Good day and welcome to the Valaris Third Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Darin Gibbins, Vice President of Investor Relations and Treasurer. Please go ahead.

Welcome, everyone, to the Valaris third quarter 2022 conference call. With me today are President and CEO, Anton Dibowitz; Senior Vice President and CFO, Chris Weber and other members of our executive management team. We issued our press release which is available on our website of 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, yesterday, we issued our most recent Fleet Status Report which provides details on contracts across our rig fleet. An updated investor presentation and ARO Drilling presentation will be available on our website after the call. Now, I’ll turn the call over to Anton Dibowitz, President and CEO.

Thanks, Darin, and good morning and afternoon to everyone. During today's call, I will start by providing an overview of our performance during the quarter. I'll then provide commentary on the outlook for the offshore drilling market and discuss our strategy for maximizing shareholder value during the unfolding industry up cycle. After that, I'll hand the call over to Chris to discuss our financial results and guidance. We continue to deliver strong operational performance to our customers, with revenue efficiency of 96% in the third quarter and 97% year-to-date. We are committed to maintaining high levels of safety performance, which is particularly important given increasing activity levels. Our safety performance is the result of the focus and dedication of the Valaris team in several programs that we have implemented. These include our bold leadership training courses that we run every other week, our behavior-based safety program with supervisors mentor and engage with junior crews to ensure that they understand and are adhering to our safe systems of work, and a new format for our basic training program in the U.S. Gulf of Mexico, utilized at one of our stacked rigs in the U.S. Gulf. We believe that this format for basic training will help new employees, especially those who are new to the industry, to be better prepared for the offshore working and living environment, and deployment on-board our working rigs. Since its inception, we have averaged 18 new hire employees graduating every two weeks. I'm pleased that these efforts have been recognized by our customers with Valaris recently being rated the number one offshore driller in EnergyPoint Research's 2022 customer satisfaction survey. Valaris was number one nine categories including total satisfaction, health safety in environment and job quality. These awards are estimate to the exceptional work that our dedicated…

Thanks, Anton, and good morning and afternoon, everyone. I am pleased to be speaking to you all today on my first conference call as CFO of Valaris, an exciting time for our business in the offshore drilling industry as a whole. We believe that the positive outlook for commodity supply and demand in the meaningful reduction in rig capacity over the past several years provide the backdrop for a multi-year industry up cycle. In my prepared remarks today, I'll provide an overview of third quarter results and our outlook for the fourth quarter. In addition, I will briefly review our financial position and capital structure. I would also highlight our third quarter results press release, which includes our trailing five quarter analysis for the income statement, balance sheet, and cash flows, as well as various supplemental data in our latest Fleet Status Report that we published yesterday. Moving now to the third quarter results, as Anton mentioned earlier, the return of four reactivated floaters to the active fleet over the past several months has contributed to a meaningful improvement in our third quarter operating results. Adjusted EBITDA with $76 million compared to $29 million in the prior quarter. And adjusted EBITDAR, adding back onetime reactivation costs was $94 million compared to $54 million in the prior quarter. Revenues were $437 million compared to $413 million in the prior quarter, excluding reimbursable items, revenues increased to $415 million from 385 million, primarily due to higher utilization for floaters and higher average day rates for both the floater and jackup fleets. Partially offset by a $51 million termination fee related to the termination of a contract for VALARIS DS-11 recognized during the prior quarter. Floater revenues increased primarily due to the impact of reactivated rigs returning to work as VALARIS DS-4 and…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Greg Lewis with BTIG. Please go ahead.

I guess my first question is more of a market question. Clearly, the U.S. Gulf of Mexico got day rates going higher earlier this year. You've seen a pick now in the overall pace and [indiscernible] it seems like it seems like rates pretty much everywhere really other than the North Sea. As we think about that, we see that continue to unfold, realizing budget seasons are being set. As we look out in the 2020 and beyond, it seems like customers have been, contractor drilling customers seem to be willing to pay up more for short-term contracts than kind of extend their taking a rig for longer-term. Just given the fact that rates continue to go up on, I don’t know, weekly, monthly basis. Are you starting to see customers coming into the market looking to get longer rates than maybe they have been recently?

