Good day, and welcome to the Valaris Second Quarter 2023 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 & Treasurer. Please go ahead.

Welcome, everyone, to the Valaris second quarter 2023 conference call. With me today are President and CEO, Anton Dibowitz; Senior Vice President and CFO, Chris Weber; 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 by providing an overview of our performance during the quarter, then I'll comment on the outlook for the offshore drilling market and our fleet strategy, including an update on our plans for newbuild drillships VALARIS DS-13 and DS-14. Finally, I'll provide an update on our share repurchase program and reiterate our capital returns philosophy. After that, I'll hand the call over to Chris to discuss our financial results and guidance. In the second quarter, we continued to deliver strong operational performance, achieving revenue efficiency of 97%. Our success as a company is driven by our people, and I want to thank the entire Valaris team, offshore and onshore, for their ongoing commitment and efforts in delivering excellent performance for our customers. One of the hallmarks of Valaris is our project execution and during the second quarter, VALARIS DS-17, departed the shipyard ahead of its contract with Equinor Offshore Brazil, which is expected to commence this month following customer acceptance. This marks our fifth floater reactivation in the past 18 months and builds on our proven track record of project execution. VALARIS DS-17 is one of the highest specification drillships in the global fleet today, and will be the first rig to deploy NOV's Atom RTX Robotic System Offshore, reducing the need for personnel in the red zone. VALARIS DS-17 also became only the second rig in the world after VALARIS DS- 12 to receive ABS' Enhanced Electrical System Notation, EHS-E. The rig's electrical system is designed to optimize power plant performance, enabling operations on fewer generators and reducing emissions. These targeted upgrades help to improve the safety and efficiency of the rig and exemplify our company's purpose of providing responsible solutions that deliver energy to…

Thanks, Anton, and good morning and afternoon, everyone. Before reviewing our financial results for the second quarter, I would like to take a moment to explain the recent change we have made to our adjusted EBITDA and adjusted EBITDA calculations to better reflect the earnings profile of our operations and more closely aligned with the calculation methodology used by our closest offshore drilling peers. Adjusted EBITDA and adjusted EBITDA now includes amortization associated with deferred mobilization and contract preparation revenues and costs and deferred capital upgrade revenues, we adjusted the calculation methodology in the second quarter and have restated all comparative periods in our second quarter results press release using the new methodology. Moving now to a review of our second quarter results. Adjusted EBITDA was $15 million compared to $28 million in the prior quarter, and adjusted EBITDA was $59 million compared to $55 million in the prior quarter. The impact of the calculation change on both adjusted EBITDA and adjusted EBITDAR was negative $2 million in the second quarter and positive $4 million in the first quarter. Excluding reimbursable items, revenues decreased to $390 million from $408 million, primarily due to fewer operating days for the jackup fleet and lower mobilization and demobilization revenues. These were partially offset by an increase in the average day rate for both floaters and jackups. Jackup revenues decreased, primarily due to fewer operating days and lower mobilization and demobilization revenues for the Valaris 249, which completed its contract offshore New Zealand late in the first quarter and was in transit to its next contract offshore Trinidad during the second quarter. In addition, Valaris 54 was sold following the completion of its contract late in the first quarter, and Valaris 108 spent most of the second quarter undergoing contract preparation work ahead of…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Eddie Kim of Barclays. Please go ahead.

Hi, good morning. So, the comments around your intention to exercise both purchase options on the DS-13 and DS-14, is obviously a very strong kind of confidence in the market outlook. You were very clear about not reactivating these rigs still securing attractive contracts for them. Just based on the conversations you're having now, is it possible we could see one of these rigs securing a contract and beginning the reactivation process even later this year, or do you expect the reactivation for both these rigs to be more of a 2024 event?

Hi Eddie, thanks. I think you've got it exactly right. We make a clear distinction about compelling value of taking these assets given where we're similar assets especially given that the two BOPs are trading versus what we've been very clear about is being disciplined about reactivating a rig. DS-11, which is our only remaining drillship that is stacked right now that we put to market is a very, very similar asset to the DS-13 and the DS-14. So, these are all almost sister rigs, similar specifications. Ultimately, the decision as to which to put to work first is going to come down to a combination of what the customer is looking for. Everything else being equal, I'd say given the fact and the investment we're making in the 13 and the 14 would like to put one of those rigs to work earlier. But we're just going to need to see what the opportunity is, where it is in the world, have the discussions with the customers. We have had customers visit these rigs already. They're in fantastic shape. I was out there looking at them myself recently. So we'll just have to see how it plays out.

