Valaris (NYSE: VAL), a leading offshore drilling contractor, reported robust second-quarter results for 2024, with a significant increase in backlog and a positive outlook for the offshore drilling market. The company's revenue efficiency hit an impressive 99%, and adjusted EBITDA stood at $139 million, surpassing the provided guidance. Valaris highlighted the successful reactivation of the Valaris DS-7 drillship and the securing of new contracts and extensions, including a notable multiyear contract for the Valaris DS-17 drillship. With the offshore drilling market showing stability and demand for long-cycle projects on the rise, Valaris is poised for sustained free cash flow generation in 2025, with plans to return value to shareholders.
Key Takeaways
- Valaris reported a backlog of over $4.3 billion, reflecting strong customer demand for 2025 and 2026 projects.
- The company achieved a fleet-wide revenue efficiency of 99% and reactivated the Valaris DS-7 drillship.
- Adjusted EBITDA for Q2 2024 reached $139 million, exceeding expectations.
- Valaris secured a multiyear contract for the Valaris DS-17 and eight new contracts or extensions.
- The company anticipates sustained free cash flow in 2025 and aims to return it to shareholders.
Company Outlook
- Valaris forecasts total revenues between $610 million and $630 million for Q3 2024.
- Full-year EBITDA guidance has been adjusted to a range of $480 million to $540 million.
- The company expects nearly 70% of available days in 2025 for their active floater fleet to be contracted.
Bearish Highlights
- Valaris reported a decline of $99 million in cash due to capital expenditures and other factors.
- The company disclosed potential impacts from contract suspensions and repair costs for certain rigs.
Bullish Highlights
- The contracted benign environment floater fleet reached its highest point since late 2016.
- Market utilization is at its highest in nearly a decade.
- Day rates for seventh generation drillships have risen, with an average increase to $480,000 in the first half of 2024.
Misses
- The company lowered its full-year EBITDA guidance range.
- Valaris received suspension notices for two lease rigs from Arrow, JV, though the impact is minimal.
Q&A Highlights
- CEO Anton Dibowitz discussed technology investments and automation in the North Sea (NYSE:SE), highlighting a strong pipeline of opportunities.
- CFO Matt Lyne indicated the potential for about 10 incremental opportunities for 7th generation deepwater rigs.
- Dibowitz mentioned the company's advantageous position with 12 or 13 ships being 7th generation and still having capacity for growth.
- Valaris is open to mergers and acquisitions that are value-creating and accretive to shareholders.
Valaris' strong second-quarter performance and the optimistic outlook for the offshore drilling market underscore the company's strategic position. With a high revenue efficiency and an increasing backlog, Valaris is well-positioned to capitalize on the favorable market conditions and deliver value to its shareholders. The company's commitment to technological advancements and strategic growth through potential M&A activities further solidifies its standing in the industry.
InvestingPro Insights
Valaris (NYSE: VAL) has demonstrated a robust financial performance, which can be further illuminated by examining key metrics from InvestingPro. With a market capitalization of $5.25 billion, Valaris stands as a significant player in the offshore drilling sector. The company's P/E ratio, a measure of its current share price relative to its per-share earnings, is 5.2, indicating that investors are currently paying less for each dollar of earnings compared to the broader market average.
InvestingPro Tips suggest that Valaris' relatively low P/E ratio may signal an undervaluation of the company's earnings potential, especially when considering the adjusted P/E ratio for the last twelve months as of Q1 2024, which stands at 6.28. This could present an opportunity for investors looking for value in the energy sector.
Moreover, the company's revenue growth has been impressive, with a 9.62% increase over the last twelve months as of Q1 2024, and an even more remarkable quarterly revenue growth of 22.06% for Q1 2024. This growth trajectory is a testament to Valaris' successful contract acquisitions and the reactivation of drillships like the Valaris DS-7.
InvestingPro also highlights the company's solid gross profit margin of 14.26% over the same period, reinforcing the efficiency of Valaris' operations. With the offshore drilling market showing positive signs, this margin indicates the company's ability to translate revenue into profit effectively.
Valaris' strategic position is further supported by the InvestingPro Fair Value estimate of $90.74, which is above the previous close price of $78.59. This suggests that the market may not have fully recognized Valaris' earnings potential and future growth prospects, providing an interesting point for investors to consider.
Investors seeking more detailed analysis and additional InvestingPro Tips can find a wealth of information on the InvestingPro platform, which lists numerous other tips to aid in making informed investment decisions.
