Valaris plc Reports First Quarter 2020 Results

Source: www.gulfoilandgas.com 4/29/2020, Location: Europe

Valaris plc reported a net loss attributable to the Company of $3.01 billion, or $15.19 per share, for first quarter 2020 compared to a net loss of $216 million, or $1.09 per share, in fourth quarter 2019. The Company reported adjusted EBITDA of ($40) million in first quarter 2020 compared to $22 million in fourth quarter 2019, and an adjusted loss of $1.66 per share in first quarter 2020 versus an adjusted loss of $1.55 per share in the prior quarter.

Chief Executive Officer and President Tom Burke said, "In the COVID-19 pandemic and corresponding economic crisis, the energy sector is facing a severe industry downturn caused by lower energy demand and a simultaneous increase in hydrocarbon supply. In response to these market conditions including lower oil prices, customers for offshore drilling services have significantly reduced their planned capital expenditures and are seeking to cancel or defer projects, which has led to terminations or renegotiations of existing contracts. The combination of these factors negatively impacted our first quarter 2020 financial results, and we expect to continue to report losses and negative cash flows throughout the remainder of the year."

Burke concluded, "In light of these challenges, we are taking further steps to manage our cost base and preserve liquidity. We expect to stack certain uncontracted rigs and remove others from our fleet, including three drillships and four semisubmersibles. We are executing plans that will lower operating costs for contracted rigs, rightsize our onshore organization for anticipated lower levels of fleet utilization, and improve our working capital management. We are also evaluating various alternatives to address our capital structure and annual interest costs, including, without limitation, a comprehensive debt restructuring that may require a substantial conversion of our indebtedness to equity."

First Quarter Results
Revenues declined to $457 million in first quarter 2020 from $512 million in fourth quarter 2019 primarily due to a two percentage point decline in fleet utilization to 59% from 61% in the prior quarter. The sale of VALARIS 6002, which operated in fourth quarter 2019 and was subsequently sold, also contributed to the sequential quarter revenue decline.

Contract drilling expense declined to $476 million in first quarter 2020 from $477 million in the prior quarter. Adjusted for merger transaction costs, contract drilling expense was $472 million compared to $465 million in the prior quarter, with the quarter-to-quarter increase due mostly to increased repair and maintenance costs for VALARIS DS-8 following a previously disclosed non-drilling incident.

First quarter 2020 results included a non-cash asset impairment charge of $2.81 billion related to three drillships, three semisubmersibles, and seven jackups. Fourth quarter 2019 results included a $13 million impairment charge primarily related to VALARIS JU-70.

Depreciation expense of $165 million in first quarter 2020 was in line with the prior quarter. General and administrative expense increased to $53 million from $42 million in the prior quarter, mostly due to higher merger transaction costs and professional fees to resolve a shareholder matter. First quarter 2020 general and administrative expense included $18 million of merger transaction and integration costs, compared to $8 million in the prior quarter, and $9 million of fees associated with resolving a shareholder matter, compared to $4 million in the prior quarter. Excluding these items, general and administrative expense was $26 million compared to $30 million in fourth quarter 2019.

Other expense of $108 million in first quarter 2020 compared to other income of $42 million in the prior quarter. Fourth quarter 2019 other income included a $200 million payment received to settle a legal dispute, which was partially offset by $20 million of other expense associated with a dispute with a legacy company partner and a $23 million loss from an adjustment to the bargain purchase gain related to the merger of legacy companies. Adjusted for these items, other expense of $108 million in first quarter 2020 was lower than other expense of $115 million in the prior quarter primarily due to a foreign currency gain and a gain on debt repurchases.

Tax benefit of $152 million in first quarter 2020 compared to tax expense of $63 million in the prior quarter. The first quarter 2020 tax provision included $164 million of discrete tax benefit mostly due to the release of certain accrued liabilities for uncertain tax positions and the recently completed internal reorganization, compared to $21 million of discrete tax expense in fourth quarter 2019. Adjusted for discrete items, tax expense of $12 million declined from $42 million in the prior quarter due to lower operating results.

Segment Highlights

Floaters
Floater revenues declined to $180 million in first quarter 2020 from $216 million in the prior quarter. The sequential quarter decline was primarily due to the sale of VALARIS 6002, as noted above, along with unplanned operational downtime on VALARIS DS-8. Average day rates declined to $196,000 from $205,000 in the prior quarter, and utilization declined by four percentage points to 38%. Adjusted for uncontracted rigs and planned downtime, operational utilization was 86% compared to 97% in the prior quarter.

Contract drilling expense declined to $214 million in first quarter 2020 from $217 million in fourth quarter 2019 primarily due to the sale of VALARIS 6002, which was partially offset by increased repair and maintenance costs for VALARIS DS-8. First quarter 2020 results included a non-cash asset impairment charge of $2.55 billion to adjust the book value of VALARIS DS-3, VALARIS DS-5, VALARIS DS-6, VALARIS 8500, VALARIS 8501, and VALARIS 8502 to salvage value as these rigs are expected to be retired from the global fleet.

Jackups
Jackup revenues decreased to $213 million in first quarter 2020 from $231 million in the prior quarter, primarily due to fewer operating days for several rigs that recently completed contracts. Utilization declined by two percentage points to 61%, while average day rates decreased to $81,000 from $83,000 in the prior quarter. Adjusted for uncontracted rigs and planned downtime, operational utilization was 98% compared to 99% in fourth quarter 2019.

Contract drilling expense decreased to $226 million in first quarter 2020 from $228 million in fourth quarter 2019 mostly due to lower costs resulting from fewer operating rig days, which were partially offset by higher costs for rigs undergoing shipyard projects in advance of new contracts. First quarter 2020 results included a non-cash asset impairment charge of $254 million related to VALARIS JU-71, VALARIS JU-75, VALARIS JU-87, VALARIS JU-100, VALARIS JU-104, VALARIS JU-105, and VALARIS JU-109.

ARO Drilling
ARO Drilling is a non-consolidated joint venture between Valaris and Saudi Aramco to own, manage and operate drilling rigs. Revenues declined to $140 million in first quarter 2020 from $148 million in the prior quarter and contract drilling expense of $108 million was in line in with the prior quarter. General and administrative expense of $8 million declined from $13 million in the prior quarter. Valaris accounts for its 50% interest in ARO Drilling using the equity method of accounting and only recognizes its portion of ARO Drilling's net income, which is included in equity earnings of ARO Drilling in our consolidated statements of operations. Valaris recognized a loss of $6 million in first quarter 2020 compared to a loss of $10 million in fourth quarter 2019, inclusive of the effect of acquisition accounting and the resulting amortization of basis differences that arose from the fair value adjustment of our investment in ARO Drilling.

Other
Revenues of $64 million were slightly lower than the prior quarter due to an adjustment to full-year transition services provided to ARO Drilling that was recognized in fourth quarter 2019, which was partially offset by higher reimbursable revenues during first quarter 2020. First quarter 2020 revenues included $21 million of ARO Drilling leased revenue, $22 million of ARO Drilling reimbursables, and $21 million for managed rigs. Contract drilling expense increased to $36 million in first quarter 2020 from $32 million in fourth quarter 2019 mostly due to higher reimbursable expenses.


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