Good day, and welcome to the Valaris Third 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 third quarter 2023 conference call. With me today are President and CEO, Anton Dibowitz; Senior Vice President and CFO, Chris Weber; 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, last week, 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 and then provide some high-level commentary on the outlook for the offshore drilling market and our fleet strategy. I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our contracting outlook for 2024. After that, Chris will discuss our financial results and guidance, including preliminary guidance for 2024. And finally, I'll wrap up the call with some closing comments. Before we get into the details of the quarter, I want to highlight some key points about our business going forward that we will discuss in more detail in this call. First, the outlook for Valaris is positive, with increasing demand and constrained supply setting up a strong and sustained upcycle. Second, we have had great contracting success over the past 12 months and retained significant operating leverage to the improving market. Consequently, we expect a meaningful improvement in our full-year results in both 2024 and 2025, driven by prior and ongoing reactivations and repricing of legacy contracts. And finally, we have demonstrated our commitment to capital returns, and when our business begins generating meaningful and sustained free cash flow, we intend to return it all to shareholders, unless there is a better or more value-accretive use for it. Moving to our third quarter operations, we're pleased that VALARIS DS-17 commenced its contract with Equinor Offshore Brazil during the quarter, following its reactivation, and expect it will contribute meaningful earnings and cash flow going forward. We're excited to be partnering with Equinor on their flagship Bacalhau project in Brazil, and to increase our presence in this strategic basin. We will soon have…

Thanks, Anton, and good morning and afternoon everyone. Since the beginning of the third quarter, we've been awarded new contracts and extensions with associated contract backlog of approximately $800 million. These awards have increased our total backlog to approximately $3.2 billion, representing a 40% increase over the past 12 months. A key driver of this backlog increase was the VALARIS DS-7 contract, which has a total contract value, including an upfront payment of $364 million. This equates to an effective rate of approximately $430,000 for work offshore West Africa, which is our lowest-cost operating region and includes no additional services. In addition, we were recently awarded a 250-day extension on the VALARIS DS-15 with TotalEnergies Offshore Brazil at a day rate of $400,000. The extension includes options for up to 440 days at an implied average day rate in the high $400s. It's worth noting that these rates do not include MPD or additional services, and an additional rate will be charged when these services are provided. Moving now to some commentary on our major markets, we currently see 25 to 30 opportunities for Ultra Deepwater floaters, with expected duration of greater than one year. They are anticipated to commence over the next few years. We estimate that approximately half of these opportunities will need to be met by either incremental reactivations of stacked and stranded new-built rigs or active rigs moving regions, which as we've said, we don't expect to see a lot of, given many currently contracted rigs will likely be retained by their existing customers. We see continued opportunity in Brazil through 2024 and 2025, with three ongoing tenders across multiple operators and expect contract awards for some of the existing opportunities by year-end. We see further demand in Brazil coming to market in 2024 with commencements…

Thanks, Matt, and good morning and afternoon everyone. In my prepared remarks, I will provide an overview of third-quarter results, our outlook for the fourth quarter, and will also provide preliminary guidance for full year 2024. Starting with our third-quarter results, revenue was $455 million, up from $415 million in the prior quarter, and Adjusted EBITDA was $40 million, up from $15 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense, was $91 million, up from $59 million in the prior quarter. Adjusted EBITDA increased primarily due to more operating days and a higher average daily revenue for the jackup fleet, which increased to $108,000, from $99,000 in the prior quarter. Results from the jackup fleet benefited from contract startups for VALARIS 121 in the U.K. North Sea and VALARIS 249 offshore Trinidad, as well as several rigs commencing new contracts at higher day rates. Adjusted EBITDAR also increased due to VALARIS DS-17 commencing its contract with Equinor Offshore Brazil in early September, along with an increase in average daily revenue for the rest of the floater fleet during the third quarter. These items were partially offset by fewer floater operating days due to unplanned downtime, as well as higher reactivation expense. Third quarter reactivation expense was $51 million, compared to $44 million in the prior quarter, primarily due to the commencement of the VALARIS DS-17 campaign offshore New Zealand due to a delay in the arrival of the heavy lift vessel hired to move the rig from Australia. Cash from operations in the quarter was $48 million, and capital expenditures were $106 million. CapEx increased by $35 million versus the prior quarter. This was primarily due to higher reactivation and contract-specific CapEx, driven by higher spend on VALARIS DS-8, as CapEx ramped up ahead of the…

Thanks, Chris. I'll conclude by reiterating some of the key points from our prepared remarks. First, the outlook for Valaris is positive, with increasing demand and constrained supply setting up a strong and sustained upcycle. Second, we've had great contracting success over the past year and remain focused on winning attractive work for our fleet. Our total backlog currently sits at $3.2 billion, representing a 40% increase over the past 12 months and provides over 80% contract coverage in 2024, and we expect this number to grow further by the end of the year. In addition, we retain significant operating leverage and line the site into attractive opportunities. 2024 EBITDA is expected to be approximately 4x higher than 2023, and we expect another material improvement in 2025, driven by recent and ongoing drill ship reactivations, and the repricing of rigs on legacy day rate contracts to higher market rates. And finally, we are well on our way to returning the $200 million of share repurchases we have targeted this year. As we look into the future, when our business begins to generate meaningful and sustained free cash flow, we intend to return it all to shareholders, unless there is a better or more value-accretive use for it. We've now reached the end of our prepared remarks. Operator, please open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Eddie Kim of Barclays. Please go ahead.

