Valaris Limited (VAL) Q1 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the Valaris First Quarter 2024 Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Nick Georgas, Vice President, Treasurer and Investor Relations. Please go ahead.

Welcome, everyone, to the Valaris First Quarter 2024 Conference Call. With me today are President and CEO, Anton Dibowitz, Senior Vice President and CFO, Chris Weber, Senior Vice President and CCO, Matt Lyne; 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, earlier this week, we issued our most recent Fleet Status Report, which provides details on contracts across our rig fleet. An updated investor presentation will be available on our website after the call. Now I'll turn the call over to Anton Dibowitz, President and CEO.

Thanks, Nick, and good morning and afternoon to everyone. During today's call, I'll begin with an overview of our performance during the quarter and provide an update on the offshore drilling market. I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and provide some additional color on recent contract awards as well as our contracting outlook. After that, Chris will discuss our financial results and guidance before I finish with some closing comments. To begin, I want to highlight some key points about our business that we will cover in more detail during this call. First, I'm very pleased with our start to 2024. Thanks to the efforts and focus of the entire Valaris team, we delivered strong safety, operational and financial performance and a great first quarter. Second, we continue to make progress towards underwriting our earnings growth by securing new contracts at higher day rates and consistently building our contract backlog. This past quarter marks the sixth consecutive increase in our backlog, which now totals more than $4 billion. And finally, we expect that the levels of customer demand we are seeing, particularly for work that is expected to commence in 2025 and 2026 will continue to support our anticipated earnings and cash flow growth over the next few years. And we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it. From a safety and operations perspective, our performance during the first 3 months of the year was excellent. We finished the quarter with no lost time incidents and fleet-wide revenue efficiency of 97%, a great achievement by the entire Valaris team, both offshore and onshore. With several rigs celebrate safety milestones during the quarter, and I'd like to congratulate in particular, the VALARIS 75 for reaching 5 years without a recordable incident. As well as the VALARIS 110 and 120 for each reaching 3 years without a recordable incidents. Well done to everyone involved. I also want to congratulate the crews of VALARIS DS-8 for achieving a successful audit from ANP, the oil and gas regulatory body in Brazil with positive feedback on the rig condition, safety culture and maintenance processes following the rig's reactivation, allowing for a smooth contract start-up ahead of schedule. DS-8 is the fifth drillship that we have reactivated over the past 2 years. We are proud of our industry-leading track record of executing reactivation projects and we remain highly focused on delivering another successful startup for DS-7, which is due to commence a multiyear contract offshore West Africa later this quarter following its reactivation. Importantly, our strong safety and operational performance during the first quarter helped us deliver better-than-expected financial results. In the first quarter, adjusted EBITDA was $54 million, and adjusted EBITDAR, adding back onetime reactivation costs was $84 million. These results were better than our guidance, primarily due to the high levels of revenue efficiency that our team delivered during the quarter. Chris will provide further details on our financial results and guidance a little later. Turning now to the broader offshore drilling market. Oil prices have increased since the beginning of the year, driven by demand growth, heightened geopolitical tensions and an extension of OPEC plus production cuts. The combination of these factors has led to the prospect of a tighter supply-demand balance through the rest of the year. Looking up further, the 5-year Brent forward price is above $70 per barrel. A level at which more than 90% of undeveloped offshore reserves are expected to be profitable. As a result, commodity prices remain very supportive for continued investment in long-cycle offshore projects. We see