Good day, and welcome to the Valaris Second Quarter 2024 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 Nick Georgas, Vice President Treasurer and Investor Relations. Please go ahead.

Welcome, everyone, to the Valaris second 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. 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 will begin with an overview of our performance during the quarter and provide an update on the offshore drilling market. I will 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, in the second quarter, we built on a great start to 2024 and would like to congratulate the entire Valaris team on delivering another excellent quarter of safety, operating and financial performance. Second, we continue to execute our commercial strategy, securing attractive new contracts and building our backlog. This past quarter marks the seventh consecutive increase in our backlog, which now totals more than $4.3 billion. Third, we maintain our conviction in the strength and duration of this up cycle and see strong customer demand for projects that are expected to commence in 2025 and 2026. Turning to operations. Our success continues to be built on the foundation of strong safety and operating performance. In the second quarter, we delivered fleet-wide revenue efficiency of 99% without a lost-time incident, a great achievement by the entire Valaris team. This achievement is even more impressive considering that we had several rigs either starting new contracts or changing operating locations during the quarter, including Valaris DS-7 following its reactivation DS-17 moving countries to drill a frontier exploration well in Argentina, and the Stavanger and 123 commencing new contracts in the North Sea following out-of-service periods for…

Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of the second quarter, we secured new contracts and extensions with associated contract backlog of approximately $715 million. These awards have increased our total backlog to more than $4.3 billion, a 42% increase compared to a year ago and our seventh consecutive quarter of backlog growth. Importantly, this growing backlog has been secured at higher day rates as seen in the increased average daily revenue within our quarterly results, and the average day rates included within our backlog. This is particularly evident for our drillship fleet. Over the past 12 months, drillship backlog has increased by nearly 50% to more than $2.5 billion. In addition, we have increased the average day rate for our drillships within backlog to $414,000 a day from $338,000 per day. These averages exclude the impact of meaningful upfront payments, we have secured on several of our drillship contracts, and we expect the average day rate within our backlog to increase as we roll legacy day rate contracts to market rates. Our recent contract awards include a multiyear contract with Equinor offshore Brazil for drillship Valaris DS-17. We are pleased to have secured a new contract in direct continuation of the rig's current program at a very strong day rate. The customer's willingness to pay a standby rate, while they wait to commence their new drilling program is a good indication of market strength as we look ahead to the second half of 2025 and 2026. Moving to shallow water. We have secured eight new contracts or extensions since the beginning of the second quarter, five of which were for rigs in the North Sea. These include a two-year program for Valaris 92 and approximately 300 days of work for Valaris Norway, securing work for…

Thanks, Matt and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of the second quarter results, our outlook for the third quarter and our guidance for the full year. Starting with our second quarter results. Revenue was $610 million, up from $525 million in the prior quarter, and adjusted EBITDA was $139 million, up from $54 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense was $150 million, up from $84 million in the prior quarter. Adjusted EBITDA increased meaningfully in the second quarter primarily due to higher utilization and average daily revenue for both the floater and jackup fleets, along with lower contract drilling expense. In the second quarter, floater revenues increased due to a full quarter of operations for Valaris DS-12 and DPS 5, which both commenced contracts during the first quarter, along with DS-7, which commenced operations offshore West Africa in late May, following the successful completion of its reactivation project. In addition, Valaris DS-15 and DS-16 started new higher day rate contracts in the second quarter, which contributed to an increase in average daily revenue. Jackup revenues increased primarily due to higher utilization, including a full quarter of operations for Valaris 107, which commenced a contract offshore Australia during the first quarter. In addition, Valaris 123 and Stavanger started new contracts in the North Sea during the second quarter, following out of service time in the first quarter, while the rigs were undergoing contract preparation survey work. Contract drilling expense decreased in the second quarter, primarily due to lower reactivation expense for DSV as it completed its reactivation project. In addition, we incurred lower repair and maintenance expense for the jackup fleet as rigs return to work following out of service time for contract preparations and survey…

Thanks Chris. I want to reiterate some of the key points we covered today. First, I am proud of the strong safety, operating and financial performance that we delivered through the first half of the year. Congratulations to the entire Valaris team on an excellent six months. Second, we maintain our conviction in the strength and duration of the sub cycle and see strong customer demand for projects that are expected to commence in 2025 and 2026. And finally, we continue to execute on our strategy, securing new contracts at higher day rates that will support our expected earnings and cash flow growth over the next few years. We believe that Valaris is well-positioned to benefit from strength and duration of this structural up cycle, 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.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Greg Lewis with BTIG. Please go ahead.

