UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to__________
Commission File Number 1-8097
Valaris Limited
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
| Bermuda | | 98-1589854 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | | | |
| Clarendon House, 2 Church Street | | |
| Hamilton | Bermuda | | HM 11 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: +44 (0) 20 7659 4660
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Ticker Symbol(s) | | Name of each exchange on which registered |
| Common Shares, $0.01 par value share | | VAL | | New York Stock Exchange |
| Warrants to purchase Common Shares | | VAL WS | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| | | | | | |
| Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☒ No ☐
As of OctoberApril 27, 2022,2023, there were 75,178,67675,181,200 Common Shares of the registrant issued and outstanding.
VALARIS LIMITED
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2022MARCH 31, 2023
FORWARD-LOOKING STATEMENTS
Statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include words or phrases such as "anticipate," "believe," "estimate," "expect," "intend," "likely," "plan," "project," "could," "may," "might," "should," "will" and similar words and specifically include statements regarding expected financial performance; expected utilization, day rates, revenues, operating expenses, cash flows, contract status, terms and duration, contract backlog, capital expenditures, insurance, financing and funding; the offshore drilling market, including supply and demand, customer drilling programs, stacking of rigs, effects of new rigs on the market and effect of the volatility of commodity prices; expected work commitments, awards, contracts and letters of intent; the availability, delivery, mobilization, contract commencement or relocation or other movement of rigs and the timing thereof; future rig reactivations, enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; performance of our joint ventures, including our joint venture with Saudi Arabian Oil Company ("Saudi Aramco"); expected divestitures of assets; general market, business and industry conditions, trends and outlook; general political conditions, including political tensions, conflicts and war (such as the ongoing conflict in Ukraine); the effect, impact, potential durationimpacts and other implicationseffects of COVID-19;public health crises, pandemics and epidemics, such as the COVID-19 pandemic; future operations; the impact of increasing regulatory complexity; the outcome of tax disputes, assessments and settlements; expense management; and the likely outcome of litigation, legal proceedings, investigations or insurance or other claims or contract disputes and the timing thereof.
Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:
•delays in contract commencement dates or cancellation, suspension, renegotiation or termination with or without cause of drilling contracts or drilling programs as a result of general or industry-specific economic conditions, mechanical difficulties, performance, delays in the delivery of critical drilling equipment, failure of the customer to receive final investment decision (FID) for which the drilling rig was contracted or other reasons;
•changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs or reactivation of stacked drilling rigs;
•general economic and business conditions, including recessions, inflation, volatility affecting the banking system and financial markets and adverse changes in the level of international trade activity;
•requirements to make significant expenditures in connection with rig reactivations, customer drilling requirements and to comply with governing laws or regulations in the regions we operate;
•loss of a significant customer or customer contract, as well as customer consolidation and changes to customer strategy, including focusing on renewable energy projects;
•our ability to attract and retain skilled personnel on commercially reasonable terms, whether due to labor regulations, rising wages, unionization, or otherwise, or to retain employees;
•governmental policies that could reduce demand for hydrocarbons, including mandating or incentivizing the conversion from internal combustion engine powered vehicles to electric-powered vehicles;
•consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition;
•increased scrutiny from regulators, market and industry participants, stakeholders and others in regards to our environmental, social and governance ("ESG") practices and reporting responsibilities;
•the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems, including our rig operating systems;
•asset impairments;
•the adequacy of sources of liquidity for us and our customers;
•general economic and business conditions, including recessions, inflation, and adverse changes in the level of international trade activity;
•risks inherent to drilling rig reactivations, repair, modification or upgrades, unexpected delays in equipment delivery, engineering, design or commissioning issues following delivery, or changes in the commencement, completion or service dates;
•our ability to generate operational efficiencies from our shared services center and potential risks relating to the processing of transactions and recording of financial information;
•downtime and other risks associated with offshore rig operations, including rig or equipment failure, damage and other unplanned repairs, the limited availability of transport vessels, hazards, self-imposed drilling limitations and other delays due to severe storms and hurricanes and the limited availability or
high cost of insurance coverage for certain offshore perils, such as hurricanes in the Gulf of Mexico or associated removal of wreckage or debris;
•our customers cancelling or shortening the duration of our drilling contracts, cancelling future drilling programs and seeking pricing and other contract concessions from us;
•decreases in levels of drilling activity and capital expenditures by our customers, whether as a result of the global capital markets and liquidity, prices of oil and natural gas, changes in tax policy (such as the U.K.’s recently announced windfall tax on oil and gas producers in the British North Sea), climate change concerns or otherwise, which may cause us to idle, stack or retire additional rigs;
•impacts and effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, the related public health measures implemented by governments worldwide, the duration and severity of the outbreak and its impact on global oil demand, the volatility in prices for oil and natural gas and the extent of disruptions to our operations;
•downtime or temporary shutdown of operations of our rigs as a result of an outbreak of COVID-19 on one or more of our rigs;
•disruptions to the operations and business of our key customers, suppliers and other counterparties, including impacts affecting our supply chain and logistics;
•governmental action, terrorism, cyber-attacks, piracy, military action and political and economic uncertainties, including civil unrest, political demonstrations, mass strikes, or an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East, North Africa, West Africa, Southeast Asia, Eastern Europe or other geographic areas, which may result in expropriation, nationalization, confiscation or deprivation or destruction of our assets; suspension and/or termination of contracts based on force majeure events or adverse environmental safety events; or volatility in prices of oil and natural gas;
•disputes over production levels among members of the Organization of Petroleum Exporting Countries and other oil and gas producing nations (“OPEC+”), which could result in increased volatility in prices for oil and natural gas that could affect the markets for our services;
•our ability to enter into, and the terms of, future drilling contracts, including contracts for newbuild rigs andor acquired rigs, for rigs currently idled and for rigs whose contracts are expiring;
•any failure to execute definitive contracts following announcements of letters of intent, letters of award or other expected work commitments;
•the outcome of litigation, legal proceedings, investigations or other claims or contract disputes, including any inability to collect receivables or resolve significant contractual or day rate disputes, and any renegotiation, nullification, cancellation or breach of contracts with customers or other parties;
•internal control risk due to significant employee reductions and changes in management;management and our shared service center;
•governmental regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations, (such as the Gulf of Mexico during hurricane season), limitations on new oil and gas leasing in U.S. federal lands and waters, and regulatory measures to limit or reduce greenhouse gas emissions;
•governmental policies that could reduce demand for hydrocarbons, including mandating or incentivizing the conversion from internal combustion engine powered vehicles to electric-powered vehicles;
•forecasts or expectations regarding the global energy transition, including consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition;
•increased scrutiny from regulators, market and industry participants, stakeholders and others in regard to our environmental, social and governance ("ESG") practices and reporting;
•our ability to achieve our ESG aspirations, targets, goals and commitments, including our Scope 1 emissions intensity reduction target, or the impact of any changes in our ESG strategy or commitments;
•potential impacts on our business resulting from climate-change or greenhouse gas legislation or regulations, and the impact on our business from climate-change related physical changes or changes in weather patterns;
•new and future regulatory, legislative or permitting requirements, future lease sales, changes in laws, rules and regulations that have or may impose increased financial responsibility, additional oil spill abatement contingency plan capability requirements and other governmental actions that may result in claims of force majeure or otherwise adversely affect our existing drilling contracts, operations or financial results;
•environmental or other liabilities, risks, damages or losses, whether related to storms, hurricanes or other weather-related events (including wreckage or debris removal), collisions, groundings, blowouts, fires, explosions, cyberattacks, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable;
•tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes;
•our ability to realize the expected benefits of our joint venture with Saudi Aramco, including our ability to fund any required capital contributions or to enforce any payment obligations of the joint venture pursuant to outstanding shareholder notes receivable;receivable and benefits of our other joint ventures;
•the impact of our emergence from bankruptcy on our business and relationships and comparability of our financial results, as well as the potentially dilutive impacts of warrants issued pursuant to the plan of reorganization;
•the costs, disruption and diversion of our management's attention associated with campaigns by activist securityholders;
•economic volatility and political, legal and tax uncertainties following the U.K.'s exit from the European Union; and
•adverse changes in foreign currency exchange rates, including their effect on the fair value measurement of any derivative instruments that we may enter into.rates.
In addition to the numerous risks, uncertainties and assumptions described above, you should also carefully read and consider "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I and "Item 1A. Risk Factors" in Part II of this report, and "Item 1A. Risk Factors" in Part I and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our annual report on Form 10-K for the year ended December 31, 2021,2022, which is available on the U.S. Securities and Exchange Commission website at www.sec.gov. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
| | | Three Months Ended
September 30, | | | Three Months Ended
March 31, | |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| | OPERATING REVENUES | OPERATING REVENUES | $ | 437.2 | | | $ | 326.7 | | | OPERATING REVENUES | $ | 430.1 | | | $ | 318.4 | | |
| OPERATING EXPENSES | OPERATING EXPENSES | | | OPERATING EXPENSES | | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 336.7 | | | 274.6 | | | Contract drilling (exclusive of depreciation) | 377.2 | | | 331.3 | | |
| | Depreciation | Depreciation | 22.6 | | | 24.4 | | | Depreciation | 23.3 | | | 22.5 | | |
| General and administrative | General and administrative | 19.2 | | | 27.2 | | | General and administrative | 24.4 | | | 18.8 | | |
| Total operating expenses | Total operating expenses | 378.5 | | | 326.2 | | | Total operating expenses | 424.9 | | | 372.6 | | |
| | EQUITY IN EARNINGS OF ARO | EQUITY IN EARNINGS OF ARO | 2.9 | | | 2.6 | | | EQUITY IN EARNINGS OF ARO | 3.3 | | | 4.3 | | |
| OPERATING INCOME | 61.6 | | | 3.1 | | | |
| OPERATING INCOME (LOSS) | | OPERATING INCOME (LOSS) | 8.5 | | | (49.9) | | |
| OTHER INCOME (EXPENSE) | OTHER INCOME (EXPENSE) | | | OTHER INCOME (EXPENSE) | | |
| Interest income | Interest income | 27.9 | | | 9.7 | | | Interest income | 23.0 | | | 10.9 | | |
| Interest expense, net | Interest expense, net | (11.7) | | | (11.3) | | | Interest expense, net | (11.1) | | | (11.5) | | |
| Reorganization items, net | (0.4) | | | (6.5) | | | |
| | Other, net | Other, net | 14.1 | | | 5.5 | | | Other, net | 0.6 | | | 10.0 | | |
| | | 29.9 | | | (2.6) | | | | 12.5 | | | 9.4 | | |
| INCOME BEFORE INCOME TAXES | 91.5 | | | 0.5 | | | |
| PROVISION FOR INCOME TAXES | | | |
| Current income tax expense | 13.4 | | | 53.2 | | | |
| Deferred income tax expense | 0.4 | | | 0.1 | | | |
| INCOME (LOSS) BEFORE INCOME TAXES | | INCOME (LOSS) BEFORE INCOME TAXES | 21.0 | | | (40.5) | | |
| BENEFIT FROM INCOME TAXES | | BENEFIT FROM INCOME TAXES | | |
| Current income tax benefit | | Current income tax benefit | (32.2) | | | (0.1) | | |
| Deferred income tax expense (benefit) | | Deferred income tax expense (benefit) | 4.6 | | | (0.6) | | |
| | | 13.8 | | | 53.3 | | | | (27.6) | | | (0.7) | | |
| NET INCOME (LOSS) | NET INCOME (LOSS) | 77.7 | | | (52.8) | | | NET INCOME (LOSS) | 48.6 | | | (39.8) | | |
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (3.4) | | | (1.7) | | | |
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.9) | | | 1.2 | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 74.3 | | | $ | (54.5) | | | NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 46.7 | | | $ | (38.6) | | |
| EARNINGS (LOSS) PER SHARE | EARNINGS (LOSS) PER SHARE | | | EARNINGS (LOSS) PER SHARE | | |
| Basic | Basic | $ | 0.99 | | | $ | (0.73) | | | Basic | $ | 0.62 | | | $ | (0.51) | | |
| Diluted | Diluted | $ | 0.98 | | | $ | (0.73) | | | Diluted | $ | 0.61 | | | $ | (0.51) | | |
| WEIGHTED-AVERAGE SHARES OUTSTANDING | WEIGHTED-AVERAGE SHARES OUTSTANDING | | | WEIGHTED-AVERAGE SHARES OUTSTANDING | | |
| Basic | Basic | 75.1 | | | 75.0 | | | Basic | $ | 75.2 | | | $ | 75.0 | | |
| Diluted | Diluted | 75.6 | | | 75.0 | | | Diluted | 76.4 | | | 75.0 | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME (LOSS)
(In millions, except per share amounts)millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
| | | | | | |
| OPERATING REVENUES | $ | 1,168.9 | | | $ | 529.5 | | | | $ | 397.4 | |
| OPERATING EXPENSES | | | | | | |
| Contract drilling (exclusive of depreciation) | 1,029.8 | | | 443.2 | | | | 343.8 | |
| Loss on impairment | 34.5 | | | — | | | | 756.5 | |
| Depreciation | 67.4 | | | 41.0 | | | | 159.6 | |
| General and administrative | 57.0 | | | 39.9 | | | | 30.7 | |
| Total operating expenses | 1,188.7 | | | 524.1 | | | | 1,290.6 | |
| | | | | | |
| EQUITY IN EARNINGS OF ARO | 15.9 | | | 7.4 | | | | 3.1 | |
| OPERATING INCOME (LOSS) | (3.9) | | | 12.8 | | | | (890.1) | |
| OTHER INCOME (EXPENSE) | | | | | | |
| Interest income | 50.0 | | | 17.5 | | | | 3.6 | |
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $132.9 million for the four months ended April 30, 2021) | (34.8) | | | (19.3) | | | | (2.4) | |
| Reorganization items, net | (2.1) | | | (10.6) | | | | (3,584.6) | |
| Other, net | 174.8 | | | 11.1 | | | | 25.9 | |
| | 187.9 | | | (1.3) | | | | (3,557.5) | |
| INCOME (LOSS) BEFORE INCOME TAXES | 184.0 | | | 11.5 | | | | (4,447.6) | |
| PROVISION FOR INCOME TAXES | | | | | | |
| Current income tax expense | 26.2 | | | 67.2 | | | | 34.4 | |
| Deferred income tax expense (benefit) | 7.1 | | | 1.2 | | | | (18.2) | |
| | 33.3 | | | 68.4 | | | | 16.2 | |
| NET INCOME (LOSS) | 150.7 | | | (56.9) | | | | (4,463.8) | |
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (3.4) | | | (3.8) | | | | (3.2) | |
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 147.3 | | | $ | (60.7) | | | | $ | (4,467.0) | |
| EARNINGS (LOSS) PER SHARE | | | | | | |
| Basic | $ | 1.96 | | | $ | (0.81) | | | | $ | (22.38) | |
| Diluted | $ | 1.95 | | | $ | (0.81) | | | | $ | (22.38) | |
| WEIGHTED-AVERAGE SHARES OUTSTANDING | | | | | | |
| Basic | 75.0 | | | 75.0 | | | | 199.6 | |
| Diluted | 75.5 | | | 75.0 | | | | 199.6 | |
| | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | |
| 2023 | | 2022 | | | |
| | | | | | |
| NET INCOME (LOSS) | $ | 48.6 | | | $ | (39.8) | | | | |
| OTHER COMPREHENSIVE LOSS, NET | | | | | | |
| Net reclassification adjustment for amounts recognized in net income as a component of net periodic pension benefit | (0.1) | | | — | | | | |
| | | | | | |
| | | | | | |
| Other | (0.1) | | | (0.3) | | | | |
| NET OTHER COMPREHENSIVE LOSS | (0.2) | | | (0.3) | | | | |
| COMPREHENSIVE INCOME (LOSS) | 48.4 | | | (40.1) | | | | |
| COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.9) | | | 1.2 | | | | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 46.5 | | | $ | (38.9) | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)BALANCE SHEETS
(In millions)millions, except par value amounts)
(Unaudited)
| | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | |
| 2022 | | 2021 | | | |
| | | | | | |
| NET INCOME (LOSS) | $ | 77.7 | | | $ | (52.8) | | | | |
| OTHER COMPREHENSIVE INCOME, NET | | | | | | |
| Net reclassification adjustment for amounts recognized in net loss as a component of net periodic benefit | — | | | (0.2) | | | | |
| | | | | | |
| | | | | | |
| Other | 0.1 | | | 0.2 | | | | |
| NET OTHER COMPREHENSIVE INCOME | 0.1 | | | — | | | | |
| COMPREHENSIVE INCOME (LOSS) | 77.8 | | | (52.8) | | | | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (3.4) | | | (1.7) | | | | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 74.4 | | | $ | (54.5) | | | | |
| | | | | | | | | | | | | |
| | | |
| March 31,
2023 | | December 31,
2022 | | |
| (Unaudited) | | | | |
| ASSETS | | | | | |
| CURRENT ASSETS | | | | | |
| Cash and cash equivalents | $ | 822.5 | | | $ | 724.1 | | | |
| Restricted cash | 21.5 | | | 24.4 | | | |
| | | | | |
| Accounts receivable, net | 393.4 | | | 449.1 | | | |
| Other current assets | 158.1 | | | 148.6 | | | |
| Total current assets | 1,395.5 | | | 1,346.2 | | | |
| PROPERTY AND EQUIPMENT, AT COST | 1,196.1 | | | 1,134.5 | | | |
| Less accumulated depreciation | 180.6 | | | 157.3 | | | |
| Property and equipment, net | 1,015.5 | | | 977.2 | | | |
| LONG-TERM NOTES RECEIVABLE FROM ARO | 261.0 | | | 254.0 | | | |
| INVESTMENT IN ARO | 114.4 | | | 111.1 | | | |
| OTHER ASSETS | 164.8 | | | 171.8 | | | |
| | $ | 2,951.2 | | | $ | 2,860.3 | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
| CURRENT LIABILITIES | | | | | |
| Accounts payable - trade | $ | 324.1 | | | $ | 256.5 | | | |
| Accrued liabilities and other | 267.7 | | | 247.9 | | | |
| | | | | |
| | | | | |
| Total current liabilities | 591.8 | | | 504.4 | | | |
| LONG-TERM DEBT | 542.8 | | | 542.4 | | | |
| OTHER LIABILITIES | 464.6 | | | 515.6 | | | |
| Total liabilities | 1,599.2 | | | 1,562.4 | | | |
| | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | |
| VALARIS SHAREHOLDERS' EQUITY | | | | | |
| | | | | |
| | | | | |
| Common shares, $0.01 par value, 700.0 shares authorized, 75.2 shares issued as of March 31, 2023 and December 31, 2022, respectively | 0.8 | | | 0.8 | | | |
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of March 31, 2023 and December 31, 2022 | — | | | — | | | |
| Stock warrants | 16.4 | | | 16.4 | | | |
| Additional paid-in capital | 1,103.6 | | | 1,097.9 | | | |
| | | | | |
| Retained earnings | 206.8 | | | 160.1 | | | |
| Accumulated other comprehensive income | 14.5 | | | 14.7 | | | |
| | | | | |
| Total Valaris shareholders' equity | 1,342.1 | | | 1,289.9 | | | |
| NONCONTROLLING INTERESTS | 9.9 | | | 8.0 | | | |
| Total equity | 1,352.0 | | | 1,297.9 | | | |
| | $ | 2,951.2 | | | $ | 2,860.3 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CASH FLOWS
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
| | | | | | |
| NET INCOME (LOSS) | $ | 150.7 | | | $ | (56.9) | | | | $ | (4,463.8) | |
| OTHER COMPREHENSIVE LOSS, NET | | | | | | |
| Net reclassification adjustment for amounts recognized in net income (loss) as a component of net periodic benefit | (0.1) | | | (0.2) | | | | 0.1 | |
| | | | | | |
| Reclassification of net gains on derivative instruments from other comprehensive loss into net loss | — | | | — | | | | (5.6) | |
| Other | 0.1 | | | — | | | | — | |
| NET OTHER COMPREHENSIVE LOSS | — | | | (0.2) | | | | (5.5) | |
| COMPREHENSIVE INCOME (LOSS) | 150.7 | | | (57.1) | | | | (4,469.3) | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (3.4) | | | (3.8) | | | | (3.2) | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 147.3 | | | $ | (60.9) | | | | $ | (4,472.5) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value amounts)
| | | | | | | | | | | | | |
| | | |
| September 30,
2022 | | December 31,
2021 | | |
| (Unaudited) | | | | |
| ASSETS | | | | | |
| CURRENT ASSETS | | | | | |
| Cash and cash equivalents | $ | 406.0 | | | $ | 608.7 | | | |
| Restricted cash | 18.2 | | | 35.9 | | | |
| Short-term investments | 220.0 | | | — | | | |
| Accounts receivable, net | 535.5 | | | 444.2 | | | |
| Other current assets | 162.9 | | | 117.8 | | | |
| Total current assets | 1,342.6 | | | 1,206.6 | | | |
| PROPERTY AND EQUIPMENT, AT COST | 1,087.1 | | | 957.0 | | | |
| Less accumulated depreciation | 133.5 | | | 66.1 | | | |
| Property and equipment, net | 953.6 | | | 890.9 | | | |
| LONG-TERM NOTES RECEIVABLE FROM ARO | 246.9 | | | 249.1 | | | |
| INVESTMENT IN ARO | 102.6 | | | 86.6 | | | |
| OTHER ASSETS | 175.5 | | | 176.0 | | | |
| | $ | 2,821.2 | | | $ | 2,609.2 | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
| CURRENT LIABILITIES | | | | | |
| Accounts payable - trade | $ | 256.6 | | | $ | 225.8 | | | |
| Accrued liabilities and other | 262.5 | | | 196.2 | | | |
| | | | | |
| | | | | |
| Total current liabilities | 519.1 | | | 422.0 | | | |
| LONG-TERM DEBT | 541.8 | | | 545.3 | | | |
| OTHER LIABILITIES | 539.8 | | | 581.1 | | | |
| Total liabilities | 1,600.7 | | | 1,548.4 | | | |
| | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | |
| VALARIS SHAREHOLDERS' EQUITY | | | | | |
| | | | | |
| | | | | |
| Common shares, $0.01 par value, 700.0 shares authorized, 75.2 and 75.0 shares issued as of September 30, 2022 and December 31, 2021, respectively | 0.8 | | | 0.8 | | | |
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of September 30, 2022 and December 31, 2021 | — | | | — | | | |
| Stock warrants | 16.4 | | | 16.4 | | | |
| Additional paid-in capital | 1,092.0 | | | 1,083.0 | | | |
| | | | | |
| Retained earnings (deficit) | 114.3 | | | (33.0) | | | |
| Accumulated other comprehensive loss | (9.1) | | | (9.1) | | | |
| | | | | |
| Total Valaris shareholders' equity | 1,214.4 | | | 1,058.1 | | | |
| NONCONTROLLING INTERESTS | 6.1 | | | 2.7 | | | |
| Total equity | 1,220.5 | | | 1,060.8 | | | |
| | $ | 2,821.2 | | | $ | 2,609.2 | | | |
| | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | |
| | 2023 | | 2022 | | | |
| | | | | | |
| OPERATING ACTIVITIES | | | | | | |
| Net income (loss) | $ | 48.6 | | | $ | (39.8) | | | | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | |
| Depreciation expense | 23.3 | | | 22.5 | | | | |
| Accretion of discount on the Notes Receivable from ARO | (7.0) | | | (7.7) | | | | |
| Share-based compensation expense | 5.7 | | | 3.4 | | | | |
| Deferred income tax expense (benefit) | 4.6 | | | (0.6) | | | | |
| Amortization, net | (4.2) | | | 1.6 | | | | |
| Equity in earnings of ARO | (3.3) | | | (4.3) | | | | |
| Net periodic pension and retiree medical income | (0.1) | | | (4.0) | | | | |
| Gain on asset disposals | (0.1) | | | (2.5) | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other | 0.1 | | | 0.5 | | | | |
| Changes in operating assets and liabilities | 85.1 | | | 32.5 | | | | |
| Contributions to pension plans and other post-retirement benefits | (1.0) | | | (0.8) | | | | |
| Net cash provided by operating activities | 151.7 | | | 0.8 | | | | |
| INVESTING ACTIVITIES | | | | | | |
| | | | | | |
| Additions to property and equipment | (56.3) | | | (38.5) | | | | |
| Net proceeds from disposition of assets | 0.1 | | | 1.3 | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash used in investing activities | (56.2) | | | (37.2) | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | 95.5 | | | (36.4) | | | | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 748.5 | | | 644.6 | | | | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 844.0 | | | $ | 608.2 | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| | Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
| | | | | | |
| OPERATING ACTIVITIES | | | | | | |
| Net income (loss) | $ | 150.7 | | | $ | (56.9) | | | | $ | (4,463.8) | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | |
| Gain on asset disposals | (137.7) | | | (0.2) | | | | (6.0) | |
| Depreciation expense | 67.4 | | | 41.0 | | | | 159.6 | |
| Accretion of discount on notes receivable | (37.8) | | | (12.9) | | | | — | |
| Loss on impairment | 34.5 | | | — | | | | 756.5 | |
| Equity in earnings of ARO | (15.9) | | | (7.4) | | | | (3.1) | |
| Net periodic pension and retiree medical income | (12.1) | | | (6.1) | | | | (5.4) | |
| Share-based compensation expense | 11.5 | | | 1.6 | | | | 4.8 | |
| Deferred income tax expense (benefit) | 7.1 | | | 1.2 | | | | (18.2) | |
| Amortization, net | (7.0) | | | 2.8 | | | | (4.8) | |
| Amortization of debt issuance cost | 0.7 | | | 0.3 | | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| Non-cash reorganization items, net | — | | | — | | | | 3,487.3 | |
| Other | 0.8 | | | — | | | | 7.3 | |
| Changes in operating assets and liabilities | (85.9) | | | 19.3 | | | | 68.5 | |
| Contributions to pension plans and other post-retirement benefits | (3.3) | | | (1.7) | | | | (22.5) | |
| Net cash used in operating activities | (27.0) | | | (19.0) | | | | (39.8) | |
| INVESTING ACTIVITIES | | | | | | |
| Purchases of short-term investments | (220.0) | | | — | | | | — | |
| Additions to property and equipment | (153.1) | | | (23.7) | | | | (8.7) | |
| Net proceeds from disposition of assets | 146.8 | | | 1.5 | | | | 30.1 | |
| | | | | | |
| | | | | | |
| Repayments of note receivable from ARO | 40.0 | | | — | | | | — | |
| Net cash provided by (used in) investing activities | (186.3) | | | (22.2) | | | | 21.4 | |
| FINANCING ACTIVITIES | | | | | | |
| | | | | | |
| Consent solicitation fees | (3.9) | | | — | | | | — | |
| Payments for tax withholdings for share-based awards | (2.5) | | | — | | | | — | |
| Issuance of first lien notes | — | | | — | | | | 520.0 | |
| Payments to Predecessor creditors | — | | | — | | | | (129.9) | |
| | | | | | |
| | | | | | |
| Other | — | | | — | | | | (1.4) | |
| Net cash provided by (used in) financing activities | (6.4) | | | — | | | | 388.7 | |
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | (0.7) | | | (0.1) | | | | (0.1) | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (220.4) | | | (41.3) | | | | 370.2 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 644.6 | | | 696.0 | | | | 325.8 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 424.2 | | | $ | 654.7 | | | | $ | 696.0 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -Unaudited Condensed Consolidated Financial Statements
We prepared the accompanying condensed consolidated financial statements of Valaris Limited and its subsidiaries ("Valaris"(the "Company," "Valaris," "our," "we" or "Successor""us") in accordance with accounting principles generally accepted in the United States of America ("GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included in this report is unaudited but, in our opinion, includes all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The December 31, 20212022 Condensed Consolidated Balance Sheet data was derived from our 20212022 audited consolidated financial statements but does not include all disclosures required by GAAP. The preparation of our condensed consolidated financial statements requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
Results of operations for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2022,2023, or for any future period. We recommend these condensed consolidated financial statements be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on February 22, 202221, 2023 (our "Annual Report").