Okay, okay. Understood. And then just my follow-up is, I mean, just with the DS-7 reactivation is now your seventh floater reactivation and you're far less, I guess, available capacity than you did 18 months ago. So in that context, could you just update us on your latest thoughts on M&A whether for specific assets or even a corporate acquisition? Is this something you're still considering, or are you content at this point, we're finding good contracts for the DS-11, DS-13 and DS-14, as you mentioned?

Yeah, Eddie, absolutely. I mean, I think we've been very clear that this is an industry that needs to continue to consolidate. We continually look at the market about consolidation opportunities. We're very comfortable with having a high specification fleet gives us competitive advantage. And we wouldn't want to see that being diluted. If there is an M&A opportunity that makes sense based on the synergies that can be generated from that transaction, we would absolutely look at it. But we also have plenty of opportunity to grow our business. So I think we put a slide in investor deck that will be coming out. Our first focus is rolling out our high-spec fleet that we have on water. We have three reactivations that are coming to market and will be earning day rates over the -- before the middle of next year. We have three legacy contracts in the next 12 months that we need to roll from legacy contracts to market clearing rates, and then some beyond that. So it's a combination of the both. We're very comfortable with organic growth, taking 13 and 14 and growing our business that way. But if there are opportunities that make sense on the M&A side, we will absolutely execute on those.

Got it, got it. That makes sense. Great. Thanks for the color. And I'll turn it back.

Thanks Eddie.

The next question is from David Smith of Pickering Energy Advisors. Please go ahead.

Hey, good morning, and thank you for taking my questions.

Good morning.

Congratulations on the DS-7 contract, very strong economics there. I did want to switch over to the jackups. We have been seeing some very strong jackup rates in multiple regions outside the North Sea, including a couple you’ve recently announced in Australia. Just wanted to make sure I didn't miss it, but how will you characterize leading-edge rates for the modern standard and heavy-duty fleets?

Yeah. I think you have that right. I mean, obviously, the North Sea has been -- we've been probably pretty forthright and transparent about that. The North Sea, especially UK side, continues to disappoint, but we have a high-spec fleet that can find opportunities in other places, and we're actively doing that. Leading-edge rates in the jackup market is more geographically diverse, so different markets operate slightly differently. We're, obviously, very proud to see the 247 going to work in Australia on a CCS project, which is a growing part of our business and will be a growing part of our business going forward at a leading edge rate of 180, we have a couple of additional contracts in Australia at 150 and above. Southeast Asia is starting to catch up a little bit. So I think you're definitely well into the hundreds, not going to sit here and say that every contract that sign is going to be at those leading edge rates. So there is a range depending on what market you're in, which is also dependent on kind of operating costs and kind of what the local supply-demand position is in those markets, but well into the hundreds.

Certainly appreciate it, and they do see a lot higher than they were last year. And where I'm going is, as we think a little further ahead for your jackups leased to ARO, right? Several of those leases expire from late 2024 through 2025. And I just wanted to check, a, if those leases might have options, best options for assumption but if not, if those rigs were if they were they up, how should we think about the relationship between potential new leases versus leading edge rates?

I think Saudi Arabia is a long-term sustainable market with long-term work. So there is a balance to be had. I think there's plenty of work to be done in Saudi through those leased rigs and Saudi rates have continued to increase as have the other rates around the world. So we're a little way away from talking about the future of those rigs. But I think there are attractive opportunities in Saudi. It is the largest jackup market for high-spec jackups in the world, also the market that -- many people say, we'll drill the last well in the world. So having a strong presence as we have through ARO, both through the owned lease -- the owned rigs, the leased rigs and the 20 rig newbuild program is a great position for us to be in. So we'll look at the opportunities and do as we do find what makes sense.

Thanks very much. I'll get back in queue.

The next question is from Kurt Hallead of Benchmark. Please go ahead.

Hey, good morning, everybody.

Good morning, Kurt.

Good morning, Kurt.

Hey, thanks for that great detail. I really appreciate it. So yes, your -- one of your larger competitors yesterday talked about the prospect for leading-edge rates for sixth, seventh-gen drillships, getting into the high $500,000 a day sometime in 2024. Obviously, you're in a very good position to potentially capture that with those two drillships plus the stacked asset that you have. So just wondering if you can kind of give everybody here on the call some insights as to how you think about pricing strategy going forward. And what -- how you think your assets are potentially positioned to kind of be in that leading-edge rate discussion?

