Valaris Ltd Q2 FY2022 Earnings Call

Good day and welcome to the Valaris Second Quarter 2022 Earnings Call. Please note that this event is being recorded. I would now like to turn the conference over to Tim Richardson, Director of Investor Relations. Please go ahead, sir.

Welcome, everyone, to the Valaris Second Quarter 2022 Conference Call. With me today are President and CEO, Anton Dibowitz; Interim CFO and Vice President, Investor Relations and Treasurer, Darin Gibbins and other members of our executive management team. We issued our press release, which is available on our website valaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations. As a reminder, last week we issued our most recent Fleet Status Report which provides details on contracts across our rig fleet. An updated investor presentation and our drilling presentation will be available on our website after the call. Now, I’ll turn the call over to Anton Dibowitz, President and Chief Executive Officer.

Thanks, Tim, and good morning and afternoon to everyone. Thank you for your interest in Valaris. During today's call, I will start by providing an overview of our operational and financial performance during the quarter. I will then provide an update on the outlook for the offshore drilling market, highlight some of our recent contract awards and discuss our strategy for maximizing shareholder value during the unfolding industry upcycle. After that, I'll hand the call over to Darin to discuss our financial results and guidance. As always, our primary focus is on delivering safe, reliable and efficient operations to our customers. We celebrated notable safety achievements during the quarter, with several rigs reaching recordable-free milestones, including jackup VALARIS 76, which has not had a recordable incident in 4 years. This is a fantastic accomplishment, and I congratulate the crews of the VALARIS 76 and support teams on their dedication to working safely. In terms of operational efficiency, we continue our demonstrated track record of delivering strong performance to our customers, achieving 97% revenue efficiency during the quarter and 98% during the first half of the year. This is particularly impressive given the commencement of new contracts for several rigs during the first half of the year, allowing for reactivations and shipyard projects. Our operating and safety performance can be adversely impacted during periods