VAL - Valaris Reports Fourth Quarter 2022 Results

Valaris Limited (NYSE: VAL) ("Valaris" or the "Company") today reported fourth quarter 2022 results.

President and Chief Executive Officer Anton Dibowitz said, “I would like to thank the entire Valaris team for continuing to deliver excellent operational performance, achieving revenue efficiency of 98% during the fourth quarter. This strong operational performance has translated into continued contracting success, and we were awarded new contracts and extensions with associated contract backlog of more than $400 million during the fourth quarter.”

Dibowitz added, “Last year was an important year for Valaris as we laid the foundation for continued success during the unfolding industry upcycle. We reactivated four floaters, all of which returned to work largely on time and on budget. Reactivation of a fifth floater, VALARIS DS-17, is well underway and we are in advanced discussions for a multi-year opportunity for one of our stacked drillships that is expected to deliver meaningful returns. We remain intent on executing our strategy of being focused, value driven and responsible in our decision making and we believe that our strategy will drive increased earnings and significant free cash flow over time."

Financial and Operational Highlights

• Generated net income of $31 million, Adjusted EBITDA of $54 million and Adjusted EBITDAR of $75 million in the fourth quarter;
• Delivered revenue efficiency of 98% in the fourth quarter and 97% for the full-year 2022;
• Awarded new contracts and extensions with associated contract backlog of more than $400 million during the fourth quarter, including floater contracts offshore Brazil and Egypt as well as jackup contracts in the Middle East, the North Sea and the U.S. Gulf of Mexico; and
• Additional contracts awarded or extended in 2023 to date, with associated contract backlog of approximately $230 million, including a floater contract offshore West Africa and jackup contracts in the Middle East, Australia and Trinidad.

Fourth Quarter Review

Net income was $31 million compared to $78 million in the third quarter 2022. Adjusted EBITDA decreased to $54 million from $76 million in the third quarter. Adjusted EBITDAR decreased to $75 million from $94 million in the third quarter.

Revenues decreased to $434 million from $437 million in the third quarter 2022. Excluding reimbursable items, revenues decreased to $413 million from $416 million in the third quarter primarily due to lower utilization and lower average day rates for the harsh environment jackup fleet, partially offset by an increase in utilization for the floater fleet.

Contract drilling expense increased to $353 million from $337 million in the third quarter 2022. Excluding reimbursable items, contract drilling expense increased to $333 million from $316 million in the third quarter primarily due to an increase in operating days for the floater fleet and higher reactivation costs, which increased to $21 million from $18 million.

Depreciation expense increased marginally to $24 million from $23 million in the third quarter 2022. General and administrative expense increased to $24 million from $19 million in the third quarter 2022 primarily due to higher personnel costs and professional fees.

Other expense was less than $1 million compared to other income of $30 million in the third quarter 2022. Other expense included foreign currency exchange losses of $13 million as compared to gains of $10 million in the third quarter. Third quarter other income also included non-cash interest income of $15 million related to the write-off of the discount attributable to the $40 million of shareholder notes receivable repaid by ARO. These items were partially offset by a $3 million increase in interest income during the fourth quarter.

Tax expense was $10 million compared to $14 million in the third quarter 2022. The fourth quarter tax provision included $3 million of discrete tax benefit attributable to the resolution of prior period tax matters. The third quarter tax provision included $2 million of discrete tax expense primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, partially offset by discrete tax benefits attributable to the resolution of other prior period tax matters. Adjusted for discrete items, tax expense increased to $13 million from $12 million in the third quarter.

Total liquidity, which includes cash and cash equivalents, restricted cash and short-term investments, increased to $748 million as of December 31, 2022, from $644 million as of September 30, 2022, primarily due to cash flow generated from operations, including changes in working capital, of which $55 million was a refund payment from the IRS related to the CARES Act that was received in the fourth quarter.

Capital expenditures of $54 million were in line with the third quarter 2022.