Full transcript - Valspar Corp (VAL) Q2 2024:
Operator: 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.
Nick Georgas: 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.
Anton Dibowitz: 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 contract preparation and survey work. In addition, we had several rigs celebrate safety milestones during the quarter, and I would like to congratulate the Valaris 249 team for reaching two years without a recordable incident as well as the Valaris DS-10 and 106 teams for each reaching one year without a recordable incident, well done to everyone involved. We also continued to build on our strong track record of reactivating rigs for contracts that benefit our financial results by returning Valaris DS-7, one of our seventh generation drillships to work on a long-term contract offshore West Africa. The DS-7 reactivation project was delivered on time and began its contract on schedule, marking our sixth drillship reactivation completed since 2022. Successfully reactivating rigs for attractive contracts has played a large part in our earnings growth story, and we still have organic growth capacity to meet increasing customer demand with Valaris DS-11, DS-13, and DS-14, the highest specification drillships in the global fleet that have yet to be reactivated. Moving to our financial performance. Adjusted EBITDA increased to $139 million in the second quarter, up meaningfully from $54 million in the first quarter. Adjusted EBITDA, adding back one-time reactivation costs was $150 million. These results were better than our guidance, primarily due to the team achieving 99% revenue efficiency during the quarter. Certain contracts extending longer than previously anticipated and the timing of costs that are not expected to be recognized in subsequent quarters. Chris will provide further details on our financial results and guidance a little later. Turning now to the broader offshore drilling market. The combination of increasing global demand for hydrocarbons and OPEC+ effectively managing supply has led to relatively stable oil prices so far this year, with spot Brent crude prices largely trading above $80 per barrel. Looking out further, the five-year Brent forward price is around $70 per barrel, a level at which more than 90% of undeveloped offshore reserves are expected to be profitable. As a result, commodity prices remain very supportive for continued investment in long-cycle offshore projects. In addition, leading indicators of offshore rig demand, including global upstream CapEx and project sanctioning are expected to see strong growth over the next few years, bolstering our view that we are in a structural up cycle. According to Rystad, deepwater upstream CapEx is expected to increase at a compound annual growth rate of 9% over the next three years, which is anticipated to drive further growth in floater demand. Average day rates for drillships have continued to increase compared to six and 12 months ago. Just past the halfway point of this year, we have already seen six fixtures above $500,000 per day compared to just two for all of last year. And these fixtures have spanned the U.S. Gulf of Mexico, Brazil, West Africa, and Asia, evidence of the broad-based growth in customer demand. The strength of the market is further demonstrated by our recently announced multiyear contract for Valaris DS-17, which added nearly $500 million of contract backlog at a leading-edge day rate. This contract includes a standby period where the customer will pay a day rates to keep the rig while they wait to commence their new drilling program. This new contract is a testament to the quality of our crews and operations, the capabilities of the rig and the collaborative nature of our relationship with Equinor, who have made meaningful investments in innovative safety and automation technology on the DS-17. Our priority remains maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best contract economics possible. With this in mind, we are laser-focused on filling as many uncontracted days in 2024 as we can and securing term work commencing in 2025 and beyond that will further support our expected earnings and cash flow growth. Moving to shallow water, the benign environment jackup market remains tight with marketed utilization of 93%. Several rigs from the first routing of Saudi Aramco (TADAWUL:2222) suspensions earlier this year have already made an orderly transition into the international benign environment jackup market, and leading-edge day rates are still north of $150,000 per day as evidenced by recent fixtures. The working rig count offshore Saudi Arabia is anticipated to move slightly lower going forward with up to five additional rigs expected to be suspended. In connection with the second round of suspensions, Saudi Aramco recently received notices from Saudi Aramco to suspend the drilling contracts for Valaris 147 and 148. Discussions are ongoing with Aramco, where there are other Valaris-leased rigs where our owned rigs could be subject to the suspensions instead of Valaris 147 and 148, along with the effective date for these suspensions. While we currently estimate the suspensions could adversely impact our full year 2024 EBITDA by up to $10 million, these two contracts represent just $35 million of our $4.3 billion in contract backlog. Taking a step back, the suspension of up to five additional rigs by Saudi Aramco does not change our view of the market as they represent approximately 1% of the global marketed jackup fleet. For harsh environment jackups, the supply/demand balance in the North Sea improved meaningfully in the latter half of 2023. Our rigs are fully contracted for 2024, and we currently have less than one rig year of availability across our nine active rigs in the region in 2025. We see strong customer interest for programs that line up well with this limited availability. Before I finish, I'd like to briefly comment on our capital return objectives. With positive industry fundamentals driving increasing day rates and contract durations, we're in a strong market to be adding contract backlog. As I noted earlier, we continue to make major strides on this front, which supports our earnings and cash flow growth. Looking ahead, we expect to generate meaningful and sustained free cash flow in 2025 and beyond, and we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it. Now, I'll hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our recent contracting success in our contracting outlook.
