Valaris Limited

Good day and welcome to the Volaris second quarter 2023 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 touchtone phone. To withdraw from the question queue, 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 Velaris Second Quarter 2023 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 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, 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. Then, I'll comment on the outlook for the offshore drilling market and our fleet strategy, including an update on our plans for new-build drill ships for Larus DS-13 and DS-14. Finally, I'll provide an update on our share repurchase program and reiterate our capital returns philosophy. After that, I'll hand the call over to Chris to discuss our financial results and guidance. In the second quarter, we continued to deliver strong operational performance, achieving revenue efficiency of 97%. Our success as a company is driven by our people, and I want to thank the entire Valeris team, offshore and onshore, for their ongoing commitment and efforts in delivering excellent performance for our customers. One of the hallmarks of Volaris is our project execution, and during the second quarter, Volaris DS17 departed the shipyard ahead of its contract with Equinor Offshore Brazil, which is expected to commence this month following customer acceptance. This marks our fifth floater reactivation in the past 18 months and builds on our proven track record of project execution. Volaris DS17 is one of the highest specification drill ships in the global fleet today and will be the first rig to deploy NOV's Atom RTX robotic system offshore, reducing the need for personnel in the Red Zone. Volaris DS17 also became only the second rig in the world, after Volaris DS12, to receive ABS's Enhanced Electrical System Notation . The rig's electrical system is designed to optimize power plant performance enabling operations on fewer generators and reducing emissions. These targeted upgrades help to improve the safety and efficiency of the rig and exemplify our company's purpose of providing responsible solutions that deliver energy to the world. Now turning to our financial performance for the quarter. We generated adjusted EBITDA of $15 million and adjusted EBITDA, adding back one-time reactivation costs of $59 million. Chris will provide further details on our financial results and guidance a little later. Turning our attention to the market. The outlook for our industry in Valeris remains very positive. Spot Brent Crude has recently moved back above $80 per barrel, and five-year Ford prices remain above $65 per barrel, a level at which more than 80% of undeveloped offshore reserves are estimated to be profitable. The supportive commodity price and attractive break-evens most offshore projects provide customers with the confidence to invest in long cycle offshore projects and further growth in both offshore upstream capex and offshore project sanctioning are expected in 2024. the constructive macro environment and increased upstream spending have led to increases in contracting and tendering activity across both floaters and jackups active utilization for sixth and seventh generation drill ships has On average exceeded 90% for more than 12 months looking at Ford demand we expect leading edge day rates to continue on an upward trajectory from the current levels in the mid to high 400s. Recent fixtures and tenders with increased durations lead times and day rates provide further evidence that we are in a strong and sustainable up cycle. Improvement in ultra-deepwater demand continues to be geographically widespread, with new long-term opportunities appearing in West Africa, the Mediterranean, Brazil, and the Gulf of Mexico over the past several months. These include opportunities with durations of five-plus years. Also, for the first time in many years, some customers are seeking to secure offshore rigs beyond the scope of their currently sanctioned projects and are contracting rigs for start dates into 2026. These are all positive signs that demonstrate both the confidence that our customers have in the economics of their offshore projects and a recognition of the increasing scarcity of high-spec floaters. Across the Golden Triangle, East Africa, and the Mediterranean, we currently see 25 to 30 opportunities for ultra-deepwater floaters with expected duration of greater than one year that are anticipated to commence over the next few years. This represents an increase from the 20 to 25 opportunities we referenced on our first quarter call, demonstrating the strong and growing pipeline of future demand. We have seen recent opportunities appear in the Mediterranean and West Africa for work commencing in 2024 and 2025 that are likely to require incremental rigs. In Brazil, there are three ongoing opportunities with Petrobras, each requiring multiple rigs, and further visibility of future demand with IOCs. we anticipate that this demand will result in several incremental additions to the rig fleet offshore Brazil. In the Gulf of Mexico, supply and demand continues to be balanced, and we expect to see sufficient future demand to keep the rigs in this region occupied. In total, we anticipate that 12 to 15 of these opportunities will need to be met by either incremental reactivations of stacked and stranded new-build rigs or active rigs moving regions, which