Good day everyone and welcome to Valaris plc's Third Quarter 2019 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I will now turn the call over to Mr. Nick Georgas, Senior Director of Investor Relations who will moderate the call. Please go ahead sir.

Welcome everyone to the Valaris third quarter 2019 conference call. With me today are President and CEO, Tom Burke; Executive Vice President and CFO, Jon Baksht; and other members of our executive management team. We issued our press release which is available on our website at valaris.com. Any comments we make today about expectations are 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. As a reminder, we issued our most recent Fleet Status Report which provides details on contracts across our rig fleet on October 25th. An updated investor presentation is also available on our website. Now, let me turn the call over to Tom Burke, President and CEO.

Thanks Nick and good morning everyone. Welcome to the call and thank you for your interest in Valaris. I'm going to speak to three main topics in my prepared remarks today. I will briefly comment on the company's third quarter results and provide an update on the company's four main priorities before discussing the broader market for offshore rigs and specific contract wins. I will then hand the call over to Jon for his comments. In terms of our financial results for the third quarter, we reported adjusted EBITDA of $35 million, approximately $26 million better than the outlook we provided on our second quarter conference call. These results reflect robust execution on our ongoing focus on operational excellence and disciplined cost management including aggressively realizing merger synergies. While we have a lot going on with integration, we remain focused on delivering safe and reliable operations to our customers. On our last conference call, I highlighted four priorities for the company following the combination in April. These are integration and synergy capture; delivering value from ARO Drilling; proactively managing our balance sheet; and fleet management, which encompasses our contracting strategy. With respect to our integration and synergy capture priority, we reached the six-month mark as a combined company in mid-October. During this time, we've made significant headway on our integration plan which is now approximately 65% complete. This plan includes a standardization of operational policies and procedures across our fleet which will drive a consistent approach to rig operations plus ongoing consolidation of IT infrastructure and performance management systems. As of the end of September, we reached a run rate synergies of approximately $115 million, which is ahead of schedule as we worked towards our previously announced merger synergy target. By completing the merger earlier this year, Valaris became the…

Thanks, Tom, and good morning everyone. My prepared remarks today will focus primarily on discussing our financial position and balance sheet management, given the heightened interest in our ability to manage our liabilities. As I've noted previously, we continue to focus on managing our liabilities in a manner that provides the company with a financial runway and adequate liquidity to best navigate the sector recovery. But before going into this topic in more detail, I'll first cover our third quarter's 2019 financial results and our outlook for fourth quarter 2019. Starting with our third quarter 2019 results. Adjusted EBITDA was $35 million for the quarter approximately $26 million better than the guidance we provided on our last conference call. These better than expected results were primarily driven by disciplined expense management, including efficiently reducing costs for rigs that recently completed contracts and a faster realization of merger synergies. When comparing to our third quarter 2019 results to the prior sequential quarter, as we have done in our press release, note that the third quarter was our first full quarter as a combined company following merger closing earlier this year, and that second quarter results reflected 10 fewer days of legacy Rowan operations since we completed the merger on April 11. Revenue for the third quarter was $551 million compared to $584 million in the prior quarter. In the floater segment, revenue declined to $270 million from $296 million from the prior quarter primarily due to VALARIS 8504, DS-4 and DPS-1 having fewer operating days on a sequential basis after completing projects during the third quarter. This is partially offset by increased revenue for drillships VALARIS DS-7, DS-9 and DS-15 which had more operating days in the third quarter after beginning new contracts in the prior quarter. In the jack-up segment…

Thanks, Jon. Operator, at this time please open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from James West with Evercore ISI. Please go ahead.

Hey. Good morning, Tom. Good morning, Jon.

Hey. James, good morning.

Good morning, James.

Tom, you seem a bit -- I guess, a bit more optimistic about the floater market than you maybe were previously specifically citing more tenders in the third quarter than almost all that first half from the high end. And you suggested that the rates would start to move up here on the higher end group of floaters that you have. Could you elaborate a bit more on kind of how you're seeing the conversations change, how you're seeing the interest from your clients change? And if there's a bit of urgency now in the market to lock in rigs for next year.

