Valaris: As four rigs land new jobs, all roads lead to ‘strong and sustained upcycle’ in offshore drilling
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Offshore drilling contractor Valaris has won new contracts for two floaters and two jack-ups in its rig fleet, which will enable it to carry out operations in West Africa, the U.S. Gulf of Mexico, and Australia. The rig owner, which recorded a strong performance during the second quarter of 2023 amid growing rig demand and tight supply, is anticipating a further rise in profit, thanks to the current boom in the offshore drilling market.
The tightening of the offshore drilling market fundamentals became more pronounced over the past few months, as oil and gas operators book rigs considerably in advance of their planned drilling campaigns to secure rig slots while also handing out long-term contracts to ensure availability amid rising rig demand. This offshore drilling upcycle, which is seen as a breath of fresh air after the downturn in 2014, is expected to be a multi-year one according to Valaris and its peers: Transocean, Borr Drilling, Shelf Drilling, Diamond Offshore, Noble, Seadrill, Vantage Drilling, and Dolphin Drilling.
Within its latest fleet status report on Wednesday, 2 August 2023, Valaris disclosed a series of new contract awards for its rig fleet, which were obtained after its previous fleet status report from May 2023, when the firm revealed contracts and extensions with an associated contract backlog of approximately $820 million, which increased the offshore drilling player’s total contract backlog to $2.8 billion.
Floaters going to West Africa and Gulf of Mexico
Valaris confirmed a 12-well contract offshore West Africa for the Valaris DS-7 drillship. The rig will need to be reactivated for this contract, as it is currently stacked in Spain. The contract with a total value of around $364 million, which is expected to begin in the second quarter of 2024, has an estimated duration of 850 days. The rig owner underlines that this deal requires minimal customer-specific upgrades to the rig and does not include the provision of any additional services.
The 2013-built Valaris DS-7 drillship is of the Samsung 96K design and can accommodate 200 people. It was constructed at Samsung Heavy Industries in Geoje, South Korea. This rig is capable of operating in a water depth of up to 10,000 ft and its maximum drilling depth is 40,000 ft.
The offshore drilling contractor also announced two deals for its Valaris DPS-5 semi-submersible rig in the U.S. Gulf of Mexico. The first contract is a two-well assignment with Anadarko Petroleum Corporation, a wholly-owned subsidiary of Occidental. It is expected to commence in August 2023 and has a minimum duration of 60 days. The second contract for this rig is a nine-well gig with Apache for a plug and abandonment campaign, which is expected to start in October 2023. It has a minimum duration of 110 days.
This rig worked for Eni until July 2023, as the oil major hired it on a three-well contract in 2022 for operations in Mexico. The rig started drilling Yatzil-1 well in February 2023, which resulted in an oil discovery estimated to contain around 200 million barrels of oil in place. The 2012-built DPS-5 rig, previously known as ENSCO 8505 from the 8500 Series, can accommodate 150 people.
Jack-ups get work in Australia
Moreover, two contracts have been awarded for the Valaris 107 heavy-duty modern jack-up rig in Australia. The first one is a 180-day (minimum duration) deal with an undisclosed operator, which is slated to begin in the first quarter of 2024 and the operating day rate is $150,000. The second contract is a one-year deal with Esso Australia, a subsidiary of ExxonMobil, and is expected to start in October 2024.
This jack-up rig has multiple jobs lined up and one of the most recent ones is a 70-day contract with Beach Energy for work offshore New Zealand, which is due to commence in the third quarter of 2023 and last from August until December 2023. The 2006-built Valaris 107 jack-up rig is of KFELS MOD V – Class B design. It can accommodate 112 people. The rig’s maximum drilling depth is 30,000 ft.
In addition, a two-well contract with an undisclosed Australian operator was awarded for the Valaris 247 heavy-duty ultra-harsh environment jack-up rig. This deal is expected to start in early to mid-2024 and has an estimated duration of 100 days. The operating day rate is $180,000 and Valaris will receive a mobilisation and demobilisation fee that covers operating costs while the rig is in transit.
At the start of the year, in January 2023, a 180-day contract was inked with Perenco in the UK North Sea for this jack-up rig. The contract was scheduled to start in March 2023 and comes with one 60-day option. It is expected to end in November 2023. The Valaris 247 rig can accommodate 140 people and its maximum drilling depth is 35,000 ft.
