Valaris(US:VAL)2022-08-01 16:00PART I - FINANCIAL INFORMATION Financial Statements This section presents Valaris Limited's unaudited condensed consolidated financial statements for Q2 2022, detailing operations, balance sheets, cash flows, and key events Condensed Consolidated Statements of Operations The company reported $413.3 million in Q2 2022 operating revenues and $111.6 million net income, significantly impacted by asset sales and the VALARIS DS-11 contract termination Q2 2022 (Successor) Statement of Operations Highlights (in millions) | Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Operating Revenues | $413.3 | $731.7 | | Contract drilling expense | $361.8 | $693.1 | | Loss on impairment | $34.5 | $34.5 | | Operating Income (Loss) | $(15.6) | $(65.5) | | Other Income, net | $149.7 | $158.0 | | Net Income (Loss) Attributable to Valaris | $111.6 | $73.0 | | Diluted EPS | $1.48 | $0.97 | - The company received a $51.0 million early termination fee for the VALARIS DS-11 contract, which was included in revenues for the three and six months ended June 30, 202242 - A pre-tax, non-cash loss on impairment of $34.5 million was recorded in Q2 2022 related to capital upgrades for the terminated VALARIS DS-11 contract4375 Condensed Consolidated Balance Sheets As of June 30, 2022, Valaris reported total assets of $2.76 billion, total liabilities of $1.62 billion, and total equity of $1.14 billion, reflecting growth from year-end 2021 Balance Sheet Summary (in millions) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,280.9 | $1,206.6 | | Cash and cash equivalents | $553.5 | $608.7 | | Property and equipment, net | $931.7 | $890.9 | | Total Assets | $2,760.8 | $2,609.2 | | Total Current Liabilities | $547.1 | $422.0 | | Long-Term Debt | $545.7 | $545.3 | | Total Liabilities | $1,620.4 | $1,548.4 | | Total Equity | $1,140.4 | $1,060.8 | Condensed Consolidated Statements of Cash Flows For H1 2022, net cash used in operations was $114.1 million, while investing activities provided $46.9 million, resulting in a $67.3 million decrease in cash and restricted cash Cash Flow Summary for Six Months Ended June 30, 2022 (Successor, in millions) | Cash Flow Activity | Amount | | :--- | :--- | | Net cash used in operating activities | $(114.1) | | Net cash provided by investing activities | $46.9 | | Net cash used in financing activities | $(0.2) | | Decrease in Cash and Restricted Cash | $(67.3) | - Investing activities were positively impacted by $146.5 million in net proceeds from the disposition of assets, while being offset by $99.6 million in additions to property and equipment26 Notes to Condensed Consolidated Financial Statements These notes provide critical context to the financial statements, detailing the VALARIS DS-11 termination fee, ARO joint venture, asset sales, debt, contingencies, segment performance, and customer concentration - The company's 50/50 unconsolidated joint venture, ARO, owns seven jackup rigs and has ordered two newbuilds. Valaris leases an additional seven rigs to ARO. ARO's net income was $9.9 million for Q2 2022585962 - In Q2 2022, the company sold three rigs (VALARIS 113, 114, and 36) for a combined pre-tax gain of $128.5 million and received an additional $7.0 million on a prior-year sale81 - The company has a potential obligation to contribute up to $1.25 billion to ARO to fund a 20-rig newbuild program if other financing is unavailable113 Customer Revenue Concentration (Six Months Ended June 30, 2022) | Customer | Percentage of Revenue | | :--- | :--- | | BP plc ("BP") | 14% | | Equinor ASA ("Equinor") | 12% | | Other | 74% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's performance, industry outlook, and financial condition, highlighting improved offshore drilling prospects, a $2.3 billion backlog, and strong liquidity Business Environment and Outlook The offshore drilling outlook has improved with increased contracting, though geopolitical and inflationary risks persist, with the company's backlog at $2.3 billion and rising utilization and day rates - Contract backlog was $2.3 billion as of July 28, 2022, a decrease from $2.4 billion as of February 21, 2022, primarily due to the termination of the VALARIS DS-11 contract157 - ARO's backlog was stable at $1.5 billion as of July 28, 2022160 Q2 2022 vs Q1 2022 