Good day and welcome to the Valaris Fourth Quarter 2022 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Darin Gibbins, Vice President of Investor Relations and Treasurer. Please go ahead.

Welcome, everyone, to the Valaris fourth quarter 2022 conference call. With me today: Senior Vice President and CCO, Matt Lyne; 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, yesterday, we issued our most recent Fleet Status Report which provides details on contracts across our rig fleet. An updated investor presentation and ARO Drilling presentation will be available on our website after the call. Now, I’ll turn the call over to Anton Dibowitz, President and CEO.

Thanks, Darin, and good morning and afternoon to everyone. During today's call, I will start providing an overview of our performance during the quarter. I will then provide commentary on the outlook for the offshore drilling market, highlight some recent contract awards and discuss our strategy for maximizing shareholder value during the unfolding industry upcycle. After that, I'll hand the call over to Chris to our financial results and guidance. I'd like to start by acknowledging the focus and efforts of the entire Valaris team, which resulted in us continuing to deliver excellent operational performance, achieving revenue efficiency of 98% in the fourth quarter and 97% for full year 2022. This is commendable performance given we reactivated four floaters during the year. These projects required a significant amount of internal resources and attention. And we are extremely pleased to have maintained high levels of operational performance that our customers expect from us under these circumstances. The safety of our offshore crews and onshore personnel is at the core of what we do as an organization, and we achieved some notable milestones during the quarter, including several rigs reaching two years and our Broussard Warehouse achieving six years without a recordable incident. These achievements are the result of our highly-skilled and dedicated workforce. We believe that our people are the most important element of our success and we recognize that a motivated, engaged and diverse workforce is essential to delivering high performance. As a result, we continue to invest in our people, both onshore and offshore. Our bold leadership training for offshore supervisors was attended by approximately 650 personnel in 2022. We also recently completed two pilot workshops for our new onshore leadership program and we will be holding more of these courses in 2023 to develop senior leadership throughout the…

Thanks, Anton, and good morning and afternoon, everyone. In my prepared remarks today, I will provide an overview of fourth quarter results as well as guidance for the first quarter and full year 2023. In addition, I will briefly review our financial position and capital structure. I will also highlight our fourth quarter results press release, which includes our trailing five quarter results, as well as various supplemental data and our latest Fleet Status Report that we published this morning. Moving now to the fourth quarter results. Adjusted EBITDA with $54 million compared to $76 million in the prior quarter. An adjusted EBITDAR, adding back one time reactivation costs, was $75 million compared to $94 million in the prior quarter. Revenues were $434 million compared to $437 million in the prior quarter. Excluding reimbursable items, revenues decreased to $413 million from $416 million, primarily due to lower utilization and lower average day rates for the harsh environment jack-up fleet but partially offset by an increase in utilization for the floater fleet. Jackup revenues decreased primarily due to VALARIS Stavanger completing its contract offshore Norway and idle time between contracts for VALARIS 123, 144 and 115. This was partially offset by more operating days for VALARIS 118 and 92 following a contract startup and a special periodic survey, respectively. Floater revenues increased primarily due to higher revenue efficiency across the floater fleet and a full quarter of revenues for VALARIS DS-4 and DS-9, which commenced contracts early in the third quarter. Contract drilling expense was $353 million compared to $337 million in the prior quarter. Excluding reimbursable items, contract drilling expense increased to $333 million from $316 million, primarily due to an increase in operating days for the floater fleet, which have a higher per day operating cost, as well as…

