Valaris Limited

Good day and welcome to the VALERES fourth quarter 2022 results conference 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 touch-tone 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 fourth quarter 2022 conference call. With me today are President and CEO Anton Dibovitz, Senior Vice President and CFO Chris Weber, Senior Vice President and CCO Matt Line, 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 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, this morning 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.

Anton Dibovitz 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 will then provide commentary on the outlook for the offshore drilling market, highlight some 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 Chris to discuss our financial results and guidance. I'd like to start by acknowledging the focus and efforts of the entire Valeris team, which resulted in us continuing to deliver excellent operational performance, achieving revenue efficiency of 98% in the fourth quarter and 97% for full year 2022. This is commendable performance given we reactivated four floaters during the year. These projects required a significant amount of internal resources and attention. And we're extremely pleased to have maintained high levels of operational performance that our customers expect from us under these circumstances. The safety of offshore crews and onshore personnel is at the core of what we do as an organization. And we achieved some notable milestones during the quarter, including several rigs reaching two years and our Broussard warehouse achieving six years without a recordable incident. These achievements are the result of our highly skilled and dedicated workforce. We believe that our people are the most important element of our success, and we recognize that a motivated, engaged, and diverse workforce is essential to delivering high performance. As a result, we continue to invest in our people, both onshore and offshore. Our bold leadership training for offshore supervisors was attended by approximately 650 personnel in 2022. We also recently completed two pilot workshops for our new onshore leadership program, and we'll be holding more of these courses in 2023 to develop senior leadership throughout the organization. Development of our people is just one element of our ESG program. We are committed to making progress in our sustainability journey and we have a strong framework in place to advance our efforts. Our sustainability program is primarily focused on reducing emissions from our own operations and partnering with our customers on their ESG efforts. We have already implemented several solutions on board our rigs to help lower emissions. such as engine optimization and SCR systems, and we will continue to make targeted investments in our fleet where it makes economic sense to do so. During the fourth quarter, we issued our latest annual sustainability report, which was prepared in accordance with the Sustainability Accounting Standards Board, and we will be further enhancing our disclosures in the 2022 report. Following the release of our 2021 sustainability report, our ESG rating was upgraded by both MSCI and Sustainalytics, two of the leading ESG rating agencies. As a result, we now have the highest ESG rating among offshore drillers with both MSCI and Sustainalytics. Moving to our financial performance for the quarter, we generated adjusted EBITDA of $54 million and adjusted EBITDA, adding back one-time reactivation costs, of $75 million. Adjusted EBITDA and EBITR were in line with and higher than our prior guidance, respectively, but were lower than the third quarter, primarily due to the ongoing weakness in the harsh environment jack-up market, which I'll discuss in more detail in a moment. During 2022, we successfully executed four major floater reactivations, with all four rigs returning to work largely on time and on budget. We are currently reactivating Valaris DS17 for a contract with Equinor Offshore Brazil starting later this year. And we're in advanced discussions regarding a further drill ship reactivation for a multi-year project expected to commence within the next 12 months. The reactivation of Valaris DS17 and any additional reactivations will impact our financial results and cash flow in 2023 as we spend money to return rigs to the active fleet. However, based on our contract profile, we believe that 2024 will represent an inflection point for earnings, with at least three drill ships expected to complete legacy contracts and be available for recontracting at market rates, along with meaningful contributions from DS17 and any additional rigs that we begin to reactivate in 2023. We are optimistic about these repricing opportunities because the fundamental outlook for our industry remains constructive. Despite the macroeconomic uncertainty, demand for hydrocarbons continues to increase. The IEA forecasts that oil and gas demand will increase by 1.9 million barrels per day to approximately 102 million barrels per day in 2023, with nearly half the expected gain attributed to increased demand from China following the lifting of COVID restrictions. Meanwhile, the IEA forecasts supply growth to slow to 1 million barrels per day, as compared to 4.7 million barrels per day in 2022, in part due to expected declines in output from Russia. A lack of investment in new sources of production over the past several years has contributed to a tight supply picture, while events over the past 12 months have brought the topic of energy security to the fore and highlighted the importance of