Valaris plc (NYSE:VAL) Q4 2019 Earnings Conference Call February 21, 2020 10:00 AM ET

Company Participants

Nick Georgas – Vice President-Investor Relations and Corporate Communications

Tom Burke – President and Chief Executive Officer

Jon Baksht – Executive Vice President and Chief Financial Officer

Conference Call Participants

James West – Evercore ISI

Ian MacPherson – Simmons

Sean Meakim – JPMorgan

Greg Lewis – BTIG

Connor Lynagh – Morgan Stanley


Good day everyone and welcome to Valaris plc’s Fourth Quarter and Full Year 2019 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

I will now like to turn the call over to Mr. Nick Georgas, Vice President of Investor Relations and Corporate Communications, who will moderate the call today. Please go ahead, sir.

Nick Georgas

Welcome everyone to the Valaris fourth quarter and full year 2019 conference call. With me today are President and CEO, Tom Burke; Executive Vice President and CFO, Jon Baksht; and other members of our executive management team.

We issued our press release which is available on our website at 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. As a reminder, we issued our most recent Fleet Status Report, which provides details on contracts across our rig fleet on February 13. An updated investor presentation is also available on our website.

Now, let me turn the call over to Tom Burke, President and CEO.

Tom Burke

Thanks, Nick, and good morning everyone. Welcome to the call and thank you for your interest in Valaris. During today’s call, I will briefly discuss the fourth quarter and full year 2019 highlights. I will provide an update on the company’s four main priorities and then I will review the broader market conditions for offshore rigs. Following my comments, I will hand the call over to Jon for his prepared remarks.

In terms of our financial results to the fourth quarter, we reported adjusted EBITDA of $22 million. These results benefited from strong operational utilization, which measures our effectiveness in keeping contracted rigs on rate. For the fourth quarter of 2019, our operational utilization was 97% for floaters and 99% for jackups.

For full year 2019, operational utilization across the fleet was 98% demonstrating our employees’ execution focus throughout the year. We also ended the year on a strong note from a safety perspective, closing 2019 with a total recordable incident rate, an industry metric used to benchmark safety performance of 0.28, 30% better than the industry average.

I will discuss our integration progress in a moment in more detail, but mergers between global companies can be challenging and do come with an amount of change and associated distraction for employees and our merger was no different. Therefore, while these results would be robust under normal circumstances, they are particularly impressive given that we closed the merger and completed a substantial amount of our integration work plan during 2019.

I want to recognize the professionalism and dedication that our employees exhibited last year and continue to show every day. Our workforce has remained focus on delivering safe and reliable operations to our customers and I thank them for that tireless efforts. I would also like to acknowledge our commercial team, which added $1.8 billion of revenue backlog during the year, a performance that led all offshore drillers in 2019. We have continued this positive momentum by adding more backlogs since the start of 2020 and we were also engaged in advanced discussions with customers for additional contracts that will help us further bolster our backlog.

This contracting success is a testament to the value our offshore crews and our onshore personnel provide to customers with our services. The quality of our rig fleet and the customer relationships we have forged over time. Our efforts have been aided by being a larger, more diverse company following last year’s merger, and I expect that we will continue to benefit from our enhanced position as a key offshore service provider going forward.

When we closed the merger nearly one year ago, I laid out four main priorities for the company. As a reminder, these priorities are integration and synergy capture, delivering value from ARO Drilling, managing our balance sheet and fleet management, which includes our contracting activities.

Starting with integration and synergies, we’ve made significant headway in executing our plans and delivering on our commitments from the combination. The focus of our integration plan was to merge the two legacy companies with minimal disruptions to the business while achieving $165 million of combinational synergies. We have now completed more than 80% of our onshore merger activities and are roughly halfway through our rig-based integration. We’ve reached 80% of our initial synergy target with an annual run rate synergy capture of approximately $135 million at the end of 2019.

This is a significant accomplishment, and I would like to thank our employees for their hard work in achieving these milestones. Well, we still have some more work to do to complete the original integration plan. We have recently turned our attention to making Valaris more effective as an organization. Synergies from increased scale and scope of operations were key to the merger’s rationale. And I am intent on delivering on this with Valaris being the industry cost leader.

To this end, we’ve kicked off the next phase in our company’s integration plan. The essence of this next step is to improve performance and build organizational capabilities while some changes will be driven top-down, my experience has been that impairing our workforce to drive inefficiencies out of the company will have a strong financial impact and be better for employee engagement.

Through this process, we will also make Valaris more agile and responsive as an organization, which will help us to truly harness the company’s potential. As a result of this next phase of the integration, as we announced late last year, we now expect to achieve additional cost savings that will exceed $100 million on an annual run rate basis by mid-2021. Combined with the initially targeted merger synergies, these additional savings were resulting in capturing cost savings or recurring EBITDA improvements of at least $265 million per year as compared to pre-merger levels.

Frankly, we are focused internally on pushing for an even higher level of value capture. Our second priority is ARO Drilling, our 50-50 joint venture with Saudi Aramco, which owns and operates offshore drilling rigs for the largest customer for jackups in the world. During the fourth quarter, ARO Drilling’s operating fleet expanded with the addition of two Valaris jackcups to its leased fleet.

In total, ARO Drilling is now operating a fleet of 16 jackups, seven of which are owned by ARO and the other nine of which are at least from Valaris. The most meaningful driver of ARO Drilling’s long-term value creation is through its newbuild construction program and ARO Drilling recently reached an important milestone, where this order of its first two newbuild rigs in January of this year.