Yeah. Thanks, James. It's a good question. It's an important question, and we certainly still project from what we -- what I talked about last quarter, which is we see the second half of next year considerably a larger amount of work. So, I think overall the theme is the back half of next year is looking pretty good, which is what we said last quarter. I would say that in this last quarter or the third quarter of this year, we did book more than $250 million of backlog which included five contract extensions and -- across our drillship fleets. And so as I sort of look forward to what is going on and the tempo, it has certainly moved up quite a bit from last -- from where we were at the last earnings call. As I highlighted in my comments, the first half of this year, we had 21 firm orders, which is 21 projects, which we -- 31 -- 21 firm tenders that we're responding to. And in the third quarter it was 19. So, it's quite a significant increase in the tempo. With respect to the customers, I do spend a lot of time with customers talking to them about their plans. And certainly, the tempo on deepwater, particularly for work starting Q2, Q3, Q4 of next year is increasing. And we do have -- there is limited availability in certain markets such as the drillship market in the Gulf of Mexico. And so, I would say, yes, it is improving obviously. We want to see contract lengths improve. Contract lengths for floaters have increased. If we look at year-to-date 2018 versus year-to-date 2019, we have seen a modest improvement, as I said in my comments, but we're also seeing that improvement starting to actually quicken as we -- at least in the tenders that we are being asked to respond to. Because, those haven't actually been pinned yet haven't actually been won yet by anybody. But we do see that the contract length is increasing, which along with utilization is important. I would say in the short-term, as other drillers have said, we have turned down work for early 2021, which we basically just didn't have a rig available. And we've also turned down work where we weren't willing to mobilize a rig or put a warm rig back to hot or back onto contract without being contracted forward.

Okay. Okay. It makes sense. Thanks. Thanks, Tom. And then, Jon maybe a quick question for you on the liquidity side. You went through a lot of stuff in your prepared remarks. But I guess the big question for me is to prove this liquidity is available what's stopping you or what's impeding you from going ahead and hitting the secured debt markets today? Is it just you don't like the price? I mean is that the issue? Or is it it's not open?

Yes. Sure James. I recognize that my prepared remarks are a bit normal -- a little bit longer than the normal. So, just kind of going through it a little bit just to reiterate. But you're -- the word you used is kind of to prove that we have access. It's an interesting choice of words. I would tell you that we have liquidity today of $1.5 billion if you look at between the cash on hand and the available revolver today. So the revolver we have is $1.5 billion available on that and another $130 million of cash. So, I'm sorry $1.6 billion of total liquidity. And so that's available to us effectively on demand and we have drawn on the revolver as you know starting a few months back. And so there is certainly -- we certainly recognize as I said in the prepared remarks that it's not a long-term funding strategy to rely on the liquidity from the revolver in the short-term -- I'm sorry in the long-term but it is something that is available to us and that we can continue to utilize. We have the asset base that based on your gross asset value and those of some of your peers is in the magnitude of $10 billion. And so since we have no unsecured -- there's no secured debt in the capital structure today that is certainly a level that we feel very strongly that we could utilize and access that market should we choose to do so with the appropriate terms and timing. But again we don't -- there's -- we're certainly focused on it. We're -- certainly something that we can spend a lot of time thinking about having conversations about with here internally. But it's also something that we don't feel like we need to go out there and rush off to do something just to kind of use your words prove to the market that we could do it.

Okay, makes sense. Thanks Jon. Thanks Tom.

Thanks James.

The next question is from Greg Lewis with BTIG.

Yes, thank you and good morning and I guess good afternoon. hiJust looking at the floater fleet specifically the drillships you have nine here I guess what you deem to be premium high-end drillships contracted. It's interesting as you look at those nine drillships each one of them has varying levels of options attached to them. I guess just looking at the initial four that roll off through Q1 of 2020 they all have options. Any thoughts around when you expect or sort of thoughts around do we think some of these options get exercised? Really I'm just trying to understand. And I don't think you were talking about these rigs but when you mentioned not necessarily being able to bid into some work for availability of rigs how should we think about the availability of kind of what you guys deem to be your high-end drillships in 2020?

