Good day, and welcome to the Valaris First Quarter 2024 Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Nick Georgas, Vice President, Treasurer and Investor Relations. Please go ahead.

Welcome, everyone, to the Valaris First Quarter 2024 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, earlier this 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, Nick, and good morning and afternoon to everyone. During today's call, I'll begin with an overview of our performance during the quarter and provide an update on the offshore drilling market. I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and provide some additional color on recent contract awards as well as our contracting outlook. After that, Chris will discuss our financial results and guidance before I finish with some closing comments. To begin, I want to highlight some key points about our business that we will cover in more detail during this call. First, I'm very pleased with our start to 2024. Thanks to the efforts and focus of the entire Valaris team, we delivered strong safety, operational and financial performance and a great first quarter. Second, we continue to make progress towards underwriting our earnings growth by securing new contracts at higher day rates and consistently building our contract backlog. This past quarter marks the sixth consecutive increase in our backlog, which now totals more than $4 billion. And finally, we expect that the levels of customer demand we are seeing, particularly for work that is expected to commence in 2025 and 2026 will continue to support our anticipated earnings and cash flow growth over the next few years. And we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it. From a safety and operations perspective, our performance during the first 3 months of the year was excellent. We finished the quarter with no lost time incidents and fleet-wide revenue efficiency of 97%, a great achievement by the entire Valaris team, both offshore and onshore. With several rigs celebrate safety milestones during the quarter, and…

Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of the first quarter, we have secured new contracts and extensions with associated contract backlog of more than $520 million. These awards have increased our total backlog to more than $4 billion, representing a 43% increase over the past 12 months and our sixth consecutive quarter of backlog growth. Recent awards include a multiyear contract offshore Angola for the VALARIS 144 at a leading-edge day rate for a benign environment jackup, along with 3-year extensions for Mad Dog and Thunder Horse, which we manage on behalf of BP in the U.S. Gulf of Mexico. For floaters, we saw priced options exercised on VALARIS DS-9 with Exxon offshore Angola. And the DS 17 with Equinor offshore Brazil, the latter of which was a day rate of $497,000. The exercise of these options extends the firm programs for these rigs into mid-2025, as well as our partnerships with these important customers in key deepwater basins. Moving now to an overview of the major markets, starting with floaters. The contracted benign environment floater count increased to 127 rigs during the first quarter, its highest point since late 2016 and an increase of 26 contracted rigs since the lows reached in early 2021. We continue to see a strong customer preference for high-specification seventh-generation drillships which comprised 12 of the 13 drillships in the Valaris fleet. Marketed utilization for this class of assets stands at 92% globally and has exceeded 90% since early 2023. These high levels of utilization have resulted in a continued improvement in average day rates for new contracts, which have increased from approximately $450,000 in the second half of 2023 to approximately $480,000 through the first 4 months of 2024. Looking at expected future demand and ongoing tenders, we…

Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of the first quarter results, our outlook for the second quarter and I also will provide an update on our guidance for the full year. Starting with our first quarter results. Revenue was $525 million, up from $484 million in the prior quarter, and adjusted EBITDA was $54 million, down from $58 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense was $84 million down from $96 million in the prior quarter. As expected, adjusted EBITDA decreased primarily due to lower revenues and higher costs for the jackup fleet associated with planned out-of-service time for rigs undergoing special periodic surveys and contract preparation work. This was partially offset by more operating days for the floater fleet. In the first quarter, jackup revenues decreased primarily due to fewer operating days for several rigs including VALARIS 107, 123 and 247. The VALARIS 107 was idle for most of the first quarter between completion of its previous contract offshore New Zealand and its current program offshore Australia. While VALARIS 123 and 247 underwent planned SPS and contract preparation work ahead of new contracts that are expected to commence in the second quarter. Contract drilling expense for the jackup fleet also increased due to contract preparation costs for Valaris Stavanger, which is expected to start a new contract this month. These items were partially offset by an increase in EBITDA for the floater fleet, primarily due to VALARIS DS-8 starting its contract with Petrobras late last year following reactivation and higher revenue efficiency in the first quarter compared to the prior quarter. Our first quarter results came in better than our guidance, primarily due to higher revenues resulting from strong revenue efficiency. We had…

Thanks, Chris. I'll conclude by reiterating some of the key points from our prepared remarks. First, I'm very pleased with our start to 2024 as we have delivered strong safety, operational and financial performance. Congratulations to the entire Valaris team on an excellent start to the year. Second, we continue to execute on the commercial front, and we are making progress towards underwriting our earnings growth by securing new contracts at higher day rates and consistently building our backlog. And finally, we see strong customer demand for work that is expected to commence in 2025 and 2026 that will continue to support our anticipated earnings and cash flow growth over the next few years. We believe the future is strong for Valaris, and we thank our employees, customers and investors for their support. We've now reached the end of our prepared remarks. Operator, please open the line for questions.