Fourth Quarter Segment Review

Floaters

Floater revenues increased to $211 million from $202 million in the third quarter 2022. Excluding reimbursable items, revenues increased to $203 million from $192 million in the third quarter. The increase was primarily due to higher revenue efficiency across the floater fleet and a full quarter of revenues for VALARIS DS-4 and DS-9, which commenced contracts early in the third quarter.

Contract drilling expense increased to $173 million from $161 million in the third quarter 2022. Excluding reimbursable items, contract drilling expense increased to $165 million from $151 million in the third quarter. The increase was primarily due to more operating days across the floater fleet and higher reactivation costs, mostly for VALARIS DS-17, which is expected to commence a contract later this year.

Jackups

Jackup revenues decreased to $182 million from $196 million in the third quarter 2022. Excluding reimbursable items, revenues decreased to $176 million from $190 million in the third quarter primarily due to VALARIS Stavanger completing its contract offshore Norway and idle time between contracts for VALARIS 123, 144 and 115. This was partially offset by more operating days for VALARIS 118 and 92 following a contract startup and a special periodic survey, respectively.

Contract drilling expense increased to $130 million from $128 million in the third quarter 2022. Excluding reimbursable items, contract drilling expense increased marginally to $124 million from $123 million in the third quarter.

ARO Drilling

Revenues increased to $120 million from $111 million in the third quarter 2022 primarily due to higher utilization as certain rigs returned to work following out of service periods for planned maintenance. Contract drilling expense decreased to $86 million from $90 million in the third quarter primarily due to higher planned maintenance costs in the third quarter.

Other

Revenues increased marginally to $41 million from $40 million in the third quarter 2022. Contract drilling expense of $18 million was in line with the third quarter.

As previously announced, Valaris will hold its fourth quarter 2022 earnings conference call at 9:00 a.m. CST (10:00 a.m. ET) on Tuesday, February 21, 2023. An updated investor presentation will be available on the Valaris website after the call.

About Valaris Limited

Valaris Limited (NYSE: VAL) is the industry leader in offshore drilling services across all water depths and geographies. Operating a high-quality rig fleet of ultra-deepwater drillships, versatile semisubmersibles, and modern shallow-water jackups, Valaris has experience operating in nearly every major offshore basin. Valaris maintains an unwavering commitment to safety, operational excellence, and customer satisfaction, with a focus on technology and innovation. Valaris Limited is a Bermuda exempted company. To learn more, visit the Valaris website at www.valaris.com .

Forward-Looking Statements

Statements contained in this press release that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include words or phrases such as "anticipate," "believe," "estimate," "expect," "intend," "likely," "plan," "project," "could," "may," "might," "should," "will" and similar words and specifically include statements regarding expected financial performance; expected utilization, day rates, revenues, operating expenses, cash flows, contract status, terms and duration, contract backlog, capital expenditures, insurance, financing and funding; the offshore drilling market, including supply and demand, customer drilling programs, stacking of rigs, effects of new rigs on the market and effect of the volatility of commodity prices; expected work commitments, awards, contracts and letters of intent; performance of our joint ventures, including our joint venture with Saudi Aramco; the availability, delivery, mobilization, contract commencement, availability, relocation or other movement of rigs and the timing thereof; rig reactivations; suitability of rigs for future contracts; divestitures of assets; general economic, market, business and industry conditions, including inflation and recessions, trends and outlook; general political conditions, including political tensions, conflicts and war (such as the ongoing conflict in Ukraine); cybersecurity attacks and threats; the effect, impact, potential duration and other implications of COVID-19; future operations; increasing regulatory complexity; the outcome of tax disputes; assessments and settlements; and expense management. The forward-looking statements contained in this press release are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including cancellation, suspension, renegotiation or termination of drilling contracts and programs; our ability to obtain financing, service our debt, fund capital expenditures and pursue other business opportunities; adequacy of sources of liquidity for us and our customers; actions by regulatory authorities, or other third parties; actions by our security holders; internal control risk; commodity price fluctuations and volatility, customer demand, loss of a significant customer or customer contract; downtime and other risks associated with offshore rig operations; adverse weather, including hurricanes; changes in worldwide rig supply, including as a result of reactivations and newbuilds, and demand, competition and technology; supply chain and logistics challenges; consumer preferences for alternative fuels; increased scrutiny of our Environmental, Social and Governance practices, initiatives and reporting responsibilities; changes in customer strategy, including increased focus on renewable energy projects; future levels of offshore drilling activity; governmental action, civil unrest and political and economic uncertainties; terrorism, piracy and military action; risks inherent to shipyard rig reactivation, construction, upgrade, repair, maintenance or enhancement; our ability to enter into, and the terms of, future drilling contracts; the outcome of litigation, legal proceedings, investigations or other claims or contract disputes; governmental regulatory, legislative and permitting requirements affecting drilling operations; our ability to attract and retain skilled personnel on commercially reasonable terms; environmental or other liabilities, risks or losses; debt restrictions that may limit our liquidity and flexibility; and changes in foreign currency exchange rates. In addition to the numerous factors described above, you should also carefully read and consider "Item 1A. Risk Factors" in Part I and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our most recent annual report on Form 10-K, which is available on the SEC's website at www.sec.gov or on the Investor Relations section of our website at www.valaris.com . Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statements, except as required by law.