So, Greg, yes, good morning. So, as we look at the fleets and we look at the options that we have, obviously, it varies by customer-to customer-and the strike dates on options fairly. But I would say that we think that based on public commentary from our customers, we expect those options to be exercised right or a number of them. And there's really options that -- aren't exercised. We do see opportunities in the so-called Golden Triangle in the Mediterranean for which those rigs are pretty well suited for work beginning in mid-2020 and beyond. There may be some gaps. But certainly as I articulated in my comments we have 25 floating rigs which were delivered in 2008 or later of which 15 we are actively marketing. And the other 10 we're holding back to reduce our costs. So, we are focused on that on those 15 rigs and we do feel that we will be able to contract them.

Okay, great. And then just one more for me. I mean clearly you guys highlighted in your prepared remarks that the jackup market is improving. You mentioned about the potential for rig disposals. I guess as we look at the jackup fleet -- and I'm really just curious around I guess the specific class rigs because they look to be two of your better stacked jackup rigs. As we look at 2020 are there thoughts about maybe reactivating? Or maybe I'm looking at -- maybe I'm thinking about it differently. Are there any -- I mean the jackup market is good. Are there opportunities to maybe put some of these sideline jackups to work/or is it more a function of hey we have kind of our core fleet of jackups working and it's really just about keeping those on higher rigs working?

So, with respect to those two specific rigs they are very good rigs and so they are something which customers visit have looked at a lot. Certainly, we want to keep our -- the rigs that we have working -- that are hot are working. So we certainly are very focused on that. We would reactivate those rigs if as I said in my remarks if the economics were right. So we do think those rigs are in very good shape and -- but we would want to make sure that we were comfortable that we would get a good return on capital for reactivating them.

Okay. Hey, perfect. Thank you everyone for the time.

Thanks very much.

Thanks, Greg.

The next question is from Connor Lynagh with Morgan Stanley. Please go ahead.

Hi, Connor.

Yeah, thank you. Hey, there. Just wanted to address some of the information that's out there in the market perhaps suggested by some of your competitors that you guys are being undisciplined in some regions. I just wanted to, sort of, you give the mic and give you a chance to address what some have been saying out there.

Yes. Certainly -- we're certainly in competition for work across the world. And I'm not really going to dignify some of the comments perhaps directly. But what I would say is as I articulated in my comments we have -- we're holding 40% of our excellent modern floater fleet off the market today to help us reduce our costs. And so the rigs that we do have and we are marketing we certainly want to keep working. And so I think that there has been -- there have been opportunities or there have been instances where we have a rig coming off a contract and there was a short gap and we've been aggressive on filling that gap. But we certainly are focused on driving value and expanding on margin on all of our floating assets. So -- and I can't -- I'm not going to give you specifics about where we're bidding because that isn't appropriate, but we certainly feel like we have a very good understanding of the market and every drillship tender that we make is very thoughtful about how to maximize value for our shareholders.

Got it. I appreciate the color. Just switching gears here you were alluding to some potential upside to synergies. I appreciate you don't want to give a number yet. But could you preview maybe where the conversation for you has shifted? Is this more cost savings? Is it more balance sheet efficiency like reducing spares or things like that? How do you think about what the next leg is here?

Yes. I can try to give a little bit more color. So we are six months into the merger. And certainly as you know when two companies are going to combine there's a lot of information that cannot be shared and was not shared around a lot about -- lot of the two companies' cost structure. So now with six months into it or actually just over six months into it we have spent a lot of time thinking about the cost structure and what we can do. And we are very focused on driving better cash flow margins. And so I would say as far as specifically where and how much we will -- we'll have to hold off on that for the moment. But it will be significantly higher than the $165 million and we're looking across all of our cost base. I'm excluding from -- when I'm thinking about synergies, I'm excluding from that any improvement or any reduction in interest. I'm more focused on operating costs support costs. The $165 million of synergies which is still our current target for the end of 2020 until we announce something higher -- a large portion of it is coming from the G&A and the support costs or the contract drilling expense portion which is onshore support. And we're broadening out to look at all of our costs specifically our procurement costs and other costs. So we're going to -- so we're looking wider and it's hard -- it's very hard to give before you close a merger to give synergies on some of the costs that you don't actually -- are unable to look at before the merger closes. And so now we've had six months we're able to go back and say there's more opportunity here and we'll be giving an announcement on it before the end of the year.