positive signs from the leading indicators of offshore rig demand with global upstream CapEx and offshore FIDs both expected to see strong growth through 2026. The floater market continues to improve. With the contracted benign environment float account increasing to its highest point since late 2016. We are also seeing increased contract durations with new drill fixtures signed so far this year averaging more than 2 years of term for the first time since 2014. The growth in opportunities with longer durations as well as increased lead times between contract award and commencement are both supportive of a sustained up cycle. While we expect to see some gaps in rig schedules this year and certain programs have pushed to 2025, leading-edge day rates continue to gradually move higher. And we have recently seen an increasing number of day rate fixtures in the high 400s and some in the low 500,000. We believe that rates will continue to move higher as demand increases. Average contract durations grow and sideline capacity is absorbed into the market. We continue to focus on maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best contract economics possible in each unique bidding situation. We anticipate contract awards for the programs currently being tendered will pick up pace over the remainder of the year. We believe that 2- to 3-year programs are likely to be awarded at or close to leading edge rates. Beyond these, we may see a range of rates for shorter-term jobs. Whether for gapfill jobs to avoid idle time or opportunistic pricing for rigs in the right place at the right time. We continue to see customer interest in our stack seventh-generation drillships, VALARIS DS-11, DS-13 and DS-14. These rigs are the highest specification assets remaining on the sidelines, and we are in active discussions with customers to put these rigs to work. We will only reactivate these rigs for opportunities that we expect will provide a meaningful return on the reactivation costs over the firm contract term. Moving to shallow water. The global jackup market remains tight. Marketed utilization is nearly 95% and the contracted rig count ended the first quarter at its highest level in nearly a decade. On our fourth quarter call, we discussed the announcement from Saudi Arabia that the Kingdom was delaying plans to increase its maximum sustainable capacity. As expected, the direct impact on our business has been minimal with ARO receiving a contract suspension notice for just 1 of its 19 rigs. VALARIS 143, which Valaris leases to ARO. VALARIS 143 is a highly capable modern jackup and we see opportunities to work the rig outside of Saudi. As such, we made the decision to terminate the contract rather than accepting a 12-month suspension, resulting in a loss of $4 million of backlog. The rig will be delivered back to Valaris in the coming weeks. We are actively pursuing contracting opportunities in other markets, and we'll be patient to find the right job for the rig. More broadly, offshore drilling contractors have announced Saudi Aramco contract suspensions for a total of 22 rigs. We believe that approximately half of these rigs are likely to be competitive in other high-specification benign environment markets such as Southeast Asia, West Africa and the broader Middle East. While it's not clear how many of these suspended rigs may ultimately leave Saudi Arabia, we expect there to be sufficient incremental demand to absorb them in an orderly fashion. In terms of the harsh environment market, the supply-demand balance in the North Sea improved meaningfully in the latter half of 2023, and fundamentals have remained positive since then. Market utilization in this region is currently 91%. Our rigs are fully contracted for 2024, and we see robust customer interest for programs that line up well with our 2025 availability. Before I finish, I'd like to briefly comment on our capital return program. Last year, we returned $200 million to shareholders through our share repurchase program. Earlier this year, the Board increased our repurchase authorization to $600 million from $300 million, and we intend to use it opportunistically. Looking ahead, we expect to generate meaningful and sustained free cash flow in 2025 and beyond, and we intend to return all future free cash flow to shareholders unless there is a better or more value accretive use for it. Now I'll hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our recent contracting success and our contracting outlook.

Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of the first quarter, we have secured new contracts and extensions with associated contract backlog of more than $520 million. These awards have increased our total backlog to more than $4 billion, representing a 43% increase over the past 12 months and our sixth consecutive quarter of backlog growth. Recent awards include a multiyear contract offshore Angola for the VALARIS 144 at a leading-edge day rate for a benign environment jackup, along with 3-year extensions for Mad Dog and Thunder Horse, which we manage on behalf of BP in the U.S. Gulf of Mexico. For floaters, we saw priced options exercised on VALARIS DS-9 with Exxon offshore Angola. And the DS 17 with Equinor offshore Brazil, the latter of which was a day rate of $497,000. The exercise of these options extends the firm programs for these rigs into mid-2025, as well as our partnerships with these important customers in key deepwater basins. Moving now to an overview of the major markets, starting with floaters. The contracted benign environment floater count increased to 127 rigs during the first quarter, its highest point since late 2016 and an increase of 26 contracted rigs since the lows reached in early 2021. We continue to see a strong customer preference for high-specification seventh-generation drillships which comprised 12 of the 13 drillships in the Valaris fleet. Marketed utilization for this class of assets stands at 92% globally and has exceeded 90% since early 2023. These high levels of utilization have resulted in a continued improvement in average day rates for new contracts, which have increased from approximately $450,000 in the second half of 2023 to approximately $480,000 through the first 4 months of 2024. Looking at expected future demand and ongoing tenders, we continue to see Brazil, Africa and the Mediterranean combined, accounting for more than 60% of the roughly 30 floater opportunities we are tracking with durations of at least 1 year. We anticipate that 10 to 15 of these opportunities will need to be met by either incremental reactivations of stacked or newbuild rigs or active rigs moving regions. In Brazil, Petrobras currently has 31 contracted floaters, including 6 rigs that have yet to commence contracts. Petrobras has 2 ongoing tenders, Roncador and Sepia, with the potential for another tender to be launched later this year. IOCs are also evaluating potential programs in Brazil, and the combination of these may result in incremental rigs needed to meet demand in the market. We are currently tracking more than a dozen opportunities offshore Africa and in the Mediterranean with up to half of these requiring incremental rigs. And we anticipate that the floater count in this region could rise to nearly 30 rigs over the next few years. We are excited about the prospect of increased activity in this region with several large IOCs expected to add rigs over the next few years, including some long-term programs that may be attractive opportunities for our active fleet, along with the DS-11, DS-13 and DS-14. In the Gulf of Mexico, we see several long-term opportunities on the radar and expect this market to remain balanced with customer demand largely met by existing supply in the region. A more recent indicator of the strength of the floater market has been the uptick in demand in Southeast Asia with several operators looking at opportunities that could require incremental rigs in the region. On the jackup side of the business, marketed utilization for jackup is approaching 95%, with leading-edge day rates in the mid- to high $100,000 in several regions. However, if contracts for each of the 22 rigs suspended by Aramco were terminated, global marketed jackup utilization would decline by approximately 5%. While this may lead to some pressure on day rates in the near term, we do not think that the rates announced on the two recent contracts for rigs relocating from Saudi are indicative of the broader market. As Anton mentioned, we have seen an improvement in the North Sea market and customer interest remains strong, particularly for programs commencing in the second half of 2025. We're also encouraged by the increasing number of longer-term new energy and plug and abandonment programs that could result in incremental demand in this region. In terms of our immediate contracting priorities, we have near-term availability on just 2 of our 13 active floaters, VALARIS DS-10 and the DPS-5. DS-10 is now expected to continue its existing contract with Shell offshore Nigeria until late May with the potential to continue into June based on well timing. We continue to believe the rig is well placed for long-term opportunities that are expected to start in 2025. And in the interim, we are actively pursuing short-term opportunities that could fill some of the expected gap. DPS-5 is expected to complete its current program with ENI offshore Mexico late in the second quarter, while some of the programs we were initially targeting for the rig of pushed into 2025. We remain in discussions with customers for work in the second half of the year. In addition, DS-12 began its campaign offshore Egypt during the first quarter. The firm term of this contract concludes in the fourth quarter. There is potential that customers well program extends to the end of the year, and the rig is well positioned for future opportunities in the Mediterranean and offshore Africa. Looking ahead to 2025 floater availability, two of our rigs have priced options, one of which is at a legacy rate, and we expect both will be exercised. We are in active discussions for the remaining rigs with either the existing customer or other operators with work programs that are expected to commence next year. On the jackup side, with the VALARIS 144 recently contracted, our only rig with meaningful contract availability in 2024 is the VALARIS 143, and we are pursuing opportunities for the rig outside of Saudi Arabia. Our active North Sea fleet is sold out for 2024. Excluding rigs with priced options, we have 4 rigs with available days in 2025 and are in active discussions regarding programs that would keep these rigs busy through next year. This includes VALARIS 92, which has been efficiently executing its customers' work scope and is now expected to complete this work in the first quarter of 2025, one year earlier than previously anticipated. We are already in discussions with other operators about alternative programs for the rig and feel confident we will replace this backlog soon. In summary, we are focused on capitalizing on the attractive opportunities we see in the market. building contract backlog through new contracts at significantly higher day rates and are laser focused on filling our uncontracted days in 2024 and securing work commencing in 2025 and beyond. And now I will hand over the call to Chris to take you through the financials.

Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of the first quarter results, our outlook for the second quarter and I also will provide an update on our guidance for the full year. Starting with our first quarter results. Revenue was $525 million, up from $484 million in the prior quarter, and adjusted EBITDA was $54 million, down from $58 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense was $84 million down from $96 million in the prior quarter. As expected, adjusted EBITDA decreased primarily due to lower revenues and higher costs for the jackup fleet associated with planned out-of-service time for rigs undergoing special periodic surveys and contract preparation work. This was partially offset by more operating days for the floater fleet. In the first quarter, jackup revenues decreased primarily due to fewer operating days for several rigs including VALARIS 107, 123 and 247. The VALARIS 107 was idle for most of the first quarter between completion of its previous contract offshore New Zealand and its current program offshore Australia. While VALARIS 123 and 247 underwent planned SPS and contract preparation work ahead of new contracts that are expected to commence in the second quarter. Contract drilling expense for the jackup fleet also increased due to contract preparation costs for Valaris Stavanger, which is expected to start a new contract this month. These items were partially offset by an increase in EBITDA for the floater fleet, primarily due to VALARIS DS-8 starting its contract with Petrobras late last year following reactivation and higher revenue efficiency in the first quarter compared to the prior quarter. Our first quarter results came in better than our guidance, primarily due to higher revenues resulting from strong revenue efficiency. We had cash and cash equivalents of $509 million at the end of the quarter. Cash declined by $127 million during the quarter, primarily due to capital expenditures of $151 million partially offset by cash generated from operations of $26 million. Our $375 million revolving credit facility remains fully available, providing total liquidity of $884 million at the end of the quarter. Moving now to our second quarter outlook. We expect total revenues in the range of $580 million to $600 million compared to $525 million in the first quarter. Floater revenues are expected to increase due to more operating days for VALARIS DS-12 and DPS-5, both of which commenced new contracts during the first quarter as well as Valaris DS-7 which is expected to commence its contract offshore West Africa in June following its reactivation. In addition, VALARIS DS-15 and DS-16 will roll to higher day rate contracts during the second quarter. Jackup revenues are also expected to increase due to more operating days for rigs that recently commenced new contracts or are expected to start new contracts during the second quarter. We expect that contract drilling expense will be $460 million to $470 million, up from $445 million in the first quarter. This is due to the addition of operating costs for several rigs following the contract start-ups that I just mentioned, along with cost for VALARIS DS-13 and DS-14, which arrived and Las Palmas during the first quarter and are being stacked. These items are expected to be partially offset by lower reactivation expense. General and administrative expense is expected to be approximately $30 million compared to $27 million in the first quarter. We expect adjusted EBITDA of $85 million to $105 million, including approximately $10 million of reactivation expense for VALARIS DS-7. CapEx in the second quarter is expected to be $100 million to $110 million. Maintenance and upgrade CapEx is expected to be approximately $75 million, including upgrades to VALARIS 76 ahead of its long-term bareboat charter to ARO. Reactivation and associated contract-specific CapEx is expected to be approximately $25 million, and new build CapEx is expected to be approximately $5 million primarily related to trailing mobilization costs for VALARIS DS-13 and DS-14. Our second quarter outlook is largely in line with what we expected at the beginning of the year. Turning to full year guidance. Our revenue for 2024 is almost entirely contracted except from the DS-10 and DPS-5. While our full year EBITDA guidance range of $500 million to $600 million contemplates some uncontracted time for these rigs in the second half of the year. We need to secure some incremental work for both rigs to be able to achieve the midpoint of the range. We are in active discussions with customers and remain laser-focused on securing the work. As we look to the second half of the year, revenues and EBITDA are expected to increase meaningfully compared to the first half for both our floater and jackup fleets. Floater results are expected to increase due to VALARIS DS-7 commencing a contract following its reactivation and the impact of DS-16 rolling to a higher day rate contract. Jackup results are expected to increase due to higher utilization and day rates for the North Sea fleet and contract commencements offshore Australia for VALARIS 107 and 247 during the first half of the year. Full year 2024 capital expenditures are expected to total $420 million to $460 million. This is $30 million higher than our prior guidance range with the increase due to contract preparation and survey costs for VALARIS 144 ahead of its recently announced multiyear contract offshore Angola that is expected to commence early next year. This incremental CapEx is expected to be incurred in the fourth quarter. As a reminder, we expect that approximately $55 million of our full year 2024 CapEx will be reimbursed through upfront customer payments. That concludes my review of our financial results and guidance. I'll now hand the call back to Anton for some closing remarks.