Summary of Significant Accounting Policies
Please refer to "Note 1. Description of the Business and Summary of Significant Accounting Policies" of our Consolidated Financial Statements from our Annual Report for the discussion of our significant accounting policies. Certain previously reported amounts have been reclassified to conform to the current year presentation.
Emergence from Chapter 11 Bankruptcy and Fresh Start Accounting
As described in "Note 1. Description of the Business and Summary of Significant Accounting Policies", "Note 2. Chapter 11 Proceedings" and "Note 3. Fresh Start Accounting" from our Annual Report, we filed voluntary petitions for bankruptcy on August 19, 2020 (the “Petition Date”) and on April 30, 2021 (the "Effective Date") emerged from bankruptcy.
References to the financial position and results of operations of the "Successor" relate to the financial position and results of operations of Valaris Limited, together with its consolidated subsidiaries, after the Effective Date. References to the financial position and results of operations of the "Predecessor" refer to the financial position and results of operations of Valaris plc ("Legacy Valaris"), together with its consolidated subsidiaries, on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Quarterly Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including the Effective Date.
On the Effective Date, we qualified for and applied fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and we became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date. The condensed consolidated financial statements and notes have been presented with a black line division to delineate the lack of comparability between the Predecessor and Successor. Historical financial statements on or before the Effective Date are not a reliable indicator of the Company's financial condition and results of operations for any period after the adoption of fresh start accounting.
New Accounting Pronouncements
Recently adopted accounting pronouncements
Leases - In July 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-05, “Leases (Topic 842); Lessors - Certain Leases with Variable Lease Payments,”(“Update 2021-05”) which requires a lessor to classify a lease with entirely or partially variable payments that do not depend on an index or rate as an operating lease if another classification (i.e. sales-type or direct financing) would trigger a day-one loss. Update 2021-05 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We adopted this update January 1, 2022 using a prospective method, with no material impact to our condensed consolidated financial statements.
Accounting pronouncements to be adopted
Reference Rate Reform - In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Update 2020-04"), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. Our notes receivable with Saudi Aramco Rowan Offshore Drilling Company, our 50/50 joint venture with Saudi Aramco ("ARO"), from which we generate interest income on a LIBOR-based rate, are impacted by the application of this standard. As the notes bear interest on the LIBOR rate determined at the end of the preceding year, the rate governing our interest income in 2022 has already been determined. We expect to be able to modify the terms of our notes receivable to a comparable interest rate before the applicable LIBOR rate is no longer available and as such, do not expect this standard to have a material impact to our condensed consolidated financial statements.
Business Combinations -In October 2021, the FASB issued ASU No. 2021-08, ““Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“(“Update 2021-08”). ASU No. 2021-08 requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 and provides practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply, such as contract liabilities for the sale of nonfinancial assets within the scope of Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. The FASB issued the update to improve the accounting for acquired revenue contracts with customers in a business combination. Update 2021-08 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. We will adoptadopted Update 2021-08 effective January 1, 2023 with no material impact to our condensed consolidated financial statements upon adoption.
Accounting pronouncements to be adopted
Reference Rate Reform - In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Update 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the period requiredamendments do not apply to contract modifications made and will apply it hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to any business combination completed subsequentextend the temporary accounting rules under Topic 848 from December 31, 2022, to December 31, 2024. Our long-term notes receivable from Saudi Aramco Rowan Offshore Drilling Company, our 50/50 unconsolidated joint venture with Saudi Aramco ("ARO"), from which we generate interest income on a LIBOR-based rate (the "Notes Receivable from ARO"), are impacted by the adoption.application of this standard. As the Notes Receivable from ARO bear interest on the LIBOR rate determined at the end of the preceding year, the rate governing our interest income in 2023 has already been determined. We expect to be able to modify the terms of our Notes Receivable from ARO to a comparable interest rate before the applicable LIBOR rate is no longer available and as such, do not expect this standard to have a material impact to our condensed consolidated financial statements.
With the exception of the updated standards discussed above, there have been no accounting pronouncements issued and not yet effective that have significance, or potential significance, to our condensed consolidated financial statements.
Note 2 -Revenue from Contracts with Customers
Our drilling contracts with customers provide a drilling rig and drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig.
We also may receive lump-sum fees or similar compensation generally for the mobilization, demobilization, and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.
Our drilling contracts contain a lease component and we have elected to apply the practical expedient provided under Accounting Standards Codification ("ASC") 842 to not separate the lease and non-lease components and apply the revenue recognition guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Our drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigsthat are not distinct performance obligations within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.
The amount estimated for variable consideration is only recognized as revenue to the extent that it is probable that a significant reversal will not occur during the contract term. We have applied the optional exemption afforded in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," and have not disclosed the variable consideration related to our estimated future day rate revenues. The remaining duration of our drilling contracts based on those in place as of September 30, 2022March 31, 2023 was between approximately 1 month and 45 years.
Contract Termination - VALARIS DS-11
In July 2021, a contract was awarded to VALARIS DS-11 for an eight-well deepwater project in the U.S. Gulf of Mexico that was expected to commence in mid-2024. In June 2022, the customer terminated the contract.
As a result of the contract termination, we received an early termination fee of $51.0 million which is included in revenues on our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.
As of the date of the termination, we had incurred costs to upgrade the rig pursuant to the requirements of the contract. Costs incurred for capital upgrades specific to the customer requirements were considered to be impaired and as such, we recorded a pre-tax, non-cash loss on impairment in the second quarter of 2022 of $34.5 million. See "Note 5 - Property and Equipment" for additional information on the impairment. Additional costs were recorded for penalties and other costs incurred upon cancellation of equipment ordered.
Day Rate Drilling Revenue
Our drilling contracts provide for payment on a day rate basis and include a rate schedule with higher rates for periods when the drilling rig is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The day rate invoiced to the customer is determined based on the varying rates applicable to specific activities performed on an hourly or other time increment basis. Day rate consideration is allocated to the distinct hourly or other time increment to which it relates within the contract term and is generally recognized consistent with the contractual rate invoiced for the services provided during the respective period. Invoices are typically issued to our customers on a monthly basis and payment terms on customer invoices are typically 30 days.
Certain of our contracts contain performance incentives whereby we may earn a bonus based on pre-established performance criteria. Such incentives are generally based on our performance over individual monthly time periods or individual wells. Consideration related to performance bonus is generally recognized in the specific time period to which the performance criteria was attributed.
We may receive termination fees if certain drilling contracts are terminated by the customer prior to the end of the contractual term. Such compensation is recognized as revenue when our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
Mobilization / Demobilization Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to the commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in Operating revenues. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in Contract drilling expense.
Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the contract term. In some cases, demobilization fees may be contingent upon the occurrence or non-occurrence of a future event. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term.
Capital Upgrade / Contract Preparation Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation generally for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received for requested capital upgrades and other contract preparation work are recorded as a contract liability and amortized on a straight-line basis over the contract term to Operating revenues.
Contract Assets and Liabilities
Contract assets represent amounts recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable.
Contract liabilities generally represent fees received for mobilization, capital upgrades or in the case of our 50/50 unconsolidated joint venture with Saudi Aramco, represent the difference between the amounts billed under the bareboat charter arrangements and lease revenues earned. See “Note 3 – Equity Method Investment in ARO" for additional details regarding our balances with ARO.
Contract assets and liabilities are presented net on our Condensed Consolidated Balance Sheets on a contract-by-contract basis. Current contract assets and liabilities are included in Other current assets and Accrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in Other assets and Other liabilities, respectively, on our Condensed Consolidated Balance Sheets.
The following table summarizes our contract assets and contract liabilities (in millions):
| | | | | September 30, 2022 | | | December 31, 2021 | | March 31, 2023 | | | December 31, 2022 |
| Current contract assets | Current contract assets | $ | 3.0 | | | | $ | 0.3 | | Current contract assets | $ | 1.3 | | | | $ | 4.6 | |
| Noncurrent contract assets | Noncurrent contract assets | $ | 0.8 | | | | $ | — | | Noncurrent contract assets | $ | 1.2 | | | | $ | 0.7 | |
| Current contract liabilities (deferred revenue) | Current contract liabilities (deferred revenue) | $ | 84.8 | | | | $ | 45.8 | | Current contract liabilities (deferred revenue) | $ | 65.8 | | | | $ | 78.0 | |
| Noncurrent contract liabilities (deferred revenue) | Noncurrent contract liabilities (deferred revenue) | $ | 30.6 | | | | $ | 10.8 | | Noncurrent contract liabilities (deferred revenue) | $ | 32.4 | | | | $ | 41.0 | |
Changes in contract assets and liabilities during the period are as follows (in millions):
| | | | Contract Assets | | Contract Liabilities | | Contract Assets | | Contract Liabilities |
| | Balance as of December 31, 2021 | $ | 0.3 | | | $ | 56.6 | | |
| Balance as of December 31, 2022 | | Balance as of December 31, 2022 | $ | 5.3 | | | $ | 119.0 | |
| Revenue recognized in advance of right to bill customer | Revenue recognized in advance of right to bill customer | 7.4 | | | — | | Revenue recognized in advance of right to bill customer | 1.1 | | | — | |
| Increase due to cash received | Increase due to cash received | — | | | 119.5 | | Increase due to cash received | — | | | 15.2 | |
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | | | (36.3) | | Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | | | (23.3) | |
| Decrease due to amortization of deferred revenue added during the period | Decrease due to amortization of deferred revenue added during the period | — | | | (24.4) | | Decrease due to amortization of deferred revenue added during the period | — | | | (4.2) | |
| | Decrease due to transfer to receivables during the period | (3.9) | | | — | | |
| Balance as of September 30, 2022 | $ | 3.8 | | | $ | 115.4 | | |
| Decrease due to transfer to receivables and payables during the period | | Decrease due to transfer to receivables and payables during the period | (3.9) | | | (8.5) | |
| Balance as of March 31, 2023 | | Balance as of March 31, 2023 | $ | 2.5 | | | $ | 98.2 | |
Deferred Contract Costs
Costs incurred for upfront rig mobilizations and certain contract preparations are attributable to our future performance obligation under each respective drilling contract. These costs are deferred and amortized on a straight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. Deferred contract costs were included in Other current assets and Other assets on our Condensed Consolidated Balance Sheets and totaled $69.8$53.8 million and $31.4$57.3 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. For the Successor, duringDuring the three and nine months ended September 30,March 31, 2023 and 2022, amortization of such costs totaled $18.8$20.0 million and $41.0$11.7 million, respectively. During three and five months ended September 30, 2021, amortization of such costs for the Successor totaled $11.4 million and $13.2 million, respectively. For the Predecessor, during the four months ended April 30, 2021, amortization of such costs totaled $7.6 million.
Deferred Certification Costs
We must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. Deferred regulatory certification and compliance costs were included in Other current assets and Other assets on our Condensed Consolidated Balance Sheets and totaled $12.6$19.2 million and $3.3$16.2 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. For the Successor, duringDuring the three and nine months ended September 30,March 31, 2023 and 2022, amortization of such costs totaled $1.4$2.7 million and $2.5$0.3 million, respectively. During the three and five months ended September 30, 2021, amortization of such costs for the Successor totaled $0.1 million and $0.2 million, respectively. For the Predecessor, during the four months ended April 30, 2021, amortization of such costs totaled $3.1 million.
Future Amortization of Contract Liabilities and Deferred Costs
Our contract liabilities and deferred costs are amortized on a straight-line basis over the contract term or corresponding certification period to Operating revenues and Contract drilling expense, respectively, with the exception of the contract liabilities related to our bareboat charter arrangements with ARO which would not be contractually payable until the end of the lease term or termination, if sooner. See "Note 3- Equity Method Investment in ARO" for additional information on ARO and related arrangements. The table below reflects the expected future amortization of our contract liabilities and deferred costs recorded as of September 30, 2022.March 31, 2023. In the case of our contract liabilities related to our bareboat charter arrangements with ARO, the contract liability is not amortized and as such, the amount is reflected in the table below at the end of the current lease term. See "Note 3 - Equity Method Investment in ARO" for additional information on ARO and related arrangements. | | | (In millions) | | (In millions) |
| | | Remaining 2022 | | 2023 | | 2024 | | 2025 and Thereafter | | Total | | Remaining 2023 | | 2024 | | 2025 | | 2026 and Thereafter | | Total |
| Amortization of contract liabilities | Amortization of contract liabilities | $ | 30.9 | | | $ | 64.2 | | | $ | 19.8 | | | $ | 0.5 | | | $ | 115.4 | | Amortization of contract liabilities | $ | 53.3 | | | $ | 41.7 | | | $ | 2.0 | | | $ | 1.2 | | | $ | 98.2 | |
| Amortization of deferred costs | Amortization of deferred costs | $ | 20.2 | | | $ | 52.1 | | | $ | 10.1 | | | $ | — | | | $ | 82.4 | | Amortization of deferred costs | $ | 51.7 | | | $ | 19.2 | | | $ | 1.6 | | | $ | 0.5 | | | $ | 73.0 | |
Note 3 -Equity Method Investment in ARO
Background
ARO is a 50/50 unconsolidated joint venture between the Company and Saudi Aramco that owns and operates offshore drilling rigs in Saudi Arabia. As of September 30, 2022,March 31, 2023, ARO owns seven jackup rigs, has ordered two newbuild jackup rigs, and leases eight rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. At September 30, 2022, each of the leased rigs were operating under three-year drilling contracts with Saudi Aramco. The seven rigs owned by ARO are currently operating under contracts with Saudi Aramco for an aggregate contract term of 15 years provided that the rigs meet the technical and operational requirements of Saudi Aramco.
ARO has plans to purchase 20 newbuild jackup rigs over an approximate 10-year period.In January 2020, ARO ordered the first two newbuild jackups, each with a shipyard price of $176.0 million. Whileand the shipyard contract contemplated delivery of these newbuild rigs in 2022, we expect delivery of these rigs to be delayed intois expected in 2023.ARO is expected to place orders for two additional newbuild jackups in the near term. In connection with these plans, we have a potential obligation to fund ARO for newbuild jackup rigs. See "Note 11 - Contingencies" for additional information.
The joint venture partners agreed in the shareholders' agreement that Saudi Aramco, as a customer, will provide drilling contracts to ARO in connection with the acquisition of the newbuild rigs. The initial contracts provided by Saudi Aramco for each of the newbuild rigs will be for an eight-year term. The day rate for the initial contracts for each newbuild rig will be determined using a pricing mechanism that targets a six-year payback period for construction costs on an EBITDA basis. The initial eight-year contracts will be followed by a minimum of another eight years of term, re-priced in three-year intervals based on a market pricing mechanism.
Summarized Financial Information
The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the ARO-owned jackup rigs as well as the rigs leased from us.
Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. Cost incurred under the Secondment Agreement are included in Contract drilling expense and General and administrative, depending on the function to which the seconded employee's service related. See additional discussion below regarding these related-party transactions.
Summarized financial information for ARO is as follows (in millions):
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | March 31, 2023 | | March 31, 2022 | |
| Revenues | Revenues | | $ | 111.4 | | | $ | 117.7 | | | $ | 339.1 | | | $ | 365.2 | | Revenues | | $ | 123.6 | | | $ | 111.3 | | |
| Operating expenses | Operating expenses | | Operating expenses | | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | | 90.0 | | | 94.4 | | | 256.3 | | | 273.4 | | Contract drilling (exclusive of depreciation) | | 90.9 | | | 84.2 | | |
| Depreciation | Depreciation | | 15.4 | | | 16.8 | | | 47.3 | | | 47.5 | | Depreciation | | 15.0 | | | 16.5 | | |
| General and administrative | General and administrative | | 4.7 | | | 5.4 | | | 13.1 | | | 12.7 | | General and administrative | | 4.6 | | | 5.2 | | |
| Operating income | Operating income | | 1.3 | | | 1.1 | | | 22.4 | | | 31.6 | | Operating income | | 13.1 | | | 5.4 | | |
| Other expense, net | Other expense, net | | 2.7 | | | 3.4 | | | 9.3 | | | 11.0 | | Other expense, net | | 10.4 | | | 3.3 | | |
| Provision (benefit) for income taxes | | (0.1) | | | 0.2 | | | 3.1 | | | 6.6 | | |
| Net income (loss) | | $ | (1.3) | | | $ | (2.5) | | | $ | 10.0 | | | $ | 14.0 | | |
| Provision for income taxes | | Provision for income taxes | | 1.9 | | | 0.7 | | |
| Net income | | Net income | | $ | 0.8 | | | $ | 1.4 | | |
| | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 173.5 | | | $ | 270.8 | | Cash and cash equivalents | | $ | 101.2 | | | $ | 176.2 | |
| Other current assets | Other current assets | | 145.6 | | | 135.0 | | Other current assets | | 189.3 | | | 140.6 | |
| Non-current assets | Non-current assets | | 800.9 | | | 775.8 | | Non-current assets | | 830.2 | | | 818.1 | |
| Total assets | Total assets | | $ | 1,120.0 | | | $ | 1,181.6 | | Total assets | | $ | 1,120.7 | | | $ | 1,134.9 | |
| | Current liabilities | Current liabilities | | $ | 87.3 | | | $ | 79.9 | | Current liabilities | | $ | 68.5 | | | $ | 86.3 | |
| Non-current liabilities | Non-current liabilities | | 879.5 | | | 956.7 | | Non-current liabilities | | 887.4 | | | 884.6 | |
| Total liabilities | Total liabilities | | $ | 966.8 | | | $ | 1,036.6 | | Total liabilities | | $ | 955.9 | | | $ | 970.9 | |
Equity in Earnings of ARO
We account for our interest in ARO using the equity method of accounting and only recognize our portion of ARO's net income, adjusted for basis differences as discussed below, which is included in Equity in earnings (losses) of ARO in our Condensed Consolidated Statements of Operations. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO. Judgments regarding our level of influence over ARO included considering key factors such as each partner's ownership interest, representation on the board of managers of ARO and ability to direct activities that most significantly impact ARO's economic performance, including the ability to influence policy-making decisions. Our investment in ARO would be assessed for impairment if there are changes in facts and circumstances that indicate a loss in value may have occurred. If a loss were deemed to have occurred and this loss was determined to be other than temporary, the carrying value of our investment would be written down to fair value and an impairment recorded.
We have anOur equity method investment in ARO that was recorded at its estimated fair value at both the Effective Date and the date of our combination with our2019 transaction where we acquired the subsidiary that held the joint venture partner.interest. We computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's U.S. GAAP financial statements ("basis differences") on each of these dates. These basis differences primarily related to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were determined to have favorable terms as of the measurement dates.
Basis differences are amortized over the remaining life of the assets or liabilities to which they relate and are recognized as an adjustment to the Equity in earnings (losses) of ARO in our Condensed Consolidated Statements of Operations. The amortization of those basis differences is combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):
| | | Three Months Ended
September 30, | | | Three Months Ended
March 31, | |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| 50% interest in ARO net income | 50% interest in ARO net income | $ | (0.7) | | | $ | (1.3) | | | 50% interest in ARO net income | $ | 0.4 | | | $ | 0.7 | | |
| Amortization of basis differences | Amortization of basis differences | 3.6 | | | 3.9 | | | Amortization of basis differences | 2.9 | | | 3.6 | | |
| Equity in earnings of ARO | Equity in earnings of ARO | $ | 2.9 | | | $ | 2.6 | | | Equity in earnings of ARO | $ | 3.3 | | | $ | 4.3 | | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
| 50% interest in ARO net income | $ | 5.0 | | | $ | 1.0 | | | | $ | 6.0 | |
| Amortization of basis differences | 10.9 | | | 6.4 | | | | (2.9) | |
| Equity in earnings of ARO | $ | 15.9 | | | $ | 7.4 | | | | $ | 3.1 | |
Related-Party Transactions
Revenues recognized by us related to the Lease Agreements arewere $18.8 million and $14.2 million for the three months ended March 31, 2023 and 2022, respectively.
Our balances related to the ARO lease agreements were as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | | | | | |
| 2022 | | 2021 | | | | | | | |
| Lease revenue | $ | 13.8 | | | $ | 14.2 | | | | | | | | |
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| | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | | |
Amounts receivable (1) | $ | 16.9 | | | $ | 12.0 | | | | |
Contract liabilities(2) | 8.9 | | | 16.7 | | | | |
Accounts payable(2) | $ | 53.4 | | | $ | 43.2 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 | | | | |
| Lease revenue | $ | 42.6 | | | $ | 24.5 | | | | $ | 21.7 | | | | | |
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Amounts receivable from ARO related to the Lease Agreements totaled $8.2 million and $12.1 million as of September 30, 2022 and December 31, 2021, respectively, and areis included in Accounts receivable, net onin our Condensed Consolidated Balance Sheets.Sheet.
We had $19.1 million and $36.3 million of Contract liabilities and Accounts payable, respectively, related to the Lease Agreements as of September 30, 2022. As of December 31, 2021, we had $10.8 million and $38.3 million of Contract liabilities and Accounts payable, respectively, related to the Lease Agreements. The per day bareboat charter amount in the Lease Agreements is subject to adjustment based on actual performance of the respective rig and as such Contractcontract liabilities related to the Lease Agreements are subject to adjustment during the lease term. Upon completion of the lease term, such amount becomes a payable to or a receivable from ARO.
During 2017 and 2018, the Company contributed cash to ARO in exchange for ten-year shareholder notes receivable with interestthe 10-year Notes Receivable from ARO based on a one-year LIBOR rate, set as of the end of the year prior to the year applicable, plus two percent. The agreement entered into by us and Saudi Aramco to create ARO prohibits the sale or transfer of the shareholder note to a third party, except in certain limited circumstances.
The principal amount discount and interest receivablediscount of the shareholder notes receivableNotes Receivable from ARO were as follows (in millions):
| | | September 30, 2022 | | December 31, 2021 | | | March 31, 2023 | | December 31, 2022 | |
| Principal amount | Principal amount | $ | 402.7 | | | $ | 442.7 | | | Principal amount | $ | 402.7 | | | $ | 402.7 | | |
| Discount | Discount | (155.8) | | | (193.6) | | | Discount | (141.7) | | | (148.7) | | |
| Carrying value | Carrying value | $ | 246.9 | | | $ | 249.1 | | | Carrying value | $ | 261.0 | | | $ | 254.0 | | |
| Interest receivable(1)(2) | Interest receivable(1)(2) | $ | 8.6 | | | $ | — | | | Interest receivable(1)(2) | $ | 7.5 | | | $ | — | | |
(1)Our interest receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheet.
(2)We collected our 20212022 interest on our long-term notes receivablethe Notes Receivable from ARO in cash prior to December 31, 2021,2022, and as such, there was no interest receivable from ARO as of December 31, 2021.2022.