One thing, I would just add just briefly is the fact that we're already $115 million in effectively two quarters into the combination -- and really that's not even two full quarters because we closed on April 11. That also gives us a lot of confidence one in the synergy target and two the ability to increase that target based on the factors Tom just discussed.

Makes sense. Thanks, guys.

The next question is from Cole Sullivan with Wells Fargo. Please go ahead.

Hi. Thanks for taking the question. On the 3Q OpEx you guys beat from both the synergies and kind of some deferred R&M. In the quarter, the 4Q guidance is obviously lower than I think the $480 million that was kind of implied on the last call. How do we think about the kind of moving parts? So is it mostly synergies that's kind of coming in, in the fourth quarter? Or is there some -- potentially some other deferrals or something that's going in there as well?

Sure, Cole. I'll address that. I think the biggest piece is really, there's just fewer operating days. Particularly for floaters, we have several floaters that are coming down. I mentioned the 5006 the DPS-1 the DS-15 the DS-4. And really we are going to be able to just reduce the cost on those rigs and other rigs as we move between contracts. But it is, as Tom highlighted, I don't know if you're picking up the theme between the two of us, I mean, we are very focused on just managing cost aggressively when we're between contracts in any way that we've been able to continue to look for opportunities to reduce cost over the last three months since the last earnings call. And I think, what you're seeing there is a reflection of that. I think, the activity is largely in line with where we were seeing things last quarter. It's probably a touch better, but it's really just a fact -- a matter of really focusing in on costs and where we can be more efficient.

And as we think about -- as we kind of enter into 2020, with where we kind of exit on the cost side and 4Q, I know, there's a lot of moving parts with rigs. Some rigs may be going back to work in 1Q. Is there any kind of base cost level that we can kind of think about before we start to include utilization changes and that sort of thing?

Yes. Cole, we're not going to guide any further into 2020 yet. We're actually going through our budgeting process now, real time, and I would look to more guidance on Q1 and full year, any other expectations we've said afterwards we're done with our budgeting process that we're right in the middle of.

All right. Thanks. I'll turn it back.

The next question is from Sean Meakim with JPMorgan. Please go ahead.

Thank you. Hey, guys.

Hey, Sean.

Good morning, Sean.

So on your floater fleet, does your current balance sheet position restrict you from any opportunities in terms of capital upgrades that could be necessary for certain jobs? How do you think about that for portions of your fleet where that could be applicable?

No. I don't think it does.

No. There's no restrictions as it relates to capital upgrades.

Okay. Fair enough. And I was hoping to touch on ARO as well. Good to see the progress in the near-term results. But as we think longer term, how would you frame the probability distribution of your first newbuild deliveries and some of the key milestones that you're focused on between here and there to stay on track?

Yes. No. Thanks for the question, Sean. And as you know it's one of our big priorities for the company. So I feel very good about the newbuild program at ARO. Obviously, we set up ARO before the IMI joint venture was set up. And we've -- and so IMI is now fully set up. It has -- it's been set up for sometime. We're working very closely with them. And the announcements which I highlighted which -- between Gusto MSC and IMI on rig design is a really good one. So, obviously, the shipyard in Ras Al-Khair in Saudi Arabia is still under construction. Actually, a group went up there recently and I'll probably visit it in December. But they'd given some realistic time lines for that rig -- that yard to start to be ready to cut steel. And we, IMI, Gusto MSC and ARO are working hard on the newbuild design. So I feel good about it. And not only is it important to us, but it's also very important -- it's a part of the vision 2030 plan for Saudi Arabia. So I feel good about it. And, overall, the fleet in Saudi Arabia, there are some good new assets in the fleet in Saudi, but they're all older assets that will need to be replaced. In the meantime, as I mentioned in my comments, there is a possibility of other construction, other -- accessing other opportunities for rigs, but nothing has been decided on that. But I feel very good about the newbuild program for ARO along the time lines that I highlighted in my comments.