Yes. Hi. Thank you. Good afternoon, and good afternoon, everybody. I was kind of hoping we could talk a little bit about capital allocation and how you're thinking about managing or returning Valaris cash flows to shareholders and that if we were to talk 6, 12 months ago, I'm sure most of us on this call would have thought, hey, the DS-14, 13, 11 are going to be reactivated because the market is that strong, and there's going to be CapEx associated with bringing those rigs on. Markets definitely improved. But at least as we think about the next 12 to 18 months and the rigs that are idle on the sidelines, whether it's Valaris or others, and just that CapEx that we're signing to reactivate those rigs, it's just going to be put on hold for a little while. Does that kind of change the way you think about your capital allocation? And maybe does that provide an opportunity for you to accelerate returning cash to shareholders over the next 12 to 18 months?

Yeah, it's a good question, Greg. Look, we've been very clear about our capital return thoughts and how we were going to demonstrate that to shareholders. We returned capital to shareholders last year. We've spent a significant amount of cash in the first half of the year, getting the 7% to work and are going to generate increasing amounts of cash as we roll legacy contracts onto new contracts -- and as we go into 2025, a real inflection point for us as a company. I don't think we feel differently about 13 and the 14. There's a strong pipeline of opportunities, as we said, coming through in the latter half of 2025 and into 2026. In fact, we -- as we see it now, we operate high specification, 12 of our 13 ships or seventh Gen and we can see a call on those assets evolving in the second half of next year and going into 2026. So we still see great opportunities for the 13 and 14 going forward. But we've been very clear on our capital return philosophy when we're generating cash, and we're heading in that direction over the next period, and we're going to return it all to shareholders. We have capacity available under our authorization right now -- when we put in place, we said it would not be necessarily linear through the year, and we're going to be opportunistic in it. And we will look with that commitment, and we intend to return cash to shareholders.

Great. Yes, no, that makes a lot of sense. And then just -- in one of those signs that the market is tightening for the high-end drillship market, you were able to contract the DS-17, where the company -- the customer was willing to pay a standby rate just so that they could have that rig ready when they needed to start drilling there. Could you talk a little bit about the dynamics of the DS 17 and how that rig was positioned to really get paid a pretty attractive standby rate for a couple of quarters as it waits for its next job?

Absolutely. As I just said in my answer to your capital question, we see a strong pipeline in 2025 and going into 2026, tight market for the high-specification assets. The DS-17 is a very high-specification assets. Equinor is a great customer. We had a great partnership with it. The crews have done a great job on the Bakala development with that rig. They partnered with us and invested significant amounts of money into the rig on innovative technology. We have the thematic robotic arms on it, a lot of automation on that rig. So they have confidence in the rig to do their going to the higher development. They have confidence in the rig to deliver that development. And I think it's a testament to where the market is going, having good customer relationships -- and operators recognizing where the market is going to be in the latter half of next year and going into 2026 that for the right asset that they're willing to invest and spend money to secure the assets so that it's available to them. And I think that's one of -- it's a great signal of where we see the market going.

Perfect. Thank you very much for the time.

The next question comes from Eddie Kim with Barclays. Please go ahead.

Hi. Good morning. Just wanted to follow up on that DS-7 contract Yeah, I mean as Greg alluded to, I mean, the standby rate for 180 days, and that's probably the longest paid standby period we've seen maybe since the 2014 downturn. It does look like it could be a strong read-through for your other reactivated rigs. Would you say operators for your other reactivated floaters have invested maybe a similar amount as Equinor did on the DS-17, was that Ecuador investment into the DS-17, probably more elevated and kind of more of a one-off than the others?