Hi, Greg, I can take that. I think it's a fair observation. I think a couple of observations about what we seeing on contract durations and day rates. I think the first thing is to remember, as I said in my prepared remarks, that contract leading edge day rates for ships have almost doubled 12 or have doubled over the last two years from 2020 to 2022 from around $200,000 to $400,000 a day. As we went through the beginning of the last down cycle, there were a lot of our customers who were caught very long rigs, I'll call it that way, and there was this significant amount of money that was spent on terminations. I think there is a general reluctance from customers to contract for longer than they know they need a rig four the program that they have in place. So, shorter exploration programs, although those have stretched out a little bit as supply, available supply of rigs has diminished kind of pushing towards a year and development programs in the kind of one to three year, and I think we we're going to see that for a period going forward. That being said, even if we look at reactivation economics, as we did on the DS-17, being able to get an 18-month or two-year contract that day rates are -- that are in the high 300s low 400s makes for an attractive program. But while there is some available stacked capacity that can still be brought to market at those rates and some stranded assets at the yard, I think, that's going to be a feature of the market for a period going forward, but not a market that we can't make good business at.

Our next question will come from Fredrik Stene with Clarksons Platou Securities. Please go ahead.

Nice to see the stack capacity coming on online and in boosting that performance. So, I have a few questions, but I'll try to be short. I think, in terms of the supply side there, I think I agree with you that for now this doesn't really seem like there will be a newbuild cycle here. And with some of the, call it easy reactivations out of the way, both from you and some of your peers, we've seen that the threshold for that called stack or smart spec capacity to come back, if that discipline is being reflected into bid day rates. And I think, I've seen the DS-7 and the DS-8 show up in some of the Brazil tenders here and the rates that you've put forth there seems to be around 500,000 or three, four years. So do you think that's where it needs to be for this to come out? Or are you looking at other opportunities for that capacity elsewhere outside of Brazil as well?

Perfect. Some good observations and obviously not going to get into the specifics of commercial strategy and where we're bidding, but what I will say is that there are attractive economics to bring rigs out. I think we're looking at all in day rates, some of the numbers that you're referring to includes as we've done on previous reactivations where we're getting the customer to contribute partly to our reactivation, which was not a feature of the market 9, 12 months ago. And those get added into the day rates. There are attractive opportunities where the market is right now for us to reactivate assets. But as we've said all along, we see the demand ticking up growth year-over-year and projected kind of 7%, 8% compound annual growth in demand for deepwater offshore floaters. You look at the rise that numbers over the next few years, and we're going to be disciplined in finding the right opportunities to bring our remaining stack capacity. Now, there are many factors that go into that, obviously day rate is an important part of it, but it's also what location are we putting the rig into. Is there an expectation of follow-on work in that basin? We have been very focused on concentrating our rigs in the Golden Triangle so that we can get efficiency and benefit of scale in there. What is -- who is the customer? What are the other contract terms beyond just the headline day rates and the go forward program that we can get from there? So yes, I think the day rates are attractive and we see opportunities for 7, 8 and 11 and not fitting them in a number of programs, but we will be patient and disciplined in putting them back to work in the right basin with the right customers and in the right market.

Thank you, very helpful. And just a follow-up on that for, I guess, the way I see it in the Golden Triangle. I'm really worried about it being enough supply with what's currently warm. But there is also when you compare the backlog now versus where we were '12, '13, '14, the forward coverage is still kind of lackluster. There is still overall lack of term on average versus where we were in the previous cycle. And I guess that's also something you would consider when bringing things back that you don't end up probably cannibalizing your current to more in fleet when you do that?

Absolutely, I think you have it precisely right there. I think both Chris and I mentioned, our first priority is to keep our active fleet highly utilized and to bring out our stack fleet back for the right opportunity. And the kind of your question and Greg's question before, there are -- there is not as we have seen in previous cycles, we haven't got to that point in the cycle at least yet where there is long-term, multi-year, four, five year contract backlog coverage on the floater fleet in general, which means we need to be very thoughtful about how we manage our fleet profile and how we manage our business. But given the right opportunities, given that an initial program, including a reactivation, provides meaningful returns, we do see place and incremental demand coming through for us to do additional reactivations. But yes, we have to manage the business, the business where we are in the cycle and needs to be managed carefully.

