Valaris announces quarter 3 results and operational update

Below are the operational highlights

Floaters

The floater contracting environment remains challenging due to limited demand, excess newbuild supply and the fall in oil prices earlier in the year. Floater demand declined materially in March and April 2020, as our customers reduced capital expenditures particularly for capital-intensive, long-lead deepwater projects in the wake of oil price declines from around $60 per barrel at year-end 2019 to around $20 per barrel in mid-April 2020. The decline in demand has resulted in the cancellation and delay of drilling programs and the termination of drilling contracts.

During 2020, we have received notices of termination, requests for concessions, cancellation and/or deferral of drilling programs by operators and we may receive additional requests for concessions, termination and/or deferral notices during the pendency of the current market environment.

During the third quarter of 2020, floater contracting remained challenging and no significant new contracts were executed. In October 2020, we extended our current contract for VALARIS DS-18 for an estimated 60 days. During the second quarter of 2020, the VALARIS DS-7 contract for operations offshore Ghana and the contract awarded in the first quarter of 2020 for operations offshore Senegal/Mauritania, the VALARIS DS-9 contract awarded in the first quarter of 2020 for operations offshore Brazil and the VALARIS MS-1 contract awarded in the first quarter of 2020 for operations offshore Australia were terminated. Additionally, the VALARIS DPS-1 contract was terminated in June, earlier than the previously scheduled end date of September 2021, and the VALARIS DS-10, VALARIS DS-15 and VALARIS 8505 are operating on reduced day rates for various periods during 2020 and 2021. During the first quarter, the VALARIS 5004 operated on a reduced day rate from mid-March to mid-April, at which point the contract was terminated, and the VALARIS DS-8 contract was terminated in March 2020 as described below.

In March 2020, VALARIS DS-8 experienced a non-drilling incident while operating offshore Angola, resulting in the blowout preventer (BOP) stack being disconnected from the riser while the rig was moving between well locations. The BOP stack, which we later recovered, dropped to the seabed floor, clear of any subsea structures. No injuries, environmental pollution or third-party damage resulted from the BOP stack being disconnected. As a result of the incident, the operator terminated the contract. The termination resulted in a decline in our contracted revenue backlog of approximately $150 million. We have loss of hire insurance for $602,500 per day, after a 45-day deductible waiting period, through the end of the contract in November 2020. The waiting period expired on April 22, 2020. We received loss of hire insurance recoveries of $118.1 million, which represents the total amount owed to us under the applicable insurance policy. The recovery was recognized and recorded in Other operating income on our Condensed Consolidated Statements of Operation.

During the first quarter of 2020, VALARIS DS-12 was awarded a one-well contract that commenced in February 2020. VALARIS MS-1 was awarded a three-well contract that is expected to commence in the second quarter of 2021 and has an estimated duration of 155 days. VALARIS 8505 was awarded a one-well contract that was expected to commence in mid-November 2020, but is now expected to commence in June 2021 with an estimated duration of 80 days.

The VALARIS 6002 was sold in January 2020 resulting in an insignificant pre-tax gain. Additionally, the VALARIS 5004 was sold in April 2020 resulting in an insignificant pre-tax loss. During the second quarter of 2020, we began marketing VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6 and classified these rigs as held-for-sale, resulting in an impairment of approximately $14.6 million as the net book value exceeded the fair value less costs to sell. During the third quarter of 2020, we sold VALARIS 8500, VALARIS 8501 and VALARIS 8502 for a total pre-tax gain of $7.7 million, we sold the VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6 for an insignificant pre-tax loss and we classified VALARIS 8504 as held-for-sale. The net book value of VALARIS 8504 did not exceed the fair value less costs to sell, therefore, we did not recognize an impairment upon classifying this rig as held-for-sale.

Our backlog for our floater segment was $222.6 million and $856.6 million as of September 30, 2020 and December 31, 2019, respectively. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions.

There are approximately 26 newbuild drillships and semisubmersible rigs reported to be under construction, of which three are scheduled to be delivered before the end of 2020. Most newbuild floaters are uncontracted. Several newbuild deliveries have been delayed into future years, and we expect that more uncontracted newbuilds will be delayed or cancelled.

Drilling contractors have retired approximately 154 floaters since the beginning of 2014. Approximately 17 floaters older than 30 years of age are currently idle, approximately 10 additional floaters older than 30 years have contracts that will expire by end of 2020 without follow-on work. Additional rigs are expected to become idle as a result of recent market events. Operating costs associated with keeping these rigs idle as well as expenditures required to re-certify these aging rigs may prove cost prohibitive. Drilling contractors will likely elect to scrap or cold-stack some or all of these rigs. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized.

