Good day, everyone, and welcome to Valaris plc's Second Quarter 2019 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, today's event is being recorded. And at this time, I would like to turn the conference call over to Mr. Nick Georgas, Senior Director of Investor Relations, who will moderate the call. Please go ahead, sir.

Welcome everyone to the Valaris second quarter 2019 conference call. With me today are President and CEO, Tom Burke; Executive Vice President and CFO, Jon Bakst; and other members of our executive management team. We issued a press release, which is available on our Web site at valaris.com. 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 Web site 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 Web site 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 July 25. An updated investor presentation is also available on our Web site. Now let me turn the call over to Tom Burke, President and CEO.

Thanks, Nick, and good morning everyone. Following our name change early this week, Jon and I are very pleased to be speaking to you today on our first quarterly conference call at Valaris. During our conference call in May, I laid out four short-term priorities for the company. Integration and synergy capture, delivering value from ARO drilling, balance sheet and liquidity, and lastly fleet management which encompasses our contracting strategy. In a moment, I will review our progress on each of these priorities. But first I will briefly discuss our second quarter performance. The second quarter of 2019 was our first quarter as a combined company following the close of our merger in April. In terms of our financial results, we reported adjusted EBITDA of $59 million for the quarter better than the outlook we provided in our first quarter conference call. While these results exceeded expectation, some of this outperformance was due to the timing of contract drilling expenses that were originally anticipated to occur in the second quarter and are now expected to occur in the third quarter of 2019. Jon will discuss our second quarter results and third quarter outlook in more detail later in the call. Our financial results benefited from strong operational performance with 98% uptime across our floaters and 99% uptime across our jackup. Additionally through the first-half of 2019, our recordable incident rate was nearly 20% better than the industry average as measured by the International Association of Drilling Contractors. These results are a testament to the continued focus on safety and efficiency from our offshore crews and onshore personnel. I want to commend our employees for their professionalism and unwavering commitment over the past several months as they have worked tirelessly to work to keep our rigs up and running and avoid…

Thanks, Tom, and good morning, everyone. In my prepared remarks today, I'll cover our second quarter 2019 financial results, our outlook for third quarter 2019, CapEx guidance for the remainder of the year and provide some high level commentary on ARO drilling. I will also spend some time discussing our financial position and capital allocation in light of our recent debt tender. And finally, I'll provide an update on merger synergies and transaction costs. As a reminder, we closed the merger on April 11. Therefore, the second quarter of 2019 results in our press release reflect legacy and corporations [ph] only for the first 10 days of the quarter and the combined company from April 11 onwards. This is because legacy and ENSCO was the accounting acquirer in the merger. Additionally, in conjunction with the organizations for large rebranding, you know we've attempted to simplify the categorization and naming with our rig fleet. The jackups fleet is now subdivided into more logical categories in our fleet status report with rig names aligning to those categories. My comments on this call will reflect legacy rig names to ease the transition. However, going forward, the updated rig names will be reflected in our investor material. Given that second quarter 2019 is our first reporting period as a combined company. My commentary will compare actual results against guidance provided on our prior conference call. Adjusted EBITDA for the quarter was $59 million compared to guidance of approximately $35 million. This feat was driven by a variety of factors including strong operational performance and disciplined expense management, which I'll review in more detail. However, as Tom mentioned, it'll also reflect the deferral of certain expenses into the third quarter, which will have an adverse impact on that quarter and effectively pull the portion of…

Thanks, Jon. Jamie, at this time, please open the line for questions.

Ladies and gentlemen, at this point we'll open the lines for questions. [Operator Instructions] And our first question today comes from Ian MacPherson from Simmons. Please go ahead with your question.

Okay. Good morning and afternoon. Thanks. Tom, one thing we picked out of the feet status was a few jackups that have longer priced options behind what we saw before. Most significantly I think was Fist of Anger that shows it has customer price options out through 2025. Can you speak to the genesis of those, how recently were they done? I think you said, broadly, that you have escalating options on some of these rigs, but is that something that goes back in time or were these options more freshly priced with something closer to market pricing expectations?

Hi, good morning, Ian. I'd say that, Ian, as far the sort of a general trend pile of contracting around jackups, particularly the last jackup, we are seeing some good trends as far as if we have priced options that are typically at rising rates, or we have maybe options on contracts which are mutually agreeable. And also the option sort of strike bait, [indiscernible] the customer needs to declare it are typically coming sooner in the drilling contract as opposed to later. So, generally all are all positive. Respect to those -- that specific contract, they were put in place some time ago.

Yes, as part of the master services agreement that we signed with Equinor [ph].