Upon delivery, each rig is expected to commence an eight-year contract with Saudi Aramco with operating day rates that effectively pay back the rig construction costs in the first six years of these contracts. The total cost of each newbuild fully compliant to Saudi Aramco technical specifications is expected to be approximately $175 million with ARO Drilling funding the shipyard takeout payment with cash or third-party financing. Both rigs are expected to be delivered in the first half of 2022.

After completing these initial eight-year contracts each rig will receive an additional eight-year contract, provided it meets certain technical requirements and a preference for new contracts working for Saudi Aramco thereafter. These initial newbuild contracts were an important first step in the larger program that we’ll see ARO Drilling grow its fleet through the construction of 20 new jackups over the next decade. This newbuild program is expected to provide visible fleet and cash flow growth for ARO Drilling and its shareholders in the years to come. And we look forward to working alongside ARO Drilling and Saudi Aramco on this important program, so that we will deliver long-term value potential of this strategic partnership.

Moving now to another of our priorities, which is balance sheet management. This priority continues to be an area of focus from Valaris’ Board of Directors and Management. To this end, the Valaris board recently formed a finance committee to assist in its oversight of the company’s capital structure and its financial strategies. This finance committee includes three new directors that were recently appointed to the Board. each of these directors augments the Board’s oversight capabilities by virtue of their experience in equity and debt capital markets, risk management and governance, which is enormously helpful as we consider our next financial steps. Jon will provide additional color on this priority in his prepared remarks.

The last of these priorities is fleet management and contracting. As I have discussed previously, we utilized a portfolio approach to guide our decision-making on contracting, reactivations and asset retirements. As I detailed last quarter, we categorized our 26 floating rigs into three main groups. Those modern floaters we are working or intend on working, those modern floaters that we are actively holding of the market for now and other non-core floaters.

We have 15 floaters in the first group of rigs that are working or we intend on working including 10 drillships and five semisubs. With these assets, our focus is on winning new contracts that generate cash for the company and actively managing costs for these rigs during uncontracted periods. We have had recent successes securing work for this group of rigs with more than 1,300 days of backlog added since our last conference call.

We have now contracted 55% of the 2020 available days for this group of rigs, and there are options in place that if all are exercised, would contract another 30% of 2020s availability. While these recent contracting wins have helped to partially derisk our 2020 outlook. We have just 10% of the 2021 availability and none of the 2022 availability for these floaters contracted as of today, and we intend to capitalize on the improving industry dynamics as we secure additional backlog to further derisk the outlook, in line with our portfolio approach.

Within the second group of floaters, we have 10 rigs. This includes two warm stacked drillships, two newbuilds in Korea, two preservation stacked drillships, and four preservation stacked 8,500 series semisubs. In terms of prioritization, these assets fall behind the first group of rigs I just mentioned in the contracting queue, and we’re holding these at a lower stated readiness, which reduces our costs. Given the queue I just mentioned, we are marketing these rigs on a limited basis and would need to be compensated for putting a rig from this second group to work and for the contracts to be cash accretive for us to do so.

The third group contains older floaters and following the sale of the VALARIS 5006 and VALARIS 6002, we now have just one such rig VALARIS 5004 that remains in our fleet. With these recent retirements from our fleet, Valaris and its predecessor companies have now retired 16 floaters, including two drillships and 14 semisubs from the global supply since the beginning of 2015. As a result of these efforts to rationalize our fleet, we’ve narrowed our focus to only the most modern drillships and semisubs that are better suited to meet the highly technical needs of customers going forward. This strategic emphasis also allows us to concentrate our organizational efforts on the core floating rigs in our fleet, improving our ability to capitalize on future demand for offshore services.

We take a similar approach to fleet management and contracting with our jackups and are also focused on capitalizing on improving market conditions as we add backlog for our actively marketed shallow-water rigs. While we have better contract coverage for our jackup fleet with approximately 75% of 2020 and 50% of 2021, available days for marketed jackups already contracted. We do not plan to reactivate jackups that we are holding off the market until we secure further backlog and cost to reactivate the rigs can be recouped through the contract award. But the market conditions in the jackup market are closer to this inflection point and we may consider reactivating an idle jackup later this year or in 2021, for the right contract opportunity.

We also continue to take appropriate action when it comes to retiring jackups from the global drilling supply. To this end, we recently sold the VALARIS JU-68 and JU-96 for salvage value and are now holding VALARIS JU-70 for sale. since the beginning of 2015, we’ve retired 21 jackups from the fleet and expect the VALARIS JU-70 will soon join these rigs. We will continue to evaluate our legacy jackups and may retire more rigs in the quarters to come.

Now, let me shift to a broader discussion of market conditions that affect our industry and more specific commentary on the offshore drilling sector. From an industry standpoint, recent concerns over slowing global growth have resulted in lower expectations for hydrocarbon demand in the near-term. on the supply side, discussions of further reductions in all supplies from the OPEC+ group in response to lower levels of demand, has yet to result in action that would better balance supply and demand.

Expectations of slowing supply growth from the U.S. shale was somewhat tempered to begin the year given a month-on-month increase in permitting applications in January. These factors collectively have led to continued volatility in commodity prices that, in turn, impact market expectations for future demand for offshore drilling services. Many integrated energy companies continue to discuss the relative attractiveness of offshore projects given improved economics. However, highly sustained commodity prices are necessary for operating cash flows to cover their CapEx and capital returns programs.

Despite the recent commodity price volatility, customer demand has remained steady over the past several months and to-date, we’ve not seen a pull back from customers in response to lower commodity prices with market conditions continuing to gradually improved as evidenced by increased utilization for the global fleet.

