Valaris Limited (NYSE:VAL) Q3 2023 Earnings Call Transcript

Valaris Limited (NYSE:VAL) Q3 2023 Earnings Call Transcript November 7, 2023

Valaris Limited misses on earnings expectations. Reported EPS is $0.17 EPS, expectations were $0.27.

Operator: Good day, and welcome to the Valaris Third Quarter 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Darin Gibbins, Vice President of Investor Relations & Treasurer. Please go ahead.

Darin Gibbins: Welcome, everyone, to the Valaris third quarter 2023 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, last week, 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.

Anton Dibowitz: 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 and then provide some high-level commentary on the outlook for the offshore drilling market and our fleet strategy. I’ll then hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our contracting outlook for 2024. After that, Chris will discuss our financial results and guidance, including preliminary guidance for 2024. And finally, I’ll wrap up the call with some closing comments. Before we get into the details of the quarter, I want to highlight some key points about our business going forward that we will discuss in more detail in this call.

First, the outlook for Valaris is positive, with increasing demand and constrained supply setting up a strong and sustained upcycle. Second, we have had great contracting success over the past 12 months and retained significant operating leverage to the improving market. Consequently, we expect a meaningful improvement in our full-year results in both 2024 and 2025, driven by prior and ongoing reactivations and repricing of legacy contracts. And finally, we have demonstrated our commitment to capital returns, and when our business begins generating meaningful and sustained free cash flow, we intend to return it all to shareholders, unless there is a better or more value-accretive use for it. Moving to our third quarter operations, we’re pleased that VALARIS DS-17 commenced its contract with Equinor Offshore Brazil during the quarter, following its reactivation, and expect it will contribute meaningful earnings and cash flow going forward.

We’re excited to be partnering with Equinor on their flagship Bacalhau project in Brazil, and to increase our presence in this strategic basin. We will soon have four drill ships working offshore Brazil, following the recent arrival of VALARIS DS-8, which is about to commence customer acceptance ahead of its 2.5 year contract with Petrobras. Operating safely is always our top priority, so we’re proud to be honored by the Center for Offshore Safety, which recognized the Valaris Basic Training Program with its 2023 Safety Leadership Award. As demand for our services continues to improve, we are hiring an increasing number of men and women that are new to the industry. The Valaris Basic Training Program, which utilizes one of our stack rigs in the U.S. Gulf of Mexico to provide basic training for new hires, is an innovative initiative to prepare new employees to work safely offshore.

Remaining on the subject of safety, I’d like to congratulate the crews of the VALARIS 76 for recently celebrating five years without a recordable incident. A fantastic achievement made possible by their dedication to building a safety-first culture and adhering to our safe systems of work on a daily basis. Now turning to our financial performance for the quarter, we generated Adjusted EBITDA of $40 million and Adjusted EBITDAR, adding back one-time reactivation costs of $91 million. Our results in the quarter were impacted by unplanned floated downtime events on a few rigs, one of which will also impact the fourth quarter, as well as delayed contract start-ups for the VALARIS DS-17 and 107. While our floated revenue efficiency for the quarter was below our expectations, our year-to-date fleet-wide revenue efficiency is strong at 97%, and we remain committed to delivering safe and efficient operations.

A couple of weeks ago, we announced that ARO Drilling had secured highly attractive financing from a syndicate of local Saudi Arabian banks to finance the deliveries of its first two new build rigs, Kingdom 1 and Kingdom 2. Kingdom 1 was recently delivered from the shipyard, and we anticipate that it will commence its maiden contract later this month, while Kingdom 2 is now expected to be delivered and commence its contract in the first quarter of 2024. The delivery and start-up of the first two new builds will mark an important milestone in the growth story of ARO and is expected to lead to a substantial increase in 2024 earnings. We are pleased that ARO has been able to secure financing for these rigs at highly attractive terms, demonstrating both the strength of the ARO business and its relationship with local lenders in Saudi Arabia.

