Good day, and welcome to the Valaris Fourth Quarter 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. Today, we are experiencing national AT&T coverage Issues. [Operator Instructions] 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 fourth 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 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 begin with an overview of our performance during the quarter, then provide some high-level commentary on the outlook for the offshore drilling market and finish with an update on our capital return program. I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and provide an overview of our recent contracting success and our contracting outlook for 2024. After that, Chris will discuss our financial results and guidance before I wrap up the call with some closing comments. Before I discuss the quarter, I want to highlight some key points about our business that we will cover in more detail during this call. First, we remain confident in the strength and duration of this upcycle and the outlook for Valaris is positive with increasing demand and constrained supply tightening the market. Second, we continue to execute on the commercial front with nearly $3 billion of new contract backlog secured during 2023 at meaningfully improved day rates. Today, we sit with total contract backlog of more than $3.9 billion and nearly 60% increase from 12 months ago. And our contracted revenue coverage of more than 90% in 2024 underpins the meaningful improvement we expect in this year's financial results. Third, we are maintaining our 2024 EBITDA guidance range of $500 million to $600 million. And finally, we continue to demonstrate our commitment to returning capital to shareholders. We repurchased $200 million of shares in 2023 and we are now increasing our share repurchase authorization from $300 million to $600 million. Starting with operations. Operating safely and efficiently remains our top priority and we ended the year with positive momentum with the fourth quarter safety performance being the strongest of…

Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of the fourth quarter, we have secured new contracts and extensions with an associated contract backlog of approximately $1.5 billion. These awards have increased our total backlog to more than $3.9 billion, representing an almost 60% increase over the past 12 months. More than $1 billion of this new backlog is for the floater fleet, including multi-year contracts for drillships, VALARIS DS-4 and DS-16. DS-4 was awarded a nearly 3-year contract with Petrobras Offshore Brazil and DS-16 received a 2-year contract extension with Oxy in the U.S. Gulf of Mexico. Importantly, these contracts are expected to contribute to a meaningful improvement in financial results with day rates transitioning from legacy rates in the low 200s to leading edge day rates. We are also awarded several new jackup contracts across the North Sea, Trinidad and Australia, which combined added nearly $500 million in backlog, demonstrating the broad based strength of the shallow water market. Most notably, we received a 3-year contract extension for VALARIS 120 with Harbour Energy in the UK North Sea. This extension is expected to commence in the third quarter of 2025 at a day rate that is meaningfully higher than the current spot rates, indicative of an improving North Sea jackup market. Moving now to some commentary on our major markets, starting with floaters. The contracted benign environment floater count reached 123 during the fourth quarter, its highest point since late 2016 and utilization for the active sixth and seventh generation drillships was at 93%. We continue to see a strong pipeline of opportunities for floaters and we are currently tracking approximately 30 prospects, each with an expected duration of greater than one year that are estimated to commence before the end of 2026. We anticipate…

Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of the fourth quarter results, our outlook for the first quarter 2024, and I also will provide updated guidance for the full-year 2024. Starting with our fourth quarter results. Revenue was $484 million, up from $455 million in the prior quarter and adjusted EBITDA was $58 million, up from $40 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense, was $96 million, up from $91 million in the prior quarter. Adjusted EBITDA increased primarily due to more operating days across the fleet and lower reactivation expense. In the fourth quarter, we had more operating days for VALARIS DS-17 which commenced its contract with Equinor offshore Brazil in early September following its reactivation. We also had more operating days for jackups VALARIS 107, 249 in the Norway, all of which incurred some idle time during the prior quarter. These benefits were partially offset by fewer operating days in the fourth quarter for VALARIS DS-12 due to mobilization and a brief shipyard visit between contracts, as well as jackups VALARIS 76 to 123, both of which completed contracts during the fourth quarter and are undergoing contract preparation and planned maintenance work prior to the start of their next contracts. Fourth quarter reactivation expense was $39 million compared to $51 million in the prior quarter, primarily due to lower reactivation expense for VALARIS DS-8, which commences contract with Petrobras Offshore Brazil at year-end, partially offset by higher reactivation expense for VALARIS DS-7, which is expected to commence its contract offshore West Africa in mid-2024. One item to note is that fourth quarter income tax was a $790 million benefit. This is due to an $800 million non-cash benefit that resulted from a change…