All right. Thanks a lot Tom.

Sean. Thank you very much.

The next question is from Kurt Hallead with RBC. Please go ahead.

Hey, good morning.

Kurt, good morning.

Good morning, Kurt.

A lot of great color. I appreciate all that info. Tom, you did offer up perspective here on -- perspective looking at the ARO dynamic and trying to figure out ways to kind of I guess maximize the financial leverage kind of back to Valaris, right? Beyond just the dynamics around the note payable, what other things could be possible in terms of potentially accelerating some cash or getting some cash out of that JV and into your hands?

Well as I mentioned to Sean, it's an important subject. What I would say, Kurt is that we are obviously pinning down the newbuild program and having more understanding of when that's going to start. And the rig cost is being key. And there have been some delays because of the shipyard has been a little bit of delay -- I wouldn't say delayed. It's just the projections that we had at the front end before they start construction have basically clarified. So when I think about ARO, it is obviously as Jon highlighted and you'll see in our Q the -- current assets are increasing. So there is as we move forward more flexibility over time. We just need to pin down a little bit more our newbuild program and our -- the newbuild program and the newbuild price. Right now as Jon highlighted, ARO doesn't have any external debt and we're working on the steps that you would do with any company such as putting a new credit facility and potentially putting in more permanent -- changing out permanent debt. But there's no -- not basically -- when we know more Kurt we will certainly alert you and give more color to it.

Thanks. Appreciate that. And just out of curiosity and Jon you kind of referenced that EBITDA in 2020 will be higher than what it was in 2019. So I appreciate that directional dynamic. I just wanted to make sure we're calibrating off the right starting point on 2019. So given that you've already provided fourth quarter guidance, what is the baseline of EBITDA that we should be looking off to build on on 2019 on a full year basis? Just I know -- is it merger dynamics? Just kind of making sure, we're all on the same page on that EBITDA number?

Sure. Sure, Kurt. Well we guided to Q4 of $25 million of EBITDA was the guidance. And to date, we've accrued here -- I would say that puts us roughly around $155 million of EBITDA for the full year basis on that $25 million guidance for Q4.

Okay. All right. Thanks for that clarity. Appreciate it.

The next question is from Taylor Zurcher with Tudor, Pickering & Holt. Please go ahead.

Hey, thank you. Wanted to circle back on the capital structure. Clearly, the opportunity is there to raise additional secured debt and -- certainly on any metric on gross asset value. But on the other hand at least on the floater side there really isn't any long-term contract backlog. And so Jon, curious if you could give us your thoughts on what the market is today for raising secured debt against a rig by itself versus a rig with a long-term contract on the other side of it.

Sure, Taylor. Yes. We've -- the characteristics you call out are generally true, right? Most secured debt if you have some cash-flowing assets across of them or some backlog typically easier to secure against on a like-for-like basis. Again, I would just point to the fact that today we have 79 rigs of which none of them are secured. And with the gross asset value of $10 billion, if we wanted to -- and I'm just using -- I'm rounding for simplicity. The range I quoted before was -- is the range that we see in analyst estimates. But on that basis, ultimately then if you don't have cash-flowing assets people will look at asset value and underlying kind of steel, which is why I referenced the gross asset value. And then, if you kind of subsegment our asset class, there are certain asset classes that are cash-flowing assets, certain asset classes that have longer backlog and duration than others. The drillship part of our business is probably one of the -- probably stronger asset class valuation on an asset basis certainly on replacement cost. But then you look at some of the other parts of the business and Tom highlighted some of the strengths in -- particularly around -- look at the North Sea jackup business. So those businesses have probably higher cash flowing on a margin basis and probably more duration to the contract. But we have a mix in the fleet and so we would -- across all of these characteristics, we have plenty of assets and cash flow profiles that would suit a variety of different secured investors.