Chris will provide further details on the financing terms a little later. Turning our attention to the market, the outlook for our industry in Valaris is positive. Commodity prices remain supportive, with spot brent crude above $85 a barrel, buoyed by tight supply and the recent escalation in geopolitical risk. More importantly, five-year forward prices are now around $70 a barrel, a level at which more than 85% of undeveloped offshore reserves are estimated to be profitable. The supportive commodity price and attractive breakevens for most offshore projects provide customers with the confidence to invest in long-cycle offshore projects. Data from riStat [ph] indicates that offshore upstream CapEx is expected to grow at a compound annual growth rate of approximately 8% through 2026, which is anticipated to lead to increased demand for offshore drilling services.

While the demand outlook over the next several years is robust, customers are being measured in how they approach their drilling programs, weighing their capital spending in a rising cost environment against the desire to return capital to shareholders. Looking at the benign environment flow to market, active utilization for 6th and 7th generation drill ships remains in the mid-90s, and we see a number of longer-term opportunities commencing in late 2024 and beyond, that provide further evidence that we are in a strong and sustainable upcycle. However when considering lengthening contract lead times, customer-acquired upgrades, and repositioning rigs for work, we expect gaps in schedules across the industry during 2024. Looking at pricing, leading-edge day rates continue to be in the mid to high 400s.

We may see a wide range of rates in the near term depending on the specific circumstances of each opportunity. However, we continue to expect that we will see an upward trajectory in the medium term as stacked and new-build capacity continues to diminish and the total supply and demand balance continues to tighten. We believe that two to three year programs are likely to be awarded at or close to leading-edge rates, while we may see lower rates for some of the five year plus opportunities, as some may be willing to accept a lower rate to secure long-term duration and backlog. Similarly, we may see lower rates on some of the shorter-term gap-filled jobs as contractors are willing to bid more aggressively to avoid rigs going idle for a period.

For Valaris, we are focused 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, whether through the day rate or meaningful upfront payments. We have made a deliberate effort to secure upfront payments on certain reactivation contracts. While moving more of the total contract value into an upfront payment may lower the headline day rate, upfront payments are not subject to operational risk, improve the overall return profile of the contract, and drive shareholder value. For example, the Valaris DS-17 contract included an $86 million upfront payment out of a total contract value of $327 million, and has a total effective day rate of over $600,000.

Another example of a contract with a meaningful upfront payment is the DS-7, which has a total effective day rate of approximately $430,000. This contract is expected to provide a cash payback on our reactivation costs of less than one year and is anticipated to generate annualized EBITDA of $95 million to $100 million. Taking a step back for a minute, it’s worth remembering that when Valaris relisted in May 2021, we had only four out of 11 drill ships contracted with minimal contract backlog. Since then, we have won six contracts for stacked drill ships, increasing our drill ship backlog tenfold to more than $1.7 billion. Looking forward, we have three drill ships currently on legacy day rate contracts in the low to mid 200s that are expected to recontract at higher market rates in 2024, and a further two that are expected to recontract in 2025, which we anticipate will be a key driver of earnings growth going forward.

We maintain further operating leverage to the strong floater market with our one remaining uncontracted stacked drill ship, VALARIS DS-11, and attractive purchase options for new-build drill ships VALARIS DS-13 and DS-14, which we currently intend to exercise. We will continue to remain disciplined in how we exercise our operational leverage, and additional rigs will only be reactivated for opportunities that are expected to generate a meaningful return on our reactivation costs over the initial firm contract. Before I hand the call over, I’d like to take this opportunity to thank the entire Valaris team, offshore and onshore, for the focus and commitment that they bring to work every day to deliver safe and efficient operations to our customers.

Now, I’ll hand the call over to Matt, to provide more detailed commentary on the floater and jackup markets by region and our contracting outlook for 2024.

Matt Lyne: Thanks, Anton, and good morning and afternoon everyone. Since the beginning of the third quarter, we’ve been awarded new contracts and extensions with associated contract backlog of approximately $800 million. These awards have increased our total backlog to approximately $3.2 billion, representing a 40% increase over the past 12 months. A key driver of this backlog increase was the VALARIS DS-7 contract, which has a total contract value, including an upfront payment of $364 million. This equates to an effective rate of approximately $430,000 for work offshore West Africa, which is our lowest-cost operating region and includes no additional services. In addition, we were recently awarded a 250-day extension on the VALARIS DS-15 with TotalEnergies Offshore Brazil at a day rate of $400,000.