Matt Lyne: 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 both rigs for nearly all of next year and further enhancing our 2025 contract coverage in the region. In addition, we secured a one-year contract for Valaris 249 offshore Trinidad at a day rate in the high 100,000, representing a 10% increase from our previous contract award in the region. Moving now to an overview of the major markets. Starting with floaters, the contracted benign environment float account reached 127 during the first quarter, its highest point since late 2016 and remained at this level during the second quarter. Marketed utilization of 86% for the benign environment floater fleet is at its highest point in nearly a decade. The strength of the market is evident in the day rates we have seen for recent contracts, particularly for high-specification seventh-generation drillships, which comprise 12 of the 13 drillships in Valaris' fleet. Average day rates for seventh generation drillship contracts have increased from approximately $450,000 in the second half of 2023 to approximately $480,000 in the first half of 2024. And as Anton mentioned, we have seen an increasing number of fixtures above $500,000 in recent months. We continue to see a robust pipeline of opportunities for work commencing in the second half of 2025 and 2026. Looking at expected future demand and ongoing tenders, we are tracking approximately 30 floater opportunities with durations of at least one year, and the average firm duration for these opportunities is approximately 2.5 years. With the average lead-times and durations for programs extending the timing of contract awards can be hard to predict. However, we are confident that we will see a high conversion rate as tenders become contract fixtures. And we anticipate that roughly 20 of the 30 long-term opportunities that we are tracking will be awarded within the next 12 months with several expected before the end of this year. We see the greatest number of opportunities for programs offshore Africa. We are currently tracking more than a dozen opportunities, including long-term tenders for work in several countries, including Nigeria, Angola and Ghana. Taking Nigeria as an example, Rystad's forecast for deepwater CapEx through the end of the decade has more than doubled as compared to their forecast just two years ago. This increased activity is expected to be primarily driven by IOCs, and we anticipate that we may see contract awards for at least one of these ongoing tenders before the end of the year with a further two expected to follow in early 2025. Offshore Brazil, there are currently 36 floaters contracted, including four rigs that have yet to commence contracts. Petrobras now has three ongoing tenders, Hankador, Sepia and a recently issued tender for up to four rigs across multiple fields. While most of these awards are likely to go to rigs that are already in country, these work scopes will keep many rigs occupied into 2028 and 2029, showing the longevity of customer demand in Brazil. In addition, there is still potential for incremental demand through a combination of Petrobras and IOC programs. In the Gulf of Mexico, we see several long-term opportunities on the radar and expect this market to remain fairly balanced with demand largely met by existing supply in the region. Outside of the major floater markets, we see potential for incremental demand from Suriname, which given its proximity to Guyana, could become a strong growth market over the next few years. In Namibia, we anticipate that the significant exploration success over the past couple of years could lead to some long-term development programs commencing later in the decade. And we have also seen an uptick in demand in Southeast Asia with several operators looking at opportunities that could require incremental rigs in the region. Moving to shallow water. The global jackup market remains in a healthy place. The contracted rig count has increased in Southeast Asia, India, China, and West Africa over the past six months. And we have already seen at least six rigs that were suspended in Saudi Arabia earlier this year find work in other regions. We expect that the remaining suspended rigs that elect to seat work outside Saudi Arabia can be absorbed with limited impact on the broader market and the expected suspensions of up to five additional rigs in Saudi Arabia does not alter our view. In the North Sea, market conditions continue to improve with all 20 active jackups in the U.K. Danish and Dutch sectors currently contracted. During the first half of 2024, we saw an increase in the number of contracts and total number of rig years awarded as compared to the same period last year. In addition, we have seen average day rates for new fixtures in the region increased to approximately $140,000 in the first half of 2024, and from $120,000 in the second half of 2023, with leading-edge day rates continuing to push higher. Customer interest remains strong, particularly for programs commencing in the second half of 2025. We are also encouraged by the increasing number of longer-term new energy and plug and abandonment programs that could result in incremental demand in this region. In terms of our contracting priorities, we continue to have 2024 availability on just two of our 13 active floaters. DPS 5 recently completed its contract with ENI (BIT:ENI) offshore Mexico and DS-10 will complete its contract with Shell (LON:SHEL) offshore Nigeria in the coming days. We