Jackups

During 2020, demand for jackups has declined in light of increased market uncertainty. We have received notices of termination, requests for concessions, cancellation and/or deferral of drilling programs by operators, and we may receive additional requests for concessions, termination and/or deferral notices during the pendency of the current market environment.

During the third quarter of 2020, the VALARIS JU-76 and VALARIS JU-54 were put on a reduced standby rate until December 2020. Following the reduced standby rate period, the rigs will be operating at an agreed upon reduced day rate until the end of 2021. During the third quarter, we also negotiated reduced rates for the VALARIS 108, VALARIS 140 and VALARIS 141, the reduced rates are effective beginning the second quarter of 2020 through November 2021, June 2021 and August 2021, respectively. Additionally, we executed a one year contract extension for VALARIS 110 and executed a short-term contract for VALARIS 115 that is expected to commence in February 2021. In October 2020, we executed an eight-well contract extension for VALARIS JU-292.

During the second quarter of 2020, the VALARIS JU-84 contract was terminated and we negotiated a day rate reduction for VALARIS JU-290 to operate at a standby rate from September 2020 to March 2021.

During the first quarter of 2020, the VALARIS JU-109 contract was terminated. In April 2020, there were various negotiated customer contract concessions, including day rate reductions. VALARIS JU-120 operated at a reduced day rate from late-April 2020 to September 2020. VALARIS JU-92 was previously expected to operate on a reduced day rate from mid-May 2020 to late-September 2020, but has continued to operate at full day rate and VALARIS JU-72 operated on a reduced day rate from April 2020 to August 2020. Additionally, VALARIS JU-249 ended its contract in April 2020 and VALARIS JU-100 ended its contract in late-April 2020, in both cases, earlier than expected.

During the second quarter of 2020, we executed short-term contracts for VALARIS JU-102 and VALARIS JU-87 that commenced in June 2020 and May 2020, respectively. We were also awarded a two-well extension for VALARIS JU-291 with an expected duration of approximately 180 days from January 2021 to June 2021. We executed a four year contract for VALARIS JU-104 expected to commence in September 2020, which was subsequently terminated during the third quarter of 2020, and we extended the VALARIS JU-67 contract 210 days from May 2020 to December 2020.

During the first quarter of 2020, we executed a three-well contract for VALARIS JU-118 that commenced in mid-March 2020 with an estimated duration of 425 days. Additionally, we executed a two-well contract for VALARIS JU-144 that commenced in May 2020 with an estimated duration of 300 days. The previously disclosed contract for the VALARIS JU-144 that was expected to commence in September 2020 was transferred to the VALARIS JU-102 and was subsequently delayed to September 2021 during the third quarter of 2020, with VALARIS JU-102 being put on a standby rate until the new commencement date. VALARIS JU-87 was awarded a one-well contract that commenced in March 2020 with an estimated duration of 30 days and an extension to May 2020 for another well with an estimated duration of 30 days.

The VALARIS JU-68 was sold in January 2020, resulting in an insignificant pre-tax gain. Additionally, VALARIS JU-70 and VALARIS JU-71 were sold in June 2020 resulting in insignificant pre-tax losses. During the second quarter of 2020, we classified VALARIS 105 as held-for-sale, resulting in an impairment of approximately $0.4 million as the net book value exceeded the fair value less cost to sell. During the third quarter of 2020, we sold VALARIS JU-87 and VALARIS JU-105 for an insignificant pre-tax gain and we classified VALARIS 84 and VALARIS 88 as held-for-sale. The net book values of VALARIS 84 and VALARIS 88 did not exceed the fair values less costs to sell, therefore, we did not recognize an impairment upon classifying these rigs as held-for-sale. These rigs were subsequently sold in October 2020.

Our backlog for our jackup segment was $841.5 million and $1,281.2 million as of September 30, 2020 and December 31, 2019, respectively. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions.

There are approximately 41 newbuild jackup rigs reported to be under construction, of which 5 are scheduled to be delivered before the end of 2020. Most newbuild jackups are uncontracted. Over the past year, some jackup orders have been cancelled, and many newbuild jackups have been delayed. We expect that scheduled jackup deliveries will continue to be delayed until more rigs are contracted.

Drilling contractors have retired approximately 114 jackups since the beginning of the downturn. Approximately 91 jackups older than 30 years are idle and 32 jackups that are 30 years or older have contracts expiring by the end of 2020 without follow-on work. Expenditures required to re-certify these aging rigs may prove cost prohibitive and drilling contractors may instead elect to scrap or coldstack these rigs. We expect jackup scrapping and cold-stacking to continue for the remainder of 2020. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized.

Source: Valaris

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