Thanks, Chris. I'll conclude by reiterating some of the key points from our prepared remarks. First, we remain confident in the strength and duration of this upcycle, and the outlook for Valaris is positive, with increasing demand and constrained supply tightening the market. Second, we continue to execute on our operating leverage in a disciplined and thoughtful manner, by repricing rigs from legacy day rates to much higher market rates and successfully delivering reactivated rigs with attractive contracts. Our recent contracting success, including the addition of approximately $1.5 billion in new contract backlog since the beginning of the fourth quarter, has increased our contracted revenue coverage to more than 90% in 2024, underpinning the meaningful improvement expected in this year's financial results. And finally, we continue to demonstrate our commitment to returning capital to shareholders by repurchasing $200 million of shares in 2023 and now increasing our share repurchase authorization from $300 million to $600 million. We expect to generate meaningful and sustained free cash flow over the next few years, and 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.

We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from David Smith with Pickering Energy Advisors.

Congratulations on the quarter. It does seem that there's a healthy amount of opportunities for term floater program starting in the next 12 to 24 months. And I'm curious, how you think about bidding a potential reactivation versus an active drillship on these, kind of how you see the trade-off between putting another drillship to work versus locking in duration and minimizing potential white space for the active fleet?

Dave, look, I think we've been pretty clear. Our first priority is to keep our active fleet highly utilized, and there are great opportunities for us to do that. When it comes to stack capacity, the 13, 14 and 11, I think we've been clear that we expect to get a meaningful return on reactivation costs, around $100 million, maybe with inflation pushing up above those numbers right now. And given where leading-edge day rates are now, the fact that you're generating about $100 million in EBITDA, as long as we can get a term contract, we see some opportunities to do that as well. We have people talking to us and interest in all 3 of the 13, 14 and 11, but again, our first priority is to keep the active fleet highly utilized on attractive contracts, and then look for the incremental opportunities that we see coming to market as demand continues to increase. Waiting for the right opportunity. Look, we have 10 rigs. Once the seven goes to work in the middle of this year, working. That's a fair stretch away from where we were a couple of years ago with just four of our ships working. And we're willing to be patient, given the positive momentum we see in the market to wait for the right opportunity to put those rigs to work.

I appreciate that. And a follow-up question, if I may. Nice to see the execution of the $200 million of share repurchases through year-end, and nicer to see the authorization doubled to $600 million. How should we think about the pace at which you might use that authorization going forward?

Yes, Dave, this is Chris. Appreciate the question. We remain committed to returning capital to shareholders. As Anton mentioned, we returned $200 million of capital to shareholders last year through share repurchases on a $300 million authorization. Our Board just doubled that authorization to $600 million from $300 million. This is an open-ended authorization. And with the additional capacity for repurchases, I think this gives us the ability to opportunistically repurchase shares in '24 and into '25, and this is all part of our commitment to returning capital to our shareholders.

We believe we trade at a discount to our intrinsic value. We put the increased authorization into place for a purpose. We intend to use it, and we’re going to be opportunistic about it.

The next question comes from Eddie Kim with Barclays.

Just wanted to ask about how you see the trend in day rate [audio gap] floaters have been in that mid- to high 400s for about six to eight months now. You mentioned in your remarks that you believe day rates will continue to move higher over time, but did highlight some potential for maybe some lower day rates on longer-term work and even some shorter-term gap fill work. So just taking all that together, would it be fair to say leading-edge levels could hold flat through year-end before starting to trend higher again next year? Just how are you thinking about the trend here?

Eddie, I'll start this off. It's Matt. I mean I think if we take a look at the market fundamentals over the last 12 to 18 months, we've seen increase in lead time for tenders, which means customers are coming out further in advance of when they expect to commence. The contracting durations are increasing. These are all data points that support the longevity of this market. And I think probably one of the most recent data points is that we're now seeing majors picking up rigs on what I would classify as speculative supply or speculative demand, depending on which side you look at it from. So what that means is if you look at the JV that was announced recently, Total, they -- while we know they have a long string of development opportunities around the world, it's unlikely they have approval on all of those programs. So they're picking up rigs or picking up a rig to satisfy some of their demand with the idea that they can pick it up for rates that are favorable to them for, obviously, reasons to avoid alternatives. So we see that as a really strong mark in the business, where speculative demand is starting to pick back up again. So the read across day rates is that, that illustrates the strength in the market. And so we see the trend and the range that we offer to continue.