In September 2022, the Company received a principal payment of $40.0 million from ARO representing a partial early repayment of the shareholder notes receivable. In connection with this repayment, we recognized non-cash interest income of $14.8 million in the third quarter of 2022 for the discount attributable to this repayment.
Interest income earned on the shareholder notes receivable wereNotes Receivable from ARO was as follows (in millions):
| | | Three Months Ended
September 30, | | | Three Months Ended
March 31, | |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| Interest income | Interest income | $ | 2.8 | | | $ | 2.7 | | | Interest income | $ | 7.5 | | | $ | 2.8 | | |
| Non-cash amortization | Non-cash amortization | 22.4 | | | 6.9 | | | Non-cash amortization | 7.0 | | | 7.7 | | |
| Total interest income on the shareholder notes receivable | $ | 25.2 | | | $ | 9.6 | | | |
| Total interest income on the Notes Receivable from ARO | | Total interest income on the Notes Receivable from ARO | $ | 14.5 | | | $ | 10.5 | | |
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| Successor | | | Predecessor |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
| Interest income | $ | 8.6 | | | $ | 4.4 | | | | $ | 3.5 | |
| Non-cash amortization | 37.8 | | | 12.9 | | | | — | |
| Total interest income on the shareholder notes receivable | $ | 46.4 | | | $ | 17.3 | | | | $ | 3.5 | |
Maximum Exposure to Loss
The following table summarizes the total assets and liabilities as reflected in our Condensed Consolidated Balance Sheets as well as our maximum exposure to loss related to ARO (in millions). Our maximum exposure to loss is limited to (1) our equity investment in ARO; (2) the carrying amount of our shareholder notes receivable; and (3) other receivables and contract assets from ARO, partially offset by contract liabilities as well as payables to ARO.
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| | | |
| September 30, 2022 | | December 31, 2021 |
| Total assets | $ | 366.9 | | | $ | 348.1 | |
| Less: total liabilities | 55.4 | | | 49.1 | |
| Maximum exposure to loss | $ | 311.5 | | | $ | 299.0 | |
Note 4 -Fair Value Measurements
The carrying values and estimated fair values of certain of our long-term debt instrumentfinancial instruments were as follows (in millions):
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| | | |
| September 30,
2022 | | December 31,
2021 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| Senior secured first lien notes | $ | 541.8 | | | $ | 537.2 | | | $ | 545.3 | | | $ | 575.7 | |
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| March 31, 2023 | | December 31, 2022 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
First Lien Notes (1) | $ | 542.8 | | | $ | 561.8 | | | $ | 542.4 | | | $ | 545.9 | |
Long-term notes receivable from ARO (2) | $ | 261.0 | | | $ | 321.9 | | | $ | 254.0 | | | $ | 336.7 | |
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(1)The estimated fair value of the Senior Secured First Lien Notes due 2028 (the "First Lien Notes")was determined using quoted market prices, which are level 1 inputs.
As of September 30, 2022, the(2)The estimated fair value of our notes receivableNotes Receivable from ARO was $268.1 million and was estimated by using an income approach to value the forecasted cash flows attributed to the notes receivableNotes Receivable from ARO using a discount rate based on a comparable yield with a country-specific risk premium.premium, which are considered to be level 2 inputs.
The estimated fair values of our cash and cash equivalents, restricted cash, short-term investments, accounts receivable and trade payables approximated their carrying values as of September 30, 2022March 31, 2023 and December 31, 2021.2022.
Note 5 -Property and Equipment
Property and equipment consisted of the following (in millions):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| Drilling rigs and equipment | Drilling rigs and equipment | | $ | 990.1 | | | $ | 886.9 | | Drilling rigs and equipment | | $ | 1,049.3 | | | $ | 1,036.5 | |
| Work-in-progress | Work-in-progress | | 58.9 | | | 35.6 | | Work-in-progress | | 108.0 | | | 59.8 | |
| Other | Other | | 38.1 | | | 34.5 | | Other | | 38.8 | | | 38.2 | |
| | $ | 1,087.1 | | | $ | 957.0 | | | $ | 1,196.1 | | | $ | 1,134.5 | |
Assets held-for-use
On a quarterly basis, we evaluate the carrying value of our property and equipment to identify events or changes in circumstances ("triggering events") that indicate the carrying value may not be recoverable. For rigs whose carrying values are determined not to be recoverable, we record an impairment for the difference between their fair values and carrying values.
Successor
In June 2022, the drilling contract previously awarded to VALARIS DS-11 was terminated. As of the date of termination, we had incurred costs to upgrade the rig pursuant to the requirements of the contract. Costs incurred related to these capital upgrades were included in work-in-progress and upon termination were determined to be impaired. We recorded a pre-tax, non-cash loss on impairment in the second quarter of 2022 of $34.5 million. See "Note 2 - Revenue from Contracts with Customers" for additional information regarding the termination.
Predecessor
During the first quarter of 2021, as a result of challenging market conditions for certain of our floaters, we revised our near-term operating assumptions which resulted in a triggering event for purposes of evaluating impairment. We determined that the estimated undiscounted cash flows were not sufficient to recover the carrying values for certain rigs and concluded they were impaired as of March 31, 2021.
Based on the asset impairment analysis performed as of March 31, 2021, we recorded a pre-tax, non-cash loss on impairment in the first quarter of 2021 for certain floaters totaling $756.5 million, inclusive of $5.6 million of gains reclassified from accumulated other comprehensive income into loss on impairment associated with related cash flow hedges. We measured the fair value of these assets to be $26.0 million at the time of impairment by applying either an income approach, using projected discounted cash flows or estimated sales price. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including, in the case of an income approach, assumptions regarding future day rates, utilization, operating costs and capital requirements. In instances where we applied an income approach, forecasted day rates and utilization took into account then current market conditions and our anticipated business outlook.
Assets held-for-sale and Assets sold
Our business strategy has been to focus on ultra-deepwater floater and premium jackup operations and de-emphasize other assets and operations that are not part of our long-term strategic plan or that no longer meet our standards for economic returns. We continue to focus on our fleet management strategy in light of the composition of our rig fleet. While taking into account certain restrictions on the sales of assets under our Indenture dated April 30, 2021 that governs our First Lien Notes (the “Indenture”), as part of our strategy, we may act opportunistically from time to time to monetize assets to enhance stakeholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of lower-specification or non-core rigs. To this end, we continually assess our rig portfolio and actively work with rig brokers to market certain rigs. See “Note 8 – Debt" for additional information on restrictions on the sales of assets.
On a quarterly basis, we assess whether any long-lived assets meet the criteria established for held-for-sale classification on our balance sheet. Assets classified as held-for-sale are recorded at fair value, less costs to sell. We measure the fair value of our assets held-for-sale by applying a market approach based on unobservable third-party estimated prices that would be received in exchange for the assets in an orderly transaction between market participants or a negotiated sales price. We reassess the fair value of our held-for-sale assets on a quarterly basis and adjust the carrying value, as necessary. No assets were consideredclassified as held-for-sale on our Condensed Consolidated Balance SheetsSheet as of September 30, 2022,March 31, 2023, or December 31, 2021.
Successor2022.
In September 2022, we reached an agreement to sellApril 2023, VALARIS 54 to a third party, the closing of which is subject to customary closing conditions, after completion of its current contractwas sold resulting in March 2023. We expect to recognize a pre-tax gain on the sale of approximately $28$28.0 million duringin the first halfsecond quarter of 2023. The rig had an immaterial net book value as of March 31, 2023.
During the second quarter of 2022, we sold VALARIS 113 and VALARIS 114 for an aggregate pre-tax gain of $120.0 million, VALARIS 36 for a pre-tax gain of $8.5 million and recognized a pre-tax gain of $7.0 million related to additional proceeds received for our 2020 sale of VALARIS 68 resulting from post-sale conditions of that sale agreement. In the first quarter of 2022, we sold VALARIS 67 for a pre-tax gain of $2.0 million. Gains on sales are included in Other, net on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.
In August 2021, VALARIS 100 was sold resulting in an insignificant pre-tax gain, which is included in Other, net on the Condensed Consolidated Statements of Operations for the five months ended September 30, 2021 (Successor).
Predecessor
In April 2021, VALARIS 101 was sold resulting in a pre-tax gain of $5.3 million. In March 2021, our Australia office building was sold resulting in an insignificant pre-tax gain. Gains on sales are included in Other, net on the Condensed Consolidated Statements of Operations for the four months ended April 30, 2021 (Predecessor).
Note 6 -Pension and Other Post-retirement Benefits
We have defined-benefit pension plans and retiree medical plans that provide post-retirement health and life insurance benefits.
The components of net periodic pension and retiree medical income were as follows (in millions):
| | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | |
| | 2022 | | 2021 | | | |
| | | | | | |
| Interest cost | $ | 5.7 | | | $ | 5.8 | | | | |
| Expected return on plan assets | (9.7) | | | (9.5) | | | | |
| | | | | | |
Net periodic pension and retiree medical income (1) | $ | (4.0) | | | $ | (3.7) | | | | |
| | | Successor | | | Predecessor | | Three Months Ended
March 31, | |
| | | Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 | | 2023 | | 2022 | |
| | Interest cost | Interest cost | $ | 16.8 | | | $ | 9.6 | | | | $ | 6.6 | | Interest cost | $ | 7.7 | | | $ | 5.5 | | |
| Expected return on plan assets | Expected return on plan assets | (28.8) | | | (15.7) | | | | (12.1) | | Expected return on plan assets | (7.7) | | | (9.5) | | |
| Amortization of net loss | (0.1) | | | — | | | | 0.1 | | |
| Amortization of net gain | | Amortization of net gain | (0.1) | | | — | | |
Net periodic pension and retiree medical income (1) | Net periodic pension and retiree medical income (1) | $ | (12.1) | | | $ | (6.1) | | | | $ | (5.4) | | Net periodic pension and retiree medical income (1) | $ | (0.1) | | | $ | (4.0) | | |
(1)Included in Other, net, in our Condensed Consolidated Statements of Operations.
In March 2021, the American Rescue Plan Act of 2021 ("ARPA-21") was passed. ARPA-21 provides funding relief for U.S. qualified pension plans which lower pension contribution requirements over the next few years. During the nine months ended September 30, 2022 (Successor), we contributed or directly paid $3.3 million to our pension and other post-retirement benefit plans. We currently expect to contribute or directly pay $1.7 million to our pension and other post-retirement benefits plans for the remainder of 2022. These amounts represent the minimum contributions we are required to make under relevant statutes. We do not expect to make contributions in excess of the minimum required amounts.
Note 7 -Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Basic and diluted earnings per share ("EPS") for the Predecessor was calculated in accordance with the two-class method. Predecessor net loss attributable to Legacy Valaris used in our computations of basic and diluted EPS was adjusted to exclude net income allocated to non-vested shares granted to our employees and non-employee directors. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and for the Successor includes the effect of all potentially dilutive stock equivalents, including warrants, restricted stock unit awards and performance stock unit awards and for the Predecessor included the effect of all potentially dilutive stock options and excluded non-vested shares.awards.
The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the three and nine months ended September 30,March 31, 2023 and 2022 (Successor), three and five months ended September 30, 2021 (Successor) and four months ended April 30, 2021 (Predecessor) (in millions):
| | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | |
| | 2022 | | 2021 | | | |
| Income (loss) from continuing operations attributable to our shares | $ | 74.3 | | | $ | (54.5) | | | | |
| Weighted average shares outstanding: | | | | | | |
| Basic | 75.1 | | | 75.0 | | | | |
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| Effect of stock equivalents | 0.5 | | | — | | | | |
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| Diluted | 75.6 | | | 75.0 | | | | |
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| Successor | | | Predecessor (1) |
| | Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Month Ended April 30, 2021 |
| Income (loss) from continuing operations attributable to our shares | $ | 147.3 | | | $ | (60.7) | | | | $ | (4,467.0) | |
| Weighted average shares outstanding: | | | | | | |
| Basic | 75.0 | | | 75.0 | | | | 199.6 | |
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| Effect of stock equivalents | 0.5 | | | — | | | | — | |
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| Diluted | 75.5 | | | 75.0 | | | | 199.6 | |
(1)No amounts were allocated to non-vested share awards in these periods given that losses are not allocated to non-vested share awards. | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | |
| | 2023 | | 2022 | | | |
| Income (loss) from continuing operations attributable to our shares | $ | 46.7 | | | $ | (38.6) | | | | |
| Weighted average shares outstanding: | | | | | | |
| Basic | 75.2 | | | 75.0 | | | | |
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| Effect of stock equivalents | 1.2 | | | — | | | | |
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| Diluted | 76.4 | | | 75.0 | | | | |
Anti-dilutive share awards totaling 38,000 and 103,0008,000 were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2022 (Successor), respectively.March 31, 2023.
Anti-dilutive share awards totaling 1.0 million were excluded from the computation of diluted EPS for the three months ended March 31, 2022. Due to the net loss position, of the Successor during the three and five months ended September 30, 2021, our potentially dilutive instrumentsshare awards were not included in the computation of diluted EPS as the effect of including these shares in the calculation would have been anti-dilutive. For the Successor, during the three and five months ended September 30, 2021, there were approximately 600,000 and 400,000 anti-dilutive shares, respectively.
Due to the net loss position of the Predecessor, during the four months ended April 30, 2021, our potentially dilutive instruments were not included in the computation of diluted EPS as the effect of including these shares in the calculation would have been anti-dilutive. For the Predecessor, during the four months ended April 30, 2021, anti-dilutive share awards totaling 300,000 were excluded from the computation of diluted EPS.
We have 5,470,971had 5,470,950 warrants outstanding (the "Warrants") as of September 30, 2022March 31, 2023 to purchase common shares of Valaris Limited (the "Common Shares") which are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. Upon issuance, the Warrants were exercisable for a period of seven years and will expire on April 29, 2028. The exercise of these Warrants into Common Shares would have a dilutive effect to the holdings of Valaris Limited's existing shareholders. These warrants are anti-dilutive for all periods presented for the Successor.presented.
Note 8 -Debt
First Lien Notes Indenture
On the Effective Date,April 30, 2021, in accordance with the plan of reorganization and Backstop Commitment Agreement, dated August 18, 2020 (as amended, the "BCA"), the Company consummated the rights offering of the First Lien Notes and associated Common Shares in an aggregate principal amount of $550$550.0 million.
The First Lien Notes were issued pursuant to the Indenture among Valaris Limited, certain direct and indirect subsidiaries of Valaris Limited as guarantors, and Wilmington Savings Fund Society, FSB, as collateral agent and trustee (in such capacities, the “Collateral Agent”).
The First Lien Notes are guaranteed, jointly and severally, on For a senior basis, by certain of the direct and indirect subsidiaries of the Company. The First Lien Notes and such guarantees are secured by first-priority perfected liens on 100% of the equity interests of each restricted subsidiary directly owned by the Company or any guarantor and a first-priority perfected lien on substantially all assets of the Company and each guarantorsummary of the First Lien Notes, see “Note 8 – Debt” to our consolidated financial statements included in each case subject to certain exceptions and limitations. The following is a brief description of the material provisions of the Indenture and the First Lien Notes.our Annual Report on Form 10-K.
The First Lien Notes are scheduled to mature onOn April 30, 2028. Interest on the First Lien Notes accrues, at our option, at a rate of: (1) 8.25% per annum, payable in cash; (2) 10.25% per annum, with 50% of such interest to be payable in cash and 50% of such interest to be paid in kind; or (3) 12% per annum, with the entirety of such interest to be paid in kind. Interest is due semi-annually in arrears on May 1 and November 1 of each year and shall be computed on the basis of a 360-day year of twelve 30-day months.
At any time prior to April 30,3, 2023, the Company may redeem upissued a notice of conditional redemption to 35% of the aggregate principal amountholders of the First Lien Notes at a redemption price of 104% upequal to the net cash proceeds received by the Company from equity offerings provided that at least 65%104.0% of the aggregate principal amount of the First Lien Notes, remains outstanding and provided that the redemption occurs within 120 days after such equity offering of the Company. At any time prior to April 30, 2023, the Company may redeem the First Lien Notes at a redemption price of 104% of the principal amount plus a “make-whole” premium. On or after April 30, 2023, the Company may redeem all or part of the First Lien Notes at fixed redemption prices (which are expressed as percentages of the principal amount) beginning at 104% on April 30, 2023 and declining each 12 month period thereafter to 100% on and after April 30, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Notwithstanding the foregoing, if a Change of Control (as defined in the Indenture, with certain exclusions as provided therein) occurs, the Company will be required to make an offer to repurchase all or any part of each note holder’s notes at a purchase price equal to 101% of the aggregate principal amount of First Lien Notes repurchased, plus accrued and unpaid interest to, but excluding,not including, the applicable date.redemption date (the “Redemption Price”). On April 19, 2023, in connection with the issuance of our 8.375% Senior Secured Second Lien Notes due 2030 (the “Second Lien Notes”) discussed below, the Company discharged its obligations under the indenture governing the First Lien Notes and deposited the Redemption Price with Wilmington Savings Fund Society, as trustee under such indenture. The First Lien Notes will be redeemed on May 3, 2023.
TheSecond Lien Notes Indenture contains covenants that limit, among other things, the Company’s ability and the ability of the guarantors and other restricted subsidiaries, to: (1) incur, assume or guarantee additional indebtedness; (2) pay dividends or distributions on equity interests or redeem or repurchase equity interests; (3) make investments; (4) repay or redeem junior debt; (5) transfer or sell assets; (6) enter into sale and lease back transactions; (7) create, incur or assume liens; and (8) enter into transactions with certain affiliates. These covenants are subject to a number of important limitations and exceptions.
On April 19, 2023, the Company and Valaris Finance Company LLC (“Valaris Finance”), a wholly-owned subsidiary, issued and sold $700.0 million aggregate principal amount of Second Lien Notes in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Indenture also providesSecond Lien Notes bear an interest rate of 8.375% per annum, will mature on April 30, 2030 and were issued at par for certain customary eventsnet proceeds of default, including, among other things, nonpaymentapproximately $685.0 million, after deducting the initial purchasers’ discount and offering expenses. The Company is using a portion of principal or interest, breachthe net proceeds to fund the redemption of covenants, failure to pay final judgments in excess of a specified threshold, failure of a guarantee to remain in effect, failure of a collateral document to create an effective security interest in collateral, with a fair market value in excess of a specified threshold, bankruptcy and insolvency events, cross payment default and cross acceleration, which could permit the principal, premium, if any, interest and other monetary obligations on all the thenits outstanding First Lien Notes as described above.
Senior Secured Revolving Credit Facility
On April 3, 2023, the Company entered into a senior secured revolving credit agreement (the “Credit Agreement”). The Credit Agreement provides for commitments permitting borrowings of up to $375.0 million (which may be increased, subject to the satisfaction of certain conditions and the agreement of lenders to provide such additional commitments, by an additional $200.0 million pursuant to the terms of the Credit Agreement) and includes a $150.0 million sublimit for the issuance of letters of credit. Valaris Finance and certain other subsidiaries of the Company (together with Valaris Finance, the “Guarantors”) guarantee the Company’s obligations under the Credit Agreement, and the lenders have a first priority lien on the assets securing the Credit Agreement. The commitments under the Credit Agreement became available to be declared due and payable immediately.borrowed on April 19, 2023.
The Company incurred $5.2 million in issuance costs in association with the First Lien Notes that are being amortized into interest expense over the expected life of the notes using the effective interest method.
On August 19, 2022, the Company completed a consent solicitation pursuant to which the Company amended the Indenture to (1) implement a consolidated net income builder basket for restricted payments, increase the general basket for restricted payments from $100 million to $175 million and make other incremental changes to the Company’s restricted payments capacity and (2) increase the general basket for investments from the greater of $100 million and 4.0% of total assets to the greater of $175 million and 6.5% of total assets. The Company incurred $4.2 million of costs, of which $3.9 million had been paid as of September 30, 2022, in connection with the consent solicitation, comprised of a consent fee paid to consenting holders and professional fees. These costs are being amortized into interest expense over the expected term of the First Lien Notes using the effective interest method.
Note 9 -Shareholders' Equity
Activity in our various shareholders' equity accounts for the three and nine months ended September 30,March 31, 2023 and 2022 (Successor), the three and five months ended September 30, 2021 (Successor), and the four months ended April 30, 2021 (Predecessor) were as follows (in millions):
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| Shares | | Par Value | | Additional
Paid-in
Capital | | Warrants | | Retained
Earnings (Deficit) | | AOCI | | | | Non-controlling
Interest |
| BALANCE, December 31, 2021 (Successor) | 75.0 | | | $ | 0.8 | | | $ | 1,083.0 | | | $ | 16.4 | | | $ | (33.0) | | | $ | (9.1) | | | | | $ | 2.7 | |
| Net loss | — | | | — | | | — | | | — | | | (38.6) | | | — | | | | | (1.2) | |
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| Share-based compensation cost | — | | | — | | | 3.4 | | | — | | | — | | | — | | | | | — | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (0.3) | | | | | — | |
| BALANCE, March 31, 2022 (Successor) | 75.0 | | | $ | 0.8 | | | $ | 1,086.4 | | | $ | 16.4 | | | $ | (71.6) | | | $ | (9.4) | | | | | $ | 1.5 | |
| Net income | — | | | — | | | — | | | — | | | 111.6 | | | — | | | | | 1.2 | |
| Net reclassification adjustment for amounts recognized in net income as a component of net periodic benefit | — | | | — | | | — | | | — | | | — | | | (0.1) | | | | | — | |
| Share-based compensation cost | — | | | — | | | 3.5 | | | — | | | — | | | — | | | | | — | |
| Shares withheld for taxes on vesting of share-based awards | — | | | — | | | (0.2) | | | — | | | — | | | — | | | | | — | |
| Net other comprehensive income | — | | | — | | | — | | | — | | | — | | | 0.3 | | | | | — | |
| BALANCE, June 30, 2022 (Successor) | 75.0 | | | $ | 0.8 | | | $ | 1,089.7 | | | $ | 16.4 | | | $ | 40.0 | | | $ | (9.2) | | | | | $ | 2.7 | |
| Net income | — | | | — | | | — | | | — | | | 74.3 | | | — | | | | | 3.4 | |
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| Share-based compensation cost | — | | | — | | | 4.6 | | | — | | | — | | | — | | | | | — | |
| Shares withheld for taxes on vesting of share-based awards | — | | | — | | | (2.3) | | | — | | | — | | | — | | | | | — | |
| Net other comprehensive income | — | | | — | | | — | | | — | | | — | | | 0.1 | | | | | — | |
| BALANCE, September 30, 2022 (Successor) | 75.0 | | | $ | 0.8 | | | $ | 1,092.0 | | | $ | 16.4 | | | $ | 114.3 | | | $ | (9.1) | | | | | $ | 6.1 | |
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| Shares | | Par Value | | Additional
Paid-in
Capital | | Warrants | | Retained Earnings | | AOCI | | | | Non-controlling
Interest |
| BALANCE, December 31, 2022 | 75.2 | | | $ | 0.8 | | | $ | 1,097.9 | | | $ | 16.4 | | | $ | 160.1 | | | $ | 14.7 | | | | | $ | 8.0 | |
| Net income | — | | | — | | | — | | | — | | | 46.7 | | | — | | | | | 1.9 | |
| Share-based compensation cost | — | | | — | | | 5.7 | | | — | | | — | | | — | | | | | — | |
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| Net changes in Pension and other postretirement benefits | — | | | — | | | — | | | — | | | — | | | (0.1) | | | | | — | |
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| Net other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (0.1) | | | | | — | |
| BALANCE, March 31, 2023 | 75.2 | | | $ | 0.8 | | | $ | 1,103.6 | | | $ | 16.4 | | | $ | 206.8 | | | $ | 14.5 | | | | | $ | 9.9 | |
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| Shares | | Par Value | | Additional
Paid-in
Capital | | Warrants | | Retained
Earnings (Deficit) | | AOCI | | Treasury
Shares | | Non-controlling
Interest |
| BALANCE, December 31, 2020 (Predecessor) | 206.1 | | | $ | 82.6 | | | $ | 8,639.9 | | | $ | — | | | $ | (4,183.8) | | | $ | (87.9) | | | $ | (76.2) | | | $ | (4.3) | |
| Net loss | — | | | — | | | — | | | — | | | (910.0) | | | — | | | — | | | 2.4 | |
| Shares issued under share-based compensation plans, net | — | | | — | | | (0.2) | | | — | | | — | | | — | | | 0.2 | | | — | |
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| Net reclassification adjustment for amounts recognized in net loss as a component of net periodic benefit | — | | | — | | | — | | | — | | | — | | | 0.1 | | | — | | | — | |
| Share-based compensation cost | — | | | — | | | 3.8 | | | — | | | — | | | — | | | — | | | — | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (5.4) | | | — | | | — | |
| BALANCE, March 31, 2021 (Predecessor) | 206.1 | | | $ | 82.6 | | | $ | 8,643.5 | | | $ | — | | | $ | (5,093.8) | | | $ | (93.2) | | | $ | (76.0) | | | $ | (1.9) | |
| Net loss | — | | | — | | | — | | | — | | | (3,557.0) | | | — | | | — | | | 0.8 | |
| Shares issued under share-based compensation plans, net | — | | | — | | | (0.5) | | | — | | | — | | | — | | | 0.5 | | | — | |
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| Share-based compensation cost | — | | | — | | | 1.0 | | | — | | | — | | | — | | | — | | | — | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (0.2) | | | — | | | — | |
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| Cancellation of Predecessor equity | (206.1) | | | (82.6) | | | (8,644.0) | | | — | | | 8,650.8 | | | 93.4 | | | 75.5 | | | — | |
| Issuance of Successor Common Shares and Warrants | 75.0 | | | 0.8 | | | 1,078.7 | | | 16.4 | | | — | | | — | | | — | | | — | |
| BALANCE, April 30, 2021 (Predecessor) | 75.0 | | | $ | 0.8 | | | $ | 1,078.7 | | | $ | 16.4 | | | $ | — | | | $ | — | | | $ | — | | | $ | (1.1) | |
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| BALANCE, May 1, 2021 (Successor) | 75.0 | | | $ | 0.8 | | | $ | 1,078.7 | | | $ | 16.4 | | | $ | — | | | $ | — | | | $ | — | | | $ | (1.1) | |
| Net loss | — | | | — | | | — | | | — | | | (6.2) | | | — | | | — | | | 2.1 | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (0.2) | | | — | | | — | |
| BALANCE, June 30, 2021 (Successor) | 75.0 | | | $ | 0.8 | | | $ | 1,078.7 | | | $ | 16.4 | | | $ | (6.2) | | | $ | (0.2) | | | $ | — | | | $ | 1.0 | |
| Net loss | — | | | — | | | — | | | — | | | (54.5) | | | — | | | — | | | 1.7 | |
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| Share-based compensation cost | — | | | — | | | 1.6 | | | — | | | — | | | — | | | — | | | — | |
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| BALANCE, September 30, 2021 (Successor) | 75.0 | | | $ | 0.8 | | | $ | 1,080.3 | | | $ | 16.4 | | | $ | (60.7) | | | $ | (0.2) | | | $ | — | | | $ | 2.7 | |
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| Shares | | Par Value | | Additional
Paid-in
Capital | | Warrants | | Retained
Deficit | | AOCI | | | | Non-controlling
Interest |
| BALANCE, December 31, 2021 | 75.0 | | | $ | 0.8 | | | $ | 1,083.0 | | | $ | 16.4 | | | $ | (16.4) | | | $ | (9.1) | | | | | $ | 2.7 | |
| Net loss | — | | | — | | | — | | | — | | | (38.6) | | | — | | | | | (1.2) | |
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| Share-based compensation cost | — | | | — | | | 3.4 | | | — | | | — | | | — | | | | | — | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (0.3) | | | | | — | |
| BALANCE, March 31, 2022 | 75.0 | | | $ | 0.8 | | | $ | 1,086.4 | | | $ | 16.4 | | | $ | (55.0) | | | $ | (9.4) | | | | | $ | 1.5 | |
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Share Repurchase Program
In September 2022, our Boardboard of Directorsdirectors authorized a share repurchase program under which we may purchase up to $100$100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million. The share repurchase program does not have a fixed expiration, and may be modified, suspended or discontinued at any time. As of September 30, 2022 (Successor), there have been no share repurchasesWe did not repurchase any Common Shares during the three months ended March 31, 2023 under thisthe repurchase program.