Thanks, Chris. I'll conclude by reiterating some of the key points from our prepared remarks. First, I'm very pleased with our start to 2024 as we have delivered strong safety, operational and financial performance. Congratulations to the entire Valaris team on an excellent start to the year. Second, we continue to execute on the commercial front, and we are making progress towards underwriting our earnings growth by securing new contracts at higher day rates and consistently building our backlog. And finally, we see strong customer demand for work that is expected to commence in 2025 and 2026 that will continue to support our anticipated earnings and cash flow growth over the next few years. We believe the future is strong for Valaris, and we thank our employees, customers and investors for their support. We've now reached the end of our prepared remarks. Operator, please open the line for questions.

[Operator Instructions]. Today's first question comes from Greg Lewis with BTIG.

I guess my first question is, I was hoping to get some more color around the 144 jackup. Clearly, that was a good contract. Just some kind of high-level questions around the all-in rate, kind of roughly how much does it cost to maybe mobilize a rig like that from basin to basin? And really, when kind of timing-wise did those contract negotiations, get to the finish line? Just there's been some questions around with all the noise, will all the, I guess, volatility out of Saudi Arabia, what that's doing for rates, just given the -- that was a pretty healthy day rate on that rig.

Greg, Matt here. So thanks for the questions on 144. So maybe hit with the timing first. The discussions were ongoing during the late half of '23, but the contract was signed in March of '24 after we had learned about Saudi Aramco's challenges or intention to suspend 22 rigs. From a -- we're not able to disclose the day rate based on the agreement with the customer. But what I can tell you is that from a cost of mobilization, we're assuming a little bit less than $10 million to move the rig. So you can make some assumptions based on the TCV that we've provided for the range of the program.

This is Anton. I'll just reiterate. I mean the contract came together around the same time. The Saudi announcement was in January. The contract was signed in March. But I would reiterate Matt's comments on during his prepared remarks that there have been some fixtures out in the market, but we don't believe that those are indicative of the broader market for jackups and where it will be going forward. And this is a great contract. And we're really excited about moving the 144 to West Africa and commencing that contract with.

Yes. No, no, absolutely. And then you kind of talked about the -- you kind of lumped in West Africa, Med or African and Med together. And I guess a couple of questions around that is you talk about the potential for 30 rigs in the region. So as we think about that base in really, or that, I guess, area, I guess, is probably the better word. A couple of questions around, where is that market currently in terms of versus the 30 you're thinking about? Really does that include any opportunities in East Africa or kind of -- and then really, as you're looking at these opportunities, any kind of sense for realizing it's probably multiple types of opportunities. Any kind of sense on the durations of these -- a lot of this work? Are these kind of shorter term, longer term on average type contract durations that kind of are going to start absorbing rigs into this region?

Sure. So let's start with timing. On the indicative numbers we're sharing that more than 30 across those regions, they're based on opportunities greater than 1 year, starting in '25 and '26, okay? If you look at the number 30, if you use that as the assumption basis for Africa, Med, you're close to about half of those represented in that region. So that gives you an idea of quantum of the potential growth of that area. And if you -- we often take a look at the -- using Rystad to model the CapEx process across multiple years. And so some of the growth we're seeing when you look at, say, if you ran from 2022 to '30 versus now '24 to' '30. We're seeing an increase in CapEx spend across that period of 26% on a comparative basis from '22 to '24. And what's interesting is in the top 2 of that. One of those is Africa, which we see a potential increase in CapEx of up to 52%, which is quite evenly split between shallow and deepwater. So indicative of the work for 144, moving to West Africa and then the opportunities that we see both known and future potential prospects, makes it look quite a bright area. And yes, within there, there are some opportunities in East Africa, particularly if you're referring to Mozambique, does provide some of the supply to that area -- demand to that area.

Let me just take it back a second. So we're going from the potential incremental demand in Africa, generally, we're really excited about. We're talking about numbers from the low 20s to the 30 number that Matt talked about. So potentially incremental assets that need to serve Africa broadly around 7. Certainly a bright spot in the market.

The next question is from Eddie Kim with Barclays.

Just wanted to dig deeper into the outlook on the jackup market. So the 22 suspended jackups in Saudi. You alluded to some potential pressure on day rates in the near term leading edge recently after the benign market has been around that 160,000 to 170,000 level. Is it reasonable to assume that, that leading edge could fall to maybe, I don't know, 130 to 140? just curious on your thoughts as to the potential magnitude of the pricing pressure that you highlighted.