continue to see long-term opportunities for both rigs that are expected to start in the second half of 2025. And in the meantime, we are actively pursuing short-term opportunities. At the time of our last call, we were in active customer discussions for opportunities for both rigs that were expected to start in the third quarter. Subsequently, these programs have either been delayed, seen their work scopes reduced or been filled by sublets. Currently, the available short-term opportunities for these rigs commenced in the fourth quarter. DS-12 is now expected to continue its current program with BP (NYSE:BP) offshore Egypt into early next year, and the rig is well positioned for future opportunities, both offshore Africa and further afield. Given recent contracting and the expected exercise of priced options, we now anticipate that nearly 70% of 2025 available days for our active floater fleet or spoken for. Aside from the three rigs I just mentioned, the only other floaters with available days in 2025 or DS-8, which is currently working for Chevron (NYSE:CVX) in the U.S. Gulf and our two semisubmersibles in Australia. We are already in active discussions regarding follow-on work for these rigs with either the existing customer or other operators with work programs that are expected to commence next year. In addition, we continue to see customer interest in our seventh generation drillships requiring reactivation, Valaris DS-11, DS-13 and DS-14, and we expect that the growing demand will provide increasingly attractive opportunities to put these rigs to work over time. Looking at 2025 for our benign environment jackups, we have availability on the Valaris 117, 118, and 247, and we expect to secure work for these rigs that will keep them busy next year. As Anton noted, discussions regarding recent suspension notices from Saudi Aramco are ongoing. While we do not know the exact form these suspensions will take, we are in discussions with Aramco on extensions for rigs that are due to complete their existing lease terms at the end of 2024 and or early part of 2025. In terms of our North Sea jackups, as mentioned earlier, we recently secured additional work for 5 rigs in the region. With these contracts and options that we expect customers to exercise, we now see less than one year of availability across two of our active rigs during 2025. We entered 2024 with our active North Sea fleet fully sold out for the year ahead. And based on our discussions with customers, we anticipate being in a similar position before the start of 2025. In summary, we continue to focus on building contract backlog by securing attractive contracts at increasing day rates. We remain laser-focused on filling as many uncontracted days in 2024 as we can and securing term work commencing in 2025 and beyond that will further support our expected earnings and cash flow growth. I will now hand the call over to Chris to take you through the financials.
Chris Weber: 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 work in the first quarter. These items were partially offset by increased operating costs for the floater fleet due to higher utilization and cost to stack Valaris DS-13 and DS-14. Our second quarter EBITDA came in better than our guidance, primarily due to three factors; strong operating performance as we achieved 99% revenue efficiency; certain contracts, including DS-10 and DPS 5 running longer than expected; and the timing of certain costs pushing into the second half of the year, primarily the third quarter. This cost timing drove roughly half of the outperformance versus guidance and is primarily attributable to the timing of mobilizations and demobilizations and repair and maintenance spend. Moving to our financial position. We had cash and cash equivalents of $410 million at the end of the quarter. Cash declined by $99 million during the quarter, primarily due to capital expenditures of $110 million, partially offset by cash generated from operations of $12 million. In the second quarter, operating cash flow was negatively impacted by a large build in working capital, primarily due to an increase in accounts receivable driven by higher fleet utilization and the start-up of the DS-7 contract. Our $375 million revolving credit facility remains fully available, providing total liquidity of $785 million at the end of the quarter. Moving now to our third quarter outlook. We expect total revenues in the range of $610 million to $630 million. Contract drilling expense of $455 million to $465 million and G&A expense of approximately $30 million. Adjusted EBITDA is expected to be $120 million to $140 million compared to $139 million in the second quarter. EBITDA is expected to move lower due to the DPS-5 and DS-10, both being idle for the rest of the quarter after completing their latest contracts, the impact of costs that have shifted from the second quarter to the third quarter, out of service time and repair cost for jack-up Valaris 249 and the potential impact of Saudi Aramco contract suspensions for Valaris 147 and 148. These items are expected to be partially offset by a full quarter of operations for DSV, the recent commencement of the Valaris 247 contract in Australia following its mobilization from the North Sea and the DS-15 and DS-16 operating at higher day rates for a full quarter. Regarding the Valaris 249, the rig recently incurred leg damage while moving off location in advance of its next contract. We currently estimate that the rig will