Segment Performance | Segment | Q2 2022 Utilization | Q1 2022 Utilization | Q2 2022 Avg. Day Rate | Q1 2022 Avg. Day Rate | | :--- | :--- | :--- | :--- | :--- | | Floaters | 31% | 25% | $213,000 | $197,000 | | Jackups | 67% | 63% | $94,000 | $89,000 | Results of Operations Q2 2022 revenue increased 30% to $413.3 million from Q1, driven by the VALARIS DS-11 termination fee and higher operating days, while contract drilling expenses also rose Q2 2022 vs Q1 2022 (Successor, in millions) | Metric | Q2 2022 | Q1 2022 | | :--- | :--- | :--- | | Revenues | $413.3 | $318.4 | | Contract drilling expense | $361.8 | $331.3 | | Operating loss | $(15.6) | $(49.9) | | Net income (loss) attributable to Valaris | $111.6 | $(38.6) | - Floater revenue for Q2 2022 increased by $88.4 million (89%) compared to Q1 2022, driven by the $51.0 million termination fee for VALARIS DS-11 and a $26.0 million increase from more operating days201 - Other income, net, increased significantly in Q2 2022 due to a $135.5 million gain on the sale of three rigs (VALARIS 113, 114, 36) and additional proceeds from a prior sale186220 Liquidity and Capital Resources The company maintains strong liquidity with $553.5 million in cash and no debt maturities until 2028, projecting $200-$210 million in 2022 capital expenditures and holding options for two newbuild drillships - As of June 30, 2022, the company had $553.5 million in cash and cash equivalents and no debt principal payments due until 2028233 - Full-year 2022 capital expenditures are expected to be approximately $200 to $210 million238 - The company has options to take delivery of two drillships, VALARIS DS-13 and VALARIS DS-14, on or before December 31, 2023236 - The company has a potential obligation to fund its joint venture, ARO, for its newbuild program, with a maximum aggregate contribution of $1.25 billion if third-party financing is not secured248 Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on fixed-rate debt and LIBOR-based notes, with a hypothetical 1% LIBOR decrease impacting interest income by $4.4 million, and unhedged foreign currency risk - The company's outstanding debt consists of $550.0 million in fixed-rate First Lien Notes, exposing it to fair value changes from market interest rate fluctuations262 - Long-term notes receivable from ARO bear interest based on LIBOR. A hypothetical 1% decrease in LIBOR would reduce interest income by approximately $4.4 million annually263 - The company is exposed to unhedged foreign currency risk from operations conducted in currencies other than the U.S. dollar264 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022269 - There were no material changes in internal controls over financial reporting during the second quarter of 2022270 PART II - OTHER INFORMATION Legal Proceedings The company is contesting fines for fluid spills in Brazil and is involved in other legal matters, increasing its accrual for certain claims by approximately $25.0 million as of June 30, 2022 - The company is contesting fines assessed by Brazilian authorities for drilling fluid spills between 2008 and 2019 and has a $0.5 million liability accrued for these matters273 - The company increased its accrual for certain other legal matters by approximately $25.0 million as of June 30, 2022, to reflect changes in the projected value of claims274115 Risk Factors This section refers readers to the comprehensive discussion of business risks detailed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - The report refers to the 'Risk Factors' section of the Annual Report on Form 10-K for the year ended December 31, 2021, for a comprehensive discussion of business risks275 Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, the company withheld 2,834 common shares to satisfy tax obligations on vesting employee share awards, not as part of a stock buyback program - A total of 2,834 shares were withheld during Q2 2022 to satisfy tax obligations on vesting share awards, not as part of a share repurchase program276278 Exhibits This section lists all exhibits filed with the Form 10-Q, including supplemental indentures, executive compensation plans, and certifications - Lists exhibits filed with the report, such as a Third Supplemental Indenture, an Amended Executive Severance Plan, and CEO/CFO certifications278