No. I mean Equinor is a very forward-leaning technology company. A lot of that technology automation desire for automation technology comes out of the North Sea, Norway, in particular. So they invested capital in the rig to, as I mentioned, the AtharTXs and some other automation. I think as much reading is the timing of that and when that program is going to be starting up and where we see the strong pipeline of opportunities that are coming to the market, I think Matt referenced in his prepared remarks, 30 opportunities and potentially 20 of those being awarded in the next 12 months. And as we roll forward a year from now, seeing that once the high-spec assets, like the 17, the seventh-gen drillships are taken up, there is a good potential for a coal on additional assets. And that's why we feel really good about the 11, the 13 and the 14, when you consider that a reactivation takes about a year to do that for that period, where we are sitting now -- from now towards the end of next year and heading into the first quarter of next year, we continue to have discussions with customers on those rigs. Those customers have been ongoing, but we're not in a rush. Those assets are increasingly going to be called on, and we will wait for the right opportunity. And as we see if those opportunities get more attractive as time goes by when we line it up against the pipeline of opportunities in late 2025 and heading into 2026.

Got it. And my follow-up is just on the two jackup suspension notices on the Valaris 147 and 148 you mentioned having discussions on whether maybe other Valaris leased rigs could be suspended instead. Could you maybe give us some more insight here? I know you have some other rigs that are expected to come off contract earlier than the 147 to 148. Is that really the main factor here? Or is there something else? And separately, just to clarify, I believe I heard you say you expected around 5 more jackups suspended from Saudi across their fleet, which would bring the total this, I guess, second round to around 7 suspended jackups. Did I hear that correctly?

Yes. So let me start off. Arrow, JV, just received these notices in the last week. So I won't like late-breaking news. So while the notices were received for 2 lease rigs, the 147 and the 148, we're in discussions with Arrow and with Aramco. -- we may -- and these are productive, constructive discussions. We may look at instead suspending another leased rig or an Arrow-owned rig. So we're just going to have to see how those discussions develop. So which rigs may be suspended and the timing of those still needs to be determined. Taking a step back from these specific rigs, you said, yes, five, we expect five, I mean, based on what we understand from discussions in the market. But in context, those two rigs, if it was those two rigs, the 147 to 148 is about $10 million of EBITDA, which is part of the adjustments we've made going through the year. But for context, this is $35 million of backlog out of $4.3 billion for Valaris. So I think we need to take that number in context. On those five rigs that are purported to be suspended is about 1% of global marketed jack-ups in a market where we have 93% utilization right now from the first series of suspensions, the 22 earlier this year, a number of those rigs have made a very orderly transition into the international market, and we see leading-edge day rates in the benign jack-up markets still north of $150,000 a day as we've seen fixtures from us and others in the market. So this is not a fundamental change in the jackup market as we see it, and we feel good about the jack-up market and these rigs like the others. Those that are competitive in the international market and not all of those rigs are competitive in the international market, we'll continue to make an orderly transition.

Yes. But just to be really clear, Aero got decisions for two rigs and the discussions we're having about or which rigs, not if is more risk, just which rigs.

Understood. Thanks for that color. I'll turn it back.

The next question comes from Kurt Hallead with Benchmark. Please go ahead.

Hey, good morning everybody. Thanks so much for the color.

Good morning, Kurt.

Hey, Kurt.

Hey, I just wanted to maybe dig a little bit further. You referenced -- went through the market dynamics, it went through the segmentation of the floater market. We kind of heard from one of your peers already this morning. So I just want to try to calibrate. So when you take everything in aggregate that you expect to see, let's say, through 2026, what do you think the net incremental 7G deepwater rate demand could be?

So hey, Kurt, Matt here. So I think from -- we're talking about -- if you remember from my prepared remarks, you're talking about the some of 30 opportunities we're seeing that are longer than a year in duration, but across the 30 have an average of 2.5 years. I think if you're putting a number on it, you're likely to see about 10 of those 30 provide potential incremental opportunities. Now that's incremental to the region. And I think your question is breaking it down into seventh gen. Obviously, we know that customers have a preference for 7th gen rates, and 12 of our 13 drillships are 7th gen rigs. So I think 10 incremental potential, but I wouldn't suggest that all 10 would be filled by sideline capacity.