be out of service for several weeks to complete the required repairs and that the total financial impact inclusive of out-of-service time and repair costs will range from $5 million to $10 million. For the Valaris 247, I also want to flag that the mobilization revenue and expense associated with its move from the North Sea to Australia will be largely recognized during the third quarter because it will be amortized over the rig's initial 100-day contract, which commenced in mid-July. Total CapEx in the third quarter is expected to be $90 million to $100 million. Maintenance and upgrade CapEx is expected to be approximately $85 million, including spend related to the start of the Valaris 144 upgrade project prior to its long-term contract offshore Angola that is scheduled to commence early next year. Reactivation and associated contract-specific CapEx is expected to be approximately $10 million, primarily related to some trailing costs for DS-7. Turning to our full year outlook. We are lowering our full year EBITDA guidance range to $480 million to $540 million, with revenue in the range of $2.35 billion to $2.4 billion; contract drilling expense of approximately $1.75 billion and G&A expense of approximately $115 million. We have updated the EBITDA guidance range, primarily due to the current outlook for the DS-10 and DPS-5 in the second half of the year. As Matt mentioned, the current available opportunities for short-term gap fill work are now starting during the fourth quarter, and this reduces our 2024 EBITDA potential. We need to secure work for one or both of the rigs in the fourth quarter to achieve the midpoint of the updated EBITDA range. Our guidance also reflects the expected financial impact of the Valaris 249 leg damage I previously discussed as well as the potential impact of Saudi Aramco contract suspensions for Valaris 147 and 148, which, as Anton mentioned, could be up to $10 million this year. Full year 2024 capital expenditures are expected to total $450 million to $480 million. This is slightly higher than our prior guidance, primarily due to certain project-related costs being capitalized that were previously expected to be deferred expense. As a reminder, we expect that approximately $55 million of our full year 2024 CapEx will be reimbursed through upfront customer payments, most of which is expected to be received in the second half of the year. Finally, we expect our free cash flow profile to improve in the second half of the year, driven by higher utilization in day rates and lower spend on reactivations and contract preparations. I want to conclude by stepping back and noting that we've had a great first half of the year. And while there are a few discrete items that are impacting our results in the second half of the year, we are excited about the future and the outlook for our business remains very strong. And now I'll hand the call back to Anton for some closing remarks.
Anton Dibowitz: 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.
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Greg Lewis with BTIG. Please go ahead.
Greg Lewis: 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?
Anton Dibowitz: 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.
Greg Lewis: 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?
Anton Dibowitz: 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.
Greg Lewis: Perfect. Thank you very much for the time.
Operator: The next question comes from Eddie Kim with Barclays (LON:BARC). Please go ahead.
Eddie Kim: 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?
Anton Dibowitz: 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.
Eddie Kim: 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?
Anton Dibowitz: 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.
Matt Lyne: 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.
Eddie Kim: Understood. Thanks for that color. I'll turn it back.
Operator: The next question comes from Kurt Hallead with Benchmark. Please go ahead.
Kurt Hallead: Hey, good morning everybody. Thanks so much for the color.
Anton Dibowitz: Good morning, Kurt.
Matt Lyne: Hey, Kurt.
Kurt Hallead: 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?
Matt Lyne: 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.
Anton Dibowitz: 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.
Kurt Hallead: 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?
Anton Dibowitz: 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.
Kurt Hallead: 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?
Anton Dibowitz: 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.
Kurt Hallead: All right. Appreciate it. Thank you.
Anton Dibowitz: Thank you, Kurt.
Operator: The next question comes from David Smith with Pickering Energy Partners. Please go ahead.
David Smith: Hi. Good morning.
Anton Dibowitz: Good morning, Dave.
David Smith: 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.
Matt Lyne: 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.
David Smith: 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?
Anton Dibowitz: 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.
David Smith: Really appreciate the color. Thank you.
Anton Dibowitz: Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Nick Georgas for any closing remarks.
Nick Georgas: Thanks, Drew, and thank you to everyone on today's call for your interest in Valaris. We look forward to--
Operator: Just one moment. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.