Perfect. And then just two super quick ones. Short-term investments. Can you comment on exactly what that is? Or if you said it, I didn't catch it? And second, the rig sale of $64, would you consider that an arm's length sales because the price points for a 40-year old rig is, in my view, fantastic. So I just need to make sure that, I understand it or see it correctly. Thanks.

This is Chris. On short-term investments, that was just a time deposit that went over 90 days, so just trying to get a little extra yield on the cash, so nothing more than that.

Yes. And on the rig sale, absolutely in arm's-length transaction, I mean, for us, we operate a high spec fleet. Most of our fleet is in the top quartile on the top half. And that's what we do well and serve those customers. 54 is a 40-year old asset, needs significant capital and we have more, more opportune places to invest that capital. But for somebody else, who wants to operate in a different market that may make sense for him. So, absolutely an arm's-length transaction, I think just speaks to how the jackup market has strengthened broad-based over the last six, nine months.

Thank you. Our next question will come from David Smith with Pickering Energy Partners. Please go ahead.

I wanted to circle back to the Norwegian jackup market. You mentioned moving this [indiscernible] to UK. I think to put it up in Dundee, I think, is that in anticipation of potential UK work, is that mostly to lower the warm stack costs?

Yes, so well say about Norway and I think we've tried to be quite upfront and clear about the Norway market. There's a market that historically has carried at some points in time up to close to 15 rigs operating at its height and is down almost down almost a third. Relocating the rig, we have already relocated one of the end-class onto a contract in the UK. We don't see the opportunities in the near-term demand in Norway. Generally, Norway is, is featured by having very long lead times in their contracting process. So you can see 9, 12 months out what the demand is going to be. And we just don't see the demand from the operators in the north. I'm not going to get into the commercials of what we're looking at for those rigs, but there are opportunities. The great thing, I mean, these assets are mobile. They can operate in, in the UK or in the remainder of the North Sea, just as easily as they can operate in Norway. And if we don't see the future demand in Norway and we don't see it, then we will look for opportunities elsewhere and wait for the Norway market to be better and stronger. And obviously, they will remain, um, capable of operating Norway. They have the suit and we will bring them back to the Norwegian market when there's a better market there.

Wondering, I guess, two quick follow-up to that. Could you talk about potential opportunities to, to deploy in class jackups outside of the North Sea and then related how should we think about idle costs for these jack ups? And I hate to ask them maybe what you might need to see before you would consider preservation stacking one.

Absolutely, the end-class, as opposed to some of the bigger Norway jackup is -- it can work outside the North Sea. Obviously, we'd like to keep. It's better utilized in harsh environment. The roads were built for harsh environments, so we can, if we can find attractive opportunities in the North Sea and not take it too far afield. But absolutely, if it makes sense for the right contract, we will absolutely move it outside the North Sea if there's an attractive opportunity. As far as stacking costs, I wouldn't put the stacking cost of a jackup. They're relatively, relatively small and I wouldn't put the stacking cost of an end-class much different from any other jackup kind of in the $3,000 to $5,000 a day range.

If I could sneak one more in, I don't want to read too much into your introductory comments, but I did want revisit your remark about the unlikelihood. I think you said specifically seeing another floater newbuild cycle. So, I wanted to ask outside of ARO, would you make the same comment about backups?

For the medium-term, absolutely, yes, I think there is a difference between building jackups and building floaters. There's a lower investment cost there, a lot more yards that could potentially build jackups if the market gets very high and stays that way for a significant period of time. Look, I think, we're a long way away from that today, but if you ask me as a comparison between the two, the chances of a newbuild cycle in jackup versus in floaters, I think there is a relative difference. But I do think we're quite away from that.

[Operator Instructions] Our next question will come from Samantha Ho with Evercore ISI. Please go ahead.

Congrats on the nice quarter. Anton, I thought it was interesting that you kicked off your prepared remarks about -- talking about your new training facility, and pretty impressive that you graduated 18 new candidates every two weeks. I was just wondering if you could talk about where you're finding this I guess new employees or how are you -- and what are you thinking in terms of the pace at which you need to keep adding new graduates? Is this -- I mean, are you putting them out to work in like your fleet worldwide, like how is this -- and then the other thing is this being expense, or is this capitalist?

