UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

FORM 10-Q

(Mark One)

OR

As of April 28, 2022,27, 2023, there were 75,001,107 common shares75,181,200 Common Shares of the registrant issued and outstanding.

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 effect, impact, potential duration and other implications of the ongoing COVID-19 pandemic; impact of our emergence from bankruptcy; 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 impacts and effects of 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:

 

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 months ended March 31, 20222023 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 21, 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 Form 10-K for the year ended December 31, 2021, filed with the SEC on February 22, 2022,Annual Report for the discussion of our significant accounting policies. Certain previously reported amounts have been reclassified to conform to the current year presentation.

New Accounting Pronouncements

AccountingRecently adopted accounting pronouncements to be adopted

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.

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.

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 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.

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 $37.2$53.8 million and $31.4$57.3 million as of March 31, 20222023 and December 31, 2021,2022, respectively. For the Successor, duringDuring the three months ended March 31, 2023 and 2022, amortization of such costs totaled $20.0 million and $11.7 million. For the Predecessor, during the three months ended March 31, 2021, amortization of such costs totaled $5.8 million.million, respectively.

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 $7.6$19.2 million and $3.3$16.2 million as of March 31, 20222023 and December 31, 2021,2022, respectively. For the Successor, duringDuring the three months ended March 31, 2023 and 2022, amortization of such costs totaled $2.7 million and $0.3 million. For the Predecessor, during the three months ended March 31, 2021, amortization of such costs totaled $2.6 million.million, respectively.

    

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 March 31, 2022,2023, ARO owns 7seven jackup rigs, has ordered 2two newbuild jackup rigs, and leases 8eight rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. At March 31, 2022, all of the leased rigs were operating under three-year drilling contracts, or related extensions, with Saudi Aramco. The 7 rigs owned by ARO are currently operating under contracts with Saudi Aramco for an aggregate 15 years provided that the rigs meet the technical and operational requirements of Saudi Aramco.

The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the 7 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):

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 areis combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):

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):

The notes receivable were adjusted to fair value asprincipal amount and discount of the Effective Date by recording a discount to the principal amount of $442.7 million. The discount is being amortized using the effective interest method to interest income over the remaining terms of the notes.As of March 31, 2022 and December 31, 2021, the carrying amount of the long-term notes receivableNotes Receivable from ARO was $256.8 million and $249.1 million, respectively. 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. During the three months ended March 31, 2022 (Successor), interest income totaled $10.5 million of which $7.7 million pertains to non-cash amortization of the discount on the shareholder notes. During the three months ended March 31, 2021 (Predecessor), interest income totaled $2.6 million. As of March 31, 2022, ourwere as follows (in millions):

The carrying values and estimated fair values of certain of our long-term debt instrumentfinancial instruments were as follows (in millions):

The estimated fair values of our cash and cash equivalents, restricted cash, accounts receivable and trade payables approximated their carrying values as of March 31, 20222023 and December 31, 2021.2022.

Property and equipment consisted of the following (in millions):

In April 2023, VALARIS 6754 was sold during the three months ended March 31, 2022 (Successor) resulting in a pre-tax gain of $2.0 million, which is included in Other, net on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 (Successor).

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 costincome were as follows (in millions):

Basic incomeearnings (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 awardsawards.

The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the Predecessor includes the effect of all potentially dilutive stock options and excludes non-vested shares. For the Successor, during the three months ended March 31, 2023 and 2022 (in millions):

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, 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. Additionally, for the Predecessor, during the three months ended March 31, 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.

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 sharesCommon Shares in an aggregate principal amount of $550.0 million.

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: (i) 8.25% per annum, payable in cash; (ii) 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 (iii) 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.

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 to be declared due and payable immediately.as described above.

On April 3, 2023, the Company entered into a senior secured revolving credit agreement (the “Credit Agreement”). The Company incurred $5.2Credit Agreement provides for commitments permitting borrowings of up to $375.0 million in issuance costs in association with(which may be increased, subject to the First Lien Notes that are being amortized into interest expense oversatisfaction of certain conditions and the expected lifeagreement of lenders to provide such additional commitments, by an additional $200.0 million pursuant to the terms of the notes usingCredit Agreement) and includes a $150.0 million sublimit for the effective interest method.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 borrowed on April 19, 2023.