we don't expect to see a lot of, as many rigs due to complete contracts over the next few years will likely be retained by the existing customer. While demand is increasing, the pool of available rigs is shrinking, and we believe there to be no more than 10 competitive rigs remaining amongst the stacked drill ship fleet. There are a further eight new-build drill ships remaining at South Korean shipyards, including Volaris DS-13 and DS-14. However, three of these eight rigs are either contracted or have been selected for future work and are expected to be contracted soon. Further, we currently believe it is highly unlikely that we will see another flow to new build cycle, given high build costs, long lead times, and limited shipyard availability. In summary, the outlook for the ultra-deepwater market is very positive, with increasing demand and constrained supply tightening the market. Further, recent developments around increased contract duration, lead times, and day rates all point towards a strong and sustained upcycle. On the jack-up side of the business, demand continues to steadily increase, and the number of contracted jack-ups recently moved above 400 for the first time since mid-2015. As a result, active utilization for jack-ups is above 90%, with both average and leading-edge day rates continuing to trend upwards. as evidenced by our recent fixture offshore Australia at a rate of $180,000 per day. Over the past 18 months, demand growth for benign environment jackups has primarily been driven by the Middle East, with Saudi Arabia, Qatar, and the UAE all increasing their rig counts. More recently, we have also seen a return of longer-duration opportunities in Southeast Asia, including in Malaysia, Thailand, and Vietnam, which will help to absorb supply in this region. While the outlook for benign environment jackups continues to be strong, the outlook for the harsh environment jackup market in the North Sea continues to be challenging in the second half of this year and through the end of 2024. In the UK, while regulators are looking at ways to make the current tax regime more appealing to operators, it has not yet been sufficient to promote an increase in activity, and we continue to see opportunities being delayed. Fortunately, some of our North Sea rigs, such as Valaris 92, 120, and 122, are contracted into 2025 and beyond. We will continue to seek attractive opportunities for our high-spec harsh environment jackups in other regions, such as our recent contract for Valaris 247 offshore Australia. Following completion of its current contract in the UK North Sea later this year, the rig will mobilize to Australia for a two-well contract. undertaking a CCS project that is expected to commence late in the first quarter of 2024. The operating day rate for this contract is $180,000 a day, and we will receive a mobilization and demobilization fee that covers all the moving and operating costs while the rig is in transit. We see strong demand for high specification rigs such as the Velaris 247, and we anticipate there will be follow-on work in the region beyond its initial contract. Jackup opportunities in Norway continue to be very limited, exemplified by a tender that was recently deferred into 2025. As a result, we do not expect any of our N-Class rigs to be working offshore Norway during 2024. On the supply side, we believe that many of the jackups that are currently idle are not competitive, either due to their age or length of time stacked. One third of the current jackup fleet is more than 30 years of age, with limited useful lives remaining. Out of the approximately 90 jackups that are currently idle, we count only 10 that are less than 30 years of age, have been stacked for less than three years, and are within the top half of global fleet rankings. As a result, we believe that many of these stacked rigs will never return to the active fleet. Further, excluding Arrow's new-build program, there are only 18 new-build jackups remaining at shipyards, and 13 of these rigs are at Chinese shipyards, many of which are expected to enter the local supply in China. In summary, we continue to see a strong and improving market for modern, high-specification jackups in regions such as the Middle East, Southeast Asia, and Latin America. However, the harsh environment jackup market in the North Sea and Norway continues to disappoint, and we do not expect to see any meaningful improvement in 2024. Our fleet strategy remains unchanged and focused on driving long-term shareholder value. Earlier this week, we were proud to announce a new long-term contract for Volaris DS7 offshore West Africa, which is anticipated to be one of the key basins for floater demand over the next several years. This most recent award represents the seventh contract awarded to one of our high-quality stack floaters since mid-2021 and speaks volumes about our demonstrated track record of project execution when reactivating rigs and delivering operational excellence for our customers. We will continue to be disciplined in exercising our operational leverage by only returning stack rigs to the active fleet for opportunities that provide meaningful returns over the initial firm contracts. The Velaris DS7 is a prime example of this approach, and Chris will provide further details that highlight the compelling economics of this contract during his prepared remarks. As part