[Operator Instructions]. Today's first question comes from Greg Lewis with BTIG.

I guess my first question is, I was hoping to get some more color around the 144 jackup. Clearly, that was a good contract. Just some kind of high-level questions around the all-in rate, kind of roughly how much does it cost to maybe mobilize a rig like that from basin to basin? And really, when kind of timing-wise did those contract negotiations, get to the finish line? Just there's been some questions around with all the noise, will all the, I guess, volatility out of Saudi Arabia, what that's doing for rates, just given the -- that was a pretty healthy day rate on that rig.

Greg, Matt here. So thanks for the questions on 144. So maybe hit with the timing first. The discussions were ongoing during the late half of '23, but the contract was signed in March of '24 after we had learned about Saudi Aramco's challenges or intention to suspend 22 rigs. From a -- we're not able to disclose the day rate based on the agreement with the customer. But what I can tell you is that from a cost of mobilization, we're assuming a little bit less than $10 million to move the rig. So you can make some assumptions based on the TCV that we've provided for the range of the program.

This is Anton. I'll just reiterate. I mean the contract came together around the same time. The Saudi announcement was in January. The contract was signed in March. But I would reiterate Matt's comments on during his prepared remarks that there have been some fixtures out in the market, but we don't believe that those are indicative of the broader market for jackups and where it will be going forward. And this is a great contract. And we're really excited about moving the 144 to West Africa and commencing that contract with.

Yes. No, no, absolutely. And then you kind of talked about the -- you kind of lumped in West Africa, Med or African and Med together. And I guess a couple of questions around that is you talk about the potential for 30 rigs in the region. So as we think about that base in really, or that, I guess, area, I guess, is probably the better word. A couple of questions around, where is that market currently in terms of versus the 30 you're thinking about? Really does that include any opportunities in East Africa or kind of -- and then really, as you're looking at these opportunities, any kind of sense for realizing it's probably multiple types of opportunities. Any kind of sense on the durations of these -- a lot of this work? Are these kind of shorter term, longer term on average type contract durations that kind of are going to start absorbing rigs into this region?

Sure. So let's start with timing. On the indicative numbers we're sharing that more than 30 across those regions, they're based on opportunities greater than 1 year, starting in '25 and '26, okay? If you look at the number 30, if you use that as the assumption basis for Africa, Med, you're close to about half of those represented in that region. So that gives you an idea of quantum of the potential growth of that area. And if you -- we often take a look at the -- using Rystad to model the CapEx process across multiple years. And so some of the growth we're seeing when you look at, say, if you ran from 2022 to '30 versus now '24 to' '30. We're seeing an increase in CapEx spend across that period of 26% on a comparative basis from '22 to '24. And what's interesting is in the top 2 of that. One of those is Africa, which we see a potential increase in CapEx of up to 52%, which is quite evenly split between shallow and deepwater. So indicative of the work for 144, moving to West Africa and then the opportunities that we see both known and future potential prospects, makes it look quite a bright area. And yes, within there, there are some opportunities in East Africa, particularly if you're referring to Mozambique, does provide some of the supply to that area -- demand to that area.

Let me just take it back a second. So we're going from the potential incremental demand in Africa, generally, we're really excited about. We're talking about numbers from the low 20s to the 30 number that Matt talked about. So potentially incremental assets that need to serve Africa broadly around 7. Certainly a bright spot in the market.

The next question is from Eddie Kim with Barclays.

Just wanted to dig deeper into the outlook on the jackup market. So the 22 suspended jackups in Saudi. You alluded to some potential pressure on day rates in the near term leading edge recently after the benign market has been around that 160,000 to 170,000 level. Is it reasonable to assume that, that leading edge could fall to maybe, I don't know, 130 to 140? just curious on your thoughts as to the potential magnitude of the pricing pressure that you highlighted.