Yes, so we signed a master service agreement with Equinor, and those options were put in place, and we're happy with the cadence of them and how they're priced.

Okay, thanks. I wanted to ask a follow-up of you, Jon. Your working capital kind of crushed your cash flow in the second quarter, and I wonder if you could provide some perspective on your expectations for that component and for the rest of the year?

Yes, sure. Good morning, Ian. From a working capital standpoint, really this quarter there was a lot of moving pieces, I guess as there typically are. But this particular quarter we had a lot of startups in Q2, so for example, the DS-12, the DS-7, the 8500s a few jackups. So typically your accounts receivable will swell when that happens. So we had -- that was one of the drivers. And then we had other aspects such as some tax payments that hit in the second quarter. Typically we would accrue those, but those there was just a bit more a cash standpoint in Q2 than others. And then there were some other mobilizations that were going on this quarter. I would say those are probably the unique items this quarter that impacting working capital. And I would expect that the next quarters would be more normalized but for other kind of movement of rig, so those type of things.

Okay. And Jon, just to clarify, you said your merger costs are expected to be $65 million in the second-half, and I assume probably a little bit heavier in Q3 than Q4. Is that fair?

I think that's fair, yes.

Great. All right, thanks. I'll pass it over.

Our next question comes from Cole Sullivan from Wells Fargo. Please go ahead with your question.

Hi, good morning. On the guidance for third quarter revenues, can you help us walk through kind of the moving parts there a little bit more in depth on -- and as to the rollovers it sounds like the utilization could be a little lower there.

Sure, Cole. Good morning. From a kind of a bridge standpoint from Q2 to Q3, what you see is that we do have some roll-offs happening in Q3. So we've got the DS-4, 8504, the DPS-1, all roll-off in July, and the 5006 in August. And so a lot of that is early in the quarter, and so that will contribute to a meaningful part of that drop-off. And then as I mentioned in the prepared remarks, CDNE is going up because it does take some time for us to ramp down those crews to put them in a more kind of warm state, if you will. And given that a lot of those rollouts are early in Q3 we will incur a lot of the cost of those rigs throughout the quarter. And then you also have other startups that are occurring, and so typically, as you know, we're going to ramp up the rigs to get ready to work. And so we had some other startups occur in the second quarter that from a third quarter standpoint that you're now going to recognize a full quarter of CDNE, so those are the drillships, the DS-7, the DS-9, the DS-12. And we've also got some mobilizations which I mentioned, the Reliance, the Roth Kauffman, and the Norway, all kind of impact in Q3, which are all lines that are adversely impacting the quarter.

All right, thanks for the color there. You said the cost savings in the second quarter ended at around $80 million on a run rate basis. Can you help us kind of split that up between G&A and OpEx? And then also can you help us think about how much additional cost savings is implied in the third quarter then?

Well, in terms of where we're at today, so from a run rate standpoint, the majority of that savings is impacting G&A at this point. And it's all -- the majority of it is back office expenses as you'd expect. In terms of kind of the ongoing guidance, that trend will continue going forward, and you will see, as Tom mentioned and I mentioned we are aggressively hitting the -- working on reducing cost. And so we're more focused on that part, and so would expect that the Q3 numbers would continue to, from a synergy standpoint, go up, more of that kind of in the near-term.

All right, thanks. I'll turn it back.

Our next question comes from Taylor Zurcher from Tudor, Pickering & Holt. Please go ahead with your question.

Hey, good morning. Thank you. Tom, maybe to start on some of your commentary on the floater market as it relates to pricing. Clearly the commentary you provided, it sounds like a recovery in pricing is continually pushed out to the right. And so my question is, if we could think about the futures curve for ultra-deepwater pricing could you help us understand what your viewpoint of that curve might look like? And then is the inflection point higher really now a 2021 event or is it a late kind of 2020 event?