Backlog boost of around $180 million
Valaris also reported the results for the second quarter of 2023, highlighting new contracts and extensions with an associated contract backlog of about $180 million. This brings the firm’s total contract backlog to $3 billion. The firm’s net loss was $27.3 million in 2Q 2023, compared to net income of $49 million in the first quarter of 2023.
The offshore drilling player’s adjusted EBITDA decreased to $15 million in 2Q 2023 from $29 million in the first quarter of 2023, primarily due to higher reactivation expenses. In line with this, the company’s adjusted EBITDAR increased to $59 million during the second quarter of 2023 from $55 million in 1Q 2023 for the same reason.
Furthermore, Valaris’ total fleet utilisation was 65 per cent during 2Q 2023, compared to 68 per cent for 1Q 2023 and 64 per cent in 2Q 2022. The firm also delivered revenue efficiency of 97 per cent in 2Q 2023, compared to 99 per cent in the first quarter of 2023 and 97 per cent in 2Q 2022. The rig owner also published its 2022 Sustainability Report in April 2023, announcing a Scope 1 carbon emissions intensity reduction target by 2030.
The company claims that its revenues decreased to $415 million in 2Q 2023 from $430 million in the first quarter of 2023. However, excluding reimbursable items, revenues decreased to $390 million from $408 million in the first quarter, primarily due to fewer operating days for the jack-up fleet and lower mobilisation and demobilisation revenues, partially offset by an increase in the average day rate for both floaters and jack-ups.
Valaris’ contract drilling expense decreased to $374 million in 2Q 2023 from $377 million in the first quarter 2023 while contract drilling expense decreased to $348 million – excluding reimbursable items – from $356 million in the first quarter primarily due to lower costs for rigs that were idle or between contracts in the second quarter, and lower repair and maintenance costs associated with special periodic surveys and contract preparation work. These were partially offset by higher reactivation costs, which increased to $44 million from $26 million.
The company explains that its depreciation expense increased to $25 million during the quarter from $23 million in the first quarter of 2023 while general and administrative expenses jumped to $26 million from $24 million in the first quarter of 2023, primarily due to higher personnel costs.
The firm’s other income decreased to $7 million in 2Q 2023 from $13 million in the first quarter of 2023, primarily due to a $29 million loss recognized on the extinguishment of the senior secured first lien notes due 2028 and a $6 million increase in interest expense associated with the refinancing transaction. These were partially offset by a $27 million pre-tax gain recognized in the second quarter on the sale of the Valaris 54 rig.
Anton Dibowitz, Valaris’ President and Chief Executive Officer, commented: “Our outlook for the industry and our business remains very positive, with increasing demand and constrained supply tightening the market. We continue to see increases in contract duration, lead times and day rates, all of which point towards a strong and sustained upcycle. Our earnings and cash flow should grow meaningfully over the next few years as rigs roll from legacy day rate contracts to higher market rates and reactivated rigs return to work on attractive contracts.
“Moving forward, we will continue to be disciplined in exercising our operational leverage and laser-focused on maximising long-term shareholder value. This includes our commitment to returning capital to shareholders, as demonstrated by our recently announced increase in our 2023 share repurchase target from $150 million to $200 million.”
The offshore drilling contractor’s tax expense was $25 million in 2Q 2023, compared to a tax benefit of $28 million in the first quarter of 2023. The second quarter tax provision included $6 million of discrete tax expense and the first quarter tax provision included $44 million of discrete tax benefit, primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Tax expense, adjusted for discrete items, rose to $18 million from $16 million in the first quarter.
The rig owner’s cash and cash equivalents and restricted cash decreased to $805 million as of 30 June 2023 from $844 million as of 31 March 2023, primarily due to payments for share repurchases, net capital expenditures and an increase in working capital, partially offset by net proceeds from the refinancing transaction completed during the quarter.
On the other hand, capital expenditures increased to $71 million in 2Q 2023 from $56 million in the first quarter of 2023, primarily due to an increase in fleetwide maintenance capital expenditures and reactivation capital expenditures associated with the Valaris DS-8 drillship.
How did floaters do?
According to Valaris, its floater revenues, which increased to $227 million in 2Q 2023 from $215 million in the first quarter 2023, actually increased to $216 million in the quarter – excluding reimbursable items – from $207 million in the previous quarter, primarily due to more operating days and a higher average day rate for the Valaris DS-12 drillship, which started a new contract in the second quarter after spending part of the first quarter mobilising from Mauritania to Angola.