Sure. Eddie, maybe I'll jump in first and then Chris and Tom can add some color. So of the 22, we see about half, and I think Anton mentioned that in his prepared remarks. And we also mentioned that the jackup utilization for high-spec units is at 95%. So there's sufficient demand based on the current utilization to absorb those rigs. Will there be some near-term rate pressure for those contractors who want to fix rates sooner there may be, as we've seen through a couple of fixtures, but we don't think that's indicative of a longer-term trend. So we feel as though there's sufficient demand tying back to some of the topics I just mentioned around CapEx growth where we see a strong market in the future, and we may not see all of those rigs come back into the competitive international benign environment market as quickly as those first 2.

So to scope it roughly half of those 22 are even competitive in the international market. We think they can be absorbed in the market in an orderly fashion. From our perspective, we have 19 rigs outside of those that we have operating in Saudi. The majority of those 15 are in the North Sea, Trinidad and Australia, which leaves us with 4, 3 of those are on long-term contracts. So we think there's plenty of capacity given the utilization levels in the international market. There's strong demand that those rigs that may come out of Saudi for those who choose not to wait or maybe take them back to their owners home market like China or Egypt, for those rigs to be absorbed in an orderly fashion. And as I said on the 143, we think there are great opportunities for that rig. We'll be patient, and we'll find the right job for it.

Got it. Just shifting over to the floater market here. Anton, in your prepared remarks, you said you expected these 2- to 3-year contracts to be awarded at or close to leading-edge rate, which is great to hear. But I assume that, that comment is more in reference to hot rigs currently working how much of a discount do you expect we could see for sideline rigs winning some of that longer-term work?

I don't think we can expect to see a discount for sideline rigs. I can't talk for what other people do, but personally, how we view the market. The 11 to 13 and the 14 are the highest specification assets available in the market, 2 BOPs. We've seen the market for seventh generation rigs. We see strong demand for them over the next few years. So I don't think. Yes, leading-edge rates and when we're talking about kind of term, 2- to 3-year contracts are in that mid- to high 400s range with potential. And we've seen that rigs continue to gradually move higher as we've said, with average day rates moving from the mid-400s to the 480s in the first 4 months of the year, and we think they'll continue to move higher as the supply/demand balance increases because there's more incremental demand coming out. And we're looking forward to finding the right opportunities for the 11, 13 and 14.

The next question is from David Smith with Heikkinen Energy Advisors.

I had some technical difficulties. So hopefully, I'm not asking the same question someone else did. But a question for Chris. Just circling back to the guidance, I wanted to make sure I understood correctly that '24 EBITDA guidance is maintained, that 500 to 600 range, but would need incremental work for the DS-10 and the DPS-5 to get to the midpoint. So I wanted to make sure I heard that correctly, but I also wanted to ask about your comfort level for the low end of guidance if minimal incremental work for those rigs materializes?

Yes, David, it's exactly right. We're maintaining our guidance range, $500 million to $600 million to get to the midpoint of that range. We need to get some incremental work on the 10 and the 5. We do assume -- but we need some incremental work to get to the midpoint of that range. So that's what we're focused on. Matt and his team and the whole organization is laser-focused on securing that work, and we're in active discussions with customers for it.

If Mexico work doesn't materialize in the second half for the DPS-5, would you look at that rig as a candidate for U.S. Gulf well intervention and P&A work? Not a lot of rigs in the region are good candidates for mid-water work. So that might be an opportunity?

I'll let Matt talk about the capability of the rig because it is a great asset and then maybe I'll come back on your question.

Thanks for the excellent leading question. I think for the DPS-5, both moored and DP capable. So it broadens the market opportunities for that rig, both in U.S. and Mexican Gulf. The program it's working on right now with ENI, it's doing one well and moored capability and the other one in DT. So it provides quite a flexible opportunity. On the -- there are a number of opportunities on the well intervention side. So that market is proving to be quite interesting in the U.S. Gulf. There are also continued opportunities with P&A and traditional drilling. And I think when you look at our track record, a similar situation to last year, we've been able to fill those opportunities to keep the rig fully active through the year. But the next key is what's next. So there's longer-term opportunities in the Gulf of Mexico region. There were some longer-term opportunities that shifted from '24 to '25 that we had -- we're focused on that are likely to return that are attractive but we're also marketing the rig internationally. So there's a number of longer-term opportunities exist across the Atlantic that are quite attractive to provide us the revenue visibility for that rig on a long-term and low cost basis.