Thanks, Chris. I want to wrap up the call with a few comments on capital allocation priorities, including shareholder returns. We have ongoing discussions regarding capital allocation as a management team and with our Board, and we are all aligned on the priorities for our cash. The first of these priorities being to execute the operational leverage in our business in a disciplined manner in order to create long-term shareholder value. We have three stacked drillships and purchase options for two newbuild drillships, and we are currently actively pursuing contracting opportunities for these rigs. With drillship day rates in the $400,000 per day range, we're able to generate meaningful returns on the reactivation investment over just the initial contract, and we are able to generate significant earnings and cash flow. We are constructive on the market; however, we cannot predict with precision the timing or terms of new contracts. We could have several reactivation projects in one year, while they could be spread over a longer period of time. Similarly, we may enter into contracts where a material portion of upgrades and reactivation costs are reimbursed upfront, or contracts where a more significant portion of the upgrades and reactivation costs are recouped in the day rate over the initial term, but which are nonetheless attractive opportunities. These variables lead us to be somewhat conservative from a cash planning and capital allocation perspective today. Because, most importantly, we want to be able to execute on all attractive contract opportunities. The second priority for our cash is pursuing strategic growth opportunities. The offshore drilling industry has benefited from the efficiencies enabled by prior combinations and Valaris has been a major driver of those efforts. However, there are opportunities for additional consolidation, whether it is at the corporate or asset level and we…

[Operator Instructions]. And today's first question comes from Greg Lewis with BTIG. Please go ahead.

Yes. Thank you and good afternoon and good morning to everybody. And, Anton, thanks a lot for the prepared remarks. Super helpful. But I was hoping to get just a little bit more color around the rig reactivations, and the newbuilds and your comments around capital allocation. I guess, I'll just ask a few questions at once. As we think about the ability to reactivate rigs, realizing that there is a lot of customer demand, as we think about re-certifications and supply chain and crewing, is that more of the hindrance? And realizing that if the market looks pretty firm and there could be opportunities to reactivate and take delivery of the newbuilds in a compressed window, is that really -- is that possible, given all of the things I just mentioned?

Good question. Absolutely, Greg. Look, what I will say is one of the true prowess of this organization is the ability to effectively reactivate rigs. There's a demonstrated track record. We’ve reactivated four rigs last year, and as importantly as bringing those rigs to market largely on time and on budget, on average is the fact that as an organization we delivered 97% revenue efficiency over the year. So it's as important to execute the reactivation project as it is to have those rigs operate at the same level as the rest of the active fleet when they get back to work. We have extended the duration that we expect the new reactivation. So on the 17 for example, that project is a year versus nine months before. But this is an organization that has great control of executing operational delivery. For us, it's more -- if I go back to the strategy of being focused and disciplined, it's about finding the right opportunities, as the constructive market continues and those incremental demand comes to market to find the right opportunity to bring those rigs back in a measured pace. And we see that those opportunities are there. I think we had made some comments about being in advanced discussions for at least one more drillship to go back. And I'm optimistic about 2023 in general that where there will be additional opportunities. So it's not -- I wouldn't say there's a constraint because of the project, I think it's more about being focused and disciplined, and finding the right timing and the right opportunities to bring those rigs back.

And then, realizing that the focus has been on -- the focus of that conversations is around the floaters and realizing, understanding that one of the N-Class rigs is being idled as I guess we look around other basins like West Africa and let's say the Golden Triangle area and even in Asia, we still do have some stacked jackups. As we think about the next 12 or 18 months, do you see a scenario where we could see some of those rigs go back to work, or at least in the near term the focus really is on just bringing floaters that are on the sidelines back into the working fleet?

No, there's certainly been an improvement in a more constructive benign jackup market driven largely by what's happened in the Middle East with a lot of rigs being relocated to Saudi in particular. There are opportunities for jackups, but again, for us it's about the capital allocation decision and if you call it the investment return we get on those reactivation economics. So today, given the fact that floater day rates, if you look at drillships of, in essence, doubled from 200s to the 400s over the last couple of years, jackups have improved kind of from the 70s north of a 100. We've executed some contracts in certain markets above 125. But on the absolute, looking at it on a capital allocation basis, the economics of allocating capital to a reactivation of a drillship is superior to that of doing a jackup today. That's not to say that those opportunities aren't there. We continue to look for attractive opportunities for our jackups. And if we find one, we'll absolutely execute on those. It's just a great priority on where we get the best returns.

