Valaris(VAL) - 2021 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements Valaris Limited's unaudited condensed consolidated financial statements reflect fresh start accounting post-Chapter 11 emergence on April 30, 2021, presenting non-comparable Predecessor and Successor data Condensed Consolidated Statements of Operations The statements report a net loss of $6.2 million for the Successor period and significant Predecessor losses, including $3.56 billion primarily due to reorganization items Condensed Consolidated Statements of Operations (In millions) | | Successor | Predecessor | Predecessor | | :--- | :--- | :--- | :--- | | | Two Months Ended June 30, 2021 | One Month Ended April 30, 2021 | Three Months Ended June 30, 2020 | | OPERATING REVENUES | $202.8 | $90.3 | $388.8 | | OPERATING INCOME (LOSS) | $9.6 | $(38.0) | $(1,019.2) | | Reorganization items, net | $(4.1) | $(3,532.4) | — | | NET LOSS | $(4.1) | $(3,556.2) | $(1,108.8) | | NET LOSS ATTRIBUTABLE TO VALARIS | $(6.2) | $(3,557.0) | $(1,107.4) | | LOSS PER SHARE - BASIC AND DILUTED | $(0.08) | $(17.81) | $(5.58) | Condensed Consolidated Balance Sheet The Successor balance sheet as of June 30, 2021, reflects total assets of $2.6 billion, significantly reduced from the Predecessor's $12.9 billion due to fresh start accounting and a new capital structure Condensed Consolidated Balance Sheets (In millions) | | Successor (June 30, 2021) | Predecessor (December 31, 2020) | | :--- | :--- | :--- | | Total current assets | $1,217.7 | $1,172.9 | | Property and equipment, net | $897.8 | $10,960.5 | | Total assets | $2,601.7 | $12,873.2 | | Total current liabilities | $396.6 | $426.8 | | Long-term debt | $544.8 | — | | Liabilities subject to compromise | — | $7,313.7 | | Total liabilities | $1,511.2 | $8,502.9 | | Total equity | $1,090.5 | $4,370.3 | Condensed Consolidated Statements of Cash Flows The statements show net cash used in operating activities for both Successor ($25.9 million) and Predecessor ($39.8 million) periods, with the Predecessor period also reflecting a $388.7 million financing cash inflow Condensed Consolidated Statements of Cash Flows (In millions) | | Successor
Two Months Ended
June 30, 2021 | Predecessor
Four Months Ended
April 30, 2021 | Predecessor
Six Months Ended
June 30, 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(25.9) | $(39.8) | $(381.1) | | Net cash provided by (used in) investing activities | $(7.9) | $21.4 | $(53.3) | | Net cash provided by financing activities | — | $388.7 | $539.4 | Note 2 - Chapter 11 Proceedings Valaris emerged from Chapter 11 on April 30, 2021, eliminating $7.1 billion in debt, injecting $520 million in new capital, and recording a $3.58 billion net reorganization expense - Emerged from Chapter 11 on April 30, 2021, eliminating $7.1 billion in debt and securing a $520 million capital injection through new First Lien Notes[45] - Legacy Valaris Class A ordinary shares were cancelled, and former holders received warrants to purchase new Common Shares[45][47] Reorganization Items, Net (Four Months Ended April 30, 2021 - Predecessor, in millions) | Item | Amount | | :--- | :--- | | Professional fees | $93.4 | | Gain on settlement of liabilities subject to compromise | $(6,139.0) | | Loss on fresh start adjustments | $9,194.6 | | Total reorganization items, net | $3,584.6 | Note 3 - Fresh Start Accounting Valaris adopted fresh start accounting upon emergence, revaluing assets and liabilities at fair value, resulting in a significant write-down of Property and Equipment and making financial statements non-comparable - The company adopted fresh start accounting upon emergence, as existing shareholders received less than 50% of the new shares and the reorganization value was less than post-petition liabilities and claims[52] Reorganization & Enterprise Value (April 30, 2021, in millions) | Metric | Value | | :--- | :--- | | Enterprise Value | $1,860.0 | | Plus: Cash and cash equivalents | $607.6 | | Reorganization value of Successor assets | $2,595.6 | - Fresh start adjustments included a significant write-down of Property and Equipment by approximately $8.7 billion to reflect its fair value[68][90] Note 5 - Equity Method Investment in ARO Valaris holds a 50% equity method investment in ARO, a joint venture with Saudi Aramco, with a maximum exposure to loss of $302.1 million