Valaris gets $200 million payment in Samsung Heavy arbitration, secures more rig work
Offshore drilling contractor Valaris has received a $200 million payment following the conclusion of arbitration proceedings with Samsung Heavy and has secured new contracts for its rig fleet, adding $100 million to its contract backlog.
Valaris said earlier this week that it had received a $200 million cash payment upon the conclusion of previously disclosed arbitration proceedings with the South Korean shipbuilder Samsung Heavy Industries.
Tom Burke, President and Chief Executive Officer, said, “We continue to make tremendous progress on several fronts. Most notably, we concluded arbitration proceedings against Samsung Heavy Industries and have received a $200 million cash payment that immediately bolsters the company’s financial position.
“We also won new contracts and extensions for our rig fleet over the past month that have added approximately $100 million of contracted revenue backlog and will benefit our future operating cash flows.
“Further, we recently announced plans for at least $100 million of annual run rate cost savings that are incremental to $165 million of targeted merger synergies, which we are well on our way to realizing. We will continue to take decisive actions to achieve sustainable success and drive value for Valaris shareholders.”
Valaris said that an arbitration tribunal had awarded the company $180 million in damages, in addition to the right to claim interest and costs, in relation to proceedings the company brought against Samsung Heavy Industries (SHI) for losses incurred in connection with the DS-5 drilling services agreement with Petrobras. The English High Court recently denied the parties’ applications for leave to appeal the tribunal’s $180 million damages award.
Following this decision, the parties reached an agreement and SHI has paid Valaris $200 million in cash. This payment, along with the previously disclosed settlement and normalization of its business relationship with Petrobras, concludes the company’s dispute surrounding the DS-5 drillship.
Valaris has also continued winning new work for its rig fleet, as new contracts and contract extensions with associated revenue backlog of approximately $100 million have been awarded to the company since its last contracting update in November 2019.
The contract for the Valaris DS-10 drillship has been extended due to the exercise of a one-year priced option with Shell offshore Nigeria from March 2020 to March 2021.
The contract for the Valaris JU-107 has been extended due to the exercise of a one-well priced option with Chevron offshore Australia, with an estimated duration of 30 days from late February 2020 to late March 2020. The rig has also been awarded a two-well contract with Jadestone Energy offshore Australia, with an estimated duration of 115 days from June 2020 to September 2020.
Valaris JU-101 jack-up has been awarded a three-well contract with Ithaca Energy in the North Sea that is expected to start in March 2020, with an estimated duration of 45 days.
Valaris JU-75 jack-up has been awarded a one-well contract with Walter Oil & Gas in the U.S. Gulf of Mexico, which started in late December 2019, with an estimated duration of 40 days.
Cost savings plans
Valaris is targeting at least $100 million of incremental annual operating cost savings beyond expected synergies resulting from the company’s merger earlier this year. By leveraging its enhanced scale, Valaris expects to achieve these savings through further procurement and supply chain improvements, process and compensation standardization, and other organizational optimization. In combination with merger synergies, these initiatives are expected to generate more than $265 million of operating cost savings on an annual run rate basis as compared to pre-merger levels.
As of December, 31, 2019, the company expects to have achieved approximately $135 million of these annual run rate operating cost savings. The company anticipates that these run rate savings will increase to approximately $235 million by the end of 2020, and more than $265 million by the end of the second quarter of 2021. These cost reductions are expected to lower both contract drilling and general and administrative expense on an ongoing basis, providing a sustainable benefit to operating cash flow going forward.