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.

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 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 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.

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,…

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…

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

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?

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.

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?

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.

Okay. Got it.

Does that make sense Jim?

Yes. Sure. It is. Thanks a lot.

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

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?

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.

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.

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?

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.

Good. Thanks Jon.

Thanks, Ian.

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

Hey, thank you.

Hi, Sean.

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?

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.

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?

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?

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.

Very good. Appreciate the feedback. Thanks.

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

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

Hey, Greg.

Good morning, Greg.

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?

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?

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.

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?

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.

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

Thanks, Greg.

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

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?

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.

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.

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?

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.

Thanks very much.

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.

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.