For old floaters, total utilization has increased to 67% from 62% a year ago. This improvement was driven by a 15% increase in the average contract – floater contract length during 2019, which led to a corresponding increase in the number of rig years awarded as compared to the prior year. With higher utilization during 2019, day rates for new floater contracts moved off cyclical lows of break even or even slightly margin dilutive contracts to levels that generate cash margins that are rig level. However, the average length of new floater contracts signed in 2019 was just nine – was just eight months and longer contract durations are needed to help further tighten the market.

to this end, we’re currently tracking more than 20 floater opportunities with durations of at least six months and have a work that’s expected to begin in either 2020 or 2021. roughly, half of these opportunities came about during the fourth quarter and the average duration for these contracts were approximately one and a half years. So, seeing these opportunities convert to firm orders could help to meaningfully increase new contract durations for floaters in 2020.

Focusing on the drillship market, higher specification assets delivered since 2013 with two blowout preventers and two and a half million low-part derricks continue to be preferred by customers. utilization for these higher specification rigs stands at 82% versus just 61% for the remaining drillships in the global fleet. These higher specification drillships are particularly well-suited for longer-term deep water programs and we expect several multi-year opportunities with work commencing in either 2020 or 2021 will be awarded to these types of rigs given customer preference for their superior technical capabilities.

Our drillship fleet includes 11 of these higher specification assets, including newbuilds VALARIS DS-13 and DS-14 and it’s well-positioned to compete for these opportunities. Since our most recent conference call, we have been awarded new contracts or extensions for six of our drillships, VALARIS DS-15 and VALARIS DS-18 in the Gulf of Mexico, VALARIS DS-9 offshore Brazil, VALARIS DS-12 offshore Egypt and VALARIS DS-10 and DS-7 offshore West Africa.

Moving now to the benign environment semi-submarket, we saw an increase in the number of opportunities that require either a MOD or dynamically positioned semisubmersible during the fourth quarter. However, in contrast to drillships, these new semi opportunities were relatively short-term with an average duration of just six months. Why it needs for these opportunities could vary greatly. Having a versatile semi fleet with modern technology that can meet these unique requirements is in the key benign environment markets like Australia, the Gulf of Mexico and the Mediterranean positions us well for future work.

Our recent contracting wins support this. Since our last conference call, we want work for MOD semi-VALARIS MS-1 offshore Australia that is expected to begin in the third quarter and occupy most of the rigs open availability for the year. MS-1 has been idle for over a year and will be returning to work in the Australian market, where it’s previously operated for many years. This market continues to be an important region for semisubmersibles and we expect additional contracting opportunities for semis in this region in 2020 and 2021. With the MS-1 returning to the market and by virtue of the rigs modern drilling capabilities, I believe it’s well positioned to secure follow on work.

In addition, VALARIS 8503 had its current contract in the U.S. Gulf of Mexico extended through the first half of 2020. the versatility of the VALARIS 8503 and its sister rig, the VALARIS 8505, which can operate in either dynamically positioned or MOD nodes places these rigs well for future opportunities in the Gulf of Mexico.

Now, moving to the jackup market. Global jackup utilization continues to improve and currently stands at 75% compared to 68%, a year ago due to higher levels of customer demand. The number of contracted jackups is up to 395 from approximately 350 this time last year and the number of rig years awarded for new jackup fixtures increased 50% during 2019 as compared to the previous year. The overall improvement in the jackup market is also highlighted by an increase in average contract durations and new jackup contracts signed during 2019 had an average term of 17 months versus 12 months in 2018. These dynamics have driven a broad based improvement in pricing for jackup rigs although the strength of improvement varies by asset type and region.

Jackups in the North Sea, particularly, the most modern rigs capable of operating in this harsh environment, continue to see the highest level of utilization across shallow-water assets. Utilization for this class of assets is in the mid-90s today and has pulled back somewhat from the high-90s six months ago. While this is to be expected given seasonality during the winter months, we are mindful that upcoming contract rollovers in the region including five Valaris jackups may impact this utilization number in the coming months.

Valaris has the largest fleet of modern, ultra-harsh and harsh environment rigs with 13 of these assets, all of which are either currently on the contract or have a contract for future work. Since our last conference call, we’ve been awarded new contracts or extensions for five of these rigs with revenue backlog of more than $120 million.

We’re seeing customers demonstrate a strong preference for modern rigs in benign environments as well. Total utilization for modern benign environments is 81%, 12 percentage points higher than utilization for older jackups and utilization for modern benign environments has increased by approximately six percentage points despite the addition of 20 rigs over this time period. Valaris also has a market leading position in the modern benign environment jackup space with 25 of these rigs. And the company has a presence in nearly every major operating basin for this type of assets.

In the middle East, we have five of these modern benign jackups that are leased to ARO Drilling on long-term contracts. In Southeast Asia, JU-115’s contracts was extended and JU-107 had its contract extended along with winning a contract that we’ll now see the rig utilized well into this year.

Moving to the Western hemisphere, we signed a contract for the VALARIS JU-144 for a job in Mexico that is expected to begin this year and take two years to complete. Mexico is a market that we believe will absorb additional modern jackup supply this year and we expect to announce additional new contracts in the region soon. We also signed a 21 well contract of JU-87 in the U.S. Gulf Mexico that is expected to work the rig in the fourth quarter 2020.

before I hand the call over to Jon, I want to emphasize that we remain focused on our four priorities, namely delivering on our merger and integration commitments, continuing to support ARO Drilling’s development, proactive balance sheet management and winning work for our rigs that benefit cash flow and position our fleet to meet increasing levels of customer demand.

