Valaris anticipates ‘meaningfully’ higher profits in next two years, as rig market tightens further
Offshore drilling contractor Valaris has recorded a strong operational and financial performance during the third quarter of 2023, thanks to a rise in rig demand and day rates. The rig owner’s outlook for the offshore drilling market over the next two years remains bullish with further improvements in fleet utilization and day rates on the horizon.
The forecasts for the ongoing offshore drilling market upcycle, connected to the rise in the search for more hydrocarbons which is prompted by energy security concerns, indicate a multi-year boom in rig demand and tight supply, enabling rig owners to reap the benefits. This is already visible within the recent quarterly results released by Valaris and its peers: Diamond Offshore, Transocean, and Noble.
Valaris’ net income was $17 million in 3Q 2023, compared to a net loss of $27 million in the second quarter of 2023. The firm’s adjusted EBITDA increased to $40 million during the third quarter of 2023 from $15 million in 2Q 2023, primarily due to two jack-ups and one floater starting contracts during the quarter after not working in the second quarter, as well as an increase in average daily revenue for both the floater and jack-up fleets. This was partially offset by higher reactivation expenses and an increase in unplanned downtime related to several floaters. In line with this, the adjusted EBITDAR increased to $91 million in 3Q 2023 from $59 million in the second quarter.
The offshore drilling player’s revenues increased to $455 million in 3Q 2023 from $415 million in the second quarter of 2023. Excluding reimbursable items, revenues increased to $427 million from $388 million in 2Q 2023. The company’s contract drilling expense increased to $391 million in 3Q 2023 from $374 million in 2Q 2023. The contract drilling expense increased to $369 million during the third quarter of 2023, excluding reimbursable items, compared to $348 million in the second quarter of 2023.
According to the offshore drilling giant, the cash and cash equivalents and restricted cash increased to $1.1 billion as of September 30, 2023, from $805 million as of June 30, 2023, primarily due to the issuance of $400 million of additional 8.375% senior secured second lien notes due 2030, partially offset by capital expenditures and share repurchases. The net proceeds from this issuance are intended to fund the purchase of the Valaris DS-13 and DS-14 drillships and for general corporate purposes.
In addition, the firm’s capital expenditures rose to $106 million in 3Q 2023 from $71 million in 2Q 2023, primarily due to an increase in reactivation and customer-specific capital expenditures associated with the Valaris DS-17, DS-8, and DS-7 drillships. Valaris’ total fleet utilization was 57% during 3Q 2023, compared to 56% for 2Q 2023 and 62% in 3Q 2022. The firm also delivered revenue efficiency of 94% in 3Q 2023, compared to 97% in 2Q 2023 and 96% in 3Q 2022.
Anton Dibowitz, Valaris’ President and Chief Executive Officer, commented: “We are pleased that Valaris DS-17 commenced its contract offshore Brazil during the quarter and expect that it will contribute meaningful earnings and cash flow going forward. While our floater revenue efficiency for the quarter was below our expectations, our year-to-date fleetwide revenue efficiency remains strong at 97%, and we remain committed to delivering safe and efficient operations.
“During the third quarter, we were awarded new contracts and extensions with associated contract backlog of approximately $465 million. Our long-term contract for Valaris DS-7 was the seventh contract awarded to our previously stacked floaters since mid-2021. Following this reactivation we will have 10 drillships working and will remain disciplined in exercising our operational leverage with only one stacked drillship and two newbuild drillship options remaining.”
What happened with floaters?
Based on Valaris’ results, the firm’s floater revenues, which increased to $243 million in 3Q 2023 from $227 million in 2Q 2023, actually rose to $232 million in the quarter, excluding reimbursable items, from $216 million in the second quarter. The increase was primarily due to Valaris DS-17 embarking on its contract with Equinor offshore Brazil in early September, following its reactivation, as well as an increase in average daily revenue for the rest of the floater fleet during the third quarter. These benefits were partially offset by fewer operating days for several floaters primarily due to unplanned downtime events.
The company’s contract drilling expense increased to $215 million in 3Q 2023 for floaters, compared to $196 million in the second quarter of 2023. Excluding reimbursable items, the contract drilling expense increased to $206 million from $185 million in 2Q 2023, primarily due to higher reactivation expense associated with Valaris DS-7 following a contract award in July for which the rig is being reactivated and Valaris DS-17 commencing a contract in early September.
How did jack-ups fare?
The offshore drilling player elaborated that its jack-up revenues increased to $166 million in 3Q 2023 from $145 million in 2Q 2023. However, revenues increased to $155 million in the quarter – excluding reimbursable items – from $135 million in the second quarter, primarily due to more operating days and an increase in average daily revenue. The company underlines that the revenues from the jack-up fleet benefited from contract startups for Valaris 121 and 249, as well as several rigs beginning new contracts at higher day rates.
The company’s contract drilling expense decreased to $122 million in 3Q 2023 from $124 million in the second quarter of 2023. Excluding reimbursable items, contract drilling expense of $114 million was in line with the second quarter. Valaris noted that lower repair and maintenance costs across the fleet and lower costs resulting from the sale of Valaris 54 were offset by higher operating costs for Valaris 249, which kicked off a contract offshore Trinidad during the quarter after mobilizing from New Zealand during the second quarter.
What’s up with ARO Drilling?
Valaris explained that revenues increased to $122 million during 3Q 2023 from $118 million in the second quarter of 2023, driven by more operating days resulting from less out-of-service time for planned maintenance during the third quarter. On the other hand, the contract drilling expense decreased to $92 million in 3Q 2023 from $95 million in the second quarter, primarily due to lower repair costs associated with the previously mentioned planned maintenance.
Within its latest fleet status report from last week, Valaris disclosed a series of new contract awards and extensions for its rig fleet, with an associated contract backlog of about $480 million, excluding lump sum payments such as mobilization fees and capital reimbursements, pushing the company’s total contract backlog to $3.2 billion.
These new contracts and extensions for four floaters and five jack-ups in the firm’s rig fleet were secured with TotalEnergies, Petrobras, ExxonMobil, Eni, BP, TAQA, and Perenco, enabling the rig owner to carry out operations in Brazil, Angola, Mexico, Trinidad, Indonesia, the Netherlands, and the UK.
“The outlook for Valaris is positive, with increasing demand and constrained supply tightening the market. We are confident in the strength and duration of this upcycle, and we expect to deliver meaningfully improved earnings in both 2024 and 2025 due to the impact of recent and ongoing drillship reactivations at attractive day rates, as well as the repricing of rigs from legacy day rate contracts to higher markets rates,” concluded Dibowitz.
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