and potential capital contributions up to $1.25 billion for newbuild rigs - Valaris is a 50% partner in the ARO joint venture with Saudi Aramco, which owns 7 jackup rigs and leases 9 rigs from Valaris[126] - ARO plans to purchase 20 newbuild jackup rigs over 10 years; if ARO cannot self-finance, Valaris may be required to contribute up to an aggregate of $1.25 billion[128][206] Valaris's Maximum Exposure to Loss from ARO (in millions) | | June 30, 2021 (Successor) | December 31, 2020 (Predecessor) | | :--- | :--- | :--- | | Total assets related to ARO | $340.7 | $585.2 | | Less: total liabilities related to ARO | $38.6 | $30.9 | | Maximum exposure to loss | $302.1 | $554.3 | Note 7 - Property and Equipment Property and equipment, net, significantly decreased to $897.8 million for the Successor due to fresh start accounting, following Predecessor impairment losses of $756.5 million in 2021 and $3.6 billion in 2020 - The Predecessor recorded a pre-tax, non-cash impairment loss of $756.5 million for certain floaters during the four months ended April 30, 2021[152][155] - In 2020, the Predecessor recorded impairment losses totaling $3.6 billion for the six months ended June 30, 2020, due to the decline in oil prices and the COVID-19 pandemic's impact on demand[153][158][159] Note 11 - Debt Valaris's capital structure was overhauled post-bankruptcy, cancelling all Predecessor debt and issuing $550 million in new First Lien Notes due 2028 with flexible interest payment options - On April 30, 2021, the company issued $550 million in aggregate principal of new First Lien Notes due 2028[179] - The First Lien Notes offer optionality for interest payments: 8.25% in cash, 10.25% as 50/50 cash/PIK, or 12% entirely PIK[182] - All of the Predecessor's senior notes and its Revolving Credit Facility were cancelled as part of the reorganization plan[188] Note 15 - Segment Information The company operates through Floaters, Jackups, ARO, and Other segments, with Jackups contributing $25.2 million in operating income and Floaters reporting a $3.4 million operating loss for the Successor period Segment Operating Income (Loss) - Two Months Ended June 30, 2021 (Successor, in millions) | Segment | Revenues | Operating Income (Loss) | | :--- | :--- | :--- | | Floaters | $49.7 | $(3.4) | | Jackups | $128.5 | $25.2 | | ARO (Full Results) | $84.0 | $8.3 | | Other | $24.6 | $14.6 | | Consolidated Operating Income | $202.8 | $9.6 | - The company's operating segments are Floaters (drillships and semisubmersibles), Jackups, ARO (50/50 joint venture), and Other (management services and ARO arrangements)[209] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This MD&A details the company's post-Chapter 11 emergence, fresh start accounting impact, improving offshore drilling market, increased contract backlog to $2.2 billion, and combined financial results reflecting decreased revenues and expenses Executive Summary and Business Environment Valaris emerged from Chapter 11 on April 30, 2021, eliminating $7.1 billion in debt, with the offshore drilling market showing improvement and contract backlog increasing to $2.2 billion - Emerged from Chapter 11 on April 30, 2021, eliminating $7.1 billion of debt and obtaining a $520.0 million capital injection[232] - Contract backlog increased to $2.2 billion as of August 2, 2021, up from $1.0 billion at December 31, 2020; ARO backlog increased to $953.2 million from $347.5 million over the same period[243][244] - The constructive oil price environment in 2021 has led to an improvement in contracting and tendering activity compared to 2020, particularly for drillships[240] Results of Operations Combined results for Q2 2021 show revenues of $293.1 million, a 25% decrease year-over-year, and contract drilling expense down 31% to $254.3 million, alongside a $3.5 billion reorganization expense Combined Results of Operations (Non-GAAP, in millions) | | Three Months Ended June 30, 2021 (Combined) | Three Months Ended June 30, 2020 (Predecessor) | | :--- | :--- | :--- | | Revenues | $293.1 | $388.8 | | Contract drilling expense | $254.3 | $370.7 | | Loss on impairment | — | $838.0 | | Operating income (loss) | $(28.4) | $(1,019.2) | | Other income (expense), net | $(3,532.3) | $(105.4) | | Net loss attributable to Valaris | $(3,563.2) | $(1,107.4) | - Combined revenues for Q2 2021 decreased