Valaris(US:VAL)2024-05-02 16:39PART I FINANCIAL INFORMATION Item 1. Financial Statements Valaris reported Q1 2024 operating revenues of $525.0 million and net income of $25.5 million, with total assets of $4.35 billion and liabilities of $2.32 billion Condensed Consolidated Statements of Operations (Q1 2024 vs Q1 2023) | Metric | Three Months Ended March 31, 2024 ($M) | Three Months Ended March 31, 2023 ($M) | | :--- | :--- | :--- | | Operating Revenues | 525.0 | 430.1 | | Operating Income | 29.3 | 8.5 | | Net Income | 25.5 | 48.6 | | Net Income Attributable to Valaris | 25.5 | 46.7 | | Diluted EPS | $0.35 | $0.61 | Condensed Consolidated Balance Sheets | Metric | March 31, 2024 ($M) | December 31, 2023 ($M) | | :--- | :--- | :--- | | Cash and cash equivalents | 494.1 | 620.5 | | Total Assets | 4,354.4 | 4,322.2 | | Long-Term Debt | 1,080.1 | 1,079.3 | | Total Liabilities | 2,324.1 | 2,325.2 | | Total Valaris shareholders' equity | 2,020.9 | 1,987.6 | Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2024 ($M) | Three Months Ended March 31, 2023 ($M) | | :--- | :--- | :--- | | Net cash provided by operating activities | 26.3 | 151.7 | | Net cash used in investing activities | (151.3) | (56.2) | | Net cash used in financing activities | (1.6) | — | | Decrease in Cash & Restricted Cash | (126.6) | 95.5 | Note 2 - Revenue from Contracts with Customers Revenue is recognized over time for drilling services, with contract liabilities of $158.5 million and deferred costs of $85.3 million as of March 31, 2024 Contract Assets and Liabilities (as of March 31, 2024) | Item | Amount ($ millions) | | :--- | :--- | | Current contract assets | 2.3 | | Noncurrent contract assets | 5.8 | | Current contract liabilities (deferred revenue) | 122.3 | | Noncurrent contract liabilities (deferred revenue) | 36.2 | Note 3 - Equity Method Investment in ARO Valaris holds a 50% interest in ARO, recognizing $2.4 million in equity earnings for Q1 2024, and holds $289.3 million in notes receivable ARO Summarized Financial Information (Q1 2024 vs Q1 2023) | Metric | Three Months Ended March 31, 2024 ($M) | Three Months Ended March 31, 2023 ($M) | | :--- | :--- | :--- | | Revenues | 138.3 | 123.6 | | Operating income | 15.2 | 13.1 | | Net income (loss) | (1.6) | 0.8 | - Valaris's share of ARO's Q1 2024 net loss was $0.8 million, but after a $3.2 million positive adjustment for amortization of basis differences, the company recognized $2.4 million in earnings from ARO51 - The carrying value of Notes Receivable from ARO was $289.3 million as of March 31, 2024, against a principal amount of $402.7 million. Valaris recognized $14.0 million in total interest income from these notes in Q1 20245658 Note 8 - Debt Long-term debt primarily consists of $1.1 billion in 8.375% Senior Secured Second Lien Notes due 2030, with an undrawn $375.0 million revolving credit facility - The company has $1.1 billion in Second Lien Notes due 2030 and an undrawn $375.0 million revolving credit facility6669 Note 9 - Shareholders' Equity The board authorized a $600.0 million share repurchase program, with $400.0 million remaining available as of March 31, 2024, and no Q1 2024 repurchases - The share repurchase program was increased to $600.0 million in February 2024, with $400.0 million available for repurchases as of March 31, 2024. No repurchases were made in Q1 202474 Note 10 - Income Taxes A favorable Luxembourg tax decision in April 2024 will result in a $63.0 million tax benefit reversal in Q2 2024 - In April 2024, Valaris received a favorable decision from Luxembourg tax authorities, which will lead to the reversal of a previously recorded liability and recognition of a tax benefit of approximately $63.0 million in Q2 202477 Note 11 - Contingencies Valaris has a potential $1.25 billion funding obligation to ARO for its newbuild program and faces ongoing patent litigation and Brazilian administrative proceedings - Valaris may be required to make capital contributions to ARO, up to a maximum of $1.25 billion, to fund ARO's 20-rig newbuild program if other financing is unavailable80 Note 12 - Segment Information Floaters segment led Q1 2024 profitability with $57.8 million operating income on $324.4 million revenue, followed by Jackups and ARO Segment Performance - Three Months Ended March 31, 2024 | Segment | Revenues ($M) | Operating Income ($M) | | :--- | :--- | :--- | | Floaters | 324.4 | 57.8 | | Jackups | 152.3 | 8.0 | | ARO | 138.3 | 15.2 | | Other | 48.3 | 24.8 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management projects a positive offshore drilling market, with a $4.0 billion contract backlog and strong liquidity, planning $420-460 million in 2024 capital expenditures - The offshore drilling market outlook is positive, with increasing global utilization and day rates for rigs. Floater utilization for 6th and 7th generation drillships is at 90%101108 Contract Backlog Summary | Segment | April 30, 2024 ($M) | February 15, 2024 ($M) | | :--- | :--- | :--- | | Floaters | 2,404.6 | 2,531.7 | | Jackups | 1,184.9 | 1,167.4 | | Other | 427.7 | 222.3 | | Total Valaris | 4,017.2 | 3,921.4 | | ARO (100%) | 1,982.2 | 2,138.1 | - The company expects capital expenditures for 2024 to be between $420.0 million and $460.0 million, primarily for maintenance, upgrades, and rig reactivations162 Results of Operations Q1 2024 revenues increased 9% sequentially to $525.0 million and 22% year-over-year, driven by the Floaters segment, despite a sequential operating income decrease Q1 2024 vs Q4 2023 Performance | Metric | Q1 2024 ($M) | Q4 2023 ($M) | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | 525.0 | 483.8 | 9% | | Operating Income | 29.3 | 38.3 | (23)% | | Net Income | 25.5 | 828.5 | (97)% | Q1 2024 vs Q1 2023 Performance | Metric | Q1 2024 ($M) | Q1 2023 ($M) | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | 525.0 | 430.1 | 22% | | Operating Income | 29.3 | 8.5 | 245% | | Net Income | 25.5 | 48.6 | (48)% | Liquidity and Capital Resources The company maintains strong liquidity with $494.1 million cash and an undrawn $375.0 million credit facility, with no debt principal due until 2030 - As of March 31, 2024, cash and cash equivalents were $494.1 million, with an additional $375.0 million available under the undrawn Credit Agreement154 - Net cash provided by operating activities was $26.3 million in Q1 2024, while capital expenditures totaled $151.3 million157 - The Notes Receivable from ARO, totaling $402.7 million in principal, are scheduled to mature in 2027 and 2028165 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to Item 2 for disclosures on interest rate and foreign currency market risks - The report directs readers to the Market Risk section within Item 2 (MD&A) for disclosures on interest rate and foreign currency risk184 Item 4. Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2024, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of the end of the quarter185 - No material changes to internal control over financial reporting occurred during the first quarter of 2024186 PART II OTHER INFORMATION Item 1. Legal Proceedings Valaris faces pending environmental assessments in Brazil with a $0.4 million liability, while other legal matters are not expected to be material - Valaris is contesting notices of assessment for environmental matters in Brazil and has recorded a $0.4 million liability related to these matters as of March 31, 2024189 Item 1A. Risk Factors No material changes to risk factors were reported from the prior Annual Report on Form 10-K, to which readers are referred for comprehensive details - The report refers readers to the risk factors section of the Annual Report on Form 10-K for the year ended December 31, 2023, for a full description of significant risks191 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Approximately $400.0 million remains available under the $600.0 million share repurchase program, with no repurchases made in Q1 2024 - Approximately $400.0 million remained available for share repurchases under the company's $600.0 million program as of March 31, 2024. No repurchases were made in Q1 2024192 Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the first quarter of 2024 - No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during Q1 2024193 Item 6. Exhibits Filed exhibits include management certifications, a new PSU award agreement form, and Inline XBRL documents - Filed exhibits include management certifications (302 and 906), a new PSU award agreement form, and Inline XBRL documents197