Note 10 -Income Taxes
Valaris Limited is domiciled and resident in Bermuda. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-Bermuda subsidiaries is not subject to Bermuda taxation as there is not an income tax regime in Bermuda. Legacy Valaris was domiciled and resident in the U.K. The income of our non-U.K. subsidiaries was generally not subject to U.K. taxation.
Income tax rates and taxation systems in the jurisdictions in which our subsidiaries conduct operations vary and our subsidiaries are frequently subjected to minimum taxation regimes. In some jurisdictions, tax liabilities are based on gross revenues, statutory deemed profits or other factors, rather than on net income, and our subsidiaries are frequently unable to realize tax benefits when they operate at a loss. Accordingly, during periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Furthermore, we will continue to incur income tax expense in periods in which we operate at a loss.
Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another.
Historically, we calculated our provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period. We determined that since small changes in estimated pre-tax income or loss would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate of income taxes for the three and nine months ended September 30,March 31, 2023 and 2022, (Successor), the three and five months ended September 30, 2021 (Successor), and the four months ended April 30, 2021 (Predecessor), and therefore, we used a discrete effective tax rate method to calculate income taxes for each of these periods. We will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.
Discrete income tax expensebenefit for the three months ended September 30,March 31, 2023 and 2022 (Successor) was $1.4$43.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, partially offset by discrete tax benefits attributable to the resolution of other prior period tax matters. Discrete income tax benefit for the nine months ended September 30, 2022 (Successor) was $6.9$14.5 million, and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and resolution of other prior period tax matters, partially offset by discrete tax expense attributable to income associated with a contract termination. Excluding the aforementioned discrete tax items, income tax expense for the three and nine months ended September 30, 2022 (Successor) was $12.4 million and $40.2 million, respectively.
Discrete income tax expense for the three months ended September 30, 2021 (Successor) was $39.2 millionrespectively, and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Discrete income tax expense for the five months ended September 30, 2021 (Successor) was $44.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and resolution of other prior period tax matters. Discrete income tax expense for the four months ended April 30, 2021 (Predecessor) was $2.2 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and resolution of other prior period tax matters offset by discrete tax benefit related to fresh start accounting adjustments. Excluding the aforementioned discrete tax items, income tax expense for the three and five months ended September 30, 2021 (Successor),March 31, 2023 and the four months ended April 30, 2021 (Predecessor)2022 was $14.1 million, $23.6$16.2 million and $14.0$13.8 million, respectively.
Note 11 -Contingencies
Indonesian Well-Control Event
In July 2019, a well being drilled offshore Indonesia by one of our jackup rigs experienced a well-control event requiring the cessation of drilling activities. In February 2020, the rig resumed operations. Indonesian authorities initiated an investigation into the event and have contacted the customer, us and other parties involved in drilling the well for additional information. We cooperated with the Indonesian authorities. We cannot predict the scope or ultimate outcome of this investigation. If the Indonesian authorities determine that we violated local laws in connection with this matter, we could be subject to penalties including environmental or other liabilities, which may have a material adverse impact on us.
ARO Newbuild Funding Obligations
In connection with our 50/50 unconsolidated joint venture, we have a potential obligation to fund ARO for newbuild jackup rigs. ARO has plans to purchase 20 newbuild jackup rigs over an approximate 10-year period. The joint venture partners intend for the newbuild jackup rigs to be financed out of available cash from ARO's operations and/or funds available from third-party debt financing. ARO paid a 25% down payment from cash on hand for each of the two newbuilds ordered in January 2020 and is actively exploring financing options for remaining payments due upon delivery. In the event ARO has insufficient cash from operations or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, as delivered, on a proportionate basis.
Letters of Credit
In the ordinary course of business with customers and others, we have entered into letters of credit to guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Letters of credit outstanding as of September 30, 2022 (Successor)March 31, 2023 totaled $130.4$140.9 million and are issued under facilities provided by various banks and other financial institutions. Obligations under these letters of credit are not normally called, as we typically comply with the underlying performance requirement. As of September 30, 2022 (Successor),March 31, 2023, we had collateral deposits in the amount of $15.7$19.4 million with respect to these agreements.
Patent Litigation
In December 2022, a subsidiary of Transocean Ltd. commenced an arbitration proceeding against us alleging breach of a license agreement related to certain dual-activity drilling patents. We are unable to estimate our potential exposure, if any, to the proceeding at this time but do not believe that our ultimate liability, if any, resulting from this proceeding will have a material effect on our consolidated financial condition, results of operations or cash flows. We do not believe that we have breached the license agreement and intend to defend ourselves vigorously against this claim.
Other Matters
In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows.
Note 12 -Segment Information
Our business consists of four operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (4) Other, which consists of management services on rigs owned by third-partiesthird parties and the activities associated with our arrangements with ARO under the Lease Agreements. Floaters, Jackups and ARO are also reportable segments.
Our onshore support costs included within Contract drilling expenses are not allocated to our operating segments for purposes of measuring segment operating income (loss) and as such, those costs are included in “Reconciling Items.” Further, General and administrative expense and Depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income (loss) and are included in "Reconciling Items."Items". We measure segment assets as Property and equipment, net.
The full operating results included below for ARO are not included within our consolidated results and thus deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See "Note 3 - Equity Method Investment in ARO" for additional information on ARO and related arrangements.
Segment information for the three and nine months ended September 30,March 31, 2023 and 2022, (Successor), the three and five months ended September 30, 2021 (Successor), and the four months ended April 30, 2021 (Predecessor), respectively, are presented below (in millions).
Three Months Ended September 30, 2022 (Successor)March 31, 2023
| | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total | | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total | |
| Revenues | Revenues | $ | 201.7 | | | $ | 195.9 | | | $ | 111.4 | | | $ | 39.6 | | | $ | (111.4) | | | $ | 437.2 | | | Revenues | $ | 214.8 | | | $ | 169.8 | | | $ | 123.6 | | | $ | 45.5 | | | $ | (123.6) | | | $ | 430.1 | | |
| Operating expenses | Operating expenses | | | Operating expenses | | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 160.5 | | | 128.0 | | | 90.0 | | | 17.8 | | | (59.6) | | | 336.7 | | | Contract drilling (exclusive of depreciation) | 174.6 | | | 148.9 | | | 90.9 | | | 20.2 | | | (57.4) | | | 377.2 | | |
| | Depreciation | Depreciation | 12.6 | | | 8.7 | | | 15.4 | | | 1.2 | | | (15.3) | | | 22.6 | | | Depreciation | 13.0 | | | 9.0 | | | 15.0 | | | 1.3 | | | (15.0) | | | 23.3 | | |
| General and administrative | General and administrative | — | | | — | | | 4.7 | | | — | | | 14.5 | | | 19.2 | | | General and administrative | — | | | — | | | 4.6 | | | — | | | 19.8 | | | 24.4 | | |
| Equity in earnings of ARO | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 2.9 | | | 2.9 | | | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 3.3 | | | 3.3 | | |
| Operating income (loss) | $ | 28.6 | | | $ | 59.2 | | | $ | 1.3 | | | $ | 20.6 | | | $ | (48.1) | | | $ | 61.6 | | | |
| Operating income | | Operating income | $ | 27.2 | | | $ | 11.9 | | | $ | 13.1 | | | $ | 24.0 | | | $ | (67.7) | | | $ | 8.5 | | |
| Property and equipment, net | Property and equipment, net | $ | 473.4 | | | $ | 386.7 | | | $ | 757.7 | | | $ | 57.7 | | | $ | (721.9) | | | $ | 953.6 | | | Property and equipment, net | $ | 515.7 | | | $ | 404.1 | | | $ | 788.6 | | | $ | 55.6 | | | $ | (748.5) | | | $ | 1,015.5 | | |
Three Months Ended September 30, 2021 (Successor)March 31, 2022
| | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | Revenues | $ | 104.3 | | | $ | 186.3 | | | $ | 117.7 | | | $ | 36.1 | | | $ | (117.7) | | | $ | 326.7 | | Revenues | $ | 99.7 | | | $ | 180.7 | | | $ | 111.3 | | | $ | 38.0 | | | $ | (111.3) | | | $ | 318.4 | |
| Operating expenses | Operating expenses | | Operating expenses | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 91.6 | | | 141.7 | | | 94.4 | | | 14.2 | | | (67.3) | | | 274.6 | | Contract drilling (exclusive of depreciation) | 147.6 | | | 139.2 | | | 84.2 | | | 15.5 | | | (55.2) | | | 331.3 | |
| | Depreciation | Depreciation | 11.4 | | | 12.1 | | | 16.8 | | | 0.9 | | | (16.8) | | | 24.4 | | Depreciation | 12.2 | | | 9.1 | | | 16.5 | | | 0.9 | | | (16.2) | | | 22.5 | |
| General and administrative | General and administrative | — | | | — | | | 5.4 | | | — | | | 21.8 | | | 27.2 | | General and administrative | — | | | — | | | 5.2 | | | — | | | 13.6 | | | 18.8 | |
| | Equity in earnings of ARO | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 2.6 | | | 2.6 | | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 4.3 | | | 4.3 | |
| Operating income (loss) | Operating income (loss) | $ | 1.3 | | | $ | 32.5 | | | $ | 1.1 | | | $ | 21.0 | | | $ | (52.8) | | | $ | 3.1 | | Operating income (loss) | $ | (60.1) | | | $ | 32.4 | | | $ | 5.4 | | | $ | 21.6 | | | $ | (49.2) | | | $ | (49.9) | |
| Property and equipment, net | Property and equipment, net | $ | 416.2 | | | $ | 394.2 | | | $ | 728.3 | | | $ | 47.3 | | | $ | (693.7) | | | $ | 892.3 | | Property and equipment, net | $ | 457.6 | | | $ | 387.1 | | | $ | 730.9 | | | $ | 51.7 | | | $ | (697.1) | | | $ | 930.2 | |
Nine Months Ended September 30, 2022 (Successor)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | | Consolidated Total |
| Revenues | $ | 489.5 | | | $ | 562.4 | | | $ | 339.1 | | | $ | 117.0 | | | $ | (339.1) | | | | $ | 1,168.9 | |
| Operating expenses | | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 473.4 | | | 409.4 | | | 256.3 | | | 58.0 | | | (167.3) | | | | 1,029.8 | |
| Loss on impairment | 34.5 | | | — | | | — | | | — | | | — | | | | 34.5 | |
| Depreciation | 37.1 | | | 26.5 | | | 47.3 | | | 3.4 | | | (46.9) | | | | 67.4 | |
| General and administrative | — | | | — | | | 13.1 | | | — | | | 43.9 | | | | 57.0 | |
| | | | | | | | | | | | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | 15.9 | | | | 15.9 | |
| Operating income (loss) | $ | (55.5) | | | $ | 126.5 | | | $ | 22.4 | | | $ | 55.6 | | | $ | (152.9) | | | | $ | (3.9) | |
| Property and equipment, net | $ | 473.4 | | | $ | 386.7 | | | $ | 757.7 | | | $ | 57.7 | | | $ | (721.9) | | | | $ | 953.6 | |
Five Months Ended September 30, 2021 (Successor)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | | Consolidated Total |
| Revenues | $ | 154.0 | | | $ | 314.8 | | | $ | 201.7 | | | $ | 60.7 | | | $ | (201.7) | | | | $ | 529.5 | |
| Operating expenses | | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 136.9 | | | 237.1 | | | 157.3 | | | 23.4 | | | (111.5) | | | | 443.2 | |
| | | | | | | | | | | | |
| Depreciation | 19.3 | | | 19.9 | | | 26.5 | | | 1.7 | | | (26.4) | | | | 41.0 | |
| General and administrative | — | | | — | | | 8.5 | | | — | | | 31.4 | | | | 39.9 | |
| | | | | | | | | | | | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | 7.4 | | | | 7.4 | |
| Operating income (loss) | $ | (2.2) | | | $ | 57.8 | | | $ | 9.4 | | | $ | 35.6 | | | $ | (87.8) | | | | $ | 12.8 | |
| Property and equipment, net | $ | 416.2 | | | $ | 394.2 | | | $ | 728.3 | | | $ | 47.3 | | | $ | (693.7) | | | | $ | 892.3 | |
Four Months Ended April 30, 2021 (Predecessor)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | | Consolidated Total |
| Revenues | $ | 115.7 | | | $ | 232.4 | | | 163.5 | | | $ | 49.3 | | | $ | (163.5) | | | | $ | 397.4 | |
| Operating expenses | | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 106.5 | | | 175.0 | | | 116.1 | | | 19.9 | | | (73.7) | | | | 343.8 | |
| Loss on impairment | 756.5 | | | — | | | — | | | — | | | — | | | | 756.5 | |
| Depreciation | 72.1 | | | 69.7 | | | 21.0 | | | 14.8 | | | (18.0) | | | | 159.6 | |
| General and administrative | — | | | — | | | 4.2 | | | — | | | 26.5 | | | | 30.7 | |
| | | | | | | | | | | | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | 3.1 | | | | 3.1 | |
| Operating income (loss) | $ | (819.4) | | | $ | (12.3) | | | $ | 22.2 | | | $ | 14.6 | | | $ | (95.2) | | | | $ | (890.1) | |
| Property and equipment, net | $ | 419.3 | | | $ | 401.4 | | | $ | 730.7 | | | $ | 50.5 | | | $ | (692.8) | | | | $ | 909.1 | |
Information about Geographic Areas
As of September 30, 2022,March 31, 2023, the geographic distribution of our and ARO's drilling rigs was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | Other | | Total Valaris | | ARO | | |
| North & South America | 7 | | 6 | | — | | 13 | | — | | |
| Europe & the Mediterranean | 4 | | 12 | | — | | 16 | | — | | |
| Middle East & Africa | 3 | | 6 | | 8 | | 17 | | 7 | | |
| Asia & Pacific Rim | 2 | | 4 | | — | | 6 | | — | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | 16 | | 28 | | 8 | | 52 | | 7 | | |
We provide management services in the U.S. Gulf of Mexico on two rigs owned by a third party not included in the table above.
We are a party to contracts whereby we have the option to take delivery of two recently constructed drillships that are not included in the table above.
ARO has ordered two newbuild jackups which are under construction in the Middle East that are not included in the table above.
Note 13 -Supplemental Financial Information
Condensed Consolidated Balance Sheet Information
Accounts receivable, net, consisted of the following (in millions):
| | | | September 30,
2022 | | December 31,
2021 | | March 31,
2023 | | December 31,
2022 |
| Trade | Trade | $ | 379.3 | | | $ | 296.8 | | Trade | $ | 339.6 | | | $ | 345.7 | |
| Income tax receivable | 148.4 | | | 151.1 | | |
| Income tax receivables | | Income tax receivables | 47.9 | | | 93.6 | |
| Other | Other | 25.0 | | | 12.7 | | Other | 20.6 | | | 24.6 | |
| | | 552.7 | | | 460.6 | | | 408.1 | | | 463.9 | |
| Allowance for doubtful accounts | Allowance for doubtful accounts | (17.2) | | | (16.4) | | Allowance for doubtful accounts | (14.7) | | | (14.8) | |
| | | $ | 535.5 | | | $ | 444.2 | | | $ | 393.4 | | | $ | 449.1 | |
Other current assets consisted of the following (in millions):
| | | | | | | | | | | |
| | | |
| September 30,
2022 | | December 31,
2021 |
| Deferred costs | $ | 62.1 | | | $ | 26.9 | |
| Prepaid taxes | 47.2 | | | 44.4 | |
| Prepaid expenses | 26.5 | | | 23.1 | |
| | | |
| Other | 27.1 | | | 23.4 | |
| | $ | 162.9 | | | $ | 117.8 | |
Other assets consisted of the following (in millions):
| | | | | | | | | | | |
| | | |
| September 30,
2022 | | December 31,
2021 |
| Tax receivables | $ | 60.8 | | | $ | 64.8 | |
| Deferred tax assets | 51.3 | | | 59.7 | |
| Right-of-use assets | 23.7 | | | 20.5 | |
| | | |
| | | |
| Other | 39.7 | | | 31.0 | |
| $ | 175.5 | | | $ | 176.0 | |
| | | | | | | | | | | |
| | | |
| March 31,
2023 | | December 31,
2022 |
| Deferred costs | $ | 63.4 | | | $ | 59.1 | |
| Prepaid taxes | 47.3 | | | 44.6 | |
| Prepaid expenses | 17.6 | | | 17.5 | |
| | | |
| Other | 29.8 | | | 27.4 | |
| | $ | 158.1 | | | $ | 148.6 | |
Accrued liabilities and other consisted of the following (in millions):
| | | | September 30,
2022 | | December 31,
2021 | | March 31,
2023 | | December 31,
2022 |
| Deferred revenue | Deferred revenue | $ | 84.8 | | | $ | 45.8 | | Deferred revenue | $ | 65.8 | | | $ | 78.0 | |
| Personnel costs | | Personnel costs | 60.6 | | | 55.8 | |
| Income and other taxes payable | Income and other taxes payable | 51.0 | | | 45.7 | | Income and other taxes payable | 53.5 | | | 41.4 | |
| Personnel costs | 48.3 | | | 47.3 | | |
| | Accrued claims | Accrued claims | 23.9 | | | 17.3 | | Accrued claims | 25.6 | | | 27.2 | |
| Accrued interest | Accrued interest | 18.9 | | | 7.6 | | Accrued interest | 18.9 | | | 7.6 | |
| Lease liabilities | Lease liabilities | 9.7 | | | 10.0 | | Lease liabilities | 8.8 | | | 9.4 | |
| | Other | Other | 25.9 | | | 22.5 | | Other | 34.5 | | | 28.5 | |
| | | $ | 262.5 | | | $ | 196.2 | | | $ | 267.7 | | | $ | 247.9 | |
Other liabilities consisted of the following (in millions):
| | | | September 30,
2022 | | December 31,
2021 | | March 31,
2023 | | December 31,
2022 |
| Unrecognized tax benefits (inclusive of interest and penalties) | Unrecognized tax benefits (inclusive of interest and penalties) | $ | 271.0 | | | $ | 320.2 | | Unrecognized tax benefits (inclusive of interest and penalties) | $ | 230.1 | | | $ | 275.0 | |
| Pension and other post-retirement benefits | Pension and other post-retirement benefits | 189.8 | | | 204.0 | | Pension and other post-retirement benefits | 158.7 | | | 159.8 | |
| | Other | Other | 79.0 | | | 56.9 | | Other | 75.8 | | | 80.8 | |
| | | $ | 539.8 | | | $ | 581.1 | | | $ | 464.6 | | | $ | 515.6 | |
Accumulated other comprehensive loss consisted of the following (in millions):
| | | | | | | | | | | |
| | | |
| September 30,
2022 | | December 31,
2021 |
| Pension and other post-retirement benefits | $ | (9.2) | | | $ | (9.1) | |
| Currency translation adjustment | 0.1 | | | — | |
| | | |
| | | |
| $ | (9.1) | | | $ | (9.1) | |
Condensed Consolidated Statements of Operations Information
Other, net consisted of the following (in millions):
| | | Three Months Ended
September 30, | | | Three Months Ended
March 31, | |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| Net foreign currency exchange gains | Net foreign currency exchange gains | $ | 9.8 | | | $ | 1.7 | | | Net foreign currency exchange gains | $ | 0.5 | | | $ | 4.7 | | |
| Net periodic pension income | Net periodic pension income | 4.0 | | | 3.7 | | | Net periodic pension income | 0.1 | | | 4.0 | | |
| | Net gain on sale of property | Net gain on sale of property | 0.1 | | | 0.3 | | | Net gain on sale of property | 0.1 | | | 2.5 | | |
| Other income (expense) | 0.2 | | | (0.2) | | | |
| Other expense | | Other expense | (0.1) | | | (1.2) | | |
| | $ | 14.1 | | | $ | 5.5 | | | | $ | 0.6 | | | $ | 10.0 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 | | |
| Net gain on sale of property | $ | 137.7 | | | $ | 0.2 | | | | $ | 6.0 | | | | | |
| Net foreign currency exchange gains | 25.2 | | | 4.8 | | | | 13.4 | | | | | |
| Net periodic pension income | 12.1 | | | 6.1 | | | | 5.4 | | | | | |
| | | | | | | | | | |
| Other income (expense) | (0.2) | | | — | | | | 1.1 | | | | | |
| $ | 174.8 | | | $ | 11.1 | | | | $ | 25.9 | | | | | |
Condensed Consolidated Statement of Cash Flows Information
Our restricted cash of $18.2$21.5 million and $35.9$24.4 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, consists primarily of $15.7$19.4 million and $31.1$20.7 million of collateral on letters of credit for each respective period. See "Note 11 - Contingencies" for more information regarding our letters of credit.
We received an income tax refund of $45.9 million during the first quarter of 2023 related to the U.S. Coronavirus Aid, Relief, and Economic Security Act.
Concentration of Risk
Credit Risk - We are exposed to credit risk relating to our receivables from customers and our cash and cash equivalents and short-term investments.equivalents. We mitigate our credit risk relating to receivables from customers, which consist primarily of major international, government-owned and independent oil and gas companies, by performing ongoing credit evaluations. We also maintain reserves for potential credit losses, which generally have been within our expectations. We mitigate our credit risk relating to cash and investments by focusing on diversification and quality of instruments.
Customer Concentration - Consolidated revenues with customers that individually contributed 10% or more of revenue were as follows:
| | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | |
| 2022 | | 2021 | | | |
BP plc ("BP")(1) | 14 | % | | 9 | % | | | |
Equinor ASA ("Equinor")(2) | 6 | % | | 6 | % | | | |
TotalEnergies SE ("Total")(3) | 4 | % | | 14 | % | | | |
| | | | | | |
| | | | | | |
| Other | 76 | % | | 71 | % | | | |
| 100 | % | | 100 | % | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 | | | |
| Floaters | | Jackups | | Other | | Total | | Floaters | | Jackups | | Other | | Total | | | |
| Eni S.p.A | 7 | % | | 7 | % | | — | % | | 14 | % | | 4 | % | | 6 | % | | — | % | | 10 | % | | | |
| BP plc | 2 | % | | 5 | % | | 6 | % | | 13 | % | | 7 | % | | 2 | % | | 7 | % | | 16 | % | | | |
| Shell plc | 5 | % | | 2 | % | | — | % | | 7 | % | | 7 | % | | 4 | % | | — | % | | 11 | % | | | |
Other customers (1) | 36 | % | | 25 | % | | 5 | % | | 66 | % | | 13 | % | | 45 | % | | 5 | % | | 63 | % | | | |
| 50 | % | | 39 | % | | 11 | % | | 100 | % | | 31 | % | | 57 | % | | 12 | % | | 100 | % | | | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
BP(1) | 14 | % | | 9 | % | | | 14 | % |
Equinor(2) | 10 | % | | 6 | % | | | 6 | % |
Total(3) | 5 | % | | 9 | % | | | — | % |
| | | | | | |
| | | | | | |
| Other | 71 | % | | 76 | % | | | 80 | % |
| 100 | % | | 100 | % | | | 100 | % |
(1)During the three months ended September 30, 2022 (Successor), 34%Other customers includes customers that individually contributed to less than 10% of the revenues provided by BP were attributable to our Floaters segment, 25% of the revenues were attributable to our Jackups segment and the remaining were attributable to our managed rigs.