Hi. Good morning. Anton, just in your prepared remarks, you mentioned that day rates for two to three year opportunities are likely to be at leading-edge levels, but that five-year opportunities are likely to be a bit lower. We haven't seen that many five-year contracts signed to-date. So just curious, how many of these five-year opportunities are you currently seeing? And if these opportunities are specific to a certain region or if they are fairly broad-based?

Good question, Eddie. Yeah, a couple of things. We know that there are at least two IOCs that are looking at the potential for long-term jobs beyond the two to three years that we're generally seeing in the market. I think that's a really good sign of, as the market continues to tighten, their desire to lock down supply. When you see compound annual growth in demand, 8% over the next few years, customers are focusing on making sure that they have attractive rates for their opportunities. I think there is a rate trade-off potentially for a very long-term opportunity. Do you take a slightly lower rate to create a pace of earnings? Our perspective on it is we're very comfortable with where rates are in the mid-400s. We expect them to grow. And yes, would there be a rate trade-off potentially for a long-term opportunity, but not at any price. And we've walked away from opportunities before, because we didn't think they were attractive for driving shareholder value and we'll continue to do that. So we will look at those opportunities in that context. If it makes sense, as in a manageable trade-off we'll take it. Otherwise, we'll walk away from it and let somebody else have it.

Got it. Got it. That's a great sign and great to hear. But my follow-up is just on the remaining stacked and stranded new-build drill ship capacity you're currently seeing today. In the market commentary, it was mentioned that most, if not all, this capacity is going to be needed to meet growing demand. As you know, there are a lot of stacked rigs that are really old and there's also a lot of stranded new-builds that are currently being built by less reputable shipyards. So just curious, how many rigs you're thinking about in both those buckets that could realistically be a part of the active fleet?

I'll let Matt take that one and maybe I'll come cover up after.

Sure. Look, I mean maybe if we bifurcated into the two segments, stacked drill ships and then stranded new-build supply. I'll take the second one first. On the stranded new-build supply, I think we see approximately five rigs, which we see as credible entrance into the market over the term, two of which obviously represented by the DS13 and 14, which those two obviously represent also the highest spec seventh-gen units and the only ones with two VOPs. On the stacked side, you could argue that there are probably up to 10, but I think if you narrow that down and you look at the behaviors of both ourselves and our competitors, people have a tendency to focus on the seventh-gen side as a priority, knowing that customers continue to value specification over all other things to provide them flexibility in what they do. So, you look at that, you've got about four stacked seventh-gen rigs with a range of the duration they've been stacked and their age. So having to take into account where they are in their SPS cycle. We expect the reactivation costs will play a factor in that. So you know overall, what I'd say is that the number of attractive stacked and shipyard assets continues to diminish. If you look at the contracts that we have reactivated ships for over the last couple of years, our priority is always to focus on utilizing our active fleet first and the reactivations from us as well as competitors have come from incremental demand that is coming to the market. Supply demand has been 90% utilization on drill ships for a significant period of time, and we continue to see incremental demand that's coming to the market over the next few years, that is going to drive – taking up that additional capacity. So yes, we feel comfortable that there is incremental demand that will take those attractive assets into the market over time.

Got it. Got it. Great. Thank you both for all that color. I'll turn it back.

Our next question today will come from Kurt Hallead with Benchmark. Please go ahead.

Hey, good morning.

Morning, Kurt.

Good morning, Kurt.

I want to really appreciate you putting into context the total contract value relative to day rate. So in that context, right, one of your larger competitors made a comment that they are being violent opposition to 500K per day kind of day rate dynamics, right. But taking that into bigger context right, what is the dynamic at play currently, with respect to the operators understanding there's a constrained supply and marrying that up with their project needs, say in ‘24, ‘25 and understanding that no matter how they shake it out, they are going to have to pay more for what's coming down the pipe?

I'll let Matt start.

Thanks. So, I mean, we feel really good about where the market sits today and the longevity of the cycle. So I guess, if we look at a couple of the supply metrics to kind of lead us down that path, which will directly relate to continued improvement in the day rate, lead times for tendering for contracts are increasing. And we're also seeing, as you were pointing out, customers increasing duration by connecting their programs to make it more attractive. And why would they be doing that would be, if they see potential or they see supply decreasing, which incentivizes them to pick up rigs for longer to ensure they have the assets they need to drill. Utilization is increasing, which is obviously resulting in a reduction in supply. And so looking at these main factors from a supply side metrics, it paints a positive picture on the direction of the market.