So I mean '24 is 97% underwritten from a revenue perspective. Clearly, we have work to do on the DS-10 and also the DPS-5. But I will remind, we were in exactly the same position with the DPS-5 last year at this time. And Matt and the team did a great job of screening together work near constant work in the second half of the year and delivering on those rigs. So we're just going to have to see, have some pieces fall in place and see what we can do. We are modeling some idle time on those rigs, but we clearly have some work to do, as Chris said, to deliver the midpoint of our guidance.

The next question comes from Fredrik Stene with Clarksons Platou Securities.

I have two questions for you today, and I just want to follow up a bit on what David asked about the guidance. Anton, you said that 97% of the revenue was underwritten. Is that on the low end of the revenue guidance of 97% of the $2.3 billion, just wanted to get the details correctly here.

At the midpoint.

At the midpoint, Okay, super helpful. Are you -- when you think about the DPS-5, DS-10 in relation to the comments around or in your prepared remarks about the rates potentially being a bit more volatile for short-term work. How are you balancing that when you're feeding these two rigs forward. Should we expect to see rates that would be deemed materially below leading-edge rates? Or should we see something that's at least for the DS-10 still in the 400s.

I go back to my comments, and this is more a general market comment, but I think it applies broadly and including to us. Term programs, when we talk about term programs, 2 to 3 years in the mid- to high 400s into the 500s for the right opportunity. I think where you see that range is more -- look, we look at getting the highest day rate we can to get the best economics on every job that we go after. But I think what you can see is, if you're talking about gap fill bridging, we're focused on getting the right program and fixing rigs long term where we can. And then you work backwards from that. and talk about the gap fill that you may be looking for. And I think that's where you may see more of a variety, and it may make economic sense for you to take a bridge program and look at what economics you can achieve on that. That's how we think about it.

Mr. Stene your line is open.

Okay. Perfect. Sorry, Anton, I dropped out actually when you started your answer. So I'll look at the transcript.

We can follow up with you off-line, Fredrik.

Yes. Okay. Good. Just have one more in terms of contracting strategy and how to think about rates going forward. And I totally understand that you might not want to reveal your strategy. But in general, we have some sideline capacity. You're mentioning the DS-11, 13, 14. There are some other rigs that have been taken out from the yards. So clearly, there is new and high spec quality wanting to get in market here. In terms of high-spec assets versus lower spec assets, you could either argue that there will be a discrepancy in rates just because of the specs or that they will tend toward each other as the market tightens and customers won't have any choice in terms of choosing the best rigs. How are you thinking about that? And I'm talking particularly for '24 and '25 more than in the long term.

Look, I can't talk for others, but I can tell you what our philosophy is, and I did allude to it on an earlier question. 12 of our 13 ships are seventh generation, and that's a great position to be in. Including the 11, 13 and 14, these are the highest spec rigs that are on the sidelines, and we can deploy for the right opportunity. We see strong pipeline of customer demand, especially in '25 and '26, and we will maximize the economics that we can work those rigs on as we see the opportunities.

Perfect. And finally, any of you thinking around any of your other stacked assets, DPS-3, DPS-6, any of the jackups? Or are they going to be assets for now?

Look, as it is now, there is a preference in the market right now from our customers for high-specification assets. From a capital allocation perspective, it's made more sense for us to deploy capital towards our high-spec drillship fleet. That's what we've been focused on over the last couple of years. Our focus is on the 11, 13 and 14. But as the supply-demand balance continues to tighten over the next few years, what we may see, there are only 10 as we see it effective reactivation candidates sitting on the sidelines in the high-specification assets. As that market continues to tighten over the next few years, we could likely see more opportunities for semis to come back to the market. But right now our focus is on the drillships.

The next question is from Kurt Hallead with Benchmark.

So Anton, I wanted to follow up. You referenced the prospect of an increase in the cadence of contract awards as we go into the second half of this year. Just wondering if you can maybe give some additional context around that in terms of maybe how do you quantify that? Is 20%, 10%, 15%, 20% increase just some context around how you're looking at it.

I don't know if we can quantify in percentage terms. I mean there've been some talk about seasonality and pace of contracting. What I can say is that the pace of contracting and the number of tenders that are out there are really solid for '24. You may see fewer awards in a certain quarter, and given that, we expect there to be a good number of awards points to when we look at the tenders that are out there, an increase of pace because people are looking for rigs in the second half of the year. And part of that is driven by these are a good number of long-term programs. Some of them are in multiple jurisdictions, which means the operator of the program needs to get partner approvals in a number of countries and longer duration programs with more complexity, take a longer time to process. Programs can move forward and backwards by quarter depending on how they make progress. But clearly, based on the number of tenders that we see that are active -- that are out there that we expect to be completed, we expect the pace of tendering award activity to increase over the remainder of the year.