And our next question today comes from David Smith at Pickering Energy Advisors.

In your prepared remarks, Anton, you mentioned there may be catalysts for opportunistic returns of capital. You mentioned rig sales as a potential catalyst. Would you consider the CARES Act refund to be a catalyst for opportunistic returns?

Yes. Let me let Chris start and just kind of update everybody on where we are on our CARES Act refunds, and then I'll come back and cover you a question after.

Yes. So from a CARES Act refund perspective, we got the $55 million in the fourth quarter. We got $45 million in January, and we've got $19 million remaining. As we think about, these CARES Act refunds, these aren't surprises to us. These obviously been -- we've been waiting for a long time for them. They've been in our planning models. So we don't necessarily consider them a catalyst or found money from that perspective.

Yes. David, I’d reiterate kind of some of my prepared remarks. I mean, we have ongoing discussions in the management team and with our Board about capital allocation. And our focus again is following the strategy of being focused and disciplined, and investing capital to create long term shareholder value. And for us today, including that CARES Act refund, it's about allocating capital to attractive economics on reactivations, particularly of our drillships. There is some opportunity for M&A, and we want to have cash available if those attractive opportunities are available. But our priority is to return any excess cash to shareholders. Today that means being opportunistic in the case of dislocation and stock price or if we do have some opportunistic rig sales. And that's largely driven by the fact that our first priority being return of drillships to the market for attractive economics, I can't tell you exactly what those contracts are going to look like. In a -- you could say in the high-class scenario, we have multiple reactivations of our remaining drillships, all going on this year, right? Heading to that -- increasing that inflection point in 2024 where we're generating even more significant cash and return and can get to a structural return scenario of returning cash. If the market has -- as it develops this year, it becomes a little more spread out, and those reactivations are over a greater period of time and/or we have to enter into contracts where we are recovering those reactivation economics over the term of the contract, but it's still a great attractive opportunity. So, we need a couple of those pieces to fall in place for us to get to that place of structural return. But the CARES Act kind of just goes into our basic numbers, and we'll see how the rest of the year as some of these pieces fall in place.

Very much appreciate it. And if I can ask a quick follow up to you Chris. Going back to your comments about the interest in a new capital structure, a revolver and high yield, wanted to kind gage your optimism and outlook for -- is that something achievable this year or what do you need to see kind of happen before you would hope to get that in place?

Yes. I mean, we've been pretty vocal for a while talking about our desire to get a regular way capital structure in place, which includes a revolver. And then obviously to do that, we need to refinance the note given the terms of the note. And so that's been on the table for a long time. We'd like to be able to execute that this year. I think, there could be opportunities to do that. We are talking to our banks about that. But I think it's really important for us is that we don't have to do that. And so, if we don't like the terms, the size of the pricing that we see, we don't have to do it. And so for us, this is opportunistic, if we can find something that allows us to do that, and we want to be able to execute on that. But again, it needs to be on size, pricing terms that makes sense for us and doesn't overly restrict us from an operational or strategic perspective.

And our next question today comes from Fredrik Stene with Clarksons Securities. Please go ahead.

Hi, Anton and team, and thanks for the comprehensive remarks today. Super helpful. I think a few of my questions have been answered already, but I wanted to pivot a bit into ARO on your plans there. You mentioned financing of the two newbuilds with local money, if not ample, at least available. And then you talked about the different IPOs that have been done in the Middle East for these local drillers. So I think, right now, ARO, it's a growth story and for some time maybe the market has kind of neglected a bit what could happen there. So I was wondering, if you envision going the route of an IPO with that asset, do you have any timeline in mind? Do you have any kind of events that would need to happen before you do something like that? And if you do some sort of IPO or strategic divestment on that side, what do you think will happen with the rigs that you lease into ARO? Would that -- likely that those will be part of such a transaction, or do you think you will continue to lease them into that, if you are kind of fully letting it go? So any thoughts that you can spare would be super helpful.