Hello, good morning. So I think when we -- when I look at my comments in our prepared remarks, what is clear is that we have seen a recovery in ultra-deepwater, and if we think back to sort of 2016-2017, the total utilization for floaters has come up from about 50% to about 66%, and market utilization is gone from less than 70% to over 80% today. So we're on a good trajectory of improving our floater utilization. And as I mentioned in my prepared remarks, we have a significant number of FIDs. So we are seeing floater utilization go up, and correspondingly we have seen floater pricing go up. And floater pricing is up. Where, as I mentioned, we are working against contracts which are generating cash flow, which is good news. And that wasn't the case two years ago. We are seeing on a number on a number of floater contracts which are -- there are a lot of floater contracts, and the teams are very busy here preparing responding to tenders, and frankly very busy on the floating side, but the length of the contracts they're responding to are shorter than when we would like. And so if we think about contracts that's just starting between now and the end of 2020, more than two-thirds of them are less than one year in duration. And so while utilization has gone up and we are seeing pricing momentum, the short-term nature of these contracts means that we won't see that much pricing momentum in the second-half of 2019 or in the first-half of 2020. Now hopefully, we're wrong and we see more acceleration in pricing. But given the short-term nature, what we're seeing, a lot of the competitors in the market are going to be focused on getting this rig to work and then worried about the contract straight after it, and so, keeping rigs that are working. Now, as we think [indiscernible] into the latter-half of 2020 and into 2021, we expect to see some longer-term work and we are seeing more longer term work every month, more longer-term contracts appear, but right now the majority of the contracts are less than one year in duration. And so therefore, we won't see much pricing momentum in the short-term.

Okay, that's helpful. And maybe if we think about that your ultra-deepwater fleet and clearly, you've got a handful of Tier-1 floaters that will roll-off in next several months, and you've got at least two warm stack, high-end floaters. If we think about rigs, like the DS-4 and DS-6 still very capable rigs, but probably a step-down from the bucket I just talked about, what sort of the marketability outlook for those two rigs moving forward?

Well, it really depends on the application that the customers have. So I would say that, the DS-4 and the DS-6. You know, the DS-4 for example, has just finished a job in West Africa and it's available right now, but it is a hot rig and customers are looking for assets which have been working recently. So it's not all gloom on the light sixth-generation rigs like the DS-4 because it's really about the customers application, is that they are drilling, if the needs of the reservoirs they are drilling into are in a very deepwater or very, very high-end work. And then perhaps that's not the rig, not the rig that's needed, but a lot of the applications, the DS-4 is just fine, as well, as being shown in the work. It's just done in West Africa. There is no doubt customers are more focused on the high-end rigs. On have on the seventh-generation rigs, but the DS-4 is still an excellent rig and it's got it's place in the market.

Okay. Thanks for that. I'll turn it back.

Thank you, Taylor.

Our next question comes from Kurt Hallead from RBC. Please go ahead with your question.

Hey, good morning.

Hi, good morning, Kurt.

I appreciate the color and the update and perspective on the dynamics to play in the market over overall. I think maybe Tom just in the dynamics of how you outlined the short duration and the churn, if you will, that's going to occur in the marketplace? Yes just curious when you say the pricing momentum or won't see much pricing momentum into the first-half of 2020, would you suggest that the pricing momentum is completely going to stall? Or just from an upward dynamic? It's, going to maybe inch along from here, instead of maybe take a serious step? Can you just maybe provide a little bit more context to that?

Sure. So it's hard? It's, I would say, it's more likely the latter. We'll see pricing improvements, but we certainly aren't going to see, we're not expecting to see a fair step up. But we are not expecting it to store but again, we are seeing utilization go up, we are seeing rigs being re-contracted. We are seeing in South America more assets being put to work. So, utilization is improving and it will continue to improve but the short term of the contracts will mean that, even though utilization is pushing up, we're not expecting to see significantly, increased pricing momentum, doesn't mean it's going to store, but it doesn't feel like it's going to take a jump up.

Okay, I appreciate that context, Tom. In the dynamic of the guidance points that have been provided for the third quarter in initial outlook into maybe the fourth quarter from an operating cost standpoint. Just kind of curious with the reduction in your debt, is that, I guess that's going to map out to be what about less than $100 million of interest expense for the second-half of the year per quarter? Is that about, right? If I were to kind of map that out?

That's about right. Yes, so we're our run rate is just around 400 pro forma for the tender, so roughly about a 100. And just keep in mind, Kurt, that's on a book basis, the cash is a bit different. And so, third quarter for us is typically a higher cash interest expense. But your numbers are in line.

Okay. And just wondering if you might be able to just offer us on -- you provided the guidance or the input for ARO EBITDA for the full-year, what's the flow through in the current equity and earnings line for the year for ARO?

Well, for the year, we didn't provide any guidance for the year, but you can see Q2 and what I'd say is that, it's highly contracted fleet. So there's a lot less variability than maybe the broader Valaris fleet, and so, if you look, one of the interesting things here and I'll probably use this opportunity to kind of make a point on the purchase accounting aspect of this, but if you look at the equity earnings, that flows through this quarter, it's really, it's less, it's about $0.5 million. But if you look at and I'll guide you there's a bit more detail, if you look at this, these footnotes for in the 10-Q, but if you look without the amortization of the purchase accounting, the equity interest is $8.4 million. And so, it's probably fair to look at that as kind of the more normalized run rate for the business. But because we have to write that when the merger happened, we had to write up our investment. And then amortize that, we effectively knock off a lot of the net income there due to purchase accounting, which is what you see flowing through on the income statements.

