Valaris(US:VAL)2022-02-21 16:00PART I Business Valaris is a global offshore drilling contractor operating a large rig fleet after emerging from bankruptcy in 2021 - Valaris is a leading global provider of offshore contract drilling services, owning a fleet of 56 rigs and holding a 50% equity interest in ARO, which owns an additional seven rigs18 - The company provides drilling services on a day rate contract basis, where it supplies the rig and crew, while customers bear the costs and risks of well construction20 - On April 30, 2021, Valaris successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy, eliminating $7.1 billion of debt and securing a $520 million capital injection through new First Lien Notes27 - The business consists of four operating segments: Floaters (drillships and semisubmersibles), Jackups, ARO (50/50 joint venture with Saudi Aramco), and Other (management services)29 Major Customer Revenue Concentration (2021) | Period | Top 5 Customers' Revenue Share | BP's Revenue Share | | :--- | :--- | :--- | | Successor (8 mos ended 12/31/21) | 42% | 11% | | Predecessor (4 mos ended 4/30/21) | 45% | 14% | - The offshore drilling industry is highly competitive, with contracts typically awarded based on competitive bids where price, quality of service, safety performance, and equipment suitability are key factors48 - Operations are subject to extensive governmental regulation and environmental laws, including those from the Bureau of Safety and Environmental Enforcement (BSEE) and emerging rules related to climate change and greenhouse gas emissions495458 Risk Factors The company faces substantial risks from market volatility, contract uncertainties, post-bankruptcy challenges, and extensive international regulations - Business & Market Risks: The company's financial condition is adversely impacted by the COVID-19 pandemic, high dependence on volatile oil and gas prices, and the highly competitive and cyclical nature of the offshore drilling industry71768286 - Contractual Risks: The current contract backlog may not be fully realized due to potential rig downtime, early terminations, or customer renegotiations899098 - Financial & Post-Bankruptcy Risks: Having emerged from bankruptcy may affect business relationships and access to financing, and historical financial information is not indicative of future performance due to fresh start accounting140141145 - ESG Risks: Increasing regulation of greenhouse gases and heightened stakeholder scrutiny of ESG practices could negatively impact demand for services and increase operational costs147150151 - Regulatory & Legal Risks: The company must comply with complex anti-bribery statutes, environmental laws, and tax regulations across numerous jurisdictions, with non-compliance potentially leading to significant fines154157160 - International Operations Risks: Non-U.S. operations, which constitute the majority of revenues (87% in the Successor period), are subject to geopolitical instability, currency fluctuations, and complex local laws174176 Unresolved Staff Comments The company reports no unresolved comments from the staff of the Securities and Exchange Commission - None192 Properties The company details its drilling fleet of 56 rigs and its owned and leased global office facilities Drilling Fleet Composition (as of Feb 21, 2022) | Rig Type | Count | | :--- | :--- | | Floaters | | | Drillship | 11 (plus 2 under construction option) | | Semisubmersible | 5 | | Jackups | 40 | | Total Owned | 56 | - The report provides a detailed table listing each rig's specifications, including name, type, year built, design, water/drilling depth, location, and current operational status193194 - The company owns all rigs in its fleet and also manages drilling operations for two platform rigs owned by a third party200 - Valaris leases office space globally and owns office and other facilities in Louisiana, Angola, and Brazil200 Legal Proceedings The company is contesting notices in Brazil for past drilling fluid spills and has accrued a minor liability - The company is contesting notices of assessment in Brazil for spills from drilling rigs between 2008 and 2019201 - A liability of $0.4 million related to the Brazilian environmental matters was recorded on the Consolidated Balance Sheet as of December 31, 2021201 - Other legal proceedings are considered incidental to the business and are not expected to have a material adverse effect on financial results202 Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable203 PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Post-bankruptcy, new shares and warrants trade on the NYSE, while