Valaris Limited

Good day and welcome to the VELARIS third 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 and 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 Third Quarter 2023 Conference Call. With me today are President and CEO Anton Dubovits, Senior Vice President and CFO Chris Webber, 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 valorous.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 aero drilling presentation will be available on our website after the call. Now, I'll turn the call over to Anton Dubovits, 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 and then provide some high-level commentary on the outlook for the offshore drilling market and our fleet strategy. I'll then hand the call over to Matt to discuss the floater and jack-up markets in more detail and to provide an overview of our contracting outlook for 2024. After that, Chris will discuss our financial results and guidance, including preliminary guidance for 2024. And finally, I'll wrap up the call with some closing comments. Before we get into the details of the quarter, I want to highlight some key points about our business going forward that we will discuss in more detail in this call. First, The outlook for Volaris is positive, with increasing demand and constrained supply setting up a strong and sustained upcycle. Second, we have had great contracting success over the past 12 months and retained significant operating leverage to the improving market. Consequently, we expect a meaningful improvement in our full-year results in both 2024 and 2025, driven by prior and ongoing reactivations and repricing of legacy contracts. And finally, we have demonstrated our commitment to capital returns. And when our business begins generating meaningful and sustained free cash flow, we intend to return it all to shareholders unless there is a better or more value accretive use for it. Moving to our third quarter operations. We're pleased that Volaris DS17 commenced its contract with Equinor Offshore Brazil during the quarter following its reactivation and expect it will contribute meaningful earnings and cash flow going forward. We're excited to be partnering with Equinor on their flagship bacalao project in Brazil, and to increase our presence in this strategic basin. We will soon have four drill ships working offshore Brazil, following the recent arrival of Valera's DS-8, which is about to commence customer acceptance ahead of its two and a half year contract with Petrobras. Operating safely is always our top priority, so we're proud to be honored by the Center for Offshore Safety, which recognized the Valera's basic training program with its 2023 Safety Leadership Award. As demand for our services continues to improve, we are hiring an increasing number of men and women that are new to the industry. The Valeris Basic Training Program, which utilizes one of our stacked rigs in the U.S. Gulf of Mexico to provide basic training for new hires, is an innovative initiative to prepare new employees to work safely offshore. Remaining on the subject of safety, I'd like to congratulate the crews of the Volaris 76 for recently celebrating five years without a recordable incident. A fantastic achievement made possible by their dedication to building a safety-first culture and adhering to our safe systems of work on a daily basis. Now turning to our financial performance for the quarter. We generated adjusted EBITDA of $40 million and adjusted EBITR, adding back one-time reactivation costs of $91 million. Our results in the quarter were impacted by unplanned floater downtime events on a few rigs, one of which will also impact the fourth quarter, as well as delayed contract startups for the Volaris DS17 and 107. While our floater revenue efficiency for the quarter was below our expectations, our year-to-date fleet-wide revenue efficiency is strong at 97%, and we remain committed to delivering safe and efficient operations. A couple of weeks ago, we announced that Arrow Drilling had secured highly attractive financing from a syndicate of local Saudi Arabian banks to finance the deliveries of its first two new build rigs, Kingdom One and Kingdom Two. Kingdom One was recently delivered from the shipyard, and we anticipate that it will commence its maiden contract later this month, while Kingdom Two is now expected to be delivered and commence its contract in the first quarter of 2024. The delivery and startup of the first two new builds will mark an important milestone in the growth story of Arrow and is expected to lead to a substantial increase in 2024 earnings. We are pleased that Arrow has been able to secure financing for these rigs at highly attractive terms, demonstrating both the strength of the Arrow business and its relationship with local lenders in Saudi Arabia. Chris will provide further details on the financing terms a little later. Turning our attention to the market. The outlook for our industry in Valeris is positive. Commodity prices remain supportive, with spot Brent crude above $85 a barrel, buoyed by tight supply and the recent escalation in geopolitical risk. More importantly, five-year forward prices are now around $70 a barrel, a level at which more than 85% of undeveloped offshore reserves are estimated to be profitable. The support of commodity price and attractive break-evens for most offshore projects provide customers with the confidence to invest in long cycle offshore projects. Data from Rystad indicates that offshore upstream CAPEX is expected to grow at a compound annual growth rate of approximately 8% through 2026, which is anticipated to lead to increased demand for offshore drilling services. While the demand outlook over the next several years is robust, customers are being measured in how they approach their drilling programs. weighing their capital spending in a rising cost environment against the desire to return capital to shareholders. Looking at the benign environment flow to market, active utilization for 6th and 7th generation drill ships remains in the mid-90s, and we see a number of longer-term opportunities commencing in late 2024 and beyond that provide further evidence that we are in a strong and sustainable upcycle. However, when considering lengthening contract lead times, customer-acquired upgrades, and repositioning rigs for work, we expect gaps in schedules across the industry during 2024. Looking at pricing, leading edge day rates continue to be in the mid to high 400s. We may see a wide range of rates in the near term depending on the specific circumstances of each opportunity. However, we continue to expect that we will see an upward trajectory in the medium term as stacked and new build capacity continues to diminish and the total supply and demand balance continues to tighten. We believe that two- to three-year programs are likely to be awarded at or close to leading-edge rates, while we may see lower rates for some of the five-year-plus opportunities, as some may be willing to accept a lower rate to secure long-term duration and backlog. Similarly, we may see lower rates on some of the shorter-term gap-filled jobs, as contractors are willing to bid more aggressively to avoid rigs going idle for a period. For Volaris, we are focused on maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best contract economics possible in each unique bidding situation, whether through the day rate or meaningful upfront payments. We've made a deliberate effort to secure upfront payments on certain reactivation contracts. While moving more of the total contract value into an upfront payment may lower the headline day rate, upfront payments are not subject to operational risk. improve the overall return profile of the contract, and drive shareholder value. For example, the Velaris DS17 contract included an $86 million upfront payment out of a total contract value of $327 million and has a total effective day rate of over $600,000. Another example of a contract with a meaningful upfront payment is the DS7, which has a total effective day rate of approximately $430,000. This contract is expected to provide a cash payback on our reactivation costs of less than one year and is anticipated to generate annualized EBITDA of $95 to $100 million. Taking a step back for a minute, it's worth remembering that when Valeris relisted in May 2021, we had only four out of 11 drill ships contracted with minimal contract backlog. Since then, we have won six contracts for stacked drill ships, increasing our drill ship backlog tenfold, to more than $1.7 billion. Looking forward, we have three drill ships currently on legacy day rate contracts in the low to mid 200s that are expected to recontract at higher market rates in 2024, and a further two that are expected to recontract in 2025, which we anticipate will be a key driver of earnings growth going forward. We maintain further operating leverage to the strong floater market with our one remaining uncontracted stacked drill ship, Valeris DS11, and attractive purchase options for new-build drill ships Valeris DS-13 and DS-14, which we currently intend to exercise. We will continue to remain disciplined in how we exercise our operational leverage, and additional rigs will only be reactivated for opportunities that are expected to generate a meaningful return on our reactivation costs over the initial firm contract. Before I hand the call over, I'd like to take this opportunity to thank the entire Valeris team, offshore and onshore, for the focus and commitment that they bring to work every day to deliver safe and efficient operations to our customers. Now, I'll hand the call over to Matt to provide more detailed commentary on the floater and jack up markets by region and our contracting outlook for 2024.