By successfully executing on these priorities, we will improve Valaris’ competitiveness going forward and position the company for future success.

I’ll now turn over the call to Jon.

Jon Baksht

Thanks, Tom, and good morning everyone. As it is clear from Tom’s commentary, there’s a lot going on at Valaris with several moving pieces that have the potential to impact our financial results, which I’ll address in my prepared remarks. Clearly, our operating performance and commercial efforts will continue to be a primary driver of cash generation and ARO Drilling will increase in significance as it continues with its growth trajectory. I’m also expecting the next step of our merger integration will lead to meaningful, sustainable improvement to future financial results. Although we will incur some non-recurring charges to get there and of course, managing the balance sheet and our liabilities is a priority to address our current funding gap.

I’ll start with our fourth quarter 2019 results; adjusted EBITDA was $22 million for the quarter compared to $35 million in third quarter of 2019. revenue for the fourth quarter was $512 million, compared to $551 million in the prior quarter.

in the floater segment, revenue declined to $216 million from $270 million in the prior quarter, primarily due to fewer operating days for VALARIS DPS-1 and VALARIS 5006, which completed its contract at the end of the third quarter and did not work in the fourth quarter before its recent sale and removal from the global drilling fleet.

In the jackup segment, revenue increased to $231 million from $218 million, primarily due to the three VALARIS JU-290 series rigs, beginning contracts offshore Norway during the fourth quarter. Along with a full quarter of revenue for VALARIS jackup 123 and VALARIS jackup 107, both of which started new contracts in the third quarter. This was partially offset by fewer operating days in fourth quarter 2019 for several rigs that recently completed contracts.

Moving now to costs, excluding transaction costs and non-reoccurring charge for certain local employee benefits noted in our press release, contract drilling expense was $459 million for the fourth quarter. It’s higher than our prior conference call guidance, largely due to higher than anticipated startup costs associated with the three VALARIS JU-290 series jackups that commenced new contracts during the quarter.

Fourth quarter results also included a non-cash asset impairment charge, a $13 million primarily related to the VALARIS jackups 70, which has been classified as held for sale and is expected to be retired from the global drilling fleet.

Depreciation expense was $164 million in fourth quarter of 2019, in line with the prior quarter. excluding transaction costs, general and administrative expense was $34 million for the fourth quarter, compared to $29 million in the third quarter. The sequential quarter increase was mostly due to $4 million of professional fees associated with the recently resolved matter with our shareholder, Luminus. In addition, as noted in our press release, we incurred approximately $19 million of merger-related transaction costs and $6 million for the non-recurring benefit charge I mentioned a moment ago.

Costs associated with the merger transaction, non-recurring benefits charge and settling the shareholder matter were excluded from adjusted EBITDA and the adjusted loss per share amounts presented in the press release.

Other income was $42 million for the fourth quarter, driven by $200 million cash receipt resulting from the settlement of a legal matter with Samsung Heavy Industries, partially offset by $115 million of net interest expense, a $23 million non-cash loss from a bargain purchase gain adjustment and a $20 million settlement that we expect to be paid in the first quarter to resolve a legacy company partner dispute in the Middle East.

Tax expense increased to $63 million from $2 million, mostly due to $21 million of discrete tax expense in the fourth quarter as compared to $18 million of discrete tax benefit in the prior quarter. The discrete tax expense in the fourth quarter was due to taxes due on the $200 million Samsung settlement. The resolution of prior year tax matters and rig sales during the quarter, while the benefit in the third quarter was primarily due to the impairment charge for VALARIS 5006.

Adjusted for discrete items, taxes increased by $22 million quarter-to-quarter due to changes in the estimate of taxable income across operating jurisdictions during the year. In addition to valuation allowances, uncertain deferred tax assets recorded during the fourth quarter.

I’m pleased to report, that as of year-end, we had no amount drawn on our revolving credit facility. We continue to be highly focused on liquidity. Our available liquidity increased by $108 million in the fourth quarter due to the $200 million cash receipt from Samsung, I just mentioned, a $50 million decline in accounts receivable from collections of past due amounts from our customers and a $23 million interest receipt from ARO Drilling related to our shareholder notes. These items are partially offset by approximately $85 million of interest payments on our debt, $12 million of tax payments, and other outflows from changes in working capital.

Now, we’ll move to fourth quarter results for our joint venture ARO Drilling. Operating income was $17 million compared to $22 million reported by Valaris in the third quarter. As compared to the prior quarter, revenues in contract drilling expenses both increased with the addition of Valaris jackups, JU-147, and JU-147 to the leased operating fleet.

However, contract drilling expenses were higher sequentially primarily due to increased repair and maintenance costs or several rigs which led to lower than expected operating margin for ARO in the fourth quarter. G&A expense also increased during the quarter due to ramp-up costs as ARO Drilling continues its transition of processes and personnel from Valaris.

Looking forward, we currently project ARP Drilling’s 2020 EBITDA will be between $130 million and $150 million. This is a decline from prior year EBITDA primarily due to significant out-of-service days to complete planned surveys and maintenance for four owned rigs and one leased rig that are operating on higher day rate contracts, along with additional costs for AROs. shore-based following the transition of processes and personnel from Valaris during 2019. This decline will be partially offset by full year of operations for leased rigs, jackup-147 and jackup-148 after their contract startups in late 2019.