During the nine months ended September 30, 2022 (Successor), 37% of the revenues provided by BP were attributable to our Floaters segment, 19% of the revenues were attributable to our Jackups segment and the remaining were attributable to our managed rigs.
During the three months ended September 30, 2021 (Successor), 24% of the revenues provided by BP were attributable to our Jackups segment, 3% of the revenues were attributable to our Floaters segment, and the remaining were attributable to our managed rigs. During the five months ended September 30, 2021 (Successor), 24% of the revenues were attributable to our Jackups segment, 2% of the revenues were attributable to our Floaters segment and the remaining were attributable to our managed rigs. During the four months ended April 30, 2021 (Predecessor), 37% of the revenue provided by BP were attributable to our Floaters segment, 17% of the revenue were attributable to our Jackups segment and the remaining were attributable to our managed rigs.
(2)During the three months ended September 30, 2022 (Successor), all revenues provided by Equinor were attributable to our Jackups segment.
During the nine months ended September 30, 2022 (Successor), 55% of the revenues provided by Equinor were attributable to our Jackups segment and 45% of the revenues were attributable to our Floaters segment.
During the three and five months ended September 30, 2021 (Successor) and four months ended April 30, 2021 (Predecessor), all revenues provided by Equinor were attributable to our Jackups segment.
(3)During the three and nine months ended September 30, 2022 (Successor) and three and five months ended September 30, 2021 (Successor), all revenues provided by Total were attributable to our Floaters segment.total revenues.
- For purposes of our geographic disclosure, we attribute revenues to the geographic location where such revenues are earned. Consolidated revenues for locations that individually had 10% or more of revenue arewere as follows (in millions):
| | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | |
| 2022 | | 2021 | | | |
U.S. Gulf of Mexico(1) | $ | 95.2 | | | $ | 40.2 | | | | |
United Kingdom(2) | 71.4 | | | 69.9 | | | | |
Australia(3) | 51.8 | | | 33.4 | | | | |
Norway(2) | 38.6 | | | 49.4 | | | | |
Saudi Arabia(4) | 30.9 | | | 33.5 | | | | |
Mexico(5) | 10.7 | | | 33.4 | | | | |
| | | | | | |
| Other | 138.6 | | | 66.9 | | | | |
| $ | 437.2 | | | $ | 326.7 | | | | |
| | | Successor | | | Predecessor | | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 | |
| | Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 | | Floaters | | Jackups | | Other | | Total | | Floaters | | Jackups | | Other | | Total | |
U.S. Gulf of Mexico(1) | U.S. Gulf of Mexico(1) | $ | 271.6 | | | $ | 71.1 | | | | $ | 74.4 | | U.S. Gulf of Mexico(1) | $ | 41.7 | | | $ | 8.2 | | | $ | 26.1 | | | $ | 76.0 | | | $ | 20.6 | | | $ | 6.7 | | | $ | 23.3 | | | $ | 50.6 | | |
United Kingdom(2) | United Kingdom(2) | 200.1 | | | 111.0 | | | | 75.7 | | United Kingdom(2) | — | | | 53.5 | | | — | | | 53.5 | | | — | | | 65.6 | | | — | | | 65.6 | | |
Australia(3) | Australia(3) | 90.9 | | | 51.2 | | | | 1.0 | | Australia(3) | 37.7 | | | 12.9 | | | — | | | 50.6 | | | 12.0 | | | 0.1 | | | — | | | 12.1 | | |
Norway(2) | 91.0 | | | 89.9 | | | | 73.3 | | |
| Saudi Arabia(4) | Saudi Arabia(4) | 104.1 | | | 58.7 | | | | 53.6 | | Saudi Arabia(4) | — | | | 19.9 | | | 19.4 | | | 39.3 | | | — | | | 23.5 | | | 14.6 | | | 38.1 | | |
Mexico(5) | 53.4 | | | 52.3 | | | | 44.3 | | |
| | Other | 357.8 | | | 95.3 | | | | 75.1 | | |
Other countries (1) | | Other countries (1) | 135.4 | | | 75.3 | | | — | | | 210.7 | | | 67.1 | | | 84.8 | | | 0.1 | | | 152.0 | | |
| | $ | 1,168.9 | | | $ | 529.5 | | | | $ | 397.4 | | | $ | 214.8 | | | $ | 169.8 | | | $ | 45.5 | | | $ | 430.1 | | | $ | 99.7 | | | $ | 180.7 | | | $ | 38.0 | | | $ | 318.4 | | |
(1)During the three months ended September 30, 2022 (Successor), 65% and 8% Other countries includes locations that individually contributed to less than 10% of the revenues earned in U.S. Gulf of Mexico were attributable to our Floaters segment and Jackups segment, respectively. The remaining revenues were attributable to our managed rigs.
During the nine months ended September 30, 2022 (Successor), 66% and 7% of the revenues earned in U.S. Gulf of Mexico were attributable to our Floaters segment and Jackups segment, respectively. The remaining revenues were primarily attributable to our managed rigs.
During the three and five months ended September 30, 2021 (Successor), 46% and 50% of the revenues earned in U.S. Gulf of Mexico were attributable to our Floaters segment respectively. The remaining revenues were attributable to our managed rigs. During the four months ended April 30, 2021 (Predecessor) 64% of the revenues earned in U.S. Gulf of Mexico were attributable to our Floaters segment. The remaining revenues were attributable to our managed rigs.
(2)During the three and nine months ended September 30, 2022 (Successor), five months ended September 30, 2021 (Successor) and four months ended April 30, 2021 (Predecessor), all revenues earned in the United Kingdom and Norway were attributable to our Jackups segment.
(3)During the three and nine months ended September 30, 2022 (Successor), 78% and 80%, respectively, of the revenues earned in Australia were attributable to our Floaters segment and the remaining revenues were attributable to our Jackups segment.total revenues.
During the three and five months ended September 30, 2021 (Successor), 64% and 62%, respectively, of the revenues earned in Australia were attributable to our Floaters segment and the remaining were attributable to Jackups segment. During the four months ended April 30, 2021 (Predecessor), 77% of the revenues earned in Australia were attributable to our Floaters segment, and the remaining revenues earned in Australia were attributable to our Jackups segment.
(4)During the three and nine months ended September 30, 2022 (Successor), 54% and 58%, respectively, of the revenues earned in Saudi Arabia were attributable to our Jackups segment. The remaining revenues were attributable to our Other segment and relates primarily to our rigs leased to ARO.
During the three and five months ended September 30, 2021 (Successor), 56% and 57%, respectively, of the revenues earned in Saudi Arabia were attributable to our Jackups segment. During the four months ended April 30, 2021 (Predecessor) 57% of the revenues earned in Saudi Arabia were attributable to our Jackups segment. The remaining revenues were attributable to our Other segment and relates to our rigs leased to ARO and certain revenues related to our Secondment Agreement.
(5)During the three months ended September 30, 2022 (Successor), all revenues earned in Mexico were attributable to our Jackups segment. During the nine months ended September 30, 2022 (Successor), 91% of the revenues earned in Mexico were attributable to our Jackups segment, and the remaining revenues were attributable to our Floaters segment.
During the three and five months ended September 30, 2021 (Successor), 52% and 54%, respectively, of the revenues earned in Mexico were attributable to our Jackups segment and the remaining revenues were attributable to our Floaters segment. During the four months ended April 30, 2021 (Predecessor), 51% of the revenues earned in Mexico were attributable to our Jackups segment and the remaining revenues were attributable to our Floaters segment.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto included in "Item 1. Financial Statements" and with our annual report on Form 10-K for the year ended December 31, 2021.2022. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report and elsewhere in this quarterly report. See “Forward-Looking Statements.”
EXECUTIVE SUMMARY
Our Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. We own the world's largest offshore drilling rig fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 5251 rigs, including 11 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 3635 jackup rigs and a 50% equity interest in ARO, our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional seven rigs. Additionally, weWe also have options to purchase two recently constructed drillships on or before December 31, 2023.
Emergence from Chapter 11 Bankruptcy and Fresh Start Accounting
On August 19, 2020 (the "Petition Date"), Valaris plc (“Legacy Valaris”) and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Southern District of Texas (the "Chapter 11 Cases"). In connection with the Chapter 11 Cases and the plan of reorganization, on and prior to April 30, 2021 ("Effective Date"), Legacy Valaris effectuated certain restructuring transactions, pursuant to which Valaris Limited ("Valaris") was formed and, through a series of transactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other assets, of Legacy Valaris.
On the Effective Date, we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. On the Effective Date, Legacy Valaris Class A ordinary shares were cancelled and the Valaris common shares (the "Common Shares") were issued. Also, former holders of Legacy Valaris' equity were issued warrants (the "Warrants") to purchase Common Shares.
References to the financial position and results of operations of the "Successor" relate to the financial position and results of operations of Valaris, together with its consolidated subsidiaries, after the Effective Date. References to the financial position and results of operations of the "Predecessor" refer to the financial position and results of operations of Legacy Valaris, together with its consolidated subsidiaries, on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Quarterly Report are to Valaris, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including the Effective Date.
On the Effective Date, we qualified for and applied fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and we became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date. The condensed consolidated financial statements and notes have been presented with a black line division to delineate the lack of comparability between the Predecessor and Successor.
Our Industry
Operating results in the offshore contract drilling industry are highly cyclical and are directly related to the demand for and the available supply of drilling rigs. Low demand and excess supply can independently affect day rates and utilization of drilling rigs. Therefore, adverse changes in either of these factors can result in adverse changes in our industry. While the cost of moving a rig may cause the balance of supply and demand to vary somewhat between regions, significant variations between most regions are generally of a short-term nature due to rig mobility.
In 2020 the combined effects of the global COVID-19 pandemic, the significant decline in theand early 2021, demand for oil significantly declined as a result of the COVID-19 pandemic and the substantial surplusvarious other factors. Since then, oil prices have increased due in the supply of oil resultedpart to an increase in significantly reduced demand and day rates for offshore drilling provided by the Company and increased uncertainty regarding long-term market conditions. These events had a significant adverse impact on our expected liquidity position and financial runway and led to the filing of the Chapter 11 Cases.
In 2021, Brent crude oil prices increased from approximately $50 per barrel at the beginning of the year to nearly $80 per barrel by the end of the year. Increased oil prices were due to, among other factors, rebounding demand for hydrocarbons, a measured approach to production increases by OPEC+ members, and a focus on cash flow and returns by major exploration and production companies. The constructive oil price environment led to an improvement in contracting and tendering activity in 2021 as compared to 2020.
Oilbut prices remainremained volatile through 2022. In the first half of 2022, Brent crude oil prices and volatility increased dramatically, in large part due to Russia’s invasion of Ukraine, which led to sanctions being placed on Russia, including its ability to export crude oil and other petroleum products. The anticipated impact on supply drove Brent crude oil prices above $130 per barrel in early March 2022.
By the end of SeptemberDecember 2022, the spot Brent crude price had declined to approximately $88$83 per barrel due in part to high inflation rates and fears of a global recession that could negatively impact oil demand. In October 2022,The Brent crude prices increased afterprice declined further during the first quarter of 2023, reaching a low of $71 per barrel in mid-March, following turmoil in the banking sector, which escalated fears of a global recession and declining oil demand. However, in April 2023, the Brent crude price per barrel returned to the mid-$80s in part due to OPEC+ announced that it willannouncing a further production cut production quotas by twoof approximately 1.2 million barrels per day startingeffective from November 2022.May 2023 through the end of the year.
Despite the high volatility in spot oil prices described above, our customers tend to be more focused on medium-term and long-term commodity prices when making investment decisions due to the longer lead times for offshore projects. These forward prices have experienced far less volatility in 2022 and the early part of 2023 and have maintained levels which are highly constructive for offshore project demand. This is evidenced by increased rig years awarded and increased tendering activity in 2022.
We are experiencing the impacts of global inflation, both in increased personnel costs as well as in the prices of goods and services required to reactivate or operate our rigs.rigs or execute capital projects. While we are currently unable to estimate the ultimate impact of rising prices, we do expect that our costs will continue to rise in the near term and will impact our profitability. Although certain of our long-term contracts contain provisions for escalating costs, we cannot predict with certainty our ability to successfully claim recoveries of higher costs from our customers under these contractual stipulations.
To date, the COVID-19 pandemic has resulted in limited operational downtime. Costs have resulted from additional personnel, housing and logistics costs in order to mitigate the potential impacts of COVID-19 to our operations. In limited instances, we have been reimbursed for these costs by our customers. Our operations and business may be subject to further economic disruptions as a result of the spread of COVID-19 among our workforce, the extension or imposition of further public health measures affecting supply chain and logistics, and the impact of the pandemic on key customers, suppliers, and other counterparties. There can be no assurance that these, or other issues caused by the COVID-19 pandemic, will not materially affect our ability to operate our rigs in the future.
The outlookRecently, the combination of global inflation, volatility affecting the banking system and financial markets and a tightening of monetary policy has led to increasing concerns of a global economic recession. However, despite the macroeconomic uncertainty, recovery in demand for the offshore drilling industry has improved since the beginning of 2021,services continues to improve as evidenced by increasing global utilization and day rates for offshore drilling rigs, most notably for drillships. However, heightened geopolitical tensions have increased volatility, inflation is increasing costs of operations and the global recovery from the COVID-19 pandemic remains uncertain.More recently, the combination of global inflation and a tightening of monetary policy has led to increasing fears of a global economic recession that may have a negative impact on demand for hydrocarbons. As a result, there is still uncertainty around the sustainability of the improvement in oil prices and the recovery in demand for, and profitability of, offshore drilling services.
Backlog
Our backlog was $2.3$2.8 billion and $2.4$2.5 billion as of October 31, 2022May 1, 2023 and February 21, 2022,2023, respectively. The declineincrease in backlog is attributable to the termination of the VALARIS DS-11recent contract awards and revenues realized,contract extensions, partially offset by recent contract awards and contract extensions.revenues realized. Our backlog excludes ARO's backlog but includes backlog of $129.6$261.2 million and $134.3$273.8 million, respectively, from our rigs leased to ARO at the contractual rates. Contract rates with ARO are subject to adjustment resulting fromunder the terms of the shareholder agreement governing the joint venture. See "Note 3 - Equity Method Investment in ARO" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information.
Our backlog as of February 21, 2022 included approximately $428 million attributable to a contract awarded to VALARIS DS-11 for an eight-well deepwater project in the U.S. Gulf of Mexico that was expected to commence in mid-2024. In June 2022, the customer terminated the contract.
As a result of the contract termination, we received an early termination fee of $51.0 million which is included in revenues on our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.As of the date of the termination, we had incurred costs to upgrade the rig pursuant to the requirements of the contract. Costs incurred for capital upgrades specific to the customer requirements were considered to be impaired and as such, we recorded a pre-tax, non-cash loss on impairment in the second quarter of 2022 of $34.5 million. Additional costs were recorded for penalties and other costs incurred upon cancellation of equipment ordered.See "Note 2 - Revenue from Contracts with Customers"and "Note 5 - Property and Equipment" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information.
ARO backlog was $1.3$1.6 billion and $1.5$1.7 billion as of October 31, 2022May 1, 2023 and February 21, 2022,2023, respectively, inclusive of backlog on both ARO owned rigs and rigs leased from us, as revenues realized were partially offset by recent contract awards. As a 50/50 unconsolidated joint venture, when ARO realizes revenue from its backlog, 50% of the earnings thereon would be reflected in our results in equity in earnings of ARO in our Condensed Consolidated Statement of Operations. The earnings from ARO backlog with respect to rigs leased from us will be net of, among other things, payments to us under bareboat charters for those rigs.
BUSINESS ENVIRONMENT
Floaters
Starting inSince 2021, the more constructive oil price environment has led to an improvement in contracting and tendering activity. On a trailing twelve-month basis, rig years awardedactivity for floaters. The number of contracted benign environment floaters are more than 40% higher thanhas increased to 120 at March 31, 2023 from a low of 101 in early 2021, contributing to a 14% increase in utilization, from 73% to 87%, for the previous twelve months and tendering activity has continued to improve.active fleet over the same period. This increase in activity is also particularly evident for drillships with several multi-year contracts awardeddrillships. Utilization for the active drillship fleet is currently at 94% and has been sustained at above 85% for more than twelve months, resulting in a meaningful improvement in day rates for this class of assets. We have recentlyIn 2022, we completed the reactivation of three drillships and one semisubmersible which have commenced long-term contracts, and we were awarded an additional long-term contract for oneare currently reactivating another two of our stacked drillships that is expected to commence in mid-2023.for long-term contracts offshore Brazil.
As of March 31, 2023, the number of benign environment floaters declined by 44% to 157 from a peak of 281 in late 2014, and as of that date we believe there are only ten competitive drillships remaining among the stacked drillship fleet. There are a further eight competitive newbuild drillships remaining at South Korean shipyards, including VALARIS DS-13 and DS-14. We expect that continued floater demand growth will continue to reduce available drillship capacity.
Our backlog for our floater segment was $1.4 billion and $1.7 billion as of October 31, 2022 and February 21, 2022, respectively. The decline in backlog is attributable to the termination of the VALARIS DS-11 contract, which represented approximately $428 million of backlog, and revenues realized, partially offset by recent contract awards and contract extensions.
Utilization for our floatersactive floater fleet was 48%82% during the thirdfirst quarter of 20222023 compared to 31%88% in the secondfourth quarter of 2022. The decrease in utilization is primarily due to fewer operating days for VALARIS DS-12, which mobilized from Mauritania to Angola during the quarter, prior to commencing operations for another customer and due to the inclusion of the DS-8 in our active fleet utilization in the first quarter, since it is now being reactivated for an upcoming contract. Average day rates were approximately $222,000$228,000 during the thirdfirst quarter of 20222023 compared to approximately $213,000$212,000 in the secondfourth quarter of 2022. The increase in average day rate and utilization is primarily due to rigs that were reactivatedVALARIS DPS-5 and VALARIS DS-12 commencing new contracts during the first quarter.
Our backlog for our floater segment was $1.8 billion and $1.4 billion as of May 1, 2023 and February 21, 2023, respectively. The increase in backlog is attributable to the second quarterrecent contract awards and subsequently commenced drilling operations.
Benign environment floater supply has declinedcontract extensions, partially offset by 44% to 158 from a peak of 281 in late 2014. Globally, there are 18 newbuild drillships and benign environment semisubmersible rigs reported to be under construction that could increase global supply. However, there are 28 benign environment floaters that are either older than 20 years of age and currently idle or have been stacked for more than three years. Operating costs associated with keeping these rigs idle as well as expenditures required to re-certify some of these rigs may prove cost prohibitive. Drilling contractors may elect to scrap or cold stack a portion of these rigs.
A sustained constructive oil price environment and continued improvement in demand for offshore projects or further rationalization of drilling rig supply are necessary to maintain the improving floater utilization and day rate trajectory.revenues realized.
Jackups
Contracting and tendering activity for jackups began to improve during 2021 as a result of the more constructive oil price environment. Further, we have seen a notable increase in jackup activity insince the beginning of 2022, primarily driven by demand from the Middle East.On The number of contracted jackups has increased to 390 at March 31, 2023 from a trailing twelve-month basis, rig years awardedlow of 341 in early 2021, contributing to a 12% increase in utilization, from 78% to 90%, for jackups are more than double the previous twelve months and tendering activity has continued to increase.active fleet over the same period.
Our backlog for our jackup segment was $662.7 million and $643.0 million asAs of OctoberMarch 31, 2022 and February 21, 2022, respectively. The increase in our backlog was due to recent contract awards and contract extensions, partially offset by revenues realized.
Utilization for our2023, the number of jackups of 67% during the third quarter of 2022 was in line with the second quarter of 2022. Average day rates were approximately $100,000 during the third quarter of 2022 compared to approximately $94,000 in the second quarter of 2022. The increase in average day rate was primarily due to rigs that commenced contracts at higher day rates towards the end of the second quarter.
Jackup supply has declined by 9% to 493 from a peak of 542 in early 2015. Globally, there are 21 newbuildWhile the number of jackups has decreased less than floaters on a relative basis, 33% of the current jackup rigs reported to be under constructionfleet is more than 30 years of age with limited useful lives remaining. Further, we believe that could increase global supply,some of which two are contracted. However, there are 80the jackups that are either older than 30 years and currently idle are not competitive, either due to their age or have been stacked for more than three years.length of time stacked. Expenditures required to re-certifyrecertify some of these rigs may prove cost prohibitive and drilling contractors may instead elect to scrap or cold stack a portion of these rigs. Excluding ARO's newbuild program, there are only 18 newbuild jackups remaining at shipyards. of which 13 are at Chinese shipyards, many of which are expected to be used for the local supply in China.
Utilization for our active jackup fleet was 81% during the first quarter of 2023 compared to 87% in the fourth quarter of 2022. Average day rates were approximately $91,000 during the first quarter of 2023 compared to approximately $93,000 in the fourth quarter of 2022. The decrease in utilization was primarily due to certain rigs undergoing special periodic surveys in the current quarter and rigs that recently completed contracts in the North Sea.
A sustained constructive oil price environmentOur backlog for our jackup segment was $715.1 million and continued improvement$742.3 million as of May 1, 2023 and February 21, 2023, respectively. The decrease in demand for offshore projects or further rationalization of drilling rig supply are necessaryour backlog was due to maintain the improving jackup utilizationrevenues realized partially offset by recent contract awards and day rate trajectory.contract extensions.
Divestitures
Our business strategy has been to focus on ultra-deepwater floater and premium jackup operations and de-emphasize other assets and operations that are not part of our long-term strategic plan or that no longer meet our standards for economic returns. We continue to focus on our fleet management strategy in light of the composition of our rig fleet.While taking into account certain restrictions on the sales of assets under our Indenture dated April 30, 2021 that governs our First Lien Notes (the “Indenture”),debt agreements, as part of our strategy, we may act opportunistically
from time to time to monetize assets to enhance stakeholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of lower-specification or non-core rigs. To this end, we continually assess our rig portfolio and actively work with rig brokers to market certain rigs. See “Note 8 – Debt" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information on restrictions on the sales of assets.
In September 2022, we reached an agreement to sellApril 2023, VALARIS 54 to a third party, the closing of which is subject to customary closing conditions, after completion of its current contractwas sold resulting in March 2023. We expect to recognize a pre-tax gain on the sale of approximately $28$28.0 million duringin the first halfsecond quarter of 2023.
During the second quarter of 2022, we sold VALARIS 113 and VALARIS 114 for an aggregate pre-tax gain of $120.0 million, VALARIS 36 for a pre-tax gain of $8.5 million and recognized a pre-tax gain of $7.0 million related to additional proceeds received for our 2020 sale of VALARIS 68 resulting from post-sale conditions of that sale agreement. In the first quarter of 2022, we sold VALARIS 67 for a pre-tax gain of $2.0 million. Gains on sales are included in Other, net on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONSManagement believes the comparison of the most recently completed quarter to the immediately preceding quarter provides more relevant information needed to understand and analyze the business. As such, as permitted under applicable SEC rules, we have elected to discuss any material changes in our results of operations by including a comparison of our most recently completed fiscal quarter ended March 31, 2023 (the "current quarter") to the immediately preceding fiscal quarter ended December 31, 2022 (the "preceding quarter"). We also continue to discuss any material changes in our results of operations for the current quarter compared to the corresponding period of the preceding fiscal year (the "prior year quarter"), as required under the applicable SEC rules.