Sure. Eddie, maybe I'll jump in first and then Chris and Tom can add some color. So of the 22, we see about half, and I think Anton mentioned that in his prepared remarks. And we also mentioned that the jackup utilization for high-spec units is at 95%. So there's sufficient demand based on the current utilization to absorb those rigs. Will there be some near-term rate pressure for those contractors who want to fix rates sooner there may be, as we've seen through a couple of fixtures, but we don't think that's indicative of a longer-term trend. So we feel as though there's sufficient demand tying back to some of the topics I just mentioned around CapEx growth where we see a strong market in the future, and we may not see all of those rigs come back into the competitive international benign environment market as quickly as those first 2.

So to scope it roughly half of those 22 are even competitive in the international market. We think they can be absorbed in the market in an orderly fashion. From our perspective, we have 19 rigs outside of those that we have operating in Saudi. The majority of those 15 are in the North Sea, Trinidad and Australia, which leaves us with 4, 3 of those are on long-term contracts. So we think there's plenty of capacity given the utilization levels in the international market. There's strong demand that those rigs that may come out of Saudi for those who choose not to wait or maybe take them back to their owners home market like China or Egypt, for those rigs to be absorbed in an orderly fashion. And as I said on the 143, we think there are great opportunities for that rig. We'll be patient, and we'll find the right job for it.

Got it. Just shifting over to the floater market here. Anton, in your prepared remarks, you said you expected these 2- to 3-year contracts to be awarded at or close to leading-edge rate, which is great to hear. But I assume that, that comment is more in reference to hot rigs currently working how much of a discount do you expect we could see for sideline rigs winning some of that longer-term work?

I don't think we can expect to see a discount for sideline rigs. I can't talk for what other people do, but personally, how we view the market. The 11 to 13 and the 14 are the highest specification assets available in the market, 2 BOPs. We've seen the market for seventh generation rigs. We see strong demand for them over the next few years. So I don't think. Yes, leading-edge rates and when we're talking about kind of term, 2- to 3-year contracts are in that mid- to high 400s range with potential. And we've seen that rigs continue to gradually move higher as we've said, with average day rates moving from the mid-400s to the 480s in the first 4 months of the year, and we think they'll continue to move higher as the supply/demand balance increases because there's more incremental demand coming out. And we're looking forward to finding the right opportunities for the 11, 13 and 14.

The next question is from David Smith with Heikkinen Energy Advisors.

I had some technical difficulties. So hopefully, I'm not asking the same question someone else did. But a question for Chris. Just circling back to the guidance, I wanted to make sure I understood correctly that '24 EBITDA guidance is maintained, that 500 to 600 range, but would need incremental work for the DS-10 and the DPS-5 to get to the midpoint. So I wanted to make sure I heard that correctly, but I also wanted to ask about your comfort level for the low end of guidance if minimal incremental work for those rigs materializes?

Yes, David, it's exactly right. We're maintaining our guidance range, $500 million to $600 million to get to the midpoint of that range. We need to get some incremental work on the 10 and the 5. We do assume -- but we need some incremental work to get to the midpoint of that range. So that's what we're focused on. Matt and his team and the whole organization is laser-focused on securing that work, and we're in active discussions with customers for it.

If Mexico work doesn't materialize in the second half for the DPS-5, would you look at that rig as a candidate for U.S. Gulf well intervention and P&A work? Not a lot of rigs in the region are good candidates for mid-water work. So that might be an opportunity?

I'll let Matt talk about the capability of the rig because it is a great asset and then maybe I'll come back on your question.

Thanks for the excellent leading question. I think for the DPS-5, both moored and DP capable. So it broadens the market opportunities for that rig, both in U.S. and Mexican Gulf. The program it's working on right now with ENI, it's doing one well and moored capability and the other one in DT. So it provides quite a flexible opportunity. On the -- there are a number of opportunities on the well intervention side. So that market is proving to be quite interesting in the U.S. Gulf. There are also continued opportunities with P&A and traditional drilling. And I think when you look at our track record, a similar situation to last year, we've been able to fill those opportunities to keep the rig fully active through the year. But the next key is what's next. So there's longer-term opportunities in the Gulf of Mexico region. There were some longer-term opportunities that shifted from '24 to '25 that we had -- we're focused on that are likely to return that are attractive but we're also marketing the rig internationally. So there's a number of longer-term opportunities exist across the Atlantic that are quite attractive to provide us the revenue visibility for that rig on a long-term and low cost basis.