Now moving to the Valaris first quarter 2020 outlook. We expect total revenues will be approximately $470 million as compared to $512 million in the fourth quarter, as we anticipate utilization for our floaters and jackups combined will decline to 54% from 55% in the fourth quarter. The sequential quarter decline is due in part to the retirement of two older, less capable rigs from our fleet, VALARIS 6002 and VALARIS-96, which had been working on higher day rate, legacy contracts, and contributed revenue in the fourth quarter. Also impacting the quarter-to-quarter comparison is out-of-service time for VALARIS-76, as it undergoes a special survey is zero rate during the first quarter.

Our first quarter revenue outlook breaks down as follows: $195 million from our floater segment, $215 million from our jackup segment and approximately $60 million other revenues, including $20 million of reimbursable revenue from ARO Drilling, $20 million of ARO Drilling lease revenue, and $20 million related two managed rigs in the Gulf of Mexico.

Excluding transaction costs, we anticipate that first quarter contract drilling expense will be approximately $445 million. The sequential quarter decline from the $459 million, I mentioned a moment ago is due to lower operating costs for rigs that are expected to be idle or were retired from the fleet and reduced personnel and repair and maintenance costs associated with the start-up of contracts that occurred in the fourth quarter as previously noted. These items will be partially offset by increased repair and maintenance costs for certain rigs, as they prepare to begin new contracts.

We expect depreciation expense will be approximately $165 million. Excluding transaction costs, G&A expense is anticipated to be $37 million for the quarter, inclusive of approximately $9 million of costs associated with the recent settlement of the shareholder matter I mentioned earlier. Adjusted for this item, G&A expense is expected to be approximately $28 million. Including transaction and shareholder settlement costs, we expect that EBITDA will be near breakeven during the first quarter as a result of the sequential decline in utilization along with the repair work to prepare rigs for new contracts that I just mentioned. However, we continue to expect a meaningful improvement in our financial results over the remainder of 2020 as several new floater and jackup contracts are expected to commence during the first half of the year.

To provide some additional context, I will provide our current outlook for full year 2020. I would note that this outlook remains subject to change and could be significantly impacted by a number of factors, including new contract awards and operational performance throughout the year. We expect 2020 revenues will be between $2 billion and $2.1 billion. This revenue outlook includes day rate revenue from the more than $1.6 billion of contracted backlog disclosed in our most recent Fleet Status Report, plus reimbursables and amortized revenues that are excluded from backlog. In total, these items cover approximately 85% of our estimated annual revenues for 2020, with the remaining 15% of our revenue outlook expected to come from future contracts and extensions.

This revenue outlook reflects our expectation that despite industry dynamics remaining competitive, utilization and day rates gradually improved during the year. Excluding transaction costs, which I will discuss in more detail in a moment, contract drilling expense associated with these revenues is expected to be between $1.7 billion and $1.8 billion. This assumes no major rig start-ups other than the $13 million to return the MS-1 to the fairly buoyant Australian market that Tom spoke about earlier.

In terms of the utilization assumption that underpins these numbers, we expect combined floater and jackup utilization will be in the high 50s percentage range for the full year 2020. If utilization for the fleet were to be higher than this, we would expect revenue and contract drilling expense to be towards the higher end of the ranges I just provided. Likewise, if we were to see utilization of lower than this, revenues will be closer to $2 billion in contract drilling expense closer to $1.7 billion for the year.

Excluding transaction costs and the $9 million of expense incurred in the first quarter to resolve the recently settled shareholder matter I just mentioned, full year G&A expense is expected to be approximately $95 million to $100 million. The net impact of amortized revenue and contract drilling expense is expected to reduce our margins on the income statement by approximately $35 million. Therefore, full year 2020 EBITDA will be $35 million higher than if one were to simply subtract contract drilling and G&A expense from revenues.

Based on the items I just described, we are providing 2020 adjusted EBITDA guidance of $210 million to $240 million, excluding transaction costs. In regards to transaction and integration costs, these items are largely driven by costs that companies typically incur in a merger such as the one we completed last year, including severance, contract termination costs, professional and other advisory fees, along with IT and other implementation costs. We have previously guided to a total of $125 million of cash transaction costs as a result of the merger. However, with the next phase of our integration and higher expected annual cost savings, our transaction and integration costs are also increasing.

As of year-end 2019, we had incurred $168 million of total onetime cash costs related to achieving our run rate synergies, including costs I mentioned earlier to settle with a legacy company partner in the Middle East. In addition, we expect to incur approximately $80 million of one – of additional one-time transaction and integration costs. However, we now anticipate that these costs will lead to at least $100 million annual run rate savings in addition to $165 million of synergies for a total of at least $265 million of savings on an annualized basis beginning in mid-2021.

In terms of capital expenditures for the year, as part of our annual budget process, we have sized this year’s planned investments in the fleet to reflect the utilization assumptions that I mentioned earlier. In total, we now expect capital expenditures for the year will be approximately $160 million. The vast majority of this CapEx budget relates to ongoing maintenance and minor upgrade costs for core rigs in our fleet.

Turning now to our financial position. As of December 31, our available liquidity was $1.7 billion, of which approximately $100 million of cash and $1.6 billion with available capacity on our undrawn revolving credit facility. Given the full year outlook I just provided, we anticipate a funding gap in 2020 as EBITDA will not be enough to offset approximately $400 million of annual interest costs, $123 million of debt maturities, cash taxes along with the capital expenditures and transaction costs that I just mentioned.

Given these factors, our revolving credit facility is an important component of our liquidity, and we expect to align it to meet our funding needs. Further, we estimate that we will draw on our revolving credit facility to address the funding gap I just described. One option at our disposal to bridge this funding gap is raising new capital. However, we believe that using our revolver to meet our funding needs is a more cost-effective financing solution since borrowings on this facility are at LIBOR plus 425 and the undrawn portion of our revolver only costs 25 basis points annually.