I mean what I’ll say, I mean I don't know about violent disagreement, but no operator wants to pay more for a rig than they have to, and we certainly don't want to put rigs to work for a dollar less than we can achieve for it. So it comes down to simple economics and supply and demand. And day rates seldom move in a nice clean parabola like you did in math class. As the supply demand picture continues to tighten and incremental demand comes to the market, we have more commercial leverage, and day rates as we have seen, will continue to trend and move up. So what people's feelings about where they want rates to be are kind of neither here nor there in the grand scheme of things. If people want rigs and the demand continues, the supply continues to tighten and demand continues to increase, which is what we see happening, going into a sustained cycle, then rates will continue to move upwards.

All right. Okay. Great. I appreciate that. Now, my follow-up is you've targeted $200 million of share repurchase for 2024. What's your general sense of what that share repurchase target could be for 20 – to-date? Earmark ’23, what are you earmarking for ‘24?

Yeah. So, thanks Kurt. One, we think we're really demonstrating our commitment to returning capital to shareholders. As you know, we repurchase 171 million shares year-to-date, that's about 3.5% of our outstanding shares, outstanding. We're on track to execute on that $200 million target this year. We're going to provide kind of more detailed perspective on ’24, return-to-capital plans on the fourth quarter call. But I want to reiterate what Anton mentioned. Our philosophy around return-to-capital is simple. And when this business is generating meaningful and sustained free cash flow, we're going to return it all to shareholders, unless we've got a more value-creative or better use for it. As we look forward, that's going to include a dividend. We'll flex with share repurchases, and we'll even look at special dividends if we got a significant liquidity event, because as we said, this team is dedicated to capital return to shareholders.

I'll just reiterate that. This is a board and the management group that is laser-focused on generating significant cash into an upcycle and our philosophy is very, very simple. We will return it all to shareholders, unless there is clearly a more value-creative use for that cash. We've demonstrated that this year with what we've done, and we will continue to deliver on that going forward.

All right. I appreciate that. Thank you.

[Operator Instructions] Our next question is from David Smith of Pickering Energy Partners. Please go ahead.

Hey, good morning, and thank you.

Good morning Dave.

Sorry if I missed it. Did you provide any color on the unplanned Q3 downtime for several floaters, if there was a common thread, or any lessons learned to help secure revenue efficiency in the future?

Yeah, Dave. Well look, I can give you some color. Obviously, the quarter and our downtime was below our expectations, and we're focused every day on first, delivering safely, and second, delivering efficiently for our customers. These were largely three events on three floaters, subsea-related. And it's a fact of this business that if you have an issue with a BOP, by the time you pull it up to surface, fix it and send it down, it's a two-week event. So this quarter is not where we would want to be on our subsea downtime particularly, and revenue efficiency, but what I would point to is our track record. Year-to-date, 97% revenue efficiency across the fleet, and we will focus and make sure that we rectify those issues and continue to deliver in the manner that people have become accustomed to us.

I appreciate that. And then switching over, when I look at the global fleet of jackups that are less than 25 years old, very few idle today. Very few are stacked, cold stacked, and I think you own most of them. Just given some of the leading edge rates we've seen pushing above 150,000 a day, certainly it seems like that kind of rate plus duration could provide attractive economics on the reactivation. So, I just wanted to ask if you also see it that way, and if there are any discussions on your radar that could see one or more of the jackups green-lit for reactivation in the next year.

I'll let Matt start with the market, and then I'll come back on the philosophy afterwards.

So, I think what we're starting to see, and I think in some of my prior remarks I mentioned the Middle East dominating jackup consumption in the past years, and now we're starting to see the resurgence of Asia. And one of the things that makes it really interesting is the duration, the term of the opportunities that they are suggesting, and also pushing out their contract lead times, because obviously there is some time required in order to reactivate and move the rates to the correct market. So we're seeing signs of those opportunities materialize, and I would say on a general basis we are bidding our stacked rigs more often these days to fit certain opportunities where we can provide guaranteed availability. They will obviously take a secondary position to increasing the utilization of our active fleet, but as you saw in the prepared remarks, with limited availability in ‘24 and that utilization continues to improve, that's going to put pressure on evaluating and pushing forward with our stacked jackup fleets.

Let me just emphasize a couple of points that Matt made. The first is about lead time. So, generally the reactivation of a jackup, and it's a shorter cycle market between tender and actual contracting, so you need the lead time in order to reactivate a jackup. The second thing is simply a capital allocation question for us. Up until now it has been much more value accretive for us to enter into flow-to-reactivations based on where the day rates are and the payback times. That being said, you're absolutely right now that jackup rates are increasing, and the durations of those contracts, which gives you a better ability to recover that reactivation cost, which you put in the order depending on the rig of $20 million to maybe $30 million, depending on specifications. So now that we have longer duration contracts, more prevalent outside the Middle East, there are more opportunities to see one of those jobs making sense for a reactivation. So we like the assets we have. They are a great option for us to continue to play into the jackup up cycle. Up until now it's been a capital allocation question where floaters have just been more value accretive. But yes, we're absolutely focused on and we continue to bid jackups into those opportunities to find the right opportunity to bring them back.

Great color. I appreciate it. And I'll turn it back.

At this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Darin Gibbins for any closing remarks.

Thanks, Allison, 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 fourth quarter 2023 results. Have a great rest of your day.

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