Eddie, this is Anton. I mean we’re always reticent. I know everybody wants us to predict when are we going to get to that next milestone and prognostication is a difficult art. But what I will say, if you look back over quarters, leading-edge day rates continue to grind higher on average. The market continues to tighten. The simple economic supply and demand. The market continues to tighten. There are less attractive assets sitting on the sidelines and incremental demand coming to market, and that will drive day rates higher over time. But that is not to say when we shouldn’t take a single data point and extrapolate it, that there are not going to be gaps in programs given increasing lead times to contracts and repositioning rigs for work in attractive markets and needing to do upgrades. But overall, we were positive on the market and rates will continue to grind higher over time.

Got it. Got it. Great. My follow-up is just on the Saudi capacity expansion curtailment. So they've had a big increase in their jackup rig count over the past 12 months to around, I believe, 85 jackups to date. The announcement probably doesn't change the Kingdom's long-term view, as you mentioned, but I have to think it could impact our needs in '25 and '26. So just in that context, do you think we could see Saudi's jackup rig count decline a bit over the next two years before trending higher afterwards? And what could this mean for your four or so leased rigs that come off contract at the end of this year?

Yes, it's a good question. I think you have it characterized quite well. Look, at this stage, it's a little bit early to say what, if any, the exact impact is going to be on Saudi's rig count. But in my prepared remarks, I said as far as our business, we believe it will have minimal to any impact on our business. They delayed the expansion of Safaniyah and Manifa, these are two oil-focused fields. But they fully expect to develop resources and in their own predictions, see increasing demand for oil and gas over time. I think what's really important is that the overall global jackup market is really tight right now. Active utilization approaching 95% and the total rig count at its highest level in almost nine years. So we see incremental demand coming to market outside the Middle East and in fact, in the Middle East as well, with 10 to 15 incremental rigs. So if, and it's a big if, it's still to be seen. If there are rigs that are relocated from Saudi, there is incremental demand to take on those rigs. If you look at our fleet, we have eight -- ARO is an unconsolidated joint venture. Valaris, we have eight rigs leased in there. We have two additional rigs going in there. These are new contracts for ARO. So we'll have new lease contracts going in there this year. Saudi Aramco and the Kingdom remain fully committed to the ARO joint venture. The newbuild program that we have at IMI is a cornerstone project of the Saudi 2030 vision. Two of our rigs that we have leased in are operating on gas fields, which is not the focus. And if you look at the remainder of those rigs, it's around 5% of our backlog. So we're very comfortable with our position, and the go-forward position in Saudi and also the global jackup market.

The next question is from Fredrik Stene with Clarkson Platou Securities.

I wanted to circle back to the capital return policy. And as you said and announced that you've now opened up for 300 more million, and I totally agree that share repurchases for you guys is a good thing right now, given where your steel values are, at least in my framework. However, I wanted to challenge you a bit in a way on the addition to -- you say you want to return all free cash flow to shareholders and then you have that unless there is a better way for more value-accretive use for it. And then you could potentially end up chasing value forever and not getting sent out in a way. Is there a stop to that? If you've done the DS-11, 13 and 14, is that kind of at the point where you'll look for no more value and say that now is the time to distribute each cent? Could it be value accretion beyond those three rigs as well?

It's a good question. And we expect to deliver significant earnings and cash flow growth over the next couple of years. We're heading into well into an upcycle, and we expect it to continue. And I think we've been very clear about our intention for what we're going to do with that increased earnings and cash flow growth. And return it all to shareholders. It's never a great idea to make absolute statements, right? And so I wouldn't read too much into that caveat. Our job is to maximize shareholder growth. And there may be things that make sense for us to invest in, in keeping with that, whether it's additional MPD systems or a very attractive opportunity to buy an asset. I'm just throwing examples out there. So having absolute statements is never a great idea, but let's be very clear on what our shareholder return policy is. When we're generating significant amounts of cash, we intend to return it all to shareholders, unless there is clearly a better value accretive use for that cash.

That's very helpful. Just one more for me. Clearly, at least in my world, the DS-11, 13 and 14 are the three rigs that you should prioritize to take out, if any. But there are some other stacked jackups, semis, et cetera, across your fleet. Or have you come to a point for some of these assets where you would more actively consider scrapping them or selling them for non-drilling use? Or is this still something you would call it keep on your balance just for future optionality?

Look, I think for us, we prioritize getting ships back to work. That's a capital allocation question. The returns talked earlier, previous question about the reactivation cost versus where leading-edge day rates are and the ability to return on that reactivation cost and on attractive contracts. For jackups, internationally, the durations of the contracts, even though the numbers are a lot smaller, have made it a more difficult capital allocation or a less attractive capital allocation decision. But we do have those jackups. We do see jackup durations increasing, which means increasingly, there may be some opportunities for some of those assets. But right now, given where we see the momentum in the market, the three, the six and our jackups are options for us and with positive growth in the market, we think there are attractive options for us to hold right now.