The following table summarizes our Condensed Consolidated Results of Operations for the three months ended September 30, 2022 (Successor) (the "current quarter"),March 31, 2023, three months ended June 30,December 31, 2022 (Successor) (the "preceding quarter"), nineand three months ended September 30,March 31, 2022 (Successor), five months ended September 30, 2021 (Successor) and four months ended April 30, 2021 (Predecessor), and the combined Successor and Predecessor results for the nine months ended September 30, 2021 (Non-GAAP) (in millions):
| | | | Three Months Ended | | |
| | September 30, 2022 | | June 30, 2022 | | | Three Months Ended
March 31,
2023 | | Three Months Ended December 31, 2022 | | Three Months Ended
March 31,
2022 | |
| Revenues | Revenues | $ | 437.2 | | | $ | 413.3 | | | Revenues | $ | 430.1 | | | $ | 433.6 | | | $ | 318.4 | | |
| Operating expenses | Operating expenses | | | Operating expenses | | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 336.7 | | | 361.8 | | | Contract drilling (exclusive of depreciation) | 377.2 | | | 353.4 | | | 331.3 | | |
| Loss on impairment | — | | | 34.5 | | | |
| | Depreciation | Depreciation | 22.6 | | | 22.3 | | | Depreciation | 23.3 | | | 23.8 | | | 22.5 | | |
| General and administrative | General and administrative | 19.2 | | | 19.0 | | | General and administrative | 24.4 | | | 23.9 | | | 18.8 | | |
| Total operating expenses | Total operating expenses | 378.5 | | | 437.6 | | | Total operating expenses | 424.9 | | | 401.1 | | | 372.6 | | |
| | Equity in earnings of ARO | Equity in earnings of ARO | 2.9 | | | 8.7 | | | Equity in earnings of ARO | 3.3 | | | 8.6 | | | 4.3 | | |
| Operating income (loss) | Operating income (loss) | 61.6 | | | (15.6) | | | Operating income (loss) | 8.5 | | | 41.1 | | | (49.9) | | |
| Other income, net | 29.9 | | | 148.6 | | | |
| Provision for income taxes | 13.8 | | | 20.2 | | | |
| Net income | 77.7 | | | 112.8 | | | |
| Net income attributable to noncontrolling interests | (3.4) | | | (1.2) | | | |
| Net income attributable to Valaris | $ | 74.3 | | | $ | 111.6 | | | |
| Other income (expense), net | | Other income (expense), net | 12.5 | | | (0.2) | | | 9.4 | | |
| Provision (benefit) for income taxes | | Provision (benefit) for income taxes | (27.6) | | | 9.8 | | | (0.7) | | |
| Net income (loss) | | Net income (loss) | 48.6 | | | 31.1 | | | (39.8) | | |
| Net (income) loss attributable to noncontrolling interests | | Net (income) loss attributable to noncontrolling interests | (1.9) | | | (1.9) | | | 1.2 | | |
| Net income (loss) attributable to Valaris | | Net income (loss) attributable to Valaris | $ | 46.7 | | | $ | 29.2 | | | $ | (38.6) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | Successor | | | Predecessor | | | | Combined (Non-GAAP)(1) | | | | | | |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 | | | | Nine Months Ended September 30, 2021 | | | | | | |
| Revenues | $ | 1,168.9 | | | $ | 529.5 | | | | $ | 397.4 | | | | | $ | 926.9 | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 1,029.8 | | | 443.2 | | | | 343.8 | | | | | 787.0 | | | | | | | |
| Loss on impairment | 34.5 | | | — | | | | 756.5 | | | | | 756.5 | | | | | | | |
| Depreciation | 67.4 | | | 41.0 | | | | 159.6 | | | | | 200.6 | | | | | | | |
| General and administrative | 57.0 | | | 39.9 | | | | 30.7 | | | | | 70.6 | | | | | | | |
| Total operating expenses | 1,188.7 | | | 524.1 | | | | 1,290.6 | | | | | 1,814.7 | | | | | | | |
| | | | | | | | | | | | | | | | |
| Equity in earnings of ARO | 15.9 | | | 7.4 | | | | 3.1 | | | | | 10.5 | | | | | | | |
| Operating income (loss) | (3.9) | | | 12.8 | | | | (890.1) | | | | | (877.3) | | | | | | | |
| Other income (expense), net | 187.9 | | | (1.3) | | | | (3,557.5) | | | | | (3,558.8) | | | | | | | |
| Provision for income taxes | 33.3 | | | 68.4 | | | | 16.2 | | | | | 84.6 | | | | | | | |
| Net income (loss) | 150.7 | | | (56.9) | | | | (4,463.8) | | | | | (4,520.7) | | | | | | | |
| Net income attributable to noncontrolling interests | (3.4) | | | (3.8) | | | | (3.2) | | | | | (7.0) | | | | | | | |
| Net loss attributable to Valaris | $ | 147.3 | | | $ | (60.7) | | | | $ | (4,467.0) | | | | | $ | (4,527.7) | | | | | | | |
(1) We believe that the discussion of our results of operations for the five months ended September 30, 2021 combined with the four-month period ended April 30, 2021 provide more meaningful comparisons to the comparable periods in 2022 and are more useful in understanding operational trends. These combined results do not comply with GAAP and have not been prepared as pro forma results under applicable SEC rules.Overview
OverviewThree Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022
Revenue increased $23.9decreased $3.5 million, or 6%1%, for the current quarter as compared to the preceding quarter, primarily due to $62.2$38.4 million from increaseddecreased operating days, across the fleet, $13.0partially offset by $23.2 million from higher average day rates on certain rigs and a $11.2$5.2 million increase in amortization of deferred mobilizationdemobilization revenue. The decrease in operating days was primarily attributable to certain rigs undergoing special periodic surveys or mobilizing between contracts during the current quarter and capital upgrade revenue. These increases were partially offset by the $51.0 million fee related to the termination of the VALARIS DS-11 contract recordedrigs that recently completed contracts in the preceding quarter and $6.7 million from lower customer reimbursable revenue.North Sea.
Revenues increased $242.0 million, or 26%, for the nine months ended September 30, 2022 (Successor) as compared to the combined Successor and Predecessor prior year period, primarily due to $130.7 million from increased operating days across the fleet, a $51.0 million fee related to the termination of the VALARIS DS-11 contract, $30.3 million from higher amortization of deferred revenue, $21.6 million from higher customer reimbursable revenue, and $4.6 million from increased average day rates on certain rigs.
Contract drilling expense decreased $25.1increased $23.8 million, or 7%, for the current quarter as compared to the preceding quarter, primarily due to a $25.6$14.7 million increase in repair costs incurred for certain rigs and a$5.5 million increase in reactivation costs.
Other income, net, increased $12.7 million for the current quarter compared to the preceding quarter, primarily due to a $13.5 million decrease in foreign currency losses.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Revenues increased $111.7 million, or 35%, for the costs for certain claims, $7.6 million decrease in repair costs for a certain rig, $6.5 million decrease in reactivation costs, $5.3 million decrease in reimbursable costs and $2.4 million decreasecurrent quarter compared to the prior year quarter, primarily due to VALARIS 141, which commenced its lease$80.9 million from increased operating days primarily attributable to AROrigs that have returned to work upon completion of reactivation projects or special periodic surveys, $15.3 million from higher amortization of deferred mobilization and capital upgrade revenue, $11.8 million from increased average day rates and $5.2 million increase in the current quarter.demobilization revenue. These decreasesincreases were partially offset by a $33.4$5.6 million increasedecrease in costs primarily attributable to reactivated rigs that have returned to work.customer reimbursable revenue.
Contract drilling expense increased $242.8$45.9 million, or 31%14%, for the nine months ended September 30, 2022 (Successor) ascurrent quarter compared to the combined Successor and Predecessor prior year period,quarter, primarily due to $125.6a $68.0 million increase attributable to rigs that have returned to work upon completion of reactivation projects or after being idle in the prior year period, $48.7quarter and a $15.3 million increase in reactivation costs, $34.5 million increase in therepair costs for certain claimsrigs. These increases were partially offset by a $35.3 million decrease in reactivation costs, a $5.8 million decrease due to VALARIS 140 and $28.2VALARIS 141, which were leased to ARO at the end of the first quarter and the third quarter of 2022, respectively, and a $4.8 million increasedecrease in reimbursable costs.
During the second quarter of 2022 (Successor), we recorded non-cash losses on impairment totaling $34.5 million, with respect to customer-specific capital upgrades for VALARIS DS-11 made pursuant to the terms of the drilling contract that was terminated during the second quarter of 2022. During the four months ended April 30, 2021 (Predecessor), we recorded non-cash losses on impairment totaling $756.5 million, with respect to certain assets in our fleet. See "Note 5 - Property and Equipment" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information.
Depreciation expense decreased $133.2 million, or 66%, for the nine months ended September 30, 2022 (Successor) as compared to the combined Successor and Predecessor prior year period, primarily as a result of the reduction in values of property and equipment from the application of fresh start accounting on the Effective Date.
General and administrative expenses decreasedincreased by $13.6$5.6 million, or 19%30%, for the nine months ended September 30, 2022 (Successor) ascurrent quarter compared to the combined Successor and Predecessor prior year period,quarter, primarily due to a change inhigher professional fees and higher compensation related to our long-term incentive compensation structure following the Effective Date.plans.
Other income, net, decreased $118.7increased $3.1 million for the current quarter as compared to the precedingprior year quarter, primarily due to a $12.1 million increase in interest income, partially offset by a $4.2 million decrease in foreign currency gains, of $135.5$3.9 million that were recognized during the preceding quarterdecrease in net periodic pension income and a $2.4 million decrease from the sale of VALARIS 113, VALARIS 114 and VALARIS 36 as well as additional proceeds received in the preceding quartergain on the sale of a rig in a prior year as a result of post-sale conditions of that sale agreement. This decrease was partially offset by non-cash interest income of $14.8 million recognized in the current quarter for the adjustment to the discount resulting from the partial early repayment on our shareholder notes receivable from ARO.
Other income (expense), net, changed from an expense of $3.6 billion in the combined Successor and Predecessor prior year period to income of $187.9 million for the nine months ended September 30, 2022 (Successor). We recorded $3.6 billion of reorganization costs incurred directly related to the Chapter 11 Cases in the prior year period and in the current year, we recognized a pre-tax gain on sale of property of $137.5 million from the sale of VALARIS 113, VALARIS 114, VALARIS 36 and VALARIS 67 as well as additional proceeds received in the current year period on the sale of a rig in a prior year as a result of post-sale conditions of that sale agreement.assets.
Rig Counts, Utilization and Average Day Rates
The following table summarizes our and ARO's offshore drilling rigs as of the following dates:
| | | | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Floaters | Floaters | 16 | | 16 | | 16 | Floaters | 16 | | 16 | | 16 |
Jackups(1) | Jackups(1) | 28 | | 29 | | 33 | Jackups(1) | 28 | | 28 | | 31 |
Other(2) | Other(2) | 8 | | 7 | | 8 | Other(2) | 8 | | 8 | | 8 |
Held-for-sale(3) | — | | — | | 2 | |
| | Total Valaris | Total Valaris | 52 | | 52 | | 59 | Total Valaris | 52 | | 52 | | 55 |
| ARO(4)(3) | ARO(4)(3) | 7 | | 7 | | 7 | ARO(4)(3) | 7 | | 7 | | 7 |
|
(1)During the first quarter of 2022, we sold VALARIS 67 and leased VALARIS 140 to ARO. During the second quarter of 2022, we sold VALARIS 113 and VALARIS 114. During the third quarter of 2022, we leased VALARIS 141 to ARO.
(2)This represents the jackup rigs leased to ARO through bareboat charter agreements whereby substantially all operating costs are incurred by ARO. Rigs leased to ARO operate under three-year contracts with Saudi Aramco. During the fourth quarter of 2021, we sold VALARIS 37, which was previously leased to ARO. During the first quarter of 2022, VALARIS 140 was leased to ARO. During the second quarter of 2022, we sold VALARIS 36, which was previously leased to ARO. During the third quarter of 2022, VALARIS 141 was leased to ARO.
(3)During the fourth quarter of 2021, we sold VALARIS 142 and VALARIS 22 which were classified as held-for-sale as of September 30, 2021.
(4)This represents the seven jackup rigs owned by ARO which are operating under long-term contracts with Saudi Aramco.
We provide management services in the U.S. Gulf of Mexico on two rigs owned by a third-party that are not included in the table above.
We are a party to contracts whereby we have the option to take delivery of two recently constructed drillships that are not included in the table above.
Additionally, ARO has ordered two jackups which are under construction in the Middle East that are not included in the table above.
The following table summarizes our and ARO's rig utilization and average day rates by reportable segment:
| | | | Three Months Ended September 30, 2022 | | Three Months Ended June 30, 2022 | | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | | | Three Months Ended
March 31,
2023 | | Three Months Ended December 31, 2022 | | | Three Months Ended
March 31,
2022 | |
Rig Utilization(1) | | | | | | | | | | |
Rig Utilization - Total Fleet(1) | | Rig Utilization - Total Fleet(1) | | | | | | | |
| Floaters | Floaters | 48 | % | | 31 | % | | | 35 | % | | 27 | % | | Floaters | 58 | % | | 60 | % | | | 28 | % | |
| Jackups | Jackups | 67 | % | | 67 | % | | | 65 | % | | 54 | % | | Jackups | 62 | % | | 68 | % | | | 63 | % | |
Other (2) | Other (2) | 100 | % | | 100 | % | | | 100 | % | | 100 | % | | Other (2) | 100 | % | | 100 | % | | | 100 | % | |
| Total Valaris | Total Valaris | 66 | % | | 61 | % | | | 62 | % | | 55 | % | | Total Valaris | 68 | % | | 72 | % | | | 59 | % | |
| ARO | ARO | 89 | % | | 96 | % | | | 92 | % | | 88 | % | | ARO | 93 | % | | 93 | % | | | 91 | % | |
| Rig Utilization - Active Fleet(1) | | Rig Utilization - Active Fleet(1) | | | | |
| Floaters | | Floaters | 82 | % | | 88 | % | | | 45 | % | |
| Jackups | | Jackups | 81 | % | | 87 | % | | | 86 | % | |
Other (2) | | Other (2) | 100 | % | | 100 | % | | | 100 | % | |
| Total Valaris | | Total Valaris | 86 | % | | 90 | % | | | 80 | % | |
| ARO | | ARO | 93 | % | | 93 | % | | | 91 | % | |
| Average Day Rates(3) | Average Day Rates(3) | | | | | Average Day Rates(3) | | | | |
| Floaters | Floaters | $ | 221,581 | | | $ | 213,452 | | | | $ | 213,438 | | | $ | 194,687 | | | Floaters | $ | 228,493 | | | $ | 211,776 | | | | $ | 197,394 | | |
| Jackups | Jackups | 100,352 | | | 93,851 | | | | 94,170 | | | 97,025 | | | Jackups | 91,017 | | | 92,646 | | | | 88,641 | | |
Other (2) | Other (2) | 37,688 | | | 39,076 | | | | 38,652 | | | 30,956 | | | Other (2) | 43,167 | | | 35,984 | | | | 39,227 | | |
| Total Valaris | Total Valaris | $ | 112,462 | | | $ | 97,717 | | | | $ | 100,346 | | | $ | 88,694 | | | Total Valaris | $ | 112,993 | | | $ | 107,633 | | | | $ | 89,609 | | |
| ARO | ARO | $ | 93,364 | | | $ | 92,397 | | | | $ | 93,834 | | | $ | 94,709 | | | ARO | $ | 98,184 | | | $ | 93,285 | | | | $ | 95,867 | | |
(1)Rig utilization istotal fleet and active fleet are derived by dividing the number of days under contract by the number of days in the period.period for the total fleet and active fleet, respectively. Active fleet represents rigs that are not preservation stacked and includes rigs that are in the process of being reactivated. Days under
contract equals the total number of days that rigs have earned and recognized day rate revenue, including days associated with early contract terminations, compensated downtime and mobilizations and excluding suspension periods. When revenue is deferred and amortized over a future period, for example, when we receive fees while mobilizing to commence a new contract or while being upgraded in a shipyard, the related days are excluded from days under contract.
For newly-constructed or acquired rigs, the number of days in the period begins upon commencement of drilling operations for rigs with a contract or when the rig becomes available for drilling operations for rigs without a contract.
(2)Includes our two management services contracts and our rigs leased to ARO under bareboat charter contracts.
(3)Average day rates are derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues, lump-sum revenues, revenues earned during suspension periods and revenues attributable to amortization of drilling contract intangibles, by the aggregate number of contract days, adjusted to exclude contract days associated with certain suspension periods, mobilizations and demobilizations.
Operating Income by Segment
Our business consists of four operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (4) Other, which consists of management services on rigs owned by third-partiesthird parties and the activities associated with our arrangements with ARO under the Lease Agreements.bareboat charter arrangements (the "Lease Agreements"). Floaters, Jackups and ARO are also reportable segments.
Our onshore support costs included within contractContract drilling expenses are not allocated to our operating segments for purposes of measuring segment operating income (loss) and as such, those costs are included in "Reconciling Items." Further, Generalgeneral and administrative expense and Depreciationdepreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income (loss) and are included in "Reconciling Items."
The full operating results included below for ARO are not included within our consolidated results and thus deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See "Note 3 - Equity Method Investment in ARO" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information. Segment information for the current quarter, the preceding quarter and the nine months ended September 30, 2022 (Successor), the five months ended September 30, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor) and the combined Successor and Predecessor results for the nine months ended September 30, 2021 (Non-GAAP)prior year quarter is as follows (in millions):
Three Months Ended September 30, 2022 (Successor)March 31, 2023
| | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | Revenues | $ | 201.7 | | | $ | 195.9 | | | $ | 111.4 | | | $ | 39.6 | | | $ | (111.4) | | | $ | 437.2 | | Revenues | $ | 214.8 | | | $ | 169.8 | | | $ | 123.6 | | | $ | 45.5 | | | $ | (123.6) | | | $ | 430.1 | |
| Operating expenses | Operating expenses | | Operating expenses | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 160.5 | | | 128.0 | | | 90.0 | | | 17.8 | | | (59.6) | | | 336.7 | | Contract drilling (exclusive of depreciation) | 174.6 | | | 148.9 | | | 90.9 | | | 20.2 | | | (57.4) | | | 377.2 | |
| | Depreciation | Depreciation | 12.6 | | | 8.7 | | | 15.4 | | | 1.2 | | | (15.3) | | | 22.6 | | Depreciation | 13.0 | | | 9.0 | | | 15.0 | | | 1.3 | | | (15.0) | | | 23.3 | |
| General and administrative | General and administrative | — | | | — | | | 4.7 | | | — | | | 14.5 | | | 19.2 | | General and administrative | — | | | — | | | 4.6 | | | — | | | 19.8 | | | 24.4 | |
| | Equity in earnings of ARO | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 2.9 | | | 2.9 | | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 3.3 | | | 3.3 | |
| Operating income (loss) | $ | 28.6 | | | $ | 59.2 | | | $ | 1.3 | | | $ | 20.6 | | | $ | (48.1) | | | $ | 61.6 | | |
| Operating income | | Operating income | $ | 27.2 | | | $ | 11.9 | | | $ | 13.1 | | | $ | 24.0 | | | $ | (67.7) | | | $ | 8.5 | |
Three Months Ended June 30,December 31, 2022 (Successor)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | | Consolidated Total |
| Revenues | $ | 188.1 | | | $ | 185.8 | | | $ | 116.4 | | | $ | 39.4 | | | $ | (116.4) | | | | $ | 413.3 | |
| Operating expenses | | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 165.3 | | | 142.2 | | | 82.1 | | | 24.7 | | | (52.5) | | | | 361.8 | |
| Loss on impairment | 34.5 | | | — | | | — | | | — | | | — | | | | 34.5 | |
| Depreciation | 12.3 | | | 8.7 | | | 15.4 | | | 1.3 | | | (15.4) | | | | 22.3 | |
| General and administrative | — | | | — | | | 3.2 | | | — | | | 15.8 | | | | 19.0 | |
| | | | | | | | | | | | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | 8.7 | | | | 8.7 | |
| Operating income (loss) | $ | (24.0) | | | $ | 34.9 | | | $ | 15.7 | | | $ | 13.4 | | | $ | (55.6) | | | | $ | (15.6) | |
Nine Months Ended September 30, 2022 (Successor)
| | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | Revenues | $ | 489.5 | | | $ | 562.4 | | | $ | 339.1 | | | $ | 117.0 | | | $ | (339.1) | | | $ | 1,168.9 | | Revenues | $ | 211.0 | | | $ | 181.8 | | | $ | 120.4 | | | $ | 40.8 | | | $ | (120.4) | | | $ | 433.6 | |
| Operating expenses | Operating expenses | | Operating expenses | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 473.4 | | | 409.4 | | | 256.3 | | | 58.0 | | | (167.3) | | | 1,029.8 | | Contract drilling (exclusive of depreciation) | 172.6 | | | 129.5 | | | 85.5 | | | 18.4 | | | (52.6) | | | 353.4 | |
| Loss on impairment | 34.5 | | | — | | | — | | | — | | | — | | | 34.5 | | |
| | Depreciation | Depreciation | 37.1 | | | 26.5 | | | 47.3 | | | 3.4 | | | (46.9) | | | 67.4 | | Depreciation | 12.9 | | | 9.6 | | | 16.1 | | | 1.2 | | | (16.0) | | | 23.8 | |
| General and administrative | General and administrative | — | | | — | | | 13.1 | | | — | | | 43.9 | | | 57 | | General and administrative | — | | | — | | | 5.6 | | | — | | | 18.3 | | | 23.9 | |
| | Equity in earnings of ARO | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 15.9 | | | 15.9 | | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 8.6 | | | 8.6 | |
| Operating income (loss) | $ | (55.5) | | | $ | 126.5 | | | $ | 22.4 | | | $ | 55.6 | | | $ | (152.9) | | | $ | (3.9) | | |
| Operating income | | Operating income | $ | 25.5 | | | $ | 42.7 | | | $ | 13.2 | | | $ | 21.2 | | | $ | (61.5) | | | $ | 41.1 | |
FiveThree Months Ended September 30, 2021March 31, 2022 (Successor)
| | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total | | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | Revenues | $ | 154.0 | | | $ | 314.8 | | | $ | 201.7 | | | $ | 60.7 | | | $ | (201.7) | | | $ | 529.5 | | Revenues | $ | 99.7 | | | $ | 180.7 | | | $ | 111.3 | | | $ | 38.0 | | | $ | (111.3) | | | $ | 318.4 | |
| Operating expenses | Operating expenses | | Operating expenses | |
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 136.9 | | | 237.1 | | | 157.3 | | | 23.4 | | | (111.5) | | | 443.2 | | Contract drilling (exclusive of depreciation) | 147.6 | | | 139.2 | | | 84.2 | | | 15.5 | | | (55.2) | | | 331.3 | |
| | Depreciation | Depreciation | 19.3 | | | 19.9 | | | 26.5 | | | 1.7 | | | (26.4) | | | 41.0 | | Depreciation | 12.2 | | | 9.1 | | | 16.5 | | | 0.9 | | | (16.2) | | | 22.5 | |
| General and administrative | General and administrative | — | | | — | | | 8.5 | | | — | | | 31.4 | | | 39.9 | | General and administrative | — | | | — | | | 5.2 | | | — | | | 13.6 | | | 18.8 | |
| | Equity in earnings of ARO | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 7.4 | | | 7.4 | | Equity in earnings of ARO | — | | | — | | | — | | | — | | | 4.3 | | | 4.3 | |
| Operating income (loss) | Operating income (loss) | $ | (2.2) | | | $ | 57.8 | | | $ | 9.4 | | | $ | 35.6 | | | $ | (87.8) | | | $ | 12.8 | | Operating income (loss) | $ | (60.1) | | | $ | 32.4 | | | $ | 5.4 | | | $ | 21.6 | | | $ | (49.2) | | | $ | (49.9) | |
FourThree Months Ended April 30, 2021 (Predecessor)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | | Consolidated Total |
| Revenues | $ | 115.7 | | | $ | 232.4 | | | $ | 163.5 | | | $ | 49.3 | | | $ | (163.5) | | | | $ | 397.4 | |
| Operating expenses | | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 106.5 | | | 175.0 | | | 116.1 | | | 19.9 | | | (73.7) | | | | 343.8 | |
| Loss on impairment | 756.5 | | | — | | | — | | | — | | | — | | | | 756.5 | |
| Depreciation | 72.1 | | | 69.7 | | | 21.0 | | | 14.8 | | | (18.0) | | | | 159.6 | |
| General and administrative | — | | | — | | | 4.2 | | | — | | | 26.5 | | | | 30.7 | |
| | | | | | | | | | | | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | 3.1 | | | | 3.1 | |
| Operating income (loss) | $ | (819.4) | | | $ | (12.3) | | | $ | 22.2 | | | $ | 14.6 | | | $ | (95.2) | | | | $ | (890.1) | |
Combined NineMarch 31, 2023 Compared to Three Months Ended September 30, 2021 (Non-GAAP)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | | Consolidated Total |
| Revenues | $ | 269.7 | | | $ | 547.2 | | | $ | 365.2 | | | $ | 110.0 | | | $ | (365.2) | | | | $ | 926.9 | |
| Operating expenses | | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 243.4 | | | 412.1 | | | 273.4 | | | 43.3 | | | (185.2) | | | | 787.0 | |
| Loss on impairment | 756.5 | | | — | | | — | | | — | | | — | | | | 756.5 | |
| Depreciation | 91.4 | | | 89.6 | | | 47.5 | | | 16.5 | | | (44.4) | | | | 200.6 | |
| General and administrative | — | | | — | | | 12.7 | | | — | | | 57.9 | | | | 70.6 | |
| | | | | | | | | | | | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | 10.5 | | | | 10.5 | |
| Operating income (loss) | $ | (821.6) | | | $ | 45.5 | | | $ | 31.6 | | | $ | 50.2 | | | $ | (183.0) | | | | $ | (877.3) | |
Floaters
Floater revenue increased $13.6$3.8 million, or 7%2%, for the current quarter as compared to the preceding quarter, primarily due to $59.5 million from increased operating days, $10.2$14.9 million from higher average day rates on certain rigs and a $7.3 millionrates. The increase in amortization of deferred mobilization and capital upgrade revenue. These increases werewas partially offset by a $51.0$10.9 million fee related to the termination of the VALARIS DS-11 contract recognized in the preceding quarter and $7.8 milliondecrease from lower customer reimbursable revenue.