Okay. Appreciate that color. Follow-up I have then is on the DS-11, 13 and 14 and a couple of parts to the question, right? First one is in the context of those 3, can you just remind us which one might be the one more likely to go first? Second dynamic is given elements related to shipyard capacity labor, supply chain dynamics, what's the feasible number of rigs in a given year? You got 3. So how many of those could you feasibly activate in a given year?

I mean, 11, 13 and 14 are all fantastic assets. They're all -- they're almost interchangeable. The customer decides what assets they want. One customer may prefer a rig like the 11 that has a track record and it's worked before and some customers prefer a new shining car right off the lot, right, the 13 and the 14. So for us, they're somewhat fungible, but we will focus on getting all 3 of them to work. As far as capacity, we've done 4 floater reactivations in parallel before and done it very successfully. One of the true strengths of this organization is our ability to execute complex projects and reactivation projects leading the industry, as you've seen on the DS-8, and I fully expect the team will deliver the DS-7 in the same way. So we feel very comfortable with our ability to effectively reactivate those rigs. When we find the right opportunities, whether it's serially or in parallel.

The next question is from Doug Becker with Capital One.

Just following along the same tenor of questions, how would you frame the likelihood of hearing about a contract for 1 or more of those rigs this year and potential for a JV with an operator for 1 of these rigs?

I'm not going to get into speculation or percentages. I mean what I would say is we will look at traditional or nontraditional ventures if it is accretive and makes economic sense for our shareholders. We have critical mass of rigs working. We've got 3 attractive assets in a growing and increasing demand market that we can deploy on the right contract with the right customer at the right time. And we're going to be very focused on finding given what we see with the demand profile over the next couple of years, finding the right job for those assets. If that comes -- we're in active discussions on all three of those assets right now, if it makes economic sense, and we've been very clear on having meaningful returns on reactivation costs and it makes sense for us and our shareholders, absolutely will execute on. But we're also willing to be patient and wait for the right opportunity to put those assets back to work because they are the best assets available on the sideline.

Yes. And our criteria is the same as it's always been. I mean, a meaningful return on the reactivation costs over that initial firm contract. So that's the same way we're looking to do remaining as we've looked at everything else.

No, that all makes sense and very consistent. Maybe then to 2Q, revenue efficiency was very strong in the first quarter. Is this strong continuing this quarter and just maybe some of the parameters that are baked into the 2Q revenue guidance for revenue efficiency.

Revenue efficiency is solid in the second quarter. I think I'm not sure if this is the question you're alluding to, but our EBITDA guidance for the second quarter is in line with what we expected at the beginning of the year. And I think some people -- and obviously, we don't know what's in your model. I think some people model kind of a linear growth of our revenue and earnings through the year where we had a lot of rigs that were transitioning between contracts, doing SPS', moving locations. When you look at the 247 going all the way to Australia. Plus the DS-7 coming to work middle of the year. So for us, there's more a ramp towards -- in the third quarter and the fourth quarter versus a linear progression when you compare kind of quarter-to-quarter guidance versus what we've given for the full year.

Yes. And when we think Q2 versus Q1, I mean, kind of big drivers of the revenue growth are more operating days on the floater fleet. So we'll have particularly the DS-7 starting up in June and then just more days on the DPS-5 and DS-12 since they started contracts in the first quarter. And then we've got a couple of ships on a roll to higher rates in the second quarter. And then all these jackups that have really a drag in the first quarter as it relates to idle time and contract prep and survey work, they're going back to work in the second quarter. And so we'll see a lift there. So we're excited about the second quarter. We'll see EBITDA up based on our guidance, almost 80% relative to the first quarter. So and then as Anton mentioned, big jump in second half of the year versus first half, with the DS-7 online impact of the higher DS-16 contract. North Sea basically kind of working. I mean, everything is working in the North Sea. Moving to some higher rates, and then we've got the contribution from the two jackups in Australia. So we expect a pretty meaningful ramp across the year.

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

Thanks, MJ, and thanks again to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our second quarter 2024 results. Have a great rest of your day.

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