Non-GAAP Financial Measures

To supplement Valaris’ condensed consolidated financial statements presented on a GAAP basis, this press release provides investors with Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP measures.

Valaris defines "Adjusted EBITDA" as net income (loss) from continuing operations before income tax expense, interest expense, reorganization items, net, other (income) expense, depreciation expense, amortization, net, loss on impairment, equity in earnings of ARO, and merger transaction and integration costs. Adjusted EBITDA is a non-GAAP measure that our management uses to facilitate period-to-period comparisons of our core operating performance and to evaluate our long-term financial performance against that of our peers. We believe that this measure is useful to investors and analysts in allowing for greater transparency of our core operating performance and makes it easier to compare our results with those of other companies within our industry. Adjusted EBITDA should not be considered (a) in isolation of, or as a substitute for, net income (loss), (b) as an indication of cash flows from operating activities, or (c) as a measure of liquidity. Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

Valaris defines "Adjusted EBITDAR" as Adjusted EBITDA before reactivation costs. Adjusted EBITDAR is a non-GAAP measure that our management uses to assess the performance of our fleet excluding one-time rig reactivation costs. We believe that this measure is useful to investors and analysts in allowing for greater transparency of our core operating performance. Adjusted EBITDAR should not be considered (a) in isolation of, or as a substitute for, net income (loss), (b) as an indication of cash flows from operating activities, or (c) as a measure of liquidity. Adjusted EBITDAR may not be comparable to other similarly titled measures reported by other companies.

Valaris defines ARO "EBITDA" as net income before income tax expense, other expense, net and depreciation expense. EBITDA is a non-GAAP measure that our management uses to facilitate period-to-period comparisons of ARO's core operating performance and to evaluate ARO's long-term financial performance against that of ARO's peers. We believe that this measure is useful to investors and analysts in allowing for greater transparency of ARO's core operating performance and makes it easier to compare ARO's results with those of other companies within ARO's industry. EBITDA should not be considered (a) in isolation of, or as a substitute for, net income (loss), (b) as an indication of cash flows from operating activities, or (c) as a measure of liquidity. EBITDA may not be comparable to other similarly titled measures reported by other companies.

The Company is not able to provide a reconciliation of the Company's forward-looking Adjusted EBITDA, as discussed on its fourth quarter 2022 earnings conference call, to the most directly comparable GAAP measure without unreasonable effort because of the inherent difficulty in forecasting and quantifying certain amounts necessary for such a reconciliation, including forward-looking tax expense and other income (expense).

Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

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