, providing a unique partnership with the largest customer for jackups in the world. During the third quarter, we received a payment of $40 million from Arrow, representing a partial early repayment of our shareholder notes receivable, with the remaining balance of $403 million after the repayment. The partial early repayment of our shareholder notes demonstrates Arrow's confidence in its earnings profile, contract structure, and that the new build rigs will be financed by third-party financing and cash from Arrow operations. Arrow is actively exploring financing options for its new build rigs and expects financing to be secured prior to delivery of its first two new builds next year. As a reminder, Each of the new builds will be backed by an initial eight-year contract with Saidi 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. We see significant investor interest in the region for drilling businesses. Recently, a local driller with both onshore and offshore rigs successfully completed its IPO, raising more than $700 million in a substantially oversubscribed offering at an attractive valuation. We remain focused on highlighting what we believe is significant value inherent to NARO, and recent asset transactions and IPOs in the region help to support this view. Further information on NARO can be found in a separate investor presentation on the Valeris website. I will conclude by reiterating some of the key points from my prepared remarks. First, we continue to deliver strong safety and operational performance, and these efforts continue to be recognized by our customers, including by being rated as the number one offshore driller in the 2022 Energy Point Research Survey. Second, Despite the current macroeconomic uncertainty, the fundamental outlook for our industry remains highly constructive as evidenced by increasing contracting and tendering activity across both loaders and jackups. And third, we continue to take a disciplined approach to fleet management and recently executed on a value accreted sale which positions us to redeploy capital on opportunities with more attractive return profiles. In summary, Valeris is well positioned to capitalize on opportunities that arise during an industry up cycle. And the Valeris management team and board remain laser 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. With that, I'll hand the call over to Chris to take you through the financials.