Valaris Limited

Good day and welcome to the Valeris second quarter 2024 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 your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nick Georges, Vice President, Treasurer, and Investor Relations. Please go ahead.

Welcome, everyone, to the Valaris second quarter 2024 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 or 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. Earlier this week, we issued our most recent fleet status report, which provides details on contracts across our rig fleet. An updated investor presentation will be available on our website after the call. Now, I'll turn the call over to Anton Divovits, President and CEO.

Thanks, Nick, and good morning and afternoon to everyone. During today's call, I will begin with an overview of our performance during the quarter and provide an update on the offshore drilling market. I will then hand the call over to Matt to discuss the floater and jackup markets in more detail and provide some additional color on recent contract awards, as well as our contracting outlook. After that, Chris will discuss our financial results and guidance before I finish with some closing comments. To begin, I want to highlight some key points about our business that we will cover in more detail during this call. First, in the second quarter, we built on our great start to 2024 and would like to congratulate the entire Valeris team on delivering another excellent quarter of safety, operating, and financial performance. Second, we continue to execute our commercial strategy, securing attractive new contracts and building our backlog. This past quarter marks the seventh consecutive increase in our backlog, which now totals more than $4.3 billion. Third, we maintain our conviction in the strength and duration of this upcycle and see strong customer demand for projects that are expected to commence in 2025 and 2026. Turning to operations, our success continues to be built on the foundation of strong safety and operating performance. In the second quarter, we delivered fleet-wide revenue efficiency of 99% without a lost time incident, a great achievement by the entire Valeros team. This achievement is even more impressive considering that we had several rigs either starting new contracts or changing operating locations during the quarter, including Volaris DS-7 following its reactivation, DS-17 moving countries to drill a frontier exploration well in Argentina, and the Stavanger and 123 commencing new contracts in the North Sea following out-of-service periods for contract preparation and survey work. In addition, we had several rigs celebrate safety milestones during the quarter, and I would like to congratulate the Volaris 249 team for reaching two years without a recordable incident, as well as the Volaris DS10 and 106 teams for each reaching one year without a recordable incident. Well done to everyone involved. We also continued to build on our strong track record of reactivating rigs for contracts that benefit our financial results by returning Valaris DS-7, one of our seventh generation drill ships, to work on a long-term contract offshore West Africa. The DS-7 reactivation project was delivered on time and began its contract on schedule, marking our sixth drill ship reactivation completed since 2022. Successfully reactivating rigs for attractive contracts has played a large part in our earnings growth story, and we still have organic growth capacity to meet increasing customer demand with Valeris DS11, DS13, and DS14, the highest specification drill ships in the global fleet that have yet to be reactivated. Moving to our financial performance, adjusted EBITDA increased to $139 million in the second quarter, up meaningfully from $54 million in the first quarter. Adjusted EBITDA, adding back one-time reactivation costs, was $150 million. These results were better than our guidance primarily due to the team achieving 99% revenue efficiency during the quarter, certain contracts extending longer than previously anticipated, and the timing of costs that are now expected to be recognized in subsequent quarters. Chris will provide further details in our financial results and guidance a little later. Turning now to the broader offshore drilling market. The combination of increasing global demand for hydrocarbons and OPEC Plus effectively managing supply has led to relatively stable oil prices so far this year, with spot Brent crude prices largely trading above $80 per barrel. Looking out further, the five-year Brent Ford price is around $70 per barrel, a level at which more than 90% of undeveloped offshore reserves are expected to be profitable. As a result, commodity prices remain very supportive for continued investment in long-cycle offshore projects. In addition, leading indicators of offshore rig demand, including global upstream capex and project sanctioning, are expected to see strong growth over the next few years, bolstering our view that we are in a structural upcycle. According to Restat, deepwater upstream capex is expected to increase at a compound annual growth rate of 9% over the next three years, which is anticipated to drive further growth in floater demand. Average day rates for drill ships have continued to increase compared to 6 and 12 months ago. Just past the halfway point of this year, we have already seen six fixtures above $500,000 per day, compared to just two for all of last year. And these fixtures have spanned the U.S. Gulf of Mexico, Brazil, West Africa, and Asia, evidence of the broad-based growth in customer demand. The strength of the market is further demonstrated by a recently announced multi-year contract for Volaris DS17, which added nearly $500 million of contract backlog at a leading-edge day rate. This contract includes a standby period where the customer will pay a day rate to keep the rig while they wait to commence their new drilling program. This new contract is a testament to the quality of our crews and operations, the capabilities of the rig, and the collaborative nature of our relationship with Equinor, who have made meaningful investments in innovative safety and automation technology on the GS-17. Our priority remains maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best contract economics possible. With this in mind, we are laser focused on filling as many uncontracted days in 2024 as we can and securing term work commencing in 2025 and beyond that will further support our expected earnings and cash flow growth. Moving to shallow water, the benign environment jack-up market remains tight, with marketed utilization of 93%. Several rigs from the first routing of Saudi Aramco suspensions earlier this year have already made an orderly transition into the international benign environment jack-up market, and leading-edge day rates are still north of $150,000 per day, as evidenced by recent fixtures. The working rig count offshore Saudi Arabia is anticipated to move slightly lower going forward, with up to five additional rigs expected to be suspended. In connection with this second round of suspensions, Arrow recently received notices from Saudi Aramco to suspend the drilling contracts for Volaris 147 and 148. Discussions are ongoing with Aramco whether other Valeris leased rigs or our own rigs could be subject to the suspensions instead of Valeris 147 and 148, along with the effective date for these suspensions. While we currently estimate the suspensions could adversely impact our full-year 2024 EBITDA by up to $10 million, these two contracts represent just $35 million of our $4.3 billion in contract backlog. Taking a step back, the suspension of up to five additional rigs by Saudi Aramco does not change our view of the market, as they represent approximately 1% of the global marketed jackup fleet. For harsh environment jackups, the supply-demand balance in the North Sea improved meaningfully in the latter half of 2023. Our rigs are fully contracted for 2024, and we currently have less than one rig year of availability across our nine active rigs in the region in 2025. We see strong customer interest for programs that line up well with this limited availability. Before I finish, I'd like to briefly comment on our capital return objectives. with positive industry fundamentals driving increasing day rates and contract durations, we're in a strong market to be adding contract backlog. As I noted earlier, we continue to make major strides on this front, which supports our earnings and cash flow growth. Looking ahead, we expect to generate meaningful and sustained free cash flow in 2025 and beyond, and we intend to return all future free cash flow to shareholders unless there is a better or more value-accretive use for it. Now, I'll hand the call over to Matt to discuss the floater and jack-up markets in more detail and to provide an overview of our recent contracting success and our contracting outlook.