That's perfect. That's great. That's great color. I really appreciate that. I'll keep it there. Thank you, guys. Bye.

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

Yes, hi everybody. Thank you and good morning.

Hi, Greg.

Hi, Greg.

Jon, I think in your prepared remarks, you mentioned about ARO and the potential financing opportunities around ARO, any kind of color, you could provide us around that?

Well, certainly what we've said, in the past, Greg still it remains true that obviously, we are a couple, just as in two years into our journey with ARO as far as operating. We have a highly contracted fleet. We are right, as I mentioned in my remarks, we are right in the middle of determining a new build project, which is flipped a little bit because of negotiations with the shipyard, as well as, there is a shipyard construction being pushed a bit to the right. But things are going well, with ARO. As far as the capital structure, we will -- once we understand the tempo and the timing of the new builds, then we'll determine what the right next steps are. One of those steps would be putting in an involving credit facility. Another one would be making sure we have the right construction financing for the new builds. And another one might be bringing in some external debt. So, but until we actually, find the -- we have some visibility on the new bill program, which is premature to start changing the capital structure.

Okay, great. And then just one more for me, you mentioned, and you can -- I think you called out three of the older floaters. And then, you kind of follow that up with comments around assets sales. As we think about asset sales, I mean, historically, I mean, I guess, we have a name change, but historically, Ensco has been very good at kind of renewing the fleet getting selling older assets, bringing in I mean, as we think about asset sales, really, should I be thinking? Should we be thinking about these as really just, legacy non-core assets? Or do you think we can? Or do you see a scenario where maybe we could even sell some of the more valuable higher end rigs, just as you mentioned you have more ultra-deepwater rigs than anyone else on the world?

Yes, we would look at all avenues. With respect to the rigs that I mentioned in the -- in my prepared remarks, I would say that, we will evaluate those rigs, we continue to evaluate them, we have a very, very robust understanding of the need as far as upgrades, special split surveys, et cetera. So we'll look at those rigs as a role of contracts over the next nine months and then determine what the right role is for them. And whether we should keep them in the fleet, if there's a good opportunity for them or we should sell them, and you're correct, the company has sold a lot of assets over the last 10 years. With respect to sales of other rigs, nothing is off the table, we certainly look at what we believe the assets are worth, and from our cash flow generation over time and what will we're able to get to them and nothing is off the table.

Okay great. And then okay guys and congratulations on the tender. That was a really big deal for you guys. So thank you very much.

Thank you, Rick.

Our next question comes from Chase Mulvehill from Bank of America. Please go ahead with your question.

Hey, thanks, good morning. So I guess I wanted to talk about the debt relief. Maybe you talked a little bit about this earlier in the call but often a little late but maybe did you provide any timing or maybe the amount of refinancing that you expect to do on the debt side and then talk about maybe whether you'd prefer to secured debt or preferred guaranteed notes?

Yes, sure, Chase. So we actually haven't covered that much detail, so I will cover some new ground with my comments. But in terms of just in the prepared remarks, I did mention the fact that on top of the debt tender which you versed on, we did just repay the 2019 maturities that we had due today. So those are repaid and we did draw on our revolver to do that. Right now we're drawn on the revolver at $125 million. So we are going to look at external funding sources to potentially continue to improve our liquidity. And so, those funding sources could be secured debt or guaranteed debt. I mentioned that right now, we have a completely unsecured capital structure with gross asset value of $11 billion per third-party. We have a book capitalization of over $18 billion and for even the prior question we have the ability to monetize assets as well. So we're going to look at all funding sources we have in the current environment to continue to bolster our liquidity to manage our way through the cycle in the current conditions.

Okay, all right. And on the timing would you expect something to happen in the third quarter here?

Yes, Chase. I think what you've seen is that we're going to continue to be opportunistic. It's we're not going to rule anything off the table but we're also not narrowing in, I think we continue to watch the market look for opportunities. We certainly have no need to rush out to the markets to do anything. We have ample liquidity at the moment. If you look at the liquidity, we have we still have the $2.3 billion on the credit facility which does tick down to $1.7 billion. But with that that amount of liquidity, we can be patient and wait for the appropriate market window.

All right, that makes sense. And on the CapEx side, have you given any color around 2020 CapEx would you care to provide any color. Maybe we can kind of use the back half run rate as maybe as a starting point for 2020 is that a good starting point?