I think we have, on average, a high-spec fleet, a lot of high-spec fleets in the 50% in the top quartile, especially when you look on the ship side and the 13 and the 14 to exercise those options will add to that. The floater and drillship market continues to move higher. I think I appreciate the comments on the DS-7, I think it's important for people to remember that not all markets the same and not all contracts are the same. So the DS-7 is already a high-spec rig. It doesn't require any significant upgrades for the shrink to go to work. And West Africa is generally a low-cost operating jurisdiction. And as many tenders in West Africa are, these are kind of long-cycle, long-duration tenders. These rigs -- that rig was bid in January of this year and was a leading-edge rate at the time it was bid. But rates continue to extend. I said on my prepared remarks, I think day rates are in the mid to high 400s. And as the supply/demand continues to tighten up, I think it's going to continue to progress from there. The pacing of that is always somewhat debatable. But we've seen a clear progression in day rates through the 300s into the 400s and low 400s earlier in the year in the mid to high 400s where we are now, and we see most bids going out, and I think they'll continue to progress higher as the supply demand balance tightens.

Totally, yeah, I appreciate that. So maybe in a different context, you've got the DS-13 and DS-14, and you referenced the prospects of getting very positive economic returns on those assets, what sort of day rate would you need over what duration to get those objectives that you think you need to get?

Look, I think there's a balance, right? We run our fleet as a portfolio, and I referenced, I think it was to Eddie's question earlier about having rigs rolling off to be able to leverage into an up-market. But there needs to be some balance. It's great to see increasing durations in this market, and for us seeking some balance between there are some very long-term opportunities that are out there and building a baseload of long-term backlog is important, so not every rig needs to be treated equally. And having a significant fleet, one of the advantages of scale is being able to take a commercial approach where you get some long-term contracts at what today are very attractive, rates generating north of $90 million of EBITDA on a rig a year, and balance that with some opportunism if we want to call it that, and having some assets available to really kind of cherry pick and set at leading-edge rates. So we're just going to -- we have the 11, and now we're looking at 13 and the 14. So we have three more opportunities plus the rigs that we're rolling. And we will take a portfolio approach. I think that's all I want to say about that.

Okay. Well, that's fair enough. So just one more, if I may. So you referenced, I think your comment was 12% to 15% of incremental rig demand and a number of these rigs were going to require the activation of idle assets or potentially some of the stranded new builds. So when you roll through that dynamic, what -- how many idle assets do you think that incremental demand will wind up absorbing?

I’d say 12% to 15%, I mean, we talked about the number of rigs that are still attractive at the yards. We may see some rigs rolling from one part of the world to another, although that's not how we see the market playing out here. Most rigs that are on contract with the customer or working in a basin continue to be extended. And I think we, as most of our competitors will look at, obviously, one of the considerations is not to have significant white space. We try to minimize the time between contracts because there is an economic cost to moving a rig from one region even if you're being compensated portion switching contracts. So we balance that between the alternative opportunities that are available to move the rig. So, definitely, there is a demand as we see it right now and what the projections say for as demand continues to increase. I think we went from 15 to 20 -- 20 to 25, 25 to 30 opportunities that we're tracking right now. That's kind of five incremental opportunities in the upside and the downside since our first quarter call, and that number continues to increase. So, demand continues to increase. the market continues to tighten. And I think there's a good projection that all of the attractive high-spec ships, like the 11, the 13 and 14 and some portion of the realistically reactivatable or at an economic cost need to come to market to meet the future demand from our customers.

Got it. Okay. Thanks so much. Really appreciate it.

Thanks.

And the final question today is from Fredrik Stene of Clarksons Securities. Please go ahead.

Hey, Anton, Chris and team, I hope you are well, and thanks for all the color today so far. I wanted to circle a bit back to the jackup site to finish it up here. It seems like the North Sea market, as you say, is quite subdued both this year and the next. And I think you said that -- don't expect that to work in Norway in 2024, at least. But on the other hand, I think if you look in the same region, but to the floaters, we have definitely seen a tightening there. I would be very -- or a large part of the fleet moving out of the regions. So, I guess kind of my question is twofold. First, now that there seems to be a shortage of semi subs in Norway in at least 2025, are you seeing any kind of new inquiries from your customers for projects that could either use a large jack-up or a semi? That's the first part. And secondly, are you able to give more color broadly on where you potentially see the most opportunities for your North Sea jackup fleets outside of the North? In other words, where do you think you could potentially move some of your assets to reduce idle time? Thanks.