Our capital structure permits us a great deal of flexibility as we evaluate next steps, including addressing our near, medium and long-term liabilities. We’re actively evaluating opportunities to enhance our capital structure and address maturities of existing debt, including by capturing debt discount and extending maturities. Given the significant flexibility under our existing debt documents, we have access to a wide range of potential transactions, including exchange offers and other repurchases to address our capital structure.

As a reminder, we have no secured debt in the capital structure today and the largest offshore drilling fleet in the industry. As we have done throughout the cycle, we’ll act opportunistically to best position the company for the future. However, we will not rely solely on our revolver reliability management to address our funding needs, and we are in the process of scrutinizing our cost base as part of the next phase of our integration efforts that we reduce our funding needs to the best extent possible.

In addition to managing our liquidity and liabilities, I also want to emphasize our focus on winning new contracts for our rigs to derisk our outlook and generate better operating cash flow. Our commercial team is committed to contracting rigs on sensible terms that generate cash for the company. By winning new contracts that are accretive to cash flow and proactively managing our costs, we can most effectively execute our strategic priorities and better position Valaris for the future.

Now I’ll turn the call back over to Nick. Operator, I believe Nick’s having some problems with his mic. Could you open up the queue for Q&A?

Question-and-Answer Session


[Operator Instructions] The first question comes from James West with Evercore ISI. Please go ahead.

James West

Hey, good morning guys. Tom, the 20 or so opportunities that have some term associated with them for the floater fleets, that’s clearly, I think, an inflection for rates and to get some momentum here in the pricing environment. When should these contracts be awarded? Are they actively being tendered and bid on today? And would you expect to see kind of a flurry of contracts for the next few weeks?

Tom Burke

Yes, James. So with respect to the 20 or so contracts which were out there, they’re active today. I mean, some of them we’re tracking – we’re expecting them to come up, but a number of them are actually in flow right now. So yes. And now as far as when they get actually awarded, we know some of them will get awarded fairly soon because they’re on a – on a some sort of a lease start or a – start to the contract, which we know is fairly soon, but others may drag out. But yes, no, they’re in flow. And we’d expect to see more awards on the floater side sooner than later.

James West

Okay. And then the bids that you’re placing on these tenders, are they at levels where you would consider taking a rig out of preservation stack?

Tom Burke

So where we’re bidding right now is not – some I guess, where we’re seeing the market today, we’re not there as far as taking rigs out of preservation stack. That’s for sure. That doesn’t mean that we are – that we wouldn’t bid on a contract with – perhaps bid on a contract, which has got a rig in preservation stack and bid at such a level that it would be economic, but we’re very unlikely to win it at this point with those bids. So we’re – it’s not to say that we’re not bidding stuff high, which would support reactivation, but those bids given where we think the market is are less like – well, pretty unlikely to be successful. So we don’t think the market is quite there yet, but it’s certainly moving up.

James West

Okay. Got it.

Tom Burke

Does that make sense Jim?

James West

Yes. Sure. It is. Thanks a lot.


The next question comes from Ian MacPherson with Simmons. Please go ahead.

Ian MacPherson

Thanks. Good morning. Tom, I’ve also heard Valaris’ name included in conversations for the 20,000 work that’s being bid. And that’s a different market, highly specialized. And I would presume that if Valaris were to be involved in that type of work, it would be for a rig that would require additional capital. Can you talk about whether or not that is appealing to you? And if so, how you think about positioning and financing yourself for a project that would presumably carry premium pricing, but also more upfront capital, given your obvious concerns today?

Tom Burke

Yes. So we are interested in this work, and Valaris has the expertise and experience to be a trusted partner for operated drilling difficult and demanding wells. And certainly, the north plat, south plat wells for total, for example, are wells that we’ve drilled before. So with respect to – so it is interesting work for us. With respect to how we would finance it, we have a number of different options and I – probably not going to get into that right now, but it’s certainly interesting.

Jon Baksht

Yes. Ian, and I think – this is Jon. The other thing that I would add on that is, when you’re looking about our capital and how we manage the capital and clear liquidity, which I’m sure will come up in the Q&A, will be – as we look at opportunities like the 20,000 work, anything that we’re doing, more cash upfront would be better clearly, and we’d be looking at not only just returns, which would be in excess of higher returns than potentially in earlier periods, given where our cost of capital is today, but we’d also be looking for fairly rapid paybacks on those. And so we’d certainly be doing those types of opportunities in a way that made economic sense for us.

Ian MacPherson

Okay. For my follow-up, I wanted to ask about the capital raise possibilities. You’ve described your situation with Luminus is being settled. They have a proposal out for a capital raise. And I wonder where you are in terms of sinking with their or other new board members priorities? And timing-wise, what’s holding you back from doing a capital raise sooner than later at this point?

Jon Baksht

Different. What I’d say is – and we put this in the press release as well. I mean, we’re evaluating our opportunities. The Board composition, as Tom noted, has changed over the last quarter and including most recently in the last couple of weeks. And so there’s still a lot of discussions at the Board level in terms of how we prioritize those opportunities and how we proceed forward. I would say that there’s general alignment. We are – we all recognize the funding gap and the various tools that we have to address that, which are significant. And as we go through those options, one of those is raising new capital, and including also other liability management exercise we could do to capture discount or extend maturities. And it is an active dialogue that we’re having, and we’re evaluating those opportunities today.

Ian MacPherson

Good. Thanks Jon.

Jon Baksht

Thanks, Ian.