Floater revenue increased $219.8 million, or 81%, for the nine months ended September 30, 2022 (Successor), as compared to the combined Successor and Predecessor prior year period,fewer operating days primarily due to $112.6 million from increasedfewer operating days a $51.0 million fee recognized infor VALARIS DS-12, which mobilized from Mauritania to Angola during the second quarter of 2022 related to the termination of the VALARIS DS-11 contract, $24.4 million from increased customer reimbursable revenue, $16.2 million from higher average day rates on certain rigs and a $10.7 million increase in amortization of deferred revenue.quarter.
Floater contract drilling expense decreased $4.8increased $2.0 million, or 3%1%, for the current quarter, as compared to the preceding quarter, primarily due to a $20.0$5.5 million increase in rig reactivation costs and a $1.1 million increase in repair cost for certain rigs, partially offset by a $5.3 million decrease in the costs for certain claims, $6.3 million decrease in reimbursable costs, and $6.3 million decrease in rig reactivation costs. These decreases were partially offset by $33.4 million of increased costs primarily attributable to rigs that returned to work following reactivation projects.
Floater contract drilling expense increased $230.0 million, or 94%, for the nine months ended September 30, 2022 (Successor) as compared to the combined Successor and Predecessor prior year period, primarily due to a $95.5 million increase in reactivation costs, $67.0 million increase attributable to rigs that have returned to work upon completion of reactivation projects or after being idle in the prior year period, $25.4 million increase in the costs for certain claims, and $25.2 million increase in reimbursable costs.
During the preceding quarter and nine months ended September 30, 2022 (Successor), we recorded non-cash losses on impairment totaling $34.5 million, with respect to customer-specific capital upgrades for VALARIS DS-11 made pursuant to the terms of the drilling contract that was terminated during the second quarter of 2022. During the four months ending April 30, 2021, we recorded non-cash losses on impairment totaling $756.5 million, with respect to certain assets in our Floater segment. See "Note 5 - Property and Equipment" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information.
Floater depreciation expense decreased $54.3 million, or 59%, for the nine months ended September 30, 2022 (Successor), as compared to the combined Successor and Predecessor prior year period, primarily due to the reduction in values of property and equipment from the application of fresh start accounting on the Effective Date.claims.
Jackups
Jackup revenues increased $10.1decreased $12.0 million, or 5%7%, for the current quarter as compared to the precedingprior year quarter, primarily due to a $3.9$27.1 million increase in amortization of deferred mobilization and capital upgrade revenue, $3.1attributable to decreased operating days, partially offset by $6.7 million from higher average day rates on certain rigs and $2.5 million attributable to increased operating days.
Jackup revenues increased $15.2 million, or 3%, for the nine months ended September 30, 2022 (Successor), as compared to the combined Successor and Predecessor prior year period, primarily due to a $20.5$5.2 million increase in amortization of deferred revenuedemobilization revenue. The decrease in operating days was primarily attributable to certain rigs undergoing special periodic surveys in the current quarter and $18.1 million from increased operating days. This increase was partially offset by a decline of $23.1 million due to lower average day rates, and $3.7 million from lower customer reimbursable revenue.rigs that recently completed contracts in the North Sea.
Jackup contract drilling expense decreased $14.2increased $19.4 million, or 10%15%, for the current quarter as compared to the precedingprior year quarter, primarily due to a $7.6 million decrease in repair costs for a certain rig in the preceding quarter and a $2.4 million decrease due to VALARIS 141, which was leased to ARO the current quarter.
Jackup contract drilling expense decreased marginally by $2.7 million, or 1%, for the nine months ended September 30, 2022 (Successor), as compared to the combined Successor and Predecessor prior year period, primarily due to a $46.5 million decrease in reactivation costs incurred on certain rigs and $11.9 million decrease due to VALARIS 140 and VALARIS 141, which were leased to ARO. These decreases were offset by a $58.6$13.6 million increase in costs attributable torepair cost for certain rigs that have returned to work upon completion of reactivation projects or after being idle in the prior year period.current quarter, a $2.5 million increase in the costs for certain claims, and $2.1 million increase in reimbursable costs.
Jackup depreciation expense decreased $63.1 million, or 70%, for the nine months ended September 30, 2022 (Successor), as compared to the combined Successor and Predecessor prior year period, primarily due to the reduction in values of property and equipment from the application of fresh start accounting on the Effective Date.
ARO
The operating revenues of ARO reflect revenues earned under drilling contracts with Saudi Aramco for both the ARO-owned jackup rigs and the rigs leased from us. Contract drilling expenses are inclusive of the bareboat charter fees for the rigs leased from us. See "Note 3 - Equity Method Investment in ARO" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information on ARO.
48ARO revenue increased $3.2 million, or 3%, for the current quarter compared to the preceding quarter, primarily due to $5.3 million from higher average day rates and utilization for the rigs leased from us. This increase was partially offset by a $1.5 million decrease due to a certain ARO-owned rig which was undergoing planned maintenance in the current quarter.
ARO revenue decreased $5.0contract drilling expense increased $5.4 million, or 4%6%, for the current quarter compared to the preceding quarter, primarily due to $5.1 million of higher charter expense in the current quarter and a $1.6 million increase for rigs undergoing special periodic surveys.
Other
Other revenue increased $4.7 million, or 12%, for the current quarter compared to the preceding quarter, primarily due to $4.6 million of higher revenues earned from lease agreements with ARO primarily from higher average day rates on certain rigs.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Floaters
Floater revenue increased $115.1 million, or 115%, for the current quarter as compared to the precedingprior year quarter, primarily due to $107.9 million from increased operating days primarily attributable to rigs that have returned to work upon completion of reactivation projects or special periodic surveys, an $8.8 million increase in amortization of deferred revenue and $4.0 million from higher average day rates. These increases were partially offset by a $4.8 million decrease from customer reimbursable revenue.
Floater contract drilling expense increased $27.0 million, or 18%, for the current quarter as compared to the prior year quarter, primarily due to a $7.6$68.0 million decrease from certainincrease attributable to rigs which were undergoing planned maintenance in the current quarter and $2.7 million decrease from VALARIS 36, which operatedthat have returned to work upon completion of reactivation projects or after being idle in the prior quarter until ityear period. This increase was sold. These decreases were partially offset by a $3.9$34.6 million increase from VALARIS 141, which was leased to AROdecrease in reactivation costs, and commenced drilling operationsa $4.8 million decrease in the current quarter.reimbursable costs.
AROJackups
Jackup revenues decreased $10.9 million, or 6%, for the current quarter as compared to the prior year quarter, primarily due to $27.0 million from decreased operating days primarily due to rigs that recently completed contracts in the North Sea or certain rigs undergoing special periodic surveys, and $2.8 million from lower customer reimbursable revenue. These decreases are partially offset by a $6.5 million increase in amortization of deferred revenue decreased $26.1and capital upgrade revenue, $6.1 million increase in demobilization revenue and $6.1 million increase due to higher average day rates.
Jackup contract drilling expense increased by $9.7 million, or 7%, for the nine months ended September 30, 2022,current quarter as compared to the nine months ended September 30, 2021,prior year quarter, primarily due to a $44.6$15.3 million decline from three rigs which operatedincrease in repair costs in the prior year period completing their contracts in 2021 or the current year period.quarter. This decreaseincrease was partially offset by a $19.5$5.8 million increase in revenues fordecrease due to VALARIS 140 and VALARIS 141, which were leased to ARO and commenced drilling operations duringat the end of the first quarter and the third quarter of 2022, respectively.
ARO
ARO contract drilling expenserevenue increased $7.9$12.3 million, or 10%11%, for the current quarter as compared to the precedingprior year quarter, primarily due to an increase in payroll costs$12.4 million due to VALARIS 140 and VALARIS 141, which were leased to ARO at the end of the first quarter and the third quarter of 2022, respectively and $4.9 million from higher repair and maintenance costsaverage day rates on certain rigs. These increases were partially offset by $6.3 million decrease due to revenues attributable to VALARIS 36 which was sold in the currentsecond quarter for certain rigs undergoing maintenance projects.of 2022.
ARO contract drilling expense decreased $17.1increased $6.7 million, or 6%8%, for the nine months ended September 30, 2022 ascurrent quarter compared to the nine months ended September 30, 2021,prior year quarter, due to a decrease in bareboat$3.9 million from higher charter lease expense of $13.2resulting from higher average day rates on certain rigs and $2.1 million primarily as a resultdue to VALARIS 140 and VALARIS 141, which were leased to ARO at the end of fewer rigs leased from Valaris during the nine months ended September 30,first quarter and the third quarter of 2022, and a decrease in payroll costs of $6.7 million during the nine months ended September 30, 2021.respectively.
Other
Other revenue increased $7.0$7.5 million, or 6%20%, for the nine months ended September 30, 2022 (Successor), ascurrent quarter compared to the combined Successor and Predecessor prior year period,quarter, primarily due to $11.5 million from higher day rates on certain rigs, partially offset by $3.6$4.6 million of lowerhigher revenues earned from lease agreements with ARO.
Other contract drilling expenses decreased $6.9ARO and $2.0 million or 28%, for the current quarter, as compared to the preceding quarter, due to a $8.4 million decrease in costs for certain claims.higher customer reimbursable revenues.
Other contract drilling expenses increased $14.7$4.7 million, or 34%30%, for the nine months ended September 30, 2022 (Successor), ascurrent quarter compared to the combined Successor and Predecessor prior year period,quarter, primarily due to a $8.7$2.3 million increase in costs for certain claims and a $6.2 million increase in personnelreimbursable costs.
Other depreciation expense decreased $13.1 million, or 79%, for the nine months ended September 30, 2022 (Successor), as compared to the combined Successor and Predecessor prior year period, primarily due to the reduction in values of property and equipment from the application of fresh start accounting on the Effective Date.
Other Income (Expense)
The following table summarizes other income (expense) (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended | | | | | | | | | | | |
| September 30, 2022 | | June 30, 2022 | | | | | | | | | |
| Interest income | $ | 27.9 | | | $ | 11.2 | | | | | | | | | | | | |
| Interest expense | (11.7) | | | (11.6) | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net foreign currency exchange gains | 9.8 | | | 10.7 | | | | | | | | | | | | |
| Reorganization items, net | (0.4) | | | (0.7) | | | | | | | | | | | | |
| Net gain on sale of property | 0.1 | | | 135.1 | | | | | | | | | | | | |
| Other | 4.2 | | | 3.9 | | | | | | | | | | | | |
| | $ | 29.9 | | | $ | 148.6 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | Successor | | | Predecessor | | Combined (Non-GAAP) | | | | | | |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 | | Nine Months Ended September 30, 2021 | | | | |
| Net gain on sale of property | $ | 137.7 | | | $ | 0.2 | | | | $ | 6.0 | | | $ | 6.2 | | | | | | | |
| Interest income | 50.0 | | | 17.5 | | | | 3.6 | | | 21.1 | | | | | | | |
| Interest expense | (34.8) | | | (19.3) | | | | (2.4) | | | (21.7) | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net foreign currency exchange gains | 25.2 | | | 4.8 | | | | 13.4 | | | 18.2 | | | | | | | |
| Reorganization items, net | (2.1) | | | (10.6) | | | | (3,584.6) | | | (3,595.2) | | | | | | | |
| Other | 11.9 | | | 6.1 | | | | 6.5 | | | 12.6 | | | | | | | |
| | $ | 187.9 | | | $ | (1.3) | | | | $ | (3,557.5) | | | $ | (3,558.8) | | | | | | | |
Net gains on the sale of property of $135.5 million were recognized in the second quarter of 2022 related to the sales of VALARIS 113, VALARIS 114 and VALARIS 36 as well as additional proceeds received on the sale of a rig in a prior year as a result of post-sale conditions of that sale agreement. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended
March 31,
2023 | | Three Months Ended December 31, 2022 | | Three Months Ended
March 31,
2022 | | | | | | | | | |
| Interest income | $ | 23.0 | | | $ | 15.5 | | | $ | 10.9 | | | | | | | | | | | | |
| Interest expense | (11.1) | | | (10.5) | | | (11.5) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Net foreign currency exchange gains (losses) | 0.5 | | | (13.0) | | | 4.7 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Net gain on sale of property | 0.1 | | | 3.5 | | | 2.5 | | | | | | | | | | | | |
| Other | — | | | 4.3 | | | 2.8 | | | | | | | | | | | | |
| | $ | 12.5 | | | $ | (0.2) | | | $ | 9.4 | | | | | | | | | | | | |
Interest income increased by $16.7$7.5 million for the current quarter as compared to the preceding quarter, primarily due to non-cashan increase of $4.8 million of interest income of $14.8 million recognizedearned on our Notes Receivable from ARO attributed to higher interest rates in the current quarter for the discount attributable to the partial repaymentperiod and an increase of $2.9 million of interest income on our notes receivable from ARO.cash equivalents.
Interest income increased by $28.9$12.1 million for the nine months ended September 30, 2022 (Successor), ascurrent quarter compared to the combined Successor and Predecessor prior year period,quarter, primarily due to non-cashan increase of $8.3 million of interest income of $14.8on cash equivalents, and a $4.7 million recognized in the third quarter for the discount attributable to the partial repaymentincrease on interest income earned on our shareholder notes receivableNotes Receivable from ARO and incremental amortization as the discount on the shareholder notes were only amortized for five months in the combined prior year period as opposedattributed to nine monthshigher interest rates in the current year period.
Interest expense increased by $13.1 million for the nine months ended September 30, 2022 (Successor), compared to the combined Successor and Predecessor prior year period, as our First Lien Notes were outstanding for five months in the combined prior year period as compared to nine months in the current year.
Reorganization items, net of $3.6 billion for the combined Successor and Predecessor prior year period were recognized related to legal and other professional advisory service fees pertaining to the Chapter 11 Cases, contract items related to rejecting certain operating leases and the effects of the emergence from bankruptcy; including the application of fresh start accounting.
Our functional currency is the U.S. dollar and we predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. However, we have net assets and liabilities denominated in numerous foreign currencies and a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates.
Net foreign currency exchange gains of $9.8$0.5 million for the current quarter primarily included gains of $5.8 million, $1.7 million and $1.6 million related to euros, Norwegian krone and British pounds, respectively.kroner partially offset by $0.8 million losses related to euros. Net foreign currency exchange gainslosses of $10.7$13.0 million for the preceding quarter primarily included gainslosses of $5.2$7.1 million, $2.1$2.4 million and $2.1$1.9 million related to euros, British pounds and Norwegian krone,kroner, respectively. Net foreign currency exchange gains of $25.2$4.7 million for the nine months ended September 30, 2022 (Successor),prior year quarter primarily included gains of $14.4 million, $3.9 million and $3.6$3.4 million related to euros, British pounds and Norwegian krone, respectively. Net foreign currency exchange gains of $18.2 million for the combined Successor and Predecessor prior year period primarily included gains of $11.7 million and $6.2 million related to Libyan dinars and euros, respectively.euros.
Provision for Income Taxes
Valaris Limited is domiciled and resident in Bermuda. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-Bermuda subsidiaries is not subject to Bermuda taxation as there is not an income tax regime in Bermuda. Legacy Valaris was domiciled and resident in the U.K. The income of our non-U.K. subsidiaries was generally not subject to U.K. taxation.
Income tax rates and taxation systems in the jurisdictions in which our subsidiaries conduct operations vary and our subsidiaries are frequently subjected to minimum taxation regimes. In some jurisdictions, tax liabilities are based on gross revenues, statutory deemed profits or other factors, rather than on net income, and our subsidiaries are frequently unable to realize tax benefits when they operate at a loss. Accordingly, during periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Furthermore, we will continue to incur income tax expense in periods in which we operate at a loss.
Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another.
Discrete income tax expensebenefit for the current quarter was $1.4$43.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, partially offset by discreteyears. Discrete income tax benefitsbenefit for the preceding quarter was $3.4 million and was primarily attributable to the resolution of other prior period tax matters. Discrete income tax expense for the preceding quarter was $6.2 million and was primarily attributable to income associated with a contract termination. Excluding the aforementioned discrete tax items, income tax expense for the current quarter and preceding quarter was $12.4 million and $14.0 million, respectively.
Discrete income tax benefit for the ninethree months ended September 30,March 31, 2022 (Successor) was $6.9$14.5 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and resolution of other prior period tax matters, partially offset by discrete tax expense attributable to income associated with a contract termination. Discrete income tax expense for the five months ended September 30, 2021 (Successor) was $44.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and resolution of other prior period tax matters. Discrete income tax expense for the four months ended April 30, 2021 (Predecessor) was $2.2 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and resolution of other prior period tax matters offset by discrete tax benefit related to fresh start accounting adjustments.years. Excluding the aforementioned discrete tax items, income tax expense was $16.2 million for the nine months ended September 30, 2022 (Successor),current quarter, $13.2 million for the five months ended September 30, 2021 (Successor)preceding quarter and $13.8 million for the four months ended April 30, 2021 (Predecessor) was $40.2 million, $23.6 million and $14.0 million, respectively.prior year quarter.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We expect to fund our short-term liquidity needs, including contractual obligations and anticipated capital expenditures, as well as working capital requirements, from cash and cash equivalents, short-term investments and cash flows from operations.operations and borrowings under the Credit Agreement (as defined below). We expect to fund our long-term liquidity needs, including contractual obligations and anticipated capital expenditures from cash and cash equivalents, short-term investments, cash flows from operations, as well as cash to be received from maturity of our long-term notes receivableNotes Receivable from ARO and from the distribution of earnings from ARO. If necessary, weWe may rely on the incurrenceissuance of debt and/or the issuance of equity securities in the future to supplement our liquidity needs. However, the Indenture contains(as defined below) and the Credit Agreement contain covenants that limit our ability to incur additional indebtedness.
As of September 30, 2022, ourOur cash and cash equivalents as of March 31, 2023 and short-term investmentsDecember 31, 2022 were $406.0$822.5 million and $220.0$724.1 million, respectively. As of December 31, 2021, our cash and cash equivalents were $608.7 million and there were no short-term investments. We have no debt principal payments due until 2028. See "Note 8 - Debt" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information on the First Lien Notes.
Cash FlowFlows and Capital Expenditures
Absent periods where we have significant financing or investing transactions or activities, such as debt or equity issuances, debt repayments, business combinations or asset sales, our primary sources and uses of cash are driven by cash generated from or used in operations and capital expenditures. Our net cash provided by or used in operating activities and capital expenditures were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
| Net cash used in operating activities | $ | (27.0) | | | $ | (19.0) | | | | $ | (39.8) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Additions to property and equipment | $ | (153.1) | | | $ | (23.7) | | | | $ | (8.7) | |
| | | | | | | | | | | |
| Three Months Ended
March 31,
2023 | | Three Months Ended
March 31,
2022 |
| Net cash provided by operating activities | $ | 151.7 | | | $ | 0.8 | |
| | | |
| | | |
| | | |
| | | |
| Capital expenditures | $ | (56.3) | | | $ | (38.5) | |
During the ninethree months ended September 30, 2022 (Successor), ourMarch 31, 2023, we generated $151.7 million from operating activities related primarily to higher margins, the collection of $45.9 million for certain tax receivables and other changes in working capital. Our primary uses of cash in operating activitieswere $56.3 million for the enhancement and other improvements of $27.0 million related primarily to the reactivation ofour drilling rigs, for new contracts as well as the payment of certain taxes.
During the five months ended September 30, 2021 (Successor), our uses of cash in operating activities of $19.0 million primarily related to reorganization costs and mobilization of drilling rigs for new contracts.including reactivations.
During the fourthree months ended April 30, 2021 (Predecessor), our primary sources ofMarch 31, 2022, net cash were $520.0 million from the issuance of the First Lien Notes and proceeds of $30.1 million for the disposition of assets. For the same period, our uses of cash inprovided by operating activities of $39.8was $0.8 million primarily related to declining marginshigher net collections of customer receivables partially offset by cash outflows from the payment of certain taxes and reorganization costs.our primary uses of cash were $38.5 million for the enhancement and other improvements of our drilling rigs.
We have construction agreements, as amended, with a shipyard that provide for, among other things, an option construct whereby the Company haswe have the right, but not the obligation, to take delivery on or before December 31, 2023 of either or both VALARIS DS-13 and VALARIS DS-14 rigs, under construction on or before December 31, 2023.which were recently constructed. Under the amended agreements, the purchase prices for the rigs are estimated to be $119.1 million for VALARIS DS-13 and $218.3 million for VALARIS DS-14, assuming a December 31, 2023 delivery date. Delivery can be requested any time prior to December 31, 2023 with a downward purchase price adjustment based on predetermined terms. If the Company electswe elect not to purchase the rigs, the Company haswe have no further obligations to the shipyard.
We continue to take a disciplined approach to reactivations with our stacked rigs, only returning them to the active fleet when there is visibility into work at attractive economics. In most cases, we expect the initial contract to pay for the reactivation costs and that the rig would have solid prospects for longer-term work. Most of the reactivation cost will be operating expenses, recognized in the income statement, related to de-preservation activities, including reinstalling key pieces of equipment and crew costs. Capital expenditures during reactivations include rig modifications, equipment overhauls and any customer required capital upgrades. We would generally expect to be compensated for any customer-specific enhancements.
Based on our current projections, we expect capital expenditures during 2022 to approximate $205 to $210 million for rig enhancement, reactivation and upgrade projects. These revised, lower projections are the result of removing expected contract-specific capital upgrades for a terminated contract for which we expected significant reimbursements and received a termination payment. Depending on market conditions and future opportunities, we may make additional capital expenditures to upgrade rigs for customer requirements and construct or acquire additional rigs.
In the second quarter of 2022, our customer terminated the eight-well contract for a deepwater project in the U.S. Gulf of Mexico that was expected to commence in mid-2024. The contract required the VALARIS DS-11 to be upgraded with 20,000 psi well-control equipment. As a result of the contract termination, we recorded an early termination fee of $51.0 million in the second quarter of 2022 that was collected in July 2022. As of the date of termination, we had incurred costs to upgrade the rig pursuant to the requirements of the contract. Costs incurred for capital upgrades of $34.5 million were considered to be impaired. Additional costs were recorded for penalties and other costs incurred upon cancellation of equipment ordered.
As we reactivate rigs, we expect spending levels to increase beyond the levels we incurred in 2021, with more spending associated with reactivation of our floater fleet relative to our jackup fleet. Further, the costs of future reactivations are expected to increase relative to our initial reactivation projects with rising costs of labor and materials, the depletion of spares from our initial reactivation projects and as the rigs we reactivate have been preservation stacked for longer periods of time. Future reactivations could be subject to further increases in the cost of labor and materials and could take longer due to increased lead times for parts and supplies.
Based on our current projections, we expect capital expenditures during 2023 to approximate $320.0 million to $360.0 million. If we exercise our options to take delivery of VALARIS DS-13 for $119.1 million and/or VALARIS DS-14 for $218.3 million on the delivery date of December 31, 2023, our capital expenditures would be higher by the respective purchase prices. Depending on market conditions, contracting activity and future opportunities, we may reactivate additional rigs or make additional capital expenditures to upgrade rigs for customer requirements and construct or acquire additional rigs.
We review from time to time possible acquisition opportunities relating to our business, which may include the acquisition of rigs or other businesses. The timing, size or success of any acquisition efforts and the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such efforts with cash on hand and proceeds from debt and/or equity issuances and may issue equity directly to the sellers. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend on our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. In addition, any additional debt service requirements we take on could be based on higher interest rates and shorter maturities and could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to shareholders.
Financing and Capital Resources
First Lien Notes
We have $550 million aggregate principal amountOn April 3, 2023, we issued a notice of conditional redemption to the holders of our Senior Secured First Lien Notes due 2028 (the "First“First Lien Notes"Notes”) which were issued onat a redemption price equal to 104.0% of the Effective Date pursuantprincipal amount of the First Lien Notes, plus accrued and unpaid interest to, but not including, the redemption date (the “Redemption Price”). On April 19, 2023, in connection with the issuance of our Second Lien Notes as discussed below, we discharged our obligations under the Indenture dated April 30, 2021 governing the First Lien Notes (the “First Lien Notes Indenture”) and deposited the Redemption Price with Wilmington Savings Fund Society, as trustee under the First Lien Notes Indenture. The First Lien Notes are scheduled to maturewill be redeemed on April 30, 2028.May 3, 2023 (the “First Lien Notes Redemption”) See "Note 8 - Debt" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information on the First Lien Notes.
Second Lien Notes
On April 19, 2023, the Company and Valaris Finance (together, the "Issuers") issued and sold $700.0 million in aggregate principal amount of 8.375% Senior Secured Second Lien Notes due 2030 (the “Second Lien Notes”) in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Second Lien Notes will mature on April 30, 2030 and were issued at par for net proceeds of approximately $685.0 million, after deducting the initial purchasers’ discount and estimated offering expenses. The Company used a portion of the net proceeds to fund the redemption of all of its outstanding First Lien Notes as discussed above.
Interest on the Second Lien Notes is payable semi-annually in arrears on April 30 and October 30 of each year, beginning on October 30, 2023. The Second Lien Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Guarantors and by each of the Company’s future restricted subsidiaries (other than Valaris Finance) that guarantees any debt of the Issuers or any guarantor under certain future debt in an aggregate principal amount in excess of a certain amount. The Second Lien Notes and completionthe related guarantees are secured on a second-priority basis by the Collateral (as defined below).