So I mean '24 is 97% underwritten from a revenue perspective. Clearly, we have work to do on the DS-10 and also the DPS-5. But I will remind, we were in exactly the same position with the DPS-5 last year at this time. And Matt and the team did a great job of screening together work near constant work in the second half of the year and delivering on those rigs. So we're just going to have to see, have some pieces fall in place and see what we can do. We are modeling some idle time on those rigs, but we clearly have some work to do, as Chris said, to deliver the midpoint of our guidance.

The next question comes from Fredrik Stene with Clarksons Platou Securities.

I have two questions for you today, and I just want to follow up a bit on what David asked about the guidance. Anton, you said that 97% of the revenue was underwritten. Is that on the low end of the revenue guidance of 97% of the $2.3 billion, just wanted to get the details correctly here.

At the midpoint.

At the midpoint, Okay, super helpful. Are you -- when you think about the DPS-5, DS-10 in relation to the comments around or in your prepared remarks about the rates potentially being a bit more volatile for short-term work. How are you balancing that when you're feeding these two rigs forward. Should we expect to see rates that would be deemed materially below leading-edge rates? Or should we see something that's at least for the DS-10 still in the 400s.

I go back to my comments, and this is more a general market comment, but I think it applies broadly and including to us. Term programs, when we talk about term programs, 2 to 3 years in the mid- to high 400s into the 500s for the right opportunity. I think where you see that range is more -- look, we look at getting the highest day rate we can to get the best economics on every job that we go after. But I think what you can see is, if you're talking about gap fill bridging, we're focused on getting the right program and fixing rigs long term where we can. And then you work backwards from that. and talk about the gap fill that you may be looking for. And I think that's where you may see more of a variety, and it may make economic sense for you to take a bridge program and look at what economics you can achieve on that. That's how we think about it.

Mr. Stene your line is open.

Okay. Perfect. Sorry, Anton, I dropped out actually when you started your answer. So I'll look at the transcript.

We can follow up with you off-line, Fredrik.

Yes. Okay. Good. Just have one more in terms of contracting strategy and how to think about rates going forward. And I totally understand that you might not want to reveal your strategy. But in general, we have some sideline capacity. You're mentioning the DS-11, 13, 14. There are some other rigs that have been taken out from the yards. So clearly, there is new and high spec quality wanting to get in market here. In terms of high-spec assets versus lower spec assets, you could either argue that there will be a discrepancy in rates just because of the specs or that they will tend toward each other as the market tightens and customers won't have any choice in terms of choosing the best rigs. How are you thinking about that? And I'm talking particularly for '24 and '25 more than in the long term.

Look, I can't talk for others, but I can tell you what our philosophy is, and I did allude to it on an earlier question. 12 of our 13 ships are seventh generation, and that's a great position to be in. Including the 11, 13 and 14, these are the highest spec rigs that are on the sidelines, and we can deploy for the right opportunity. We see strong pipeline of customer demand, especially in '25 and '26, and we will maximize the economics that we can work those rigs on as we see the opportunities.

Perfect. And finally, any of you thinking around any of your other stacked assets, DPS-3, DPS-6, any of the jackups? Or are they going to be assets for now?

Look, as it is now, there is a preference in the market right now from our customers for high-specification assets. From a capital allocation perspective, it's made more sense for us to deploy capital towards our high-spec drillship fleet. That's what we've been focused on over the last couple of years. Our focus is on the 11, 13 and 14. But as the supply-demand balance continues to tighten over the next few years, what we may see, there are only 10 as we see it effective reactivation candidates sitting on the sidelines in the high-specification assets. As that market continues to tighten over the next few years, we could likely see more opportunities for semis to come back to the market. But right now our focus is on the drillships.

The next question is from Kurt Hallead with Benchmark.

So Anton, I wanted to follow up. You referenced the prospect of an increase in the cadence of contract awards as we go into the second half of this year. Just wondering if you can maybe give some additional context around that in terms of maybe how do you quantify that? Is 20%, 10%, 15%, 20% increase just some context around how you're looking at it.