The next question comes from Sean Meakim with JPMorgan. Please go ahead.

Sean Meakim

Hey, thank you.

Tom Burke

Hi, Sean.

Sean Meakim

So just thinking about some of the moving pieces on liquidity. So you got the SHI settlement in the quarter, paid down the revolver, but the 10-K shows a $90 million draw on the revolver at the end of January. Can you maybe just talk a little bit about how you’re managing cash intra quarter? And how we should think about cash and revolver use progression, kind of the cadence going through 2020?

Tom Burke

Yes, Sean. Well, it’s obviously something that we’re very focused on. It’s – we were happy that at the end of the year that we had – we finished the year without any draw on the revolver. That went from a position of $140 million draw at Q3. As you pointed out, the SHI award was helpful in that regard certainly. Month-to-month, it’s – we’re highly focused on it. As I mentioned, we are going to have a funding gap. And the timing of cash flows intra months can be lumpy between receivables and – from our clients. And so I would track it less – from an investor standpoint, I would look at it less month-to-month, but I will continue to provide guidance quarter-to-quarter and over the course of the year. And we did provide a 2020 EBITDA guidance for you to think about that on an annualized basis. And we have some materials in our investor presentation to talk about all the uses of cash for the business. So between – EBITDA is clearly positive, but then if you subtract out the interest expense, which is meaningful at $400 million. Our CapEx I just guided to $160 million, cash taxes, which will likely be in excess of $100 million for the year and then the addition of transaction costs, which we’re still incurring, plus the debt maturities that we have this year, which is only $123 million. You add it all up, and some of those payments aren’t – the outflows will be somewhat lumpy. So, it’s hard to track month-to-month, but we are very focused on what we can do in terms of trying to collect those payments as quickly as possible and – from customers and then the payments we’re making, we are diligent about monitoring our working capital, and DSO and DPO are a priority for the organization.

Sean Meakim

Got it. Yes. Thank you for that. I think that was helpful. So, thinking about the VALARIS DS-13 and VALARIS DS-14, just the array of options. Would we consider some kind of secured structure as far as the financing for the future milestone payments? And then, I guess, other alternatives are trying to maybe extend again on the payments and/or even at some point terminating those? Just how do you think about what are the options available to you? How do you think about next steps there?

Tom Burke

Well, I think in big picture, Sean, what I would say is that, they’re very good rigs, two of the best rigs in the world. And I think that sort of consolidation of the ultra-deepwater rigs into a number of them into the Valaris fleet to be very important. So they are very important assets, a very good rig. And certainly, along the way, we have pushed the – push the payment for those down the road. So, with respect to what we do in the future we certainly look at lots of different ways we can handle that with either extending them or doing different things. And so it’s an active dialogue internally. And I think we’ve got a very good understanding about what our options are. Jon, anything to add?

Jon Baksht

Yes. just to build on that, when you talk about securing rigs, we have all kinds of capacity today, because of our 76 rigs, not a single one of them is secured and so we – including the VALARIS DS-13 and the VALARIS DS-14. So, we do have a commitment to take those rigs and have payments as we have outlined in our financials, as you know, in total, just over $300 million for both rigs. And if we wanted to, we could certainly secure those upon delivery, just like any of the other high-spec drillships. I don’t know how – if I would necessarily single those out as being unique, I would say, broadly speaking, cash-flowing assets are better to finance than non-cash flowing assets. And today, we don’t have contracts on those rigs, clearly. And so while they are some of the best drillships in the market, the amount of secured debt we could put on them would be probably less than something that potentially was cash flowing at the time. So it’s something that would go into our thinking is, that we got closer to delivery of those rigs. And in terms of speculating whether the yards in Korea would be willing to provide additional extensions, I mean, your speculation of what could be coming down the road is probably a good mine at this point. We just executed those not that long ago. So if we wanted to try to do some deferred financing, it would be something that would probably be a future conversation.

Sean Meakim

Very good. Appreciate the feedback. Thanks.


The next question comes from Greg Lewis with BTIG. Please go ahead.

Greg Lewis

Yes. Thank you and good morning, everybody. Just Jon, following up on that…

Jon Baksht

Hey, Greg.

Tom Burke

Good morning, Greg.

Greg Lewis

Yes. Just following up on that comment, you mentioned about, obviously, having line of sight on work for rigs being able to really help in going out and getting that more attractive financing. More – I guess, in the last month, one of your competitors with some, I guess, one of their customers kind of sign a long-term agreement, where the rate is flexible, but it guarantees utilization. And just I’m kind of curious given management, Valaris has been pretty focused on, hey, this is about utilization for us here is, did that peak your interest? Was that conversations you maybe were already having along those lines with some of your core customers? And is that something that you think could actually gain traction in the offshore drilling market over the next 12 months? And just sort of a different way of contracting a rig?

Tom Burke

Yes. So, Greg, what I would say about that that is, I mean, I think the general sense of customers in deepwater rigs and take Petrobras off to one side, is to contract rigs for where they have the work. And as far as a big greenfield programs, there are a number but they are not that many. So that – not that many customers are taking that approach. They’re typically contracting rigs and – for how long they have to work and not much longer perhaps with options and now in the current environment, less options and more – less priced options and more unpriced options.

So I would say that, that’s a – that thing that you just described it’s probably a little less common. And I wouldn’t say that it’s necessarily – I’d say, it’s probably attractive and actually it’s a similar mechanism actually that we used in our drilling as far as long-term contracts, a sort of discount of the market, right? But I’d say it was – it’s fairly attractive. But frankly, not that common. Jon, anything?