oil and gas in meeting the world's need for secure and affordable energy. A significant increase in investment will be required to rebuild global supplies, with offshore production expected to continue playing an important role due to the scale provided by offshore reserves, attractive break-even prices for most offshore projects, and lower carbon intensity as compared to onshore oil and gas extraction. We believe that these factors, along with a significant reduction in the global rig fleet, especially floaters over the past several years, lay the foundation for a sustained industry upcycle in which Volaris is poised to thrive. Commodity prices remain at levels that are highly supportive of continued investment in offshore oil and gas projects. According to S&P Global, offshore exploration and production spending is expected to increase by 14% in 2023, following an estimated 18% increase in 2022. In addition, offshore project approvals in 2023 and 2024 are expected to be at their highest levels in more than a decade, which should help drive capital expenditures for several years to come. The constructive macro environment and increased upstream spending have led to increases in contracting and tendering activity across both floaters and jackups. The number of contracted benign environment floaters has steadily increased from the lows in late 2020 and early 2021 and has nearly returned to pre-COVID levels. Active utilization for drill ships is currently above 90% and has been above 85% for more than 12 months, which has led to meaningful improvements in day rates, with leading-edge day rates now pushing in the low to mid-400,000s. As of the end of 2022, rig years of open demand at tender or pre-tender stage for benign floaters were 14% higher than 12 months ago, and we continue to see new opportunities coming to market, particularly offshore Brazil. Building on last year's eight-rig tender, Petrobras has been actively seeking rigs for its BMS-11 and Buseus fields, and recently launched a new tender for up to four floaters on long-term contracts commencing in 2024. This is in keeping with reports that Brazil is seeking to double production by 2030. And with offshore resources that can deliver production at a track of economics, we anticipate that Brazil will be a significant driver of offshore demand over the next several years. We continue to see a mix of short-term exploration and longer-term development programs offshore West Africa, including in Namibia, which was estimated to have the world's largest offshore discovery in 2022. The potential for this market is highlighted by the fact that one major IOC recently announced that 50% of their 2023 exploration budget is allocated to Namibia alone. New discoveries, along with a pickup in activity in other parts of West Africa, could lead to increased rigged demand for the floater market going forward. We have a strong footprint in the region and were recently awarded a 330-day extension with Shell for drill ship Valaris DS10, which will keep the rig working through March 2024 and is the final priced option under the rig's current contract. We're also in discussions to fill some of the available time in 2023 for Velaris DS12. We also see opportunities in the Gulf of Mexico, both on the US and Mexican sides. On the jackup side of the business, the number of contracted jackups has increased by more than 15% from lows in early 2021. and are at their highest level since mid-2015. Most of this increase occurred over the past 12 months, primarily driven by demand from the Middle East. As a result, active utilization for jackups is above 90%, and day rates continue to trend upwards, as demonstrated by our most recent contract awards at $125,000 per day or higher for work offshore Australia and Trinidad. The outlook for jackups continues to be constructive, with rig years of open demand at tender and pre-tender stage 20% higher at year end as compared to 12 months ago. While the benign environment jackup market has improved meaningfully over the past 12 months, the timing and pace of a recovery in the harsh environment jackup market is uncertain. As highlighted on our third quarter call, we do not expect opportunities to materialize in Norway until 2024. In addition, the outlook for the rest of the North Sea has softened, as we are now also seeing more projects delayed in the UK, with customers citing the uncertainty created by changes to fiscal policy related to windfall taxes. Our three Keppelfells N-Class rigs, which are capable of operating in Norway, are all now located in the UK, with only the Valeras Norway partially contracted for the year ahead. The Stavanger is currently undergoing a special periodic survey, and we are actively marketing both the Stavanger and the Norway for projects in the North Sea as well as further afield. We do not see sufficient prospects over the next 12 to 18 months to keep all three of these rigs working, and as a result, we are preservation stacking the Viking in Dundee to reduce costs while the rig is idle. This uncertainty is expected to have a negative impact on our business in 2023, particularly in the first half. Based on customer discussions, we expect the market outside of Norway to begin improving in the second half of the year, although most of the opportunities we see at present are short-term in nature. Moreover, given the role that hydrocarbons should play in ensuring European countries' energy security, we expect that demand offshore Norway the UK, and other sectors of the North Sea will improve in 2024 and create a more balanced, harsh environment jack-up market