I don't know if we can quantify in percentage terms. I mean there've been some talk about seasonality and pace of contracting. What I can say is that the pace of contracting and the number of tenders that are out there are really solid for '24. You may see fewer awards in a certain quarter, and given that, we expect there to be a good number of awards points to when we look at the tenders that are out there, an increase of pace because people are looking for rigs in the second half of the year. And part of that is driven by these are a good number of long-term programs. Some of them are in multiple jurisdictions, which means the operator of the program needs to get partner approvals in a number of countries and longer duration programs with more complexity, take a longer time to process. Programs can move forward and backwards by quarter depending on how they make progress. But clearly, based on the number of tenders that we see that are active -- that are out there that we expect to be completed, we expect the pace of tendering award activity to increase over the remainder of the year.

Okay. Appreciate that color. Follow-up I have then is on the DS-11, 13 and 14 and a couple of parts to the question, right? First one is in the context of those 3, can you just remind us which one might be the one more likely to go first? Second dynamic is given elements related to shipyard capacity labor, supply chain dynamics, what's the feasible number of rigs in a given year? You got 3. So how many of those could you feasibly activate in a given year?

I mean, 11, 13 and 14 are all fantastic assets. They're all -- they're almost interchangeable. The customer decides what assets they want. One customer may prefer a rig like the 11 that has a track record and it's worked before and some customers prefer a new shining car right off the lot, right, the 13 and the 14. So for us, they're somewhat fungible, but we will focus on getting all 3 of them to work. As far as capacity, we've done 4 floater reactivations in parallel before and done it very successfully. One of the true strengths of this organization is our ability to execute complex projects and reactivation projects leading the industry, as you've seen on the DS-8, and I fully expect the team will deliver the DS-7 in the same way. So we feel very comfortable with our ability to effectively reactivate those rigs. When we find the right opportunities, whether it's serially or in parallel.

The next question is from Doug Becker with Capital One.

Just following along the same tenor of questions, how would you frame the likelihood of hearing about a contract for 1 or more of those rigs this year and potential for a JV with an operator for 1 of these rigs?

I'm not going to get into speculation or percentages. I mean what I would say is we will look at traditional or nontraditional ventures if it is accretive and makes economic sense for our shareholders. We have critical mass of rigs working. We've got 3 attractive assets in a growing and increasing demand market that we can deploy on the right contract with the right customer at the right time. And we're going to be very focused on finding given what we see with the demand profile over the next couple of years, finding the right job for those assets. If that comes -- we're in active discussions on all three of those assets right now, if it makes economic sense, and we've been very clear on having meaningful returns on reactivation costs and it makes sense for us and our shareholders, absolutely will execute on. But we're also willing to be patient and wait for the right opportunity to put those assets back to work because they are the best assets available on the sideline.

Yes. And our criteria is the same as it's always been. I mean, a meaningful return on the reactivation costs over that initial firm contract. So that's the same way we're looking to do remaining as we've looked at everything else.

No, that all makes sense and very consistent. Maybe then to 2Q, revenue efficiency was very strong in the first quarter. Is this strong continuing this quarter and just maybe some of the parameters that are baked into the 2Q revenue guidance for revenue efficiency.

Revenue efficiency is solid in the second quarter. I think I'm not sure if this is the question you're alluding to, but our EBITDA guidance for the second quarter is in line with what we expected at the beginning of the year. And I think some people -- and obviously, we don't know what's in your model. I think some people model kind of a linear growth of our revenue and earnings through the year where we had a lot of rigs that were transitioning between contracts, doing SPS', moving locations. When you look at the 247 going all the way to Australia. Plus the DS-7 coming to work middle of the year. So for us, there's more a ramp towards -- in the third quarter and the fourth quarter versus a linear progression when you compare kind of quarter-to-quarter guidance versus what we've given for the full year.

Yes. And when we think Q2 versus Q1, I mean, kind of big drivers of the revenue growth are more operating days on the floater fleet. So we'll have particularly the DS-7 starting up in June and then just more days on the DPS-5 and DS-12 since they started contracts in the first quarter. And then we've got a couple of ships on a roll to higher rates in the second quarter. And then all these jackups that have really a drag in the first quarter as it relates to idle time and contract prep and survey work, they're going back to work in the second quarter. And so we'll see a lift there. So we're excited about the second quarter. We'll see EBITDA up based on our guidance, almost 80% relative to the first quarter. So and then as Anton mentioned, big jump in second half of the year versus first half, with the DS-7 online impact of the higher DS-16 contract. North Sea basically kind of working. I mean, everything is working in the North Sea. Moving to some higher rates, and then we've got the contribution from the two jackups in Australia. So we expect a pretty meaningful ramp across the year.

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

Thanks, MJ, and thanks again to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our second 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.