of our fleet strategy, we want to have a critical mass of rigs in priority basins to benefit from economies of scale. Following the completion of our ongoing reactivations, we will have 11 floaters working across the Golden Triangle, with four offshore Brazil, four offshore Africa, and three in the Gulf of Mexico. At the beginning of the year, I stated that I was optimistic about being able to secure contracts for two of our stacked drill ships in 2023. We have now delivered on that seven months into the year, and we see good opportunities for at least one more to be contracted by the end of the year. Following the contract award to DS-7, we have only one uncontracted drill ship remaining, the DS-11. Beyond this, Our operating leverage to the strong ultra-deepwater floatable market is through re-contracting our existing active fleet and our attractive purchase options for new-build drill ships DS-13 and DS-14. Based on our contracting progress and the current market view, we intend to exercise the options for both of these rigs. Both DS-13 and DS-14 are amongst the highest specification assets in the global fleet and are the most technically capable drill ships still available at South Korean shipyards per third-party rig rankings. They are the only remaining drill ships available at the South Korean shipyards with two BOPs, and we estimate that it would cost approximately $50 million to add a second BOP to a ship that is only equipped with one. We see strong customer interest in these rigs, And based on our current market outlook, we believe that most, if not all, of the supply of stacked and new-built drill ships in the global fleet will be needed to meet growing future demand. Based on estimates by third-party rig brokers, shipyard clearing prices for the remaining rigs are likely to be $300 million or higher, when including the cost of a second BOP. By comparison, shipyard prices of $119 million for the DS-13 and $218 million for the DS-14 are very attractive, representing a discount of 60% and 30% respectively to the current market rate for a comparable asset. As a result, we believe the purchase options for both DS-13 and DS-14 represent compelling investment opportunities that will generate attractive returns over their lives. That being said, we will continue to be disciplined in our approach to reactivating rigs and will only reactivate the DS-13 and DS-14 for contracts that are expected to generate a meaningful return on our reactivation costs over the initial firm term. Moving now to an update on Arrow Drilling, our unconsolidated 50-50 joint venture with Saudi Aramco. We expect that new build rig one will be delivered in September with contract startup expected by the end of October. New Build Rig 2 is still expected to be delivered before year end, with contract startup anticipated in the first quarter of 2024. Arrow continues the progress of financing for the new builds, which we expect to be in place prior to delivery of both rigs. Saudi Arabia is an attractive, growing, and sustainable market, and Arrow is well positioned with its 20-rig new build program. The delivery and startup of the first two new builds will mark an important milestone in the growth story of Arrow. Moving now to an update on our share repurchase program. In May, we announced an increase in our share repurchase authorization to $300 million, and our intent to repurchase $150 million of shares by year-end 2023. We began the repurchase program in May, and to date, we have repurchased $94 million of shares at an average price of $62. As a result of the recent contract awarded to Velaris DS7, which includes a meaningful upfront payment and our continued commitment to returning capital to shareholders, we have increased our 2023 share repurchase target from $150 to $200 million. We expect to achieve significant earnings growth and generate meaningful and sustained free cash flow over the next few years as RIGS transition from legacy day rate contracts to higher market rates. and reactivated rigs return to work on attractive contracts. Our philosophy on what to do with this future free cash flow is simple. We intend to return it all to shareholders, unless there is a better or more value-accretive use for it. This philosophy is consistent with our value-driven approach to capital allocation and our goal of maximizing long-term shareholder returns. I will conclude by reiterating some of the key points from my prepared remarks. We continue to deliver excellent operational performance, evidenced by achieving 97% revenue efficiency in the second quarter and 98% through the first half of the year. Second, the outlook for our industry and Valeris remain very positive, with increasing demand and constrained supply tightening the market. Further, we continue to see increases in contract duration, lead times, and day rates, all of which point towards a strong and sustained upcycle. And finally, due to the positive market outlook and strong customer interest in these high-spec assets, we intend to exercise the purchase options on new-build drill ships for Laris DS-13 and DS-14, as we believe that these investments will generate attractive returns. As we look ahead, we will continue to be disciplined in exercising our operational leverage and laser-focused on maximizing long-term shareholder value. I'll now hand the call over to Chris to take you through the financials.