by 25% year-over-year, primarily due to fewer days under contract, prior-year termination fees, and asset sales[260] - Combined contract drilling expense for Q2 2021 decreased by 31% year-over-year, driven by lower costs on idle rigs and rigs sold[262] Liquidity and Capital Resources Valaris's post-emergence liquidity is $608.8 million in cash and cash equivalents, with $550 million in First Lien Notes, and potential capital commitments including up to $1.25 billion for ARO's newbuild program Liquidity Position (in millions) | | June 30, 2021 (Successor) | December 31, 2020 (Predecessor) | | :--- | :--- | :--- | | Cash and cash equivalents | $608.8 | $325.8 | | Available DIP Facility | — | $500.0 | | Total liquidity | $608.8 | $825.8 | - The company has an option to take delivery of two newbuild drillships, VALARIS DS-13 and DS-14, on or before December 31, 2023, with no further obligation if it elects not to purchase them[330] - Valaris has a potential obligation to make capital contributions to the ARO joint venture to fund its 20-rig newbuild program, up to a maximum aggregate of $1.25 billion[341] Quantitative and Qualitative Disclosures About Market Risk This section is marked as not applicable for the current reporting period - The company has indicated that this section is not applicable for this reporting period[359] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with new controls established for fresh start accounting post-Chapter 11 emergence - Management concluded that disclosure controls and procedures were effective as of June 30, 2021[362] - New controls were established during the quarter to oversee the application of fresh start accounting following the emergence from bankruptcy[363] PART II OTHER INFORMATION Legal Proceedings This section details the dismissal of the UMB Bank lawsuit and a shareholder class action, while noting a $0.5 million accrued liability for environmental spills in Brazil - The UMB Bank lawsuit concerning fraudulent transfer allegations was dismissed with prejudice after the company's Chapter 11 plan was consummated[366] - A shareholder class action lawsuit was voluntarily dismissed with prejudice by the lead plaintiff in July 2021[367] - The company is subject to notices of assessment for environmental spills in Brazil and has a $0.5 million liability accrued for these matters as of June 30, 2021[368] Risk Factors Key risks post-bankruptcy emergence include adverse effects on business relationships, non-comparability of financial data, potential share dilution, ability to service new debt, and challenges of enforcing judgments against a Bermuda-based company - Risk that the recent emergence from bankruptcy may adversely affect relationships with vendors, suppliers, and customers[372] - Historical financial information is not indicative of future performance due to the significant impact of fresh start accounting[374] - Shareholders face potential dilution from 5.6 million outstanding warrants and up to 9.0 million shares reserved for the new Management Incentive Plan[375] - The company's contract backlog of $2.2 billion is not guaranteed and may not be fully realized due to risks of early termination, rig downtime, or contract renegotiations[384][385] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company repurchased a small number of equity securities from employees to settle tax withholding obligations related to vested share awards, prior to legacy share cancellation Issuer Repurchases of Equity Securities | Period | Total Number of Securities Repurchased | Average Price Paid per Security | | :--- | :--- | :--- | | April 1 - April 30 | 1,057 | $0.07 | | May 1 - May 31 | — | $— | | June 1 - June 30 | — | $— | | Total | 1,057 | $0.07 | - Repurchases in April 2021 were from employees to cover tax withholding on vesting share awards, prior to the cancellation of all legacy shares[390] Exhibits This section lists exhibits filed with the Form 10-Q, including foundational documents for the reorganized company, such as new Bye-laws, First Lien Notes Indenture, Warrant Agreement, and the 2021 Management Incentive Plan - Filed exhibits include foundational documents for the reorganized company, such as the new Bye-laws (3.2), First Lien Notes Indenture (4.1), Warrant Agreement (10.1), and the 2021 Management Incentive Plan (10.4)[390][391]