Jon Baksht

Well, in terms of the – and then in terms of the – Greg, in terms of the financing, that, that would provide, you draw at a good point. That would be one or a handful of contracts that are like that in the market today. But if we were to be able to get more duration on our backlog and particularly utilization, even if it was unpriced and subject to market rate, I do think it would facilitate a lower cost of capital and better costs on our financing. And so this is something that we are looking at, and our commercial team is looking at in the opportunities that we go after. The challenge, as Tom pointed out on – particularly on the deepwater side, there’s less opportunities for that duration with our clients today as they put together their programs. And if you look at our own fleet, the jackup side of the business has probably more duration on that backlog, which does help on the financing side.

Greg Lewis

Okay, great. And then just following up on one of the previous questions and realizing you can’t really – no one can time the market and in terms of – clearly, there’s the unsecured debt or prior guarantees, but there’s a way that, I imagine that Valaris will approach the market. Earlier this year, there were a couple oilfield service companies that actually access the capital markets through debt. Was that – was there something about that market that may be the company didn’t think is it was attractive or was it just a fact that, that window just for that – it was open and then it was close. Just kind of curious was there something about that market where the company just didn’t like it? Or was it just kind of – it just was – the openness of the market was just too fleeting?

Tom Burke

Yes, Greg, I mean, in terms of timing the market, it is – that’s a tricky one, right? It’s hard to ever do perfectly, right? I would say that our competitor did hit a very good market window. And so hats off to them on that financing. I think from a – in terms of how we think about new issuance and timing of that, I did address a little bit of that in my prepared remarks. I mean, right now, the funding cost on our revolver is just relatively cheap capital, right? So we have $1.7 billion of liquidity today and LIBOR plus 4.25% is attractive. And so there is a bit of a trade-off of carrying costs. So it depends on what you use the proceeds for.

And so as we look at new capital, certainly one of the things that we look at. The timing of that is something that we’re evaluating, along with the other tools that we could go out there and pursue, including liability management, which we could use to capture discount and then extend maturities. And so the sequencing of all that is something very much under evaluation internally, and we’re having very good dialogue around that internally. So stay tuned.

Greg Lewis

Okay, perfect. Okay guys. Thank you very much and have a great weekend.

Tom Burke

Thanks, Greg.


The last question today comes from Connor Lynagh with Morgan Stanley. Please go ahead.

Connor Lynagh

I just wanted to ask about ARO. It seems like there’s some progress there and on the newbuild side, and just wanted to pick your brain. What do you think the financing looks like for these newbuilds? I mean, it sounds like you consider – continue to highlight the third-party financing options. But how should we think about what the terms or the loan to value or any sort of dynamics would look like?

Tom Burke

I’ll make a comment on that, and then Jon can add sense to it. I guess I’d say on ARO, there is – as the company moves through this sort of progression, we – this is obviously a major milestone, and it’s obviously attractive contract with – obviously, with an attractive campaign – a very strong counterparties. So I think there’s a good opportunity for some newbuilds. I guess, I would call it, project CapEx – project financing. I do think there’s – as I said before, there is some steps around putting in some revolving credit facilities and maybe more permanent debt. And there was also the project financing.

And I think as far as the project financing, I think it’s an attractive project that people would like to find out. But given the length of the term, the payback and the counterparties. So I think we’ve got a lot of choices regarding that shipyard financing. And I think we don’t – but we don’t have to – we don’t have to do it right now as we – as the down payment has been made out of cash and the rigs will be delivered a little bit further down the road. So I think it’s not something we have to do today. And certainly – but certainly, the capital structure of ours is something which is certainly something that Jon and I think about and talk a lot with the rest of the ARO Board.

Jon Baksht

No, you said well, Tom. And then the thing I would add is, today, ARO currently – has current assets over $400 million and the majority of that is cash. And so cash was utilized for the down payments of the 25% down on those two newbuilds. And then as you think about the final payment, I think it’s very – it’s clearly recognized between ourselves and Saudi Aramco, our partner there, that 16-year contracts with the first eight years with the six-year EBITDA payback is highly attractive from a financing standpoint. So as I mentioned in one of the prior questions, you – one of the challenges, just lack of cash flow for a lot of – and duration on a lot of the opportunities in the current backlog.

But if you look at the opportunities within ARO, it’s exactly the opposite. These are long-term contracts with high amounts of cash flow. So the amount of available capital and funding sources is much better and ARO’s cost of capital is clearly much lower than that of Valaris.

Connor Lynagh

Yes, that makes sense. Thanks for the color there. I guess, just one final question on ARO. Is your expectation at this point in time that all of these newbuilds will be incremental activity or will they be replacing some of the rigs that are currently working?

Tom Burke

Well, there is a newbuild program over 10 years. So while there is a – so it’s over 10 years. And some of the rigs that are working in ARO are – and I’d say in Saudi Arabia more broadly are certainly towards the end of their life. They are rigs that were built in the late 70s or early 80s. Some of them are in ARO and some of them are not in ARO, but working in Saudi Arabia. So from a perspective of replacing assets that are working, they’re going to be needed to replace some of those old assets because those rigs are certainly – some of them approaching – actually, some of them are at 40 years old. So I think there will be replacements. And I think that’s a good thing.

Connor Lynagh

Thanks very much.

Tom Burke

Thanks very much.


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

Nick Georgas

Thanks, Anita, and thank you to everyone on the call for your interest in Valaris. I know there’s a few of you who are left in the question queue, and I’ll be following up with you later today. In the meantime, we look forward to speaking with you again when we report first quarter 2020 results. Have a great rest of your day.


This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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