Absolutely, Fredrik. It's a great question, because I think the value of ARO's strategic asset to Valaris is somewhat underappreciated by many people because we don't consolidate it. What I will say at a high end macro level, this is a 50-50 venture with the biggest user of 9 jackups in the world, in a market where some could say colloquially, the last well in the world will be drilled. 15 rigs operating today. We recently announced two contracts of rigs that would transition, plus two new builds this year. This will be 19 rigs operating once that process happens. I think there are some -- I'm not going to get into details of kind of what the thinking is at ARO, but I think there are some natural kind of timing points where it may make sense to look at more strategic options for ARO as far as value realization. And that is particularly the two newbuilds. The newbuild story with 20 rigs being built in ARO and the last 18 in Kingdom is an important part of ARO's growth story. And with those first two rigs being delivered this year, getting on contract, demonstrating that contract model with the first contract eight years with six year EBITDA payback, and along with that committing to the additional rigs in the newbuild cycle, is an important milestone for ARO and the venture. And I think although we continue to have discussions at the Board level and in ARO, that would be a natural point for us to start looking at what's next. So I don't want to comment more than that.

And our next question today comes from Eddie Kim at Barclays.

Just regarding the cold stacked asset that you're in advanced discussions on reactivating, you noted this was a program expected to commence within the next 12 months. We've heard from NOV that it would take around that long to complete a reactivation and I believe you also mentioned 12 month lead times in your prepared remarks. So I'm just curious about your confidence level and be able to reactivate that rig in time for this contract's commencement date. And separately, what would be your estimate of the reactivation cost for this particular cold stacked drillship?

Yes, I think I answered in one of the earlier questions, Eddie. One thing this organization has a demonstrated track record of with four in the last year and the 17 project going on, which is on pace and largely on budget, is the ability to reactivate rigs on the timing and on the budgetary numbers that we say we're going to do it. So we are in advanced discussions and I'm confident in the team that they can execute that project and have that rig reactivated in the timeframe that we need it to be and as expected by the customer. As far as the budgetary estimate, we're in a discussion and are very optimistic and constructive on us closing out that contract here in the near future. And when we do, we will update the market including the adjustments to our numbers as a result of adding in that additional reactivation. We said 65 million to 75 million for the DS-17. I think you can be looking at numbers towards the top end of that range if we're looking at additional reactivations today. But we will certainly update the market as we go through that process.

And we'll be looking forward to learning more about that. Anton, secondly, you mentioned eight newbuild drillships currently stranded in Korean shipyards and that you expect these rigs to come to market in a staged manner. What headline do you think would be required to bring one of those drillships out? Is it 500 or 550 or would you -- are you even close to it now in the mid-400s depending on the contract structure? And when might you expect us to see an announcement about one of those rigs coming into the supply stack?

Look, there are quite a few discussions going on. The market and incremental demand that keeps coming to market is making it more realistic for those rigs. What I will say, I expect them largely to come to market in the hands in some way, shape or form of kind of established prudent drillers. When you look -- I don't want to get into day rate speculation on what others may do. But I will say, with market clearing prices to take up, we have two options, one at $119 million, the other at $218 million. The clearing price on those rigs is north of $200 million today. You need to think that on top of that you would have another reactivation type expense, plus the mobilization. So, call it another maybe $80 million to $100 million all-in in order to do that project, that there needs to be a robust day rate both in contract term and day rate in order to justify those economics. And I'd say we would be at the rate levels we are seeing today or north of those rate levels. But I think the most folks' priority and definitely ours is to take priority to our active fleet, to make sure that, that is highly utilized for us. Then secondly, to look at our cold stacked -- preservation stacked ships and return those, and then to look at kind of newbuild options after that. And I think most folks in the market see it the same way.

And our next question today comes from Kurt Hallead with Benchmark.