in future years. Against this backdrop of a broadly constructive market environment and renewed optimism within our sector, I'd like to spend a few moments discussing our fleet strategy as we navigate the unfolding industry upcycle. We continue to employ a disciplined fleet management strategy with a focus on driving long-term shareholder value, Our 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 continue to regularly assess our fleet for retirement and divestiture candidates. As part of our fleet strategy, we aim to have a critical mass of rigs in priority basins to benefit from economies of scale. Following the reactivation of Valeris DS-17, we will have three floaters operating at each point of the Golden Triangle. Our other two drill ships in Brazil, Valeris DS-4 and DS-15, are both expected to finish their current contracts in mid-2024, leaving them well positioned to roll onto higher day rate contracts in a region where we expect to see continued growth. We have proven our ability to win work for and reactivate our preservation stacked assets and we see attractive opportunities to commence reactivation of additional drill ships in 2023. We will remain disciplined in exercising our operational leverage by only returning additional stacked rigs to the active fleet for opportunities that provide meaningful returns over the initial contract. Given the opportunities we see in the market today, we believe that investing in our fleet by reactivating our high-specification stacked drill ships is an attractive use of our available cash, as we expect that these investments would generate significant returns for our shareholders. In addition to our stacked fleet, we have options to take delivery of new-built drill ships, Velaris DS-13 and DS-14, by year-end 2023, for a shipyard price of approximately $119 and $218 million, respectively. Velaris DS-13 is attractively priced compared to recent market transactions for similar assets, while DS14 is in line with recent transactions. Both drill ships are amongst the highest specification assets in the global fleet and have two BOPs, which remains a preference for customers globally. We will continue to evaluate our options regarding these rigs as we see the market evolve over the course of the year. The pool of available supply is shrinking as stacked rigs are absorbed into the active fleet when supported by demand. Following the recent announcement by a competitor to utilize one of their stacked drill ships for non-drilling activities, we count only 14 competitive drill ships remaining on the sidelines, 13 of which are owned by Valeris and two other major drilling contractors. We believe that our demonstrated track record of successfully reactivating rigs leaves Valeris well positioned to benefit when the right opportunities present themselves. There are a further eight new-build drill ships remaining at South Korean shipyards, including Volaris DS-13 and DS-14. We expect these rigs to come to market in a staged manner when demand supports incremental supply, and likely only if these rigs are in the hands of established international drilling contractors. Importantly, we currently believe that it is unlikely that we will see another floated 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. A large portion of demand growth in the jackup market over the past 12 months has been driven by the Middle East, particularly Saudi Arabia. Valeris has significant exposure to this market through Arrow Drilling, our unconsolidated 50-50 joint venture with Saudi Aramco. And Arrow was recently awarded multi-year contracts with Aramco for Volaris 76 and 108, which will be leased to Arrow following completion of their existing contracts. 2023 is expected to be an important year in the growth of Arrow, with two new build rigs due to be delivered. As a reminder, each of the 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. We see significant appetite in the local market for financing the new builds, and we expect funding to be secured prior to delivery. Importantly, we do not expect that Valeros or Aramco will need to provide any additional financing to Arrow to fund the new-build program. Furthermore, there is significant investor interest in the Middle East for drilling businesses. Last year, 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. remain focused on highlighting what we believe is the significant value inherent in Arrow, and recent asset transactions and IPOs in the region help to support this view. I will conclude by reiterating some of the key points from our prepared remarks. First, we continue to deliver excellent operational performance, as demonstrated by achieving 98% revenue efficiency in the fourth quarter and 97% for 2022. Second, The fundamental outlook for our industry remains highly constructive with offshore exploration and production spending expected to increase over the next several years, which is anticipated to drive increased demand for our services. And third, we will continue to exercise our operational leverage in a disciplined manner by returning our high quality stack rigs to the active fleet for opportunities that will generate meaningful returns. and we see attractive opportunities to commence reactivation of additional drill ships in 2023, including one for which we are in advanced discussions. In summary, we will continue executing our focused, value-driven, and responsible strategy, and we believe that our strategy will drive meaningful earnings and free cash flow during the unfolding industry upcycle. I'll now hand the call over to Chris to take you through the financials.