dividends are restricted by debt covenants - As a result of the Chapter 11 cases, the Class A ordinary shares of Legacy Valaris were cancelled on the Effective Date, April 30, 2021206 - The new Common Shares and Warrants of the successor company, Valaris Limited, are listed on the New York Stock Exchange under the ticker symbols "VAL" and "VAL WS", respectively207 - The company has not paid or declared any dividends on its Common Shares, and the Indenture governing its debt includes provisions that limit its ability to pay dividends208 - Valaris has obtained an assurance from the Minister of Finance of Bermuda that certain taxes on profits, income, or capital gains will not be applicable to the company or its shares until March 31, 2035210 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial results are not comparable year-over-year due to fresh start accounting post-bankruptcy emergence Introduction The company emerged from bankruptcy with a new accounting basis, making post-emergence financials incomparable to prior periods - Upon emergence from Chapter 11, the company adopted fresh start accounting, resulting in a new basis of accounting, making financial statements after April 30, 2021 (Successor) not comparable to those prior (Predecessor)219 - The industry environment improved in 2021, with Brent crude oil prices rising from ~$50 to nearly $80 per barrel, leading to increased contracting and tendering activity225 Contract Backlog Comparison (in millions) | Category | Feb 21, 2022 | Dec 31, 2020 | | :--- | :--- | :--- | | Valaris Total | $2,443.9 | $1,041.4 | | Floaters | $1,665.3 | $163.7 | | Jackups | $643.0 | $737.6 | | Other | $135.6 | $140.1 | | ARO | $1,501.1 | $347.5 | - The increase in Valaris's backlog by $1.4 billion is attributed to new contract awards and extensions, partially offset by revenue realization231 Business Environment The offshore drilling market improved in 2021, with a significant recovery in the floater segment but a more modest recovery for jackups - Floaters: The floater segment backlog increased significantly from $163.7 million at YE 2020 to $1.7 billion as of Feb 21, 2022, with stable utilization and day rates236237 - Jackups: The jackup segment backlog decreased from $737.6 million to $643.0 million, though utilization was stable and average day rates increased to approximately $95,000 in 2021242243 - The market continues to be oversupplied with rigs, but rig retirements are ongoing, with 134 benign environment floaters and 161 jackups retired since 2014239245 Results of Operations A non-GAAP combined 2021 analysis shows lower revenue but a significantly smaller operating loss compared to 2020 due to reduced expenses and impairments Consolidated Results of Operations (in millions) | | Combined 2021 (Non-GAAP) | 2020 (Predecessor) | | :--- | :--- | :--- | | Revenues | $1,232.4 | $1,427.2 | | Contract drilling expense | $1,072.5 | $1,470.4 | | Loss on impairment | $756.5 | $3,646.2 | | Depreciation | $225.7 | $540.8 | | General and administrative | $88.9 | $214.6 | | Operating loss | ($902.0) | ($4,334.5) | | Net loss attributable to Valaris | ($4,500.0) | ($4,855.5) | - Combined 2021 revenues declined by $194.8 million (13.6%) compared to 2020, primarily due to fewer operating days and prior-year contract termination fees250 - Combined 2021 contract drilling expense decreased by $397.9 million (27.1%) compared to 2020, driven by lower costs for idle rigs, rigs sold, and cost control efforts251 - A non-cash impairment loss of $756.5 million was recorded in the four-month 2021 Predecessor period, compared to a $3.6 billion impairment in 2020252 - Other expense, net, for the combined 2021 period includes $3.6 billion in reorganization items, primarily related to the effects of emerging from bankruptcy and applying fresh start accounting256318 Liquidity and Capital Resources The company holds $608.7 million in cash with $550 million in debt and projects significant capital expenditures for rig upgrades in 2022 Liquidity Position (in millions) | | Dec 31, 2021 (Successor) | Dec 31, 2020 (Predecessor) | | :--- | :--- | :--- | | Cash and cash equivalents | $608.7 | $325.8 | | Available credit/DIP facility | $0.0 | $500.0 | | Total liquidity | $608.7 | $825.8 | - Capital expenditures for 2022 are expected to be approximately $225 million to $250 million for rig enhancement, reactivation, and upgrade projects350 - The company's primary debt consists of $550 million in First Lien Notes due April 30, 2028, issued upon emergence from bankruptcy354357 Contractual Obligations as of Dec 31, 2021 (in millions) | Category | Total | | :--- | :--- | | Principal payments on long-term debt | $550.0 | | Interest payments on long-term debt | $294.9 | | Operating leases | $27.4 | | Total contractual obligations | $872.3 | - The company has a potential obligation to make capital contributions to its ARO joint venture to fund a 20-rig newbuild program, up to a maximum aggregate of $1.25 billion371772 Critical Accounting Policies and Estimates Key accounting judgments involve property depreciation, impairment assessments, income taxes, and pension benefit assumptions - Upon emergence from bankruptcy, the company changed its accounting policy for property and equipment, moving from a single asset approach to identifying and depreciating significant components of its drilling rigs separately398400 - Impairment of Property and Equipment was a critical policy for the Predecessor, leading to non-cash impairment charges of $756.5 million in the first four months of 2021 and $3.6 billion in 2020404405 - Accounting for income taxes is complex due to operations in numerous jurisdictions; as of December 31, 2021, the company had a $320.2 million liability for unrecognized tax benefits412 - Pension and other postretirement benefit liabilities are based on significant actuarial assumptions; a one-percentage-point decrease in the assumed discount rate would increase liabilities by approximately $109.1 million420 Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - Not applicable422 Financial Statements and Supplementary Data This section presents audited financial statements reflecting the post-bankruptcy new basis of accounting and an unqualified audit opinion - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021425 - The independent auditor, KPMG LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting428429 - The financial statements are presented for two distinct periods: the Successor (post-bankruptcy) and the Predecessor (pre-bankruptcy), which are not comparable due to fresh start accounting430465 Key Financial Statement Data (in millions) | | Successor (8 mos ended 12/31/21) | Predecessor (4 mos ended 4/30/21) | Predecessor (Year ended 12/31/20) | | :--- | :--- | :--- | :--- | | Operating Revenues | $835.0 | $397.4 | $1,427.2 | | Operating Loss | ($11.9) | ($890.1) | ($4,334.5) | | Net Loss Attributable to Valaris | ($33.0) | ($4,467.0) | ($4,855.5) | | Total Assets (at period end) | $2,609.2 | N/A | $12,873.2 | | Total Liabilities (at period end) | $1,548.4 | N/A | $8,502.9 (incl. subject to compromise) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable811 Controls and Procedures Management concluded that the company's disclosure controls and procedures are effective as of year-end 2021 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report812 - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2021814 Other Information This item is not applicable to the company - Not applicable815 PART III This section incorporates by reference information from the company's forthcoming definitive Proxy Statement Directors, Executive Officers and Corporate Governance Information on directors and governance is incorporated by reference from the Proxy Statement, while officer information is in Part I - Information required by this item is incorporated by reference from the company's Proxy Statement to be filed within 120 days of the fiscal year-end817 - Information regarding executive officers is located in Part I of this Annual Report818 Executive Compensation Information concerning executive compensation is incorporated by reference from the company's Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement821 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters This section provides details on equity compensation plans not approved by security holders Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise (a) | Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | | Equity compensation plans not approved by security holders | 1,467,438 | 7,493,135 | - Additional information required by this item is incorporated by reference from the company's Proxy Statement823 Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement824 Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement825 PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K - This item lists all financial statements and exhibits filed with the Form 10-K828 - Key exhibits filed include the Fourth Amended Joint Chapter 11 Plan of Reorganization (2.1), Bye-laws of Valaris Limited (3.2), Indenture for the First Lien Notes (4.1), and the Warrant Agreement (4.5)829 Form 10-K Summary The company has not provided a summary for its Form 10-K - None834