Thanks. Good questions. Look, I'll start with some overall comment. I mean we've been quite transparent that the North Sea continues to be challenging second half of this year and through the end of 2024. UK -- in the UK, especially regulators are looking to ways to make the current tax regime more appealing to operators, but it really hasn't been sufficient to kind of promote getting back to work. That being said, we do have a number of rigs, the 92, 120 and 122 that are contracted well into 2025. There is work available, but it's generally shorter term. There is growing CCS work in the North Sea. I mean, we worked on Northern Endurance and [indiscernible] in the Netherlands. And I think recently been some announcements in the UK back in two additional large-scale CCS projects, Acorn and Viking, which is attractive for that market long-term. Sometimes when people see rigs leaving the area and heading over the horizon to better pastures, it does store some thought that between regulators and industry that something needs to be done to retain assets. So there is plenty of work to be done in the area, we just have to see how it plays out. Obviously, Australia with high-spec rigs is one good opportunity for kind of the high-spec assets that we operate to operate. There's work in the Middle East, where they generally like high-spec assets where we could look at N-class or other of our high-spec rigs. So all of those harsh environment rates can work benign environment. It's just a question of finding the right opportunity and a commercial deal where the customer is willing to -- as was the case with the 247 and compensate for the mobilization. And Southeast Asia is now kind of coming back and picking up demand, longer durations, high day rates there, which add that to the mix. So, pretty widespread set of opportunities and we will look at what we see in the near-term market versus what's available elsewhere in the world and try to balance that out. As far as kind of high-spec jackups in the during some of the work that was done by semi subs, there is a crossover there. There's a potential crossover in water depths between the two, especially for kind of shallower water harsh environment rigs. We haven't seen a huge amount of that coming through to the jackup market yet. But let's see how -- as you say, the Somerset market continues to be extremely tied to undersupplied. So that may be a fact that we see coming through as we go forward.

Yeah. And I'd add, even just when we think about moving rigs outside the North Sea, I mean it's been great to see with the one that we're moving to Australia to be able to get that coverage, not just on the move there, but on the move back and that's definitely something that we think about as part of the move, which I will say we take as downside protection because we believe they are great opportunities for the 247 to continue in Australia. But if that doesn't pan out the way we expect, we do have that the downside protection of moving it back to the North Sea if we see a recovery there.

Super helpful. And actually, one more, just circling back to your the filters on contracting strategy, which you partially touched on. But as you say, with the DS-7 seven rig you've taken out now in a relatively short amount of time. So call it, the overhang or optionality of your stacked fleet, you can you have become more and more comfortable with the cash flow that you'll generate from the rigs that you've already reactivated. So I guess one thing when it comes to your activation is as to say you need to get your costs covered, et cetera, it needs to be a good economic decision on a project basis. But I guess you can also regardless of whether it's the DS-11, DS-13 or DS-14 to take out first, you can afford now to be a bit more greedy in a way you approach that. Have you -- the way you that you’re going to give these three last assets, has anything changed there in terms of kind of holding out for better rates?

Look, we've been very clear from the beginning, even when we were talking about bringing the four out a couple of years ago that we wanted to cover reactivation costs. Right now as day rates have moved up and we've put additional of these rigs to work, we’ve let's call it increased our hurdle rates. We've worked – we’ve expected to see a better return on each success of contract become -- if you want to – say little more choosy on the contract that we're looking for and being more willing to be more patient on finding the right contract. And I think you've seen that -- I think you've seen that action from us as we've continued to put rigs to work. And yes, you're quite correct. Now with the 11 being the only remaining rig from our cost type fleet that's still available. We will, if necessary, be patient and wait for the right opportunity because we do strongly believe in our constructive market. But I think there are great opportunities with a balance of opportunistic and having rigs that can roll in a few years and some potential very long-term opportunities that are attractive, and we have seen interest from customers on these rigs.

And our criteria for turning these on forces us to be choosy, right, which is we've got to earn a meaningful return over that initial firm contract. And so we're only turning these on when we satisfy those criteria, and we'll wait until we can.

We talk about the discipline of reactivating them and making sure that we get a meaningful return on that. But as the good commercial practices, as the market gets stronger and we see increasing opportunities that we have an increasing expectation of what it takes to turn these rigs and put them back into the active fleet.

All right. Thank you both for the color. I appreciate it, and I wish you both a good day.

Thanks.

Thanks for your question.

This concludes our question-and-answer session. I would like to turn the conference back over to Darin Gibbins Gibbons for closing remarks.

Thanks, Kate, 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 third quarter 2023 results. Have a great rest of your day.

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