But what I will say to that is as we roll forward, as I say, we roll for 12 months, 25 going into 26, a potential coal inside line capacity on expectation for coal sideline capacity. The reason why we feel good about it is when you look at sideline capacity, the 11, 13 and the 14 are the highest-spec rigs in that sideline capacity. So there -- we expect there to be good opportunities for those rigs going forward.

Okay. That's great. And then the follow-up I have then is when you guys are obviously having a very shareholder-friendly capital allocation program, right. How are you targeting or what is your target in terms of free cash flow conversion on expected EBITDA going forward?

Yes. We don't have a specific target from a conversion perspective. But what I'd say, we remain committed to returning capital to shareholders. As Anton mentioned, we've got significant capacity under the existing authorization. We intend to use that. It's not going to be linear. We're going to be opportunistic. But as I mentioned on the call, we expect the free cash flow profile of the business to improve in the second half of the year. And looking ahead to 2025 and beyond, that's really part of the transition to where we start generating meaningful and sustained free cash flow. And like Anton mentioned, we intend to return it all to the shareholders unless there's a better and more value accretive use for it.

Okay. Great. And then if I just may just wrap it with this. If -- would you -- a general comment here, right, nothing specific, but do you expect there to be another round of M&A within the offshore drilling space before the end of the year?

No, I'm going to ask two questions. Not only is there going to be more before the end of the year. Look, timing and contracting and timing and M&A is both very hard to predict with certainty. I think there is definitely room for additional M&A in this business. Looking at it from a Valaris perspective, some of this M&A has occurred in the business because people didn't have high-spec capacity and needed to go and buy that capacity through M&A. We're in a very fortunate position, having 12 or 13 of our ships being 7th gen and still having 7th gen organic available capacity to be able to grow into a market that we see as highly, highly constructive. That being said, we're very pro M&A. We will look at opportunities. And if it is -- makes sense, creates value and is accretive to shareholders, we will absolutely engage in it. And I think there's definitely room for more of it in this business.

All right. Appreciate it. Thank you.

Thank you, Kurt.

The next question comes from David Smith with Pickering Energy Partners. Please go ahead.

Hi. Good morning.

Good morning, Dave.

Congratulations on the solid quarter and the solid jackup contracts in particular, really nice rate off of Trinidad. And I just wanted to ask if this was an agreed upon rate before April or just a confirmation of the point you've made in the past that some markets will see minimal or no direct competition from the Saudi suspensions.

Yes, it's the latter. I mean that discussion continued to -- up until the point where the contract was finalized and announced recently. So that data point is known during the -- and after the first round of Saudi suspension. So you're right, it's indicative that certain markets and certainly, certain customers are focused on securing the top end assets for their future developments.

Great. And one follow-up. We've seen lead times for all border rig contracts shrinking versus last year outside of the Gulf of Mexico at least. We can't see your negotiations sister contracts, but I wanted to ask if your discussions are also reflecting shrinking lead times compared to last year. So maybe we shouldn't be too nervous about a slower recent pace of contracting and implications for first half 2025 availability?

I'll start with the end of your question. I mean, we are not concerned about the pace of contracting. Contracting in this business is not linear through the year. And I think we going to be careful when we look at data, it may be as much a mix question as it is a general train question. Different geographies are very different contract lead times and contract execution times, whether you're in kind of formal Petrobras or West Africa negotiations where there may be NOCs involved versus a number of more direct negotiations. So there can be a mix component, a geography component. Overall, we see lead times increasing, especially when you look at where we expect demand to be -- supply/demand to be kind of late 2025 and into -- so we see some of these lead times stretching out. And as much as that, we see contract durations continuing to extend. And of course, we see day rates continuing to grind higher with six fixtures. So just after halfway through the year above $500,000 a day versus only two last year. So all of those components lead us to be quite constructive on where that market is going.

Really appreciate the color. Thank you.

Thank you.

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

Thanks, Drew, and thank you to everyone on today's call for your interest in Valaris. We look forward to--

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