Okay, understood. And I wanted to follow-up on the topic that I don't think I heard in the prepared remarks which is the 20,000 psi opportunity set moving forward. Obviously, there's only one rig in the market with that type -- or soon to be in the market with that type of capability. But there's more than one opportunity -- incremental opportunity on the horizon. And those are likely to go to upgraded rigs that are still newbuilds in the shipyard of which you have two. Is that -- is the 20,000-psi opportunities something that you're thinking about or pursuing moving forward?

Yeah. We see a reasonable level of customer interest in 20k-psi work in the U.S. Gulf of Mexico. I mean, it's always going to be a niche market in this game of -- or at least in the short-term it'll be a niche market. Short and medium-term, it'll be a niche market, in the scheme of the overall floater market. But we would consider an upgrading one of our assets perhaps the DS-13 or DS-14, to be capable of 20k work. If we felt that it would achieve a good return on any capital invested in it. So, yeah, in general, any capital investment if there were good return we would certainly consider. And as far as drilling wells with 20k BOPs to this point, I believe Valaris is the only company who's done although it's been on the jackup side. So we have drilled 20k before on the jackup side. And we would certainly be interested in doing it on the floating side, if it was a good return on capital.

Awesome, thanks for the responses.

Thank you.

The next question is from Mike Sabella with Bank of America. Please go ahead.

Hi. Good morning, everyone.

Good morning.

I'm wondering if maybe we could circle back to ARO. And I know in the past you guys have said, the Valaris jackups that operate outside of the JV, we should just assume they continue to operate independently. Kind of given the update on the manufacturing facilities, is there any room for that strategy to change at all? And can you kind of walk us through how both you and the JV partner view that sort of transaction?

Yeah. Sure. I think that obviously we have some jackups working in -- we have jackups in -- there are jackups from Saudi Arabia, which we are in half of because we are a 50% owner in ARO Drilling. There are jackups in Saudi, which we own 100% of and they are leased to ARO Drilling. And there are jackups which we're operating outside of ARO Drilling in Saudi. And we'll have to see how things pan out over time. But the Valaris jackups in Saudi will -- operating outside of our ARO Drilling will certainly finish their current contracts. What happens to them after that we will tell you, when we sign new contracts. But they will -- the rigs that are on contract there will certainly finish their current contracts as part of Valaris. Does that help?

Great, that's helpful. Yeah, that's helpful. And then, just real quick you kind of touched on technology. I know that in the past you've discussed some of the advancements you guys have made on the rigs. Can you comment a little on the success you've had getting paid for those investments? And are you still making incremental investments in technology? Or has that mainly stopped?

I -- that's quite a -- I mean, it's a -- excuse me, I think the question which we could probably talk about for some time. I would say that, generally we are very focused on driving value in everything we do. And I'll give you an example of some technologies where we think that we are being paid for, and that is certainly our focus. So, Valaris has some very what we believe advanced technology to help us move drilling rigs where we instrument the jackup. It's patented. And it allows us to move jackups in -- to be very precise about what conditions we are able to move our jackups. We've use that technology in certain markets in the world and we believe that we have been able to get outsized -- or better day rates, because we have that technology, because the customers believe we'll be able to move our rigs when -- or at least we believe we'll be able to move our rigs when others won't. So that will be a good example of a technology we've invested in where we are able to gain an advantage in contracting -- or at least we believe we have an advantage in contracting. So certainly there are opportunities. Another one would be what we've done with -- on maintenance system. We have an advanced maintenance system, which helps us manage our costs and drive down our costs and be efficient in our maintenance. Certainly not doing too little though, but certainly not doing too much. And so, the customer is not paying us for that, but we do believe it's an example of something where we reduce our costs. So, we would certainly be looking at that. Are we -- our appetite at this point of the cycle to do heavy capital investments in new projects is limited unless we get paid for it.

That’s really helpful. Thanks a lot, guys.

Thanks Mike.

Thank you, Mike.

There are no further questions. I would like to turn the conference back over to Nick Georgas for any closing remarks.

Thanks, Gary, and thank you to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report full year and fourth quarter 2019 results. Have a great rest of your day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.