Well we haven't provided 2020 guidance just yet Chase. But what I would say is that we've effectively if you look at 2019 versus 2020, we're effectively passed the newbuild program moving forward. We do have the DS-13 and the DS-14 that are outstanding. I'm putting those in a different bucket because we do have the ability to roll that CapEx into a notes receivable. But barring those two rigs if you just look at kind of the kind of the sustaining CapEx and the run rate kind of the base CapEx that's something that will clearly have next year but we haven't gone through our capital kind of planning cycle yet. So we don't have any guidance for that.

Okay, understood. I'll turn it back over. Thanks Jon.

And our next question comes from Vebs Vaishnav from Howard Weil. Please go ahead with your question.

Hey, good morning, and thank you for taking my questions. Can you talk about going forward with all the changes you have done in the debt. How do we think about the cash interest expense? I think tell us a little bit about that and how to think about cash taxes and maintenance CapEx?

Sorry just to clarify. So cash interest expense, cash taxes, and what is last thing?

Maintenance CapEx for the pro forma company?

Yes, so I'll start with the cash interest expense and I think you're looking for more of a run rate, and so as I mentioned, our cash interest right now pro forma for the tender are our debt. I call it our unsecured bonds carry an interest expense of roughly $400 million. If we are to draw on the revolver for additional funding needs that will add to that interest expense and so you saw that we shaved off about $52 million from the tender that we just did from our bonds. However that will be partially offset by any revolver draw that we do, so I mentioned we just drew this week in order to pay down the 2020 maturities. And so, as you go forward the cash interest expense will be somewhat higher if we need to draw on that revolver further and in the current environment with the environment that we have today, we do anticipate that we are going to continue to be drawing on that revolver which will increase that that cash interest expense. On a cash taxes standpoint, I don't know if we have. It's very hard to guide to it to run rate on that. I think we could probably go through that a bit more detail offline, if you want to kind of understand how taxes work. But it really is a function of what jurisdictions we are working in, the timing of contracts. And as you know, we do make profits in certain jurisdictions even though we are operating at a net loss today, our cash taxes are very much impacted by where we're working in the margins in different jurisdictions which does change over time and so it's much harder to provide a kind of a run rate for that one. But if you look at kind of the current quarters as a probably fairly decent guides to kind of the near-term anywhere near-term being maybe the next quarter or two but it will very much be a function of our business mix. And then there is some base level taxes that we will be paying just based on our jurisdiction that we operate in our structure. So I know that's not completely clear but it's taxes isn't variability just based on the operating profile.

And I guess maintenance CapEx how should we think about it going forward?

Yes, and similar to what I mentioned with Chase. We don't have guidance out there from a long-term basis. I would say that if you look at kind of where we're at between now and the end of this current year's CapEx cycle or at least the back half of the year that's probably good guidance for the end of the next. That is the guidance for the next six months next year, we're going to have our capital budgeting cycle later this year where we'll look at 2020. We've completed the merger in the last quarter so it's something we need to get together and really do an assessment on the fleet on what the type of maintenance run rate we really want to have as a pro forma fleet in the current environment. And so, it's probably premature to guide to it but sufficed to say that on a gross CapEx basis, we should be lower year-over-year given that we don't have the same number of upgrades and enhancements that we have this year barring the two DS-13 and the DS-14 which we can roll those into a promissory note. So stay tuned, we'll provide a bit more guidance on that in the coming quarter.

Okay. And as we think about the debt markets like can you say like what bankers are telling you about, how open the debt markets are either on unsecured basis or secured basis?

It's hard to comment, I think you can probably talk to your bankers and get the same input. I mean you can see where the bonds are trading clearly it's a bit of a challenge market right now which is one of the reasons why we did the debt tender, so it was that the bonds have really traded off. And so, we were able to capture a meaningful discount, so mentioned 24% discount. So you can read through where our bonds are trading now and the discount that they're at the yields that we purchase those bonds that is a bit of a proxy for new issuance. Obviously there would be some variances and a new issuance then where they're trading, but it's very much market dependent and it could trade. So I don't change I said don't necessary I want to provide guidance out there but using that you could look at the yield on our bonds as a proxy. And clearly if we were to do anything that was senior to the current bonds, we would expect that those would trade at a premium to the current complex given a similar type of tenor but the market is challenged at the moment.

Got it. Thank you so much for taking my questions.

Thank you.

And ladies and gentlemen we've reached the end of today's question-and-answer session. At this time, I'd like to turn the conference call back over to Nick for any closing remarks.

Thanks, Jamie, and thank you to everyone on the call today for your interest in Valaris. We look forward to speaking with you again when we report third quarter 2019 results. Have a great rest of your day.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.