The next question comes from Greg Lewis with BTIG.

I guess most of my questions have been asked. So I was kind of curious on your views, like Total announced that rig joint venture with Vantage. Just knowing that Valaris and previously, Ensco, have really had a good long-term relationship for Total for years. I'm curious if that was something you actually looked at or considered, and kind of your view on the potential opportunity for those types of JVs going forward?

Look, I think it's a great sign for the market, in general, as Matt said earlier, that operators are looking for the first time in a long time at contracting rigs well beyond programs that they have approved or FIDed and it speaks to their view of the market that the market is going to continue to tighten and where day rates are going to be going. So it's an attractive opportunity, and I think it's a great sign for where the market is going. We will absolutely -- part of having -- it's important to have scale in this business. And part of having scale in this business means you can take a portfolio approach. So we have 10 ships that are working or looking to go to work. Yes, we would be willing to look at an opportunity to secure long-term backlog and baseload backlog for a long period of time and then be opportunistic, more opportunistic on some of our other assets. But we look at each opportunity and bidding situation in its own rights. And if it makes sense and is value accretive to shareholders and fits into the portfolio, we would absolutely look at engaging something like that. But it depends on the commercial opportunity that's available.

The next question comes from Kurt Hallead with Benchmark.

I'm kind of curious in the context, right, you have now, as you mentioned, three drillships that can be activated and brought into the market, maybe a couple of semisubmersibles, but obviously, the focus of the market is on the ultra-deepwater ships, right? Now my question really relates to this, right? As you've gone through this process of activating rigs over the course of the past 12 months, the industry, the drillers have been very much focused on making sure that they get some upfront payment for the activation of these assets. So I'm just kind of curious as we roll forward with less fewer activations, but as you mentioned in kind of contract prep opportunities, are the offshore drillers and you, in particular, in a position to continue to demand upfront payments from your customers for the contract prep work that's going to happen?

Yes, absolutely. As the market continues to tighten, we absolutely continue to have that opportunity. I think we kind of led the charge on that in seeking upfront payments. We look at the opportunity based on the economics of the opportunity, and getting a significant upfront payment, one, it's not subject to kind of operational downtime risk and it helps the cash flow profile and helps the economics of a job. We have a different cost of capital versus our customers. And if not all operators are amenable to it, some of them like it and would prefer to pay cash upfront and maybe get a lower headline day rate, but we look at the economics of the job. So I think there are opportunities for significant upfront payments are as much there, if not more than they ever have been.

Okay. That's good color. So as you guys are very much aware, right, the investor community has been a little bit reticent to continue to put money flow into offshore drillers broadly. Some of that was due to concerns about the pace of contracting activity slowing down and pretty much the concept around leading-edge rates stalling out or maybe temporarily, but falling out from the left. You addressed both elements of that in your prepared comments. But what is the -- if demand is so tight and the outlook for demand exceeds supply, I don't know. I mean, it does beg the question like -- it seems like you guys are in the driver seat and the oil companies seem to still have some element of, I don't know, leverage to keep a lid on pricing. So what do you think is at play here?

Look, I mean, stalling out or taking a pause versus being solid with leading-edge day rates generating $100 million annually of EBITDA, is a really good market and incremental demand continues to come to market. The number of attractive sideline capacity in the form of stack rigs continues to dwindle around 10 today. So I think this is a process that plays out over time. And we fully expect there, as the supply-demand balance continues to tighten, there to be continued pressure on day rates and day rates to move higher over time. It's going to be -- we see a long duration cycle, and we just need to play it out and be disciplined as we play into that cycle, which is why we have the 11, the 13 and the 14, and we're going to be patient and disciplined about bringing that capacity back to the market.

Okay. And then lastly on shareholder distributions, you made it clear that you think your stock is undervalued, which is why you're going to buy back stock. Obviously, if the market starts to recognize the inherent value, starts begging the question as to whether or not you may consider a dividend. So can you just give us an update on how you're thinking about the dynamics between share repo and the dividend strategy longer term?

Yes. No, Kurt, great question. As we said, when this business really starts generating sustained and meaningful free cash flow, which we don't think we're that far away from, we think having both [audio gap] makes sense. And so from a dividend would obviously want to have that be at a level that sustainable through the cycle, but we think both are good components of a capital return policy.

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

Thanks, MJ, 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 2024 results. Have a great rest of your day.

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