Hi, Samantha. No problem. No, look, obviously as the fleet, as the whole business activity levels increased, there is increasing competition for people and attracting people. Now, the facility we're talking about in the Gulf of Mexico is really for entry level people coming in kind of floor hands kind of at the bottom level as we're training them up. And we've lost a lot of people from the industry through the down cycle. And some of those folks aren't coming back. So for us it's about bringing new entry level people who've maybe never worked offshore before and getting them used to what the offshore working environment is. And it's one thing to learn it in a training facility on land and then go out offshore and have to do with that environment. And we just thought this was a great way to actually have people live on a rig for a couple of weeks while they're doing training, be able to see what a rig floor looks like, to be able to practice lifting operations with real cranes, and really get into the environment. Partly, so they could see whether they liked the environment and they -- it wasn't a surprise to them and they felt comfortable on the rig when they got out there. And we've had great response from the folks who are doing that. So for us we went through this period of reactivating four floaters, which was a huge lift for the organization. And we will continue to reactivate rigs, but that will be at a kind of a more measured pace that will have four going on simultaneously. But let's see. But this is really about building our pipeline and having the people who working on our rigs understand our culture, understand our safe systems of work, and be safe and successful when they get out onto a working facility.

And this is Chris. It is expense, but I mean, when we look at this it is, as I mentioned, this is about a pipeline and with turnover you're always needing to bring crews in, especially for these junior level positions. So, we think it's a really cost effective solution to manage that.

To be clear, these are people who are -- we know are going off to a working assets, so they're hired, we would be doing the training. This is part of normal business. This isn't an incremental amount that we're adding to the cost base. So, it's about where and how we do our training for our people. We trained to option.

And also trying to if it's not the right fit for someone, we want to know sooner rather than later.

Got it. Okay, thank you. I think, if I squeeze on more, it was interesting to see what you guys bid for the, I think, for the eight and nine into the Petrobras tender. Probably assume that there is the reactivation cost in there of maybe some upgrades and then also moves kind of rolled up into that bid. And then I also thought it was kind of interesting that PT noted this morning that they plan on adding two more deepwater rigs in the Gulf of Mexico. But I'm just kind of wondering with all your closet floaters in the Canary Islands, how are you thinking about balancing, where you add that incremental reactivation like between the Golden Triangle? How should we think about the difference between what you need on the day rate side versus what it costs incrementally working in each of those three basins and like, where you would really like to add more scale on your floater operation geographically?

Well, right now, we have three rigs at each point of the Golden Triangle, and we have three high-spec drill ships. So in a perfect world, put one in each corner. Look, we will see where the most attractive opportunities are and deploy them to those. There are quite different requirements in each of the markets. Brazil and Petrobras in particular have very specific requirements about how they like their rigs setup as to most operators, but Brazil in particular Petrobras certain equipment being set up a certain way. So there is an upgrade in CapEx components to those rates. One of the features of that contract structure is also that, bridge bid that comes out, they limit the upfront, you can call it, mobilization and upfront payment to a number of days times the day rate that you get, normally in order of about 70 days. So your day rate needs to reflect, if there is an amount that you can't recover under that upfront payment. So, it's kind of function of how that market operates versus others. But to your question, I think there are opportunities at all corners of the Golden Triangle. There is incremental work coming in Africa, West Africa, North Africa, that are attractive opportunities for our cold stacked assets. We obviously talked about the incremental demand. We have just had the seven rigs tender, the [indiscernible] tenders out. There is still a couple of rigs that need to be secured for [indiscernible] [BMS 11] which haven't been secured yet. And I think when you look at the day rates that will bid into that Petrobras tender without getting into specifics, you saw a clear delineation between folks, who already had a rig in market and were wanting to make sure that they continued to be operating there versus the folks who were bringing rigs from outside the market into the market, and seeking compensation for the upgrade, CapEx and the mobilization that would be required to bring a rig into the market.

I think as Anton, sorry, the nice thing is we already have three rigs in each of key basins. And so you have already got a scale position there. So it gives us flexibility.

This concludes our question-and-answer session. I would like to turn the conference back over to Darin Gibbins for any closing remarks.

Thanks Matt and thank you to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our fourth quarter 2022 results. Have a great rest of your day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.