The extension includes options for up to 440 days at an implied average day rate in the high $400s. It’s worth noting that these rates do not include MPD or additional services, and an additional rate will be charged when these services are provided. Moving now to some commentary on our major markets, we currently see 25 to 30 opportunities for Ultra Deepwater floaters, with expected duration of greater than one year. They are anticipated to commence over the next few years. We estimate that approximately half of these opportunities will need to be met by either incremental reactivations of stacked and stranded new-built rigs or active rigs moving regions, which as we’ve said, we don’t expect to see a lot of, given many currently contracted rigs will likely be retained by their existing customers.

We see continued opportunity in Brazil through 2024 and 2025, with three ongoing tenders across multiple operators and expect contract awards for some of the existing opportunities by year-end. We see further demand in Brazil coming to market in 2024 with commencements in 2025, with potential for up to five incremental additions to the fleet offshore Brazil. There’s a strong pipeline of opportunities in the Mediterranean and West Africa for work commencing in late 2024, 2025 and 2026, with approximately 17 requirements, more than half of which are likely to require incremental rigs. These include some multi-year opportunities that could help to increase demand for a limited supply of available rigs. While visible demand in the Gulf of Mexico is lower than in other areas of the Golden Triangle, we continue to see a constructive supply and demand picture in the region and expect future demand to keep the majority of rigs occupied.

Based on our current market outlook, we believe that most, if not all, of the supply stacked and new-built drillships in the global fleet will be needed to meet growing future demand. In addition, we continue to believe it is highly unlikely that we will see another floater new-build cycle in the foreseeable future, given high build costs, long lead times and limited shipyard availability. On the jackup side of the business, demand continues to steadily increase, with the contracted jackup count currently at its highest level since mid-2015. As a result, active utilization for jackups is above 90%, with both average and leading-edge day rates continuing to trend upwards. Since the beginning of last year, demand growth for benign environment jackups has primarily been driven by the Middle East, with Saudi Arabia, Qatar and the UAE all increasing their rig counts.

More recently, we have also seen a return of longer-duration opportunities in Southeast Asia, including Malaysia, Thailand and Vietnam. We anticipate that rigs from outside the region will be needed to satisfy some of this demand, which should enable day rates to increase as contractors moving rigs in from other regions will seek to recover mobilization costs either through upfront payments or the day rate. We also continue to see a strong demand for high-spec jackups in Trinidad, and were recently awarded a one-year extension on the Valaris 118 and an additional short-term program for Valaris 249 offshore Trinidad. As outlined in our second quarter call, the outlook for harsh environment jackup market in the North Sea continues to be challenging through the end of 2024.

Jackup opportunities in Norway, in particular, are very limited and we do not expect any of our N-class rigs to be working offshore in Norway in 2024. Due to the relatively weak near-term demand outlook, we expect to see a further reduction in available supply either through rigs being stacked, as we did with the Valaris Viking, or by contractors moving rigs to other regions for attractive opportunities, such as our recent contract for VALARIS 247 offshore Australia. While 2024 in the North Sea may be challenging, we are seeing an increase in tender activity and durations for opportunities commencing in 2025. For example, the VALARIS 123 recently secured a minimum 170-day contract with TACA [ph] commencing in late 2024, starting at a day rate in the low 140s and increasing to the low 150s in 2025, representing an improvement on recent fixtures in the region.

In addition, we recently signed a nearly four-year contract for VALARIS 72, a 40-plus year old standard duty jackup, to undertake a P&A program for Eni in the East Irish Sea. As we look to 2024, we currently have four of our 13 active floaters with meaningful contract availability. However, given that the one-year priced option on the VALARIS DS-16 is below current market rates. It is reasonable to expect this option will be exercised, leaving just the DS-4, DS-10 and DPS-5. VALARIS DS-4 recently received a six-month contract extension with Petrobras. This is the final priced option for the DS-4 and its current contract, which will keep the rig working into the third quarter of 2024. We are in advanced discussions regarding a multi-year opportunity for the rig, though we expect some out-of-service time between the end of its current contract and the start of its anticipated next program for contract preparations.

VALARIS DS-10 is due to complete an existing contract with Shell Offshore Nigeria towards the end of the first quarter, and we believe it is well placed for new opportunities in the region, many of which are expected to start in the second half of 2024. For the VALARIS DPS-5, we recently secured a minimum 110-day program with Eni Offshore Mexico that is expected to commence in March of 2024 at a day rate of $345,000. The rig may be idle for up to six days between the end of its next program in the U.S. Gulf and the start of its new contract Offshore Mexico. We have a good track record of keeping the DPS-5 well utilized with relatively short-term programs across the Gulf of Mexico, and we see a number of opportunities in the pipeline that could keep the rig working through the majority of 2024.

On the jackup side, we currently have contract availability on six of our 28 active rigs. Three of these rigs are located in the North Sea, and we are pursuing a mix of short-term and longer opportunities. Outside of the North Sea, we have some availability on both the VALARIS 247 and the 249. In the second half of 2024, but have good line of sight into opportunities Offshore Australia and Trinidad, respectively that we believe will keep these rigs working. Finally, we are pursuing near-term opportunities for VALARIS 144 in the U.S. Gulf and Mexico, while looking for longer-term opportunities outside the region. In summary, we feel good about the 2024 contracting outlook, with only a small number of our rigs with contract availability and a strong pipeline of opportunities.

I will now hand the call over to Chris to take you through the financials.

Chris Weber : Thanks, Matt, and good morning and afternoon everyone. In my prepared remarks, I will provide an overview of third-quarter results, our outlook for the fourth quarter, and will also provide preliminary guidance for full year 2024. Starting with our third-quarter results, revenue was $455 million, up from $415 million in the prior quarter, and Adjusted EBITDA was $40 million, up from $15 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense, was $91 million, up from $59 million in the prior quarter. Adjusted EBITDA increased primarily due to more operating days and a higher average daily revenue for the jackup fleet, which increased to $108,000, from $99,000 in the prior quarter. Results from the jackup fleet benefited from contract startups for VALARIS 121 in the U.K. North Sea and VALARIS 249 offshore Trinidad, as well as several rigs commencing new contracts at higher day rates.

Adjusted EBITDAR also increased due to VALARIS DS-17 commencing its contract with Equinor Offshore Brazil in early September, along with an increase in average daily revenue for the rest of the floater fleet during the third quarter. These items were partially offset by fewer floater operating days due to unplanned downtime, as well as higher reactivation expense. Third quarter reactivation expense was $51 million, compared to $44 million in the prior quarter, primarily due to the commencement of the VALARIS DS-17 campaign offshore New Zealand due to a delay in the arrival of the heavy lift vessel hired to move the rig from Australia. Cash from operations in the quarter was $48 million, and capital expenditures were $106 million. CapEx increased by $35 million versus the prior quarter.

This was primarily due to higher reactivation and contract-specific CapEx, driven by higher spend on VALARIS DS-8, as CapEx ramped up ahead of the rig’s departure from the shipyard in the fourth quarter. CapEx also increased due to VALARIS 72 completing its SPS and contract preparation work prior to returning to its long-term P&A program with Eni. In the third quarter, maintenance and upgrade CapEx was $51 million, and reactivation and contract-specific CapEx was $55 million. We had a total cash balance of $1.1 billion at the end of the quarter. Cash increased by $252 million during the quarter, primarily due to the issuance of $400 million of additional senior-secured second-lien notes due 2030, partially offset by capital expenditures and share repurchases.

The net proceeds from the issuance are expected to fund the purchase of new-build drillships VALARIS DS-13 and DS-14, and for general corporate purposes. We are pleased that we were able to hit an attractive window earlier in the quarter in what has been a volatile period in the capital markets, financing the expected new-build purchases with notes that priced above par. Following the $400 million add-on, we have $1.1 billion of senior-secured second-lien notes due to 2030 with a coupon of 8.375%. In addition, our $375 million revolving credit facility remains fully available. In the third quarter, we repurchased $85 million of shares, and year-to-date, we have repurchased $171 million of shares, representing 2.6 million shares or 3.4% of our share count.

We remain on track to achieve our 2023 share repurchase target of $200 million by year-end. Now I’ll move to a brief overview of ARO Drilling’s financials. As a reminder, ARO is not consolidated in the financial results of Valaris. ARO EBITDA increased to $24 million from $17 million in the prior quarter, primarily due to more operating days and lower repair costs, resulting from less out-of-service time for planned maintenance. ARO’s fourth quarter EBITDA is expected to increase to $30 million to $32 million from $24 million in the third quarter, primarily due to the impact of new-build Kingdom 1, which is expected to commence its maiden contract later this month. As Anton mentioned earlier, ARO recently secured highly attractive financing in the form of a $359 million term loan with a syndicate of local Saudi Arabian banks to finance the deliveries of its first two new-build rigs, Kingdom 1 and Kingdom 2.

The loan matures in eight years, requires equal quarterly amortization payments during the term, with a 50% balloon payment due at each maturity in 2031 and 2032. As a reminder, these new-builds are backed by 16 years of guaranteed work with Aramco. Day rates for the initial eight-year contracts will be determined using a pricing mechanism that targets a six-year payback for construction costs on an EBITDA basis. These initial contracts will be followed by a minimum additional eight-year term, repriced every three years based on a market pricing mechanism. Moving now to our fourth quarter 2023 outlook. We expect total revenues will be in the range of $480 million to $490 million, as compared to $455 million in the third quarter. Revenues are expected to increase, primarily due to a full quarter of operations for VALARIS DS-17 and 107 following contract startups.

These are expected to be partially offset by fewer operating days for VALARIS DS-12, which will mobilize from West Africa to the Mediterranean ahead of its next contract, which is expected to commence offshore Egypt around the end of the year. We expect that contract drilling expense will be $405 million to $415 million, as compared to $391 million in the third quarter, primarily due to higher operating costs for VALARIS DS-17 and 107 following their contract startups. This is anticipated to be partially offset by lower reactivation expense as VALARIS DS-8 departed the shipyard for Brazil in late October. In addition, operating costs for VALARIS DS-12 are expected to decrease in the fourth quarter, as it will spend part of the quarter mobilizing from West Africa to Egypt ahead of its upcoming contract.

General and administrative expenses are expected to be approximately $28 million, up from $24 million in the prior quarter, primarily due to an anticipated increase in professional fees, as certain costs that were expected to be incurred in the third quarter have been delayed to the fourth quarter. As a result, we expect adjusted EBITDA to be $45 million to $50 million and adjusted EBITDAR to be $85 million to $90 million. This is below what was implied by our prior guidance, primarily due to a delayed startup for VALARIS 108, ahead of its upcoming three-year bareboat charter with ARO, the floater downtime that Anton mentioned earlier, and the timing of reactivation and survey costs as some are shifting from 2024 into the fourth quarter. CapEx in the fourth quarter is expected to be approximately $110 million, compared to $106 million in the third quarter.

Maintenance and upgrade CapEx is expected to be approximately $50 million, including upgrades to VALARIS 76 ahead of its five-year bareboat charter to ARO. Reactivation and associated contract-specific CapEx is expected to be approximately $60 million, and this includes approximately $20 million of DS-8 CapEx being accelerated from 2024 into the fourth quarter. We expect approximately $30 million of customer reimbursements for CapEx in 2023, most of which has already been received. This CapEx guidance does not include assumed expenditures for exercising our options to purchase the drillships VALARIS DS-13 and DS-14. Exercising the options on both rigs would increase fourth quarter CapEx by approximately $370 million. The incremental CapEx covers the purchase price of the rigs and costs to prepare the rigs to be moved from South Korea to Las Palmas, where they would be stacked alongside VALARIS DS-11 until they are contracted.

I will now provide preliminary financial guidance for full year 2024. Similar to prior years, we will provide more specific guidance on our Q4 earnings call in February. This preliminary guidance does not account for any incremental reactivations for contracts that have yet to be executed. Therefore, it does not assume any additional contracted reactivations other than the completion of the VALARIS DS-7 and DS-8 projects. We currently forecast revenues to be between $2.25 billion and $2.35 billion and adjusted EBITDA to range from $500 million to $600 million, including approximately $30 million of reactivation expense. 2024 revenue and EBITDA are expected to benefit from a full year contribution from VALARIS DS-17 and they are anticipated to increase meaningfully in the second half of the year versus the first half, driven by contract startups for the DS-8 and DS-7 in the first half, as well as drill ships rolling to higher day rate contracts during the year.

As Matt discussed, we have a limited number of rigs with contract availability next year. At the midpoint of the revenue range, we currently have 83% of the revenue contracted, and if we include price options with rates well below current market, it would be 87%. I also want to highlight that the midpoint of this EBITDA guidance range is approximately 4x higher than expected 2023. Full year 2024 capital expenditures, excluding any potential CapEx associated with VALARIS DS-13 and DS-14 are expected to be approximately $290 million to $330 million, compared to an anticipated $340 million in 2023. Maintenance and upgrade CapEx is expected to be approximately $250 million, with about $20 million being reimbursable. This covers SPS and contract preparation requirements, as well as capital spares.

Like 2023, 2024 is expected to be a heavy year for jackup SPS projects. The balance of approximately $60 million is for reactivation and contract-specific CapEx, primarily related to VALARIS DS-7 and DS-8. In addition, if we exercise the new build options as planned, we expect to spend a further $30 million to mobilize VALARIS DS-13 and DS-14 from South Korea to Las Palmas. That concludes my review of our financial results and guidance. I’ll now hand the call back to Anton for some closing remarks.

Anton Dibowitz : Thanks, Chris. I’ll conclude by reiterating some of the key points from our prepared remarks. First, the outlook for Valaris is positive, with increasing demand and constrained supply setting up a strong and sustained upcycle. Second, we’ve had great contracting success over the past year and remain focused on winning attractive work for our fleet. Our total backlog currently sits at $3.2 billion, representing a 40% increase over the past 12 months and provides over 80% contract coverage in 2024, and we expect this number to grow further by the end of the year. In addition, we retain significant operating leverage and line the site into attractive opportunities. 2024 EBITDA is expected to be approximately 4x higher than 2023, and we expect another material improvement in 2025, driven by recent and ongoing drill ship reactivations, and the repricing of rigs on legacy day rate contracts to higher market rates.

And finally, we are well on our way to returning the $200 million of share repurchases we have targeted this year. As we look into the future, when our business begins to generate meaningful and sustained free cash flow, we intend to return it all to shareholders, unless there is a better or more value-accretive use for it. We’ve now reached the end of our prepared remarks. Operator, please open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Eddie Kim of Barclays. Please go ahead.

Eddie Kim: Hi. Good morning. Anton, just in your prepared remarks, you mentioned that day rates for two to three year opportunities are likely to be at leading-edge levels, but that five-year opportunities are likely to be a bit lower. We haven’t seen that many five-year contracts signed to-date. So just curious, how many of these five-year opportunities are you currently seeing? And if these opportunities are specific to a certain region or if they are fairly broad-based?

Anton Dibowitz: Good question, Eddie. Yeah, a couple of things. We know that there are at least two IOCs that are looking at the potential for long-term jobs beyond the two to three years that we’re generally seeing in the market. I think that’s a really good sign of, as the market continues to tighten, their desire to lock down supply. When you see compound annual growth in demand, 8% over the next few years, customers are focusing on making sure that they have attractive rates for their opportunities. I think there is a rate trade-off potentially for a very long-term opportunity. Do you take a slightly lower rate to create a pace of earnings? Our perspective on it is we’re very comfortable with where rates are in the mid-400s.

We expect them to grow. And yes, would there be a rate trade-off potentially for a long-term opportunity, but not at any price. And we’ve walked away from opportunities before, because we didn’t think they were attractive for driving shareholder value and we’ll continue to do that. So we will look at those opportunities in that context. If it makes sense, as in a manageable trade-off we’ll take it. Otherwise, we’ll walk away from it and let somebody else have it.

Eddie Kim: Got it. Got it. That’s a great sign and great to hear. But my follow-up is just on the remaining stacked and stranded new-build drill ship capacity you’re currently seeing today. In the market commentary, it was mentioned that most, if not all, this capacity is going to be needed to meet growing demand. As you know, there are a lot of stacked rigs that are really old and there’s also a lot of stranded new-builds that are currently being built by less reputable shipyards. So just curious, how many rigs you’re thinking about in both those buckets that could realistically be a part of the active fleet?

Anton Dibowitz: I’ll let Matt take that one and maybe I’ll come cover up after.

A – Matt Lyne: Sure. Look, I mean maybe if we bifurcated into the two segments, stacked drill ships and then stranded new-build supply. I’ll take the second one first. On the stranded new-build supply, I think we see approximately five rigs, which we see as credible entrance into the market over the term, two of which obviously represented by the DS13 and 14, which those two obviously represent also the highest spec seventh-gen units and the only ones with two VOPs. On the stacked side, you could argue that there are probably up to 10, but I think if you narrow that down and you look at the behaviors of both ourselves and our competitors, people have a tendency to focus on the seventh-gen side as a priority, knowing that customers continue to value specification over all other things to provide them flexibility in what they do.

So, you look at that, you’ve got about four stacked seventh-gen rigs with a range of the duration they’ve been stacked and their age. So having to take into account where they are in their SPS cycle. We expect the reactivation costs will play a factor in that. So you know overall, what I’d say is that the number of attractive stacked and shipyard assets continues to diminish. If you look at the contracts that we have reactivated ships for over the last couple of years, our priority is always to focus on utilizing our active fleet first and the reactivations from us as well as competitors have come from incremental demand that is coming to the market. Supply demand has been 90% utilization on drill ships for a significant period of time, and we continue to see incremental demand that’s coming to the market over the next few years, that is going to drive – taking up that additional capacity.

So yes, we feel comfortable that there is incremental demand that will take those attractive assets into the market over time.

Eddie Kim: Got it. Got it. Great. Thank you both for all that color. I’ll turn it back.

Operator: Our next question today will come from Kurt Hallead with Benchmark. Please go ahead.

Kurt Hallead: Hey, good morning.

Anton Dibowitz: Morning, Kurt.

Matt Lyne: Good morning, Kurt.

Kurt Hallead: I want to really appreciate you putting into context the total contract value relative to day rate. So in that context, right, one of your larger competitors made a comment that they are being violent opposition to 500K per day kind of day rate dynamics, right. But taking that into bigger context right, what is the dynamic at play currently, with respect to the operators understanding there’s a constrained supply and marrying that up with their project needs, say in ‘24, ‘25 and understanding that no matter how they shake it out, they are going to have to pay more for what’s coming down the pipe?

Anton Dibowitz: I’ll let Matt start.

Matt Lyne: Thanks. So, I mean, we feel really good about where the market sits today and the longevity of the cycle. So I guess, if we look at a couple of the supply metrics to kind of lead us down that path, which will directly relate to continued improvement in the day rate, lead times for tendering for contracts are increasing. And we’re also seeing, as you were pointing out, customers increasing duration by connecting their programs to make it more attractive. And why would they be doing that would be, if they see potential or they see supply decreasing, which incentivizes them to pick up rigs for longer to ensure they have the assets they need to drill. Utilization is increasing, which is obviously resulting in a reduction in supply. And so looking at these main factors from a supply side metrics, it paints a positive picture on the direction of the market.

Anton Dibowitz: I mean what I’ll say, I mean I don’t know about violent disagreement, but no operator wants to pay more for a rig than they have to, and we certainly don’t want to put rigs to work for a dollar less than we can achieve for it. So it comes down to simple economics and supply and demand. And day rates seldom move in a nice clean parabola like you did in math class. As the supply demand picture continues to tighten and incremental demand comes to the market, we have more commercial leverage, and day rates as we have seen, will continue to trend and move up. So what people’s feelings about where they want rates to be are kind of neither here nor there in the grand scheme of things. If people want rigs and the demand continues, the supply continues to tighten and demand continues to increase, which is what we see happening, going into a sustained cycle, then rates will continue to move upwards.

Kurt Hallead: All right. Okay. Great. I appreciate that. Now, my follow-up is you’ve targeted $200 million of share repurchase for 2024. What’s your general sense of what that share repurchase target could be for 20 – to-date? Earmark ’23, what are you earmarking for ‘24?

Anton Dibowitz: Yeah. So, thanks Kurt. One, we think we’re really demonstrating our commitment to returning capital to shareholders. As you know, we repurchase 171 million shares year-to-date, that’s about 3.5% of our outstanding shares, outstanding. We’re on track to execute on that $200 million target this year. We’re going to provide kind of more detailed perspective on ’24, return-to-capital plans on the fourth quarter call. But I want to reiterate what Anton mentioned. Our philosophy around return-to-capital is simple. And when this business is generating meaningful and sustained free cash flow, we’re going to return it all to shareholders, unless we’ve got a more value-creative or better use for it. As we look forward, that’s going to include a dividend. We’ll flex with share repurchases, and we’ll even look at special dividends if we got a significant liquidity event, because as we said, this team is dedicated to capital return to shareholders.

Matt Lyne: I’ll just reiterate that. This is a board and the management group that is laser-focused on generating significant cash into an upcycle and our philosophy is very, very simple. We will return it all to shareholders, unless there is clearly a more value-creative use for that cash. We’ve demonstrated that this year with what we’ve done, and we will continue to deliver on that going forward.

Kurt Hallead: All right. I appreciate that. Thank you.

Operator: [Operator Instructions] Our next question is from David Smith of Pickering Energy Partners. Please go ahead.

David Smith : Hey, good morning, and thank you.

A – Anton Dibowitz: Good morning Dave.

David Smith : Sorry if I missed it. Did you provide any color on the unplanned Q3 downtime for several floaters, if there was a common thread, or any lessons learned to help secure revenue efficiency in the future?

A – Anton Dibowitz: Yeah, Dave. Well look, I can give you some color. Obviously, the quarter and our downtime was below our expectations, and we’re focused every day on first, delivering safely, and second, delivering efficiently for our customers. These were largely three events on three floaters, subsea-related. And it’s a fact of this business that if you have an issue with a BOP, by the time you pull it up to surface, fix it and send it down, it’s a two-week event. So this quarter is not where we would want to be on our subsea downtime particularly, and revenue efficiency, but what I would point to is our track record. Year-to-date, 97% revenue efficiency across the fleet, and we will focus and make sure that we rectify those issues and continue to deliver in the manner that people have become accustomed to us.

David Smith : I appreciate that. And then switching over, when I look at the global fleet of jackups that are less than 25 years old, very few idle today. Very few are stacked, cold stacked, and I think you own most of them. Just given some of the leading edge rates we’ve seen pushing above 150,000 a day, certainly it seems like that kind of rate plus duration could provide attractive economics on the reactivation. So, I just wanted to ask if you also see it that way, and if there are any discussions on your radar that could see one or more of the jackups green-lit for reactivation in the next year.

Anton Dibowitz: I’ll let Matt start with the market, and then I’ll come back on the philosophy afterwards.

A – Matt Lyne: So, I think what we’re starting to see, and I think in some of my prior remarks I mentioned the Middle East dominating jackup consumption in the past years, and now we’re starting to see the resurgence of Asia. And one of the things that makes it really interesting is the duration, the term of the opportunities that they are suggesting, and also pushing out their contract lead times, because obviously there is some time required in order to reactivate and move the rates to the correct market. So we’re seeing signs of those opportunities materialize, and I would say on a general basis we are bidding our stacked rigs more often these days to fit certain opportunities where we can provide guaranteed availability.

They will obviously take a secondary position to increasing the utilization of our active fleet, but as you saw in the prepared remarks, with limited availability in ‘24 and that utilization continues to improve, that’s going to put pressure on evaluating and pushing forward with our stacked jackup fleets.

Anton Dibowitz: Let me just emphasize a couple of points that Matt made. The first is about lead time. So, generally the reactivation of a jackup, and it’s a shorter cycle market between tender and actual contracting, so you need the lead time in order to reactivate a jackup. The second thing is simply a capital allocation question for us. Up until now it has been much more value accretive for us to enter into flow-to-reactivations based on where the day rates are and the payback times. That being said, you’re absolutely right now that jackup rates are increasing, and the durations of those contracts, which gives you a better ability to recover that reactivation cost, which you put in the order depending on the rig of $20 million to maybe $30 million, depending on specifications.

So now that we have longer duration contracts, more prevalent outside the Middle East, there are more opportunities to see one of those jobs making sense for a reactivation. So we like the assets we have. They are a great option for us to continue to play into the jackup up cycle. Up until now it’s been a capital allocation question where floaters have just been more value accretive. But yes, we’re absolutely focused on and we continue to bid jackups into those opportunities to find the right opportunity to bring them back.

David Smith : Great color. I appreciate it. And I’ll turn it back.

Operator: At this time, we will conclude our question-and-answer session. I’d like to turn the conference back over to Darin Gibbins for any closing remarks.

Darin Gibbins : Thanks, Allison, 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 2023 results. Have a great rest of your day.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.