On or after April 30, 2026, the Issuers may, at their option, redeem all or any portion of the consent solicitationSecond Lien Notes, at once or over time, at the redemption prices set forth below, plus accrued and unpaid interest, if any, to, but not including, the redemption date. The following prices are for Second Lien Notes redeemed during the third quarter12-month period commencing on April 30 of 2022.the years set forth below, and are expressed as percentages of principal amount:
| | | | | |
| Redemption Year | Price |
| 2026 | 104.188% |
| 2027 | 102.094% |
| 2028 and thereafter | 100.000% |
At any time prior to April 30, 2026, the Issuers may, on any one or more occasions, redeem up to 40.0% of the aggregate principal amount of the Second Lien Notes issued under the Indenture, dated April 19, 2023 (the "Indenture") (including any additional Second Lien Notes, if any) with an amount equal to or less than the net cash proceeds of certain equity offerings, at a redemption price equal to 108.375% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to but not including, the redemption date. In addition, at any time prior to April 30, 2026, the Issuers may redeem up to 10.0% of the aggregate principal amount of the Second Lien Notes during any twelve-month period at a redemption price equal to 103.0% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date.
At any time prior to April 30, 2026, the Issuers may redeem some or all of the Second Lien Notes at a price equal to 100.0% of the principal amount of the Second Lien Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date, plus a “make-whole” premium.
The Indenture contains covenants that, among other things, restrict the Company’s ability and the ability of certain of its subsidiaries to: (i) incur additional debt and issue certain preferred stock; (ii) incur or create liens; (iii) make certain distributions, investments and other restricted payments; (iv) sell or otherwise dispose of certain assets; (v) engage in certain transactions with affiliates; and (vi) merge, consolidate, amalgamate or sell, transfer, lease or otherwise dispose of all or substantially all of the Company’s assets. These covenants are subject to important exceptions and qualifications. In addition, many of these covenants will be suspended with respect to the Notes during any time that the Notes have investment grade ratings from at least two rating agencies and no default with respect to the Notes has occurred and is continuing.
Upon the occurrence of certain Change of Control Triggering Event (as defined in the Indenture), the Issuers may be required to make an offer to repurchase all of the Second Lien Notes then outstanding at a price equal to 101.0% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the repurchase date.
Revolving Credit Agreement
On April 3, 2023, we entered into a senior secured revolving credit agreement (the “Credit Agreement”). The Credit Agreement provides for commitments permitting borrowings of up to $375.0 million (which may be increased, subject to the satisfaction of certain conditions and the agreement of lenders to provide such additional commitments, by an additional $200.0 million pursuant to the terms of the Credit Agreement) and includes a $150.0 million sublimit for the issuance of letters of credit). Valaris Finance and certain other of our subsidiaries (together with Valaris Finance, the “Guarantors”) guarantee our obligations under the Credit Agreement, and the lenders have a first priority lien on the assets securing the Credit Agreement. The commitments under the Credit Agreement became available to be borrowed on April 19, 2023 (the “Availability Date”).
The Credit Agreement and the related guarantees are secured on a first-priority basis, subject to permitted liens, by (a) first preferred ship mortgages over each vessel owned by us and the Guarantors as of the Availability Date, with certain exceptions (the “Collateral Vessels”); (b) first priority assignments of certain insurances and requisition compensation in respect of the Collateral Vessels; (c) first priority pledges of all equity interests in our subsidiaries that own Collateral Vessels and certain subsidiaries that hold equity interests in entities that own vessels (the “Collateral Rig Owners”); (d) first priority assignments of earnings of the Collateral Vessels from the Collateral Rig Owners; (e) any vessels of ours and the Guarantors that are pledged, at our option, to secure the Credit Agreement; and (f) all proceeds thereof (the "Collateral").
Amounts borrowed under the Credit Agreement are subject to an interest rate per annum equal to, at our option, either (a) a base rate determined as the greatest of (i) a prime rate, (ii) the federal funds rate plus 1∕2 of 1% and (iii) Term SOFR (as defined in the Credit Agreement) for a one month interest period plus 0.10% plus 1% (such base rate to be subject to a 1% floor) or (b) Term SOFR plus 0.10% (subject to a 0% floor), plus, in each case of clauses (a) and (b) above, an applicable margin ranging from 1.50% to 3.00% and 2.50% to 4.00%, respectively, based on the credit ratings that are one notch higher than the corporate family ratings provided by Standard & Poor’s Financial Services LLC (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”) with respect to Valaris Limited.
In addition to paying interest on outstanding borrowings under the Credit Agreement, we are required to pay a quarterly commitment fee to the lenders under the Credit Agreement with respect to the average daily unutilized commitments thereunder at a rate ranging from 0.375% to 0.75% depending on the credit ratings that are one notch higher than the corporate family ratings provided by S&P and Moody’s with respect to Valaris Limited. With respect to each letter of credit issued pursuant to the Credit Agreement, we are required to pay a letter of credit fee equal to the applicable margin in effect for Term SOFR loans and a fronting fee in an amount to be mutually
agreed between us and the issuer of such letter of credit. We are also required to pay customary agency fees in respect of the Credit Agreement.
The Credit Agreement contains various covenants that limit, among other things, our and our restricted subsidiaries’ ability to: incur indebtedness; grant liens; dispose of certain assets; make certain acquisitions and investments; redeem or prepay other debt or make other restricted payments such as distributions to shareholders; enter into transactions with affiliates; enter into sale-leaseback transactions; and enter into a merger, amalgamation, consolidation or sale of assets. Further, the Credit Agreement contains financial covenants that require us to maintain (i) a minimum book value of equity to total assets ratio, (ii) a minimum interest coverage ratio and (iii) a minimum amount of liquidity.
Investment in ARO and Notes Receivable from ARO
We consider our investment in ARO to be a significant component of our investment portfolio and an integral part of our long-term capital resources. We expect to receive cash from ARO in the future both from the maturity of our long-term notes receivableNotes Receivable from ARO and from the distribution of earnings from ARO.
The long-term notes receivable,Notes Receivable from ARO, which are governed by the laws of Saudi Arabia, mature induring 2027 and 2028. In the event that ARO is unable to repay these notesthe Notes Receivable from ARO when they become due, we would require the prior consent of our joint venture partner to enforce ARO’s payment obligations. In September 2022, we received a payment of $40.0 million from ARO representing a partial early repayment of the shareholder notes receivable.
The following table summarizes the maturity schedule of our notes receivableNotes Receivable from ARO as of September 30, 2022March 31, 2023 (in millions):
| | | | | |
| Maturity Date | Principal Amount |
| October 2027 | $ | 225.0 | |
| October 2028 | 177.7 | |
| |
| Total | $ | 402.7 | |
The distribution of earnings to the joint-venture partners is at the discretion of the ARO Boardboard of Managers,managers, consisting of 50/50 membership of managers appointed by Saudi Aramco and managers appointed by us, with approval required by both shareholders. The timing and amount of any cash distributions to the joint-venturejoint venture partners cannot be predicted with certainty and will be influenced by various factors, including the liquidity position and long-term capital requirements of ARO. ARO has not made a cash distribution of earnings to its partners since its formation.
See "Note 3 - Equity Method Investment in ARO" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information on our investment in ARO and notes receivableNotes Receivable from ARO.
Share Repurchase Program
In September 2022, our Boardboard of Directorsdirectors authorized a share repurchase program under which we may purchase up to $100$100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million. The share repurchase program does not have a fixed expiration, and may be modified, suspended or discontinued at any time. We are under no obligation to purchase any Common Shares under the share repurchase program. Common Shares may be repurchased under the repurchase program in open market purchases, private-negotiated purchases, through block trades, by effecting a tender offer, by way of accelerated share repurchase transactions or other derivative transactions, through the purchase of call options or the sale of put options, or otherwise, or by any combination of the foregoing. The manner, timing, pricing and amount of any repurchases will be subject to our discretion and may be based upon a number of factors, including market conditions, our earnings, capital requirements, financial conditions, available cash resources and competing uses for cash that may arise in the future, the Indenture's restrictions that govern the
First Lien Notes and other factors. We did not purchaserepurchase any Common Shares during the three months ended September 30, 2022March 31, 2023 under the repurchase program.program, but we expect to repurchase approximately $150.0 million of shares by the end of 2023.
Other Commitments
We have other commitments that we are contractually obligated to fulfill with cash under certain circumstances. As of September 30, 2022,March 31, 2023, we were contingently liable for an aggregate amount of $130.4$140.9 million under outstanding letters of credit which guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Obligations under these letters of credit are not normally called, as we typically comply with the underlying performance requirement. As of September 30, 2022,March 31, 2023, we had collateral deposits in the amount of $15.7$19.4 million with respect to these agreements.
In connection with our 50/50 unconsolidated joint venture, we have a potential obligation to fund ARO for newbuild jackup rigs. ARO has plans to purchase 20 newbuild jackup rigs over an approximate 10-year period. In January 2020, ARO ordered the first two newbuild jackups, each with a shipyard price of $176.0 million. Whileand the shipyard contract contemplated that these newbuild rigs would be delivered in 2022, we expect delivery of thethese rigs to be delayed intois expected in 2023. ARO is expected to place orders for two additional newbuild jackups in the near term. The joint venture partners intend for the newbuild jackup rigs to be financed out of available cash from ARO's operations and/or funds available from third-party debt financing. ARO paid a 25% down payment from cash on hand for each of the newbuilds ordered in January 2020 and is actively exploring financing options for remaining payments due upon delivery. In the event ARO has insufficient cash from operations or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, as delivered, on a proportionate basis. See "Note 3- Equity Method Investment in ARO" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information on ARO.
Tax Assessments
During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101101.0 million ($64.667.5 million converted at current period-end exchange rates) plus interest related to the examination of certain of our tax returns for the years 2011 through 2016. During the third quarter of 2019, we made a A$4242.0 million payment (approximately $29$29.0 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have a $16.5$17.7 million liability for unrecognized tax benefits relating to these assessments as of September 30, 2022.March 31, 2023. We believe our tax returns are materially correct as filed, and we are vigorously contesting these assessments. Although the outcome of such assessments and related administrative proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows.
SUPPLEMENTAL FINANCIAL INFORMATION
Guarantees of Registered Securities
The First Lien Notes issued by Valaris Limited have been fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by certain of the direct and indirect subsidiaries (the “Guarantors”) of Valaris Limited under the Indenture governing the First Lien Notes (the “Guarantees”). The First Lien Notes and Guarantees are secured by liens on the collateral, including, among other things, subject to certain agreed security principles, (1) first-priority perfected liens on 100% of the equity interests of each restricted subsidiary directly owned by Valaris Limited or any Guarantor and (2) a first-priority perfected lien on substantially all assets of Valaris Limited and each Guarantor, in each case subject to certain exceptions and limitations (collectively, the “Collateral”). We are providing the following information about the Guarantors and the Collateral in compliance with Rules 13-01 and 13-02 of Regulation S-X.
First Lien Note Guarantees
The Guarantees are joint and several senior secured obligations of each Guarantor and rank equally in right of payment with existing and future senior indebtedness of such Guarantor and effectively senior to such Guarantor’s existing and future indebtedness (1) that is not secured by a lien on the Collateral securing the First Lien Notes, or (2) that is secured by a lien on the Collateral securing the First Lien Notes ranking junior to the liens securing the First Lien Notes. The Guarantees rank effectively junior to such Guarantor’s existing and future secured indebtedness (1) that is secured by a lien on the Collateral that is senior or prior to the lien securing the First Lien Notes, or (2) that is secured by liens on assets that are not part of the Collateral, to the extent of the value of such assets. The Guarantees rank equally with such Guarantor’s existing and future indebtedness that is secured by first-priority liens on the Collateral and senior in right of payment to any existing and future subordinated indebtedness of such Guarantor. The Guarantees are structurally subordinated to all existing and future indebtedness and other liabilities of any non-Guarantors, including trade payables (other than indebtedness and liabilities owed to such Guarantor).
Under the Indenture, a Guarantor may be automatically and unconditionally released and relieved of its obligations under its guarantee under certain circumstances, including: (1) in connection with any sale, transfer or other disposition (including by merger, consolidation, distribution, dividend or otherwise) of all or substantially all of the assets of such Guarantor to a person that is not the Company or a restricted subsidiary, if such sale, transfer or other disposition is conducted in accordance with the applicable terms of the Indenture, (2) in connection with any sale, transfer or other disposition (including by merger, consolidation, amalgamation, distribution, dividend or otherwise) of all of the capital stock of any Guarantor, if such sale, transfer or other disposition is conducted in accordance with the applicable terms of the Indenture, (3) upon our exercise of legal defeasance, covenant defeasance or discharge under the Indenture, (4) unless an event of default has occurred and is continuing, upon the dissolution or liquidation of a Guarantor in accordance with the Indenture, and (5) if such Guarantor is properly designated as an unrestricted subsidiary, in each case in accordance with the provisions of the Indenture.
We conduct our operations primarily through our subsidiaries. As a result, our ability to pay principal and interest on the First Lien Notes is dependent on the cash flow generated by our subsidiaries and their ability to make such cash available to us by dividend or otherwise. The Guarantors’ earnings will depend on their financial and operating performance, which will be affected by general economic, industry, financial, competitive, operating, legislative, regulatory and other factors beyond their control. Any payments of dividends, distributions, loans or advances to us by the Guarantors could also be subject to restrictions on dividends under applicable local law in the jurisdictions in which the Guarantors operate. In the event that we do not receive distributions from the Guarantors, or to the extent that the earnings from, or other available assets of, the Guarantors are insufficient, we may be unable to make payments on the First Lien Notes.
Pledged Securities of Affiliates
Pursuant to the terms of the First Lien Notes collateral documents, the Collateral Agent under the Indenture may pursue remedies, or pursue foreclosure proceedings on the Collateral (including the equity of the Guarantors and other direct subsidiaries of Valaris Limited and the Guarantors), following an event of default under the Indenture. The Collateral Agent’s ability to exercise such remedies is limited by the intercreditor agreement for so long as any priority lien debt is outstanding.
The assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in Valaris Limited's consolidated financial statements, except with respect to (1) approximately $312 million of cash held at Valaris Limited, (2) approximately $220 million of short-term investments, and (3) the First Lien Notes and related accrued interest and interest expense. The value of the pledged equity is subject to fluctuations based on factors that include, among other things, general economic conditions and the ability to realize on the Collateral as part of a going concern and in an orderly fashion to available and willing buyers and outside of distressed circumstances. There is no trading market for the pledged equity interests.
Under the terms of the Indenture and the other documents governing the obligations with respect to the First Lien Notes (the “Notes Documents”), Valaris Limited and the Guarantors will be entitled to the release of the Collateral from the liens securing the First Lien Notes under one or more circumstances, including (1) upon full and final payment of any such obligations; (2) to the extent that proceeds continue to constitute Collateral, in the event that Collateral is sold, transferred, disbursed or otherwise disposed of in accordance with the Notes Documents; (3) upon our exercise of legal defeasance, covenant defeasance or discharge under the Indenture; (4) with respect to vessels, certain specified events permitting release of the mortgage with respect to such vessels under the Indenture; (5) with the consent of the requisite holders under the Indenture; (6) with respect to equity interests in restricted subsidiaries that incur permitted indebtedness, if such equity interests shall secure such other indebtedness and the same is permitted under the terms of the Indenture; and (7) as provided in the intercreditor agreement. The collateral agency agreement also provides for release of the Collateral from the liens securing the Notes under the above-described circumstances (but including additional requirements for release in relation to all of the documents governing the indebtedness that is secured by first-priority liens on the Collateral, in addition to the Indenture). Upon the release of any subsidiary from its guarantee, if any, in accordance with the terms of the Indenture, the lien on any pledged equity interests issued by such Guarantor and on any assets of such Guarantor will automatically terminate.
Summarized Financial Information
The summarized financial information below reflects the combined accounts of the Guarantors and Valaris Limited (collectively, the “Obligors”), for the dates and periods indicated. The financial information is presented on a combined basis and intercompany balances and transactions between entities in the Obligor group have been eliminated.
Summarized Balance Sheet Information:
| | | | | | | | | | | | | | |
| | | | |
| (in millions) | September 30, 2022 | | | December 31, 2021 |
| ASSETS | | | | |
| Current assets | $ | 1,284.2 | | | | $ | 1,147.4 | |
| Amounts due from non-guarantor subsidiaries, current | 621.7 | | | | 791.9 | |
| Amounts due from related party, current | 9.0 | | | | 13.1 | |
| Noncurrent assets | 1,048.8 | | | | 990.7 | |
| Amounts due from non-guarantor subsidiaries, noncurrent | 1,466.9 | | | | 1,469.7 | |
| LIABILITIES AND SHAREHOLDER'S EQUITY | | | | |
| Current liabilities | 432.6 | | | | 309.6 | |
| Amounts due to non-guarantor subsidiaries, current | 7.5 | | | | 55.3 | |
| Amounts due to related party, current | 36.3 | | | | 38.3 | |
| Long-term debt | 541.8 | | | | 545.3 | |
| Noncurrent liabilities | 454.1 | | | | 438.6 | |
| Amounts due to non-guarantor subsidiaries, noncurrent | 1,926.2 | | | | 1,921.6 | |
| Noncontrolling interest | 6.0 | | | | 2.6 | |
Summarized Statement of Operations Information:
| | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | |
| (in millions) | 2022 | | 2021 | | | |
| Operating revenues | $ | 400.0 | | | $ | 295.7 | | | | |
| Operating revenues from related party | 14.2 | | | 14.7 | | | | |
| Operating costs and expenses | 358.9 | | | 308.6 | | | | |
| Reorganization expense | (0.4) | | | (6.5) | | | | |
| Income (loss) from continuing operations | 40.9 | | | (74.9) | | | | |
| Net income attributable to noncontrolling interest | (3.4) | | | (1.7) | | | | |
| Net income (loss) | 37.5 | | | (76.6) | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| (in millions) | Nine Months Ended September 30, 2022 | | Five Months Ended September 30, 2021 | | | Four Months Ended April 30, 2021 |
| Operating revenues | $ | 1,076.7 | | | $ | 515.6 | | | | $ | 388.8 | |
| Operating revenues from related party | 44.0 | | | 25.5 | | | | 23.1 | |
| Operating costs and expenses | 1,128.2 | | | 503.6 | | | | 1,272.9 | |
| Reorganization expense | (2.1) | | | (10.6) | | | | (3,584.1) | |
| Income (loss) from continuing operations | 58.3 | | | 99.5 | | | | (4,343.4) | |
| Net income attributable to noncontrolling interest | (3.4) | | | (3.8) | | | | (3.2) | |
| Net income (loss) | 54.9 | | | 95.7 | | | | (4,346.6) | |
MARKET RISK
Interest Rate Risk
Our outstanding debt at September 30, 2022March 31, 2023 consisted of our $550$550.0 million aggregate principal amount of First Lien Notes. We are subject to interest rate risk on our fixed-interest rate borrowings. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to changes in market interest rates impacting the fair value of the debt.
Our long-term notes receivableNotes Receivable from ARO bear interest based on a one-year LIBOR rate, set as of the end of the year prior to the year applicable, plus two percent. As the notesNotes Receivable from ARO bear interest on the LIBOR rate determined at the end of the preceding year, the rate governing our interest income in 20222023 has already been determined. A hypothetical 1% decrease to LIBOR would decrease interest income for the year ended December 31, 20222023 by $4.0 million based on the principal amount outstanding at September 30, 2022March 31, 2023 of $402.7 million.
Foreign Currency Risk
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. We are exposed to foreign currency exchange risk to the extent the amount of our monetary assets denominated in the foreign currency differs from our obligations in the foreign currency or revenue earned differs from costs incurred in the foreign currency. We do not currently hedge our foreign currency risk as our unsecured foreign currency credit lines were terminated in the second quarter of 2020 and our access to other foreign currency credit lines is limited.risk.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our significant accounting policies are included in Note 1 to our audited consolidated financial statements for the year ended December 31, 2021,2022, included in our annual report on Form 10-K filed with the SEC on February 22, 2022.21, 2023. These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our condensed consolidated financial statements.
We identify our critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and operating results and that require the most difficult, subjective and/or complex judgments regarding estimates in matters that are inherently uncertain. Our critical accounting policies are those related to property and equipment, impairment of property and equipment for the Predecessor, income taxes and pension and other post-retirement benefits. For a discussion of the critical accounting policies and estimates that we use in the preparation of our condensed consolidated financial statements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in Part II of our annual report on Form 10-K for the year ended December 31, 2021.2022.
New Accounting Pronouncements
See Note 1 - Unaudited Condensed Consolidated Financial Statements to our condensed consolidated financial statements included in "Item 1. Financial Statements" for information on new accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Information required under this Item 3. has been incorporated herein from "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures – We have established disclosure controls and procedures to ensure that the information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Boardboard of Directorsdirectors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of September 30, 2022,March 31, 2023, our management, with the participation of our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective.
Changes in Internal Controls – There have beenwere no material changes in our internal controlscontrol over financial reporting during the fiscal quarter ended September 30, 2022March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Matters
We are currently subject to pending notices of assessment relating to spills of drilling fluids, oil, brine, chemicals, grease or fuel from drilling rigs operating offshore Brazil from 2008 to 2019, pursuant to which the governmental authorities have assessed, or are anticipated to assess, fines. We have contested these notices and appealed certain adverse decisions and are awaiting decisions in these cases. Although we do not expect final disposition of these assessments to have a material adverse effect on our financial position, operating results and cash flows, there can be no assurance as to the ultimate outcome of these assessments. A $0.5 million liability related to these matters was included in Accrued liabilities and other on our Condensed Consolidated Balance Sheet as of September 30, 2022March 31, 2023 included in "Item 1. Financial Statements."
Other Matters
In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results or cash flows.
Item 1A. Risk Factors
There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to the risk factor discussed below and other information presented in this quarterly report, you should carefully read and consider "Item 1A. Risk Factors" in Part I and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our annual report on Form 10-K for the year ended December 31, 2021,2022, which contains descriptions of significant risks that may cause our actual results of operations in future periods to differ materially from those currently anticipated or expected.
The agreements governing our debt, including the Indenture and the Credit Agreement, contain various covenants that impose restrictions on us and certain of our subsidiaries that may affect our ability to operate our business and to make payments on our debt.
The Indenture, the Credit Agreement and the agreements governing our other indebtedness contain covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:
•incur additional debt and issue preferred stock;
•incur or create liens;
•redeem and/or prepay certain debt;
•pay dividends on our shares or repurchase shares;
•make certain investments;
•engage in specified sales of assets;
•enter into transactions with affiliates; and
•engage in consolidation, mergers and acquisitions.
In addition, the Credit Agreement contains financial covenants requiring us to maintain (i) a minimum book value of equity to total assets ratio, (ii) a minimum interest coverage ratio and (iii) a minimum amount of liquidity. Any future indebtedness may also require us to comply with similar or other covenants.
These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In September 2022, our Boardboard of Directorsdirectors authorized a share repurchase program under which we may purchase up to $100$100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million. The share repurchase program does not have a fixed expiration, and may be modified, suspended or discontinued at any time. As of September 30, 2022, there have been no share repurchasesWe did not repurchase any Common Shares during the three months ended March 31, 2023 under the share repurchase program.
Item 6. Exhibits
| | | | | | | | | | | |
| Exhibit Number | | Exhibit | |
| | | |
| 4.1 | | Fourth Supplemental Indenture, dated AugustApril 19, 2022,2023, among Valaris Limited, Valaris Finance Company LLC, the guarantors party thereto and Wilmington Savings Fund Society, FSB, as trustee and first lien collateral agent (incorporated(including the form of Second Lien Note attached thereto) (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filled on August 22, 2022,April 19, 2023, File No, 1-8097). | |
| +*10.1 | | | |
| +*10.2 | | | |
*22.110.3 | | List of Guarantor SubsidiariesCredit Agreement, dated April 3, 2023, among Valaris Limited, Citibank, N.A., as administrative agent, Wilmington Savings Fund Society, FSB, as collateral trustee, the issuing banks party thereto and AffiliateCitibank, N.A., Deutsche Bank Securities PledgedInc. and DNB Markets, Inc., as joint lead arrangers and lead bookrunners. | |
| 10.4 | | Collateral Trust Agreement, dated April 19, 2023, by and among Valaris Limited, Valaris Finance Company LLC, the guarantors party thereto and Wilmington Savings Fund Society, FSB, as trustee and collateral agent (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filled on April 19, 2023, File No, 1-8097). | |
| | | |
| *31.1 | | | |
| *31.2 | | | |
| **32.1 | | | |
| **32.2 | | | |
| *101.INS | | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| *101.SCH | | Inline XBRL Taxonomy Extension Schema Document | |
| *101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| *101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| *101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| *101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| *104 | | The cover page of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022,March 31, 2023, formatted in Inline XBRL (included with Exhibit 101 attachments). | |
* Filed herewith.
** Furnished herewith.
+ Management contract or compensatory plan and arrangement required to be filed as an exhibit pursuant to Item 6 of this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | Valaris Limited |
| | | | |
| | | | |
| Date: | November 1, 2022May 2, 2023 | | /s/ CHRISTOPHER T. WEBER |
| | | Christopher T. Weber
Senior Vice President and Chief Financial Officer
(principal financial officer) |
| | | |
| | | /s/ COLLEEN W. GRABLE |
| | | Colleen W. Grable
Vice President and Controller
(principal accounting officer) |