The rig owner’s contract drilling expense, which went up to $196 million in 2Q 2023 from $175 million in the first quarter of 2023, increased to $185 million – excluding reimbursable items – from $166 million in the first quarter. The increase was primarily due to higher reactivation costs, which increased to $44 million from $26 million in the first quarter due to the commencement of a reactivation project for the Valaris DS-8 rig ahead of a three-year contract offshore Brazil. This was partially offset by lower reactivation expense for the Valaris DS-17 drillship, which is expected to kick off operations offshore Brazil this month.
What’s up with jack-ups?
The offshore drilling player elaborated that its jack-up revenues decreased to $145 million in 2Q 2023 from $170 million in the first quarter of 2023. Excluding reimbursable items, these revenues decreased to $136 million from $162 million in the first quarter, primarily due to fewer operating days and lower mobilisation and demobilisation revenues for the Valaris 249 rig, which completed its contract offshore New Zealand late in the first quarter and was mobilising to its next contract offshore Trinidad during the second quarter.
Additionally, the 40-year-old Valaris 54 standard duty legacy jack-up rig was sold for $28.5 million, following the completion of its contract late in the first quarter. The 1982-built rig can accommodate 96 people and its maximum drilling depth is 25,000 ft. Meanwhile, the Valaris 108 rig was idle for most of the second quarter undergoing contract preparation work ahead of a three-year bareboat charter with ARO Drilling. This was partially offset by more operating days for the Valaris 115 and 247 rigs as both began new contracts after idle periods.
The company’s contract drilling expense decreased to $124 million in 2Q 2023 from $149 million in the first quarter of 2023 while excluding reimbursable items, contract drilling expense decreased to $114 million from $142 million in 1Q 2023. This was primarily due to lower costs for the Valaris 249 rig – as its operating costs were deferred during its mobilisation from New Zealand to Trinidad – lower costs for the Valaris Viking rig – due to it being preservation stacked in the first quarter – and lower costs associated with special periodic surveys and contract preparations for certain rigs.
How did ARO Drilling fare?
Valaris emphasised that revenues decreased to $118 million in 2Q 2023 from $124 million in the first quarter of 2023, primarily due to an increase in out-of-service time related to planned maintenance on certain rigs. In contrast, the contract drilling expense increased to $95 million in the second quarter of 2023 from $91 million in 1Q 2023, primarily due to higher repair costs associated with the planned maintenance.
Are there any changes on the stacked rigs list?
While Valaris had two drillships stacked in Spain in May, this has now changed and only one rig is still stacked. This is the 2013-built Valaris DS-11 of the DSME 12000 design. The rig owner still has two stacked semi-submersible rigs in the U.S. Gulf of Mexico: the 2012-built Valaris DPS-6 of the ENSCO 8500 Series design and the 2010-built Valaris DPS-3 rig.
Meanwhile, a heavy-duty ultra-harsh environment jack-up rig – the 2010-built Valaris Viking of the KFELS N Class design – is also still stacked in the UK, just like another heavy-duty harsh environment jack-up rig – the 2002-built Valaris 102 of the KFELS MOD V-A design – which is stacked in the U.S. Gulf of Mexico.
Three heavy-duty modern jack-up rigs – the 2003-built Valaris 111 of the KFELS MOD V-B design, the 2008-built Valaris 109 of the KFELS MOD V-Super B design, and the 2002-built Valaris 104 of the KFELS MOD V-B design – are stacked in Croatia, Namibia and the UAE, respectively.
Aside from these, two standard-duty modern jack-up rigs – the 1999-built Valaris 75 of the LT Super 116-C design and the 2010-built Valaris 145 of the LT Super 116-E design – are stacked in the U.S. Gulf of Mexico.
Rig fleet expansion on the cards
Valaris also has the option to purchase two drillships – Valaris DS-13 and Valaris DS-14 – by the end of the year from a shipyard in South Korea. Back in March 2021, the offshore drilling contractor reached an agreement with Daewoo Shipbuilding & Marine Engineering (DSME) to amend its two newbuild drillship contracts to delay the delivery of the rigs.
Both of these drillships are of the DSME 12000 design. The final payments for the Valaris DS-13 and Valaris DS-14 are estimated to be approximately $119 million and $218 million, respectively, assuming a 31 December 2023 delivery.
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