I appreciate the in depth color. I'm kind of curious here, right? And as you look at the market tightness for the drillships, you mentioned that there were 14 idle assets with 13 of those with three companies, obviously five of those being yours -- for at least three of those have been yours, excuse me, not including the potential drillships. So when you think about your balance sheet, when you think about protecting your cash, when you think about the demand factor for these rigs being activated, you mentioned some upfront costs being borne by the customer base order magnitude of $27 million, seems like a very low percentage given still the capital risk, and the balance sheet strength that your customers have. So, long-winded way of getting around to my question, which is how are the discussions going with your customer base about them, putting up more capital upfront to bring these assets into the market? Because at the end of the day, again, they're in limited hands. There's not so much competition out there as there had been, and you guys just should be preserving capital, and making the customer base pay for it. So just kind of curious on how those discussions are evolving? If they've evolved? And if you have some greater leverage going forward?

No, I mean, you can see what we did on the DS-17 contract, but not all customers are the same, right? There's a great variety in customer and appetite and ability. And there's a -- ultimately, there's a trade off in one way, shape or form. There's a market clearing price that a rig can be re-contracted at. And there are certainly some customers that we have discussions with who are more apt or to pay more capital upfront towards the reactivation. In some manner that can be offset by the day rates that you're going to get under the contract. But there are other contracts, some point more to kind of national oil companies let's say, where they have a very prescribed upfront mobilization or upfront payment mechanism, because it's a very regimented contract structure. And then, our job is to make sure that we look at the economics and the ability to recoup those reactivation economics over the term of the contract. What I will say is the contracts that are available in the market, whatever flavor they are, whether it's recouping more of the -- recouping more of that, those economics over the term of the contract with day rates north of kind of $400,000 a day and contract tenures in the three-year range, it's an attractive opportunity that generates cash under the initial contract, whichever form of contract that you're looking at. So for us, your question about balance sheet and cash management, it's about understanding how those contracts will stack up as we re-contract those rigs, so what is the timing of our liquidity and cash needs? But we've been very, very clear in being focused and disciplined. And for us, discipline means not taking on contracts, where we are not generating return over the initial contract. That is what is most important to us.

That's great. Appreciate that. So my follow-up is on the North Sea market. You mentioned you expect improvements next year. Is that kind of your team's kind of forecast or perspective? Or is that coming from your customer base that's basically saying '23 is going to be what it is, but '24 will be in a much better position and we plan to move forward on projects? So just wondering if it's customer driven or just kind of or your -- neither answer is wrong. I'm just trying to gauge whether it's coming from the customer or coming from your internal team?

Let me let Matt start up with that question because he is having a lot of customer discussions and maybe I'll cover up afterwards to give you some more color on the North Sea.

Hi, there. So I think, if we dial back the clock and you look at where we felt in 2022 regarding the '23 opportunities, we felt quite good about what the North Sea was bringing to the table on demand. There was obviously the fiscal change with respect to the windfall tax that added some headwinds to where operators had to take pause to think about how they view going forward with projects. What I would highlight is that it's less about going forward and more about possibly delaying or digest the new economics. And I think that's what we are starting to benefit from and what we see as visible demand in the second half of '23 and into '24, where a number of those projects that likely had short-term delays are now being stacked into the next 12 to 18 months, and giving us a better outlook and a more positive outcome for that market. So I -- to answer your question, it's largely driven by what we see demand coming from customer conversations on the ground in the North Sea.

So what we see is more a question of timing is on our programs that have been taken off the table. It's a question of re-looking at their capital allocation and the timing of them doing those projects. So there’s plow and stuff moving to the back end of '23 and into '24.

Thank you. And ladies and gentlemen, this concludes today's question-and-answer session. I'd like to turn the conference back over to Darin Gibbins for any closing remarks.

Thanks, Rocco, and thank you to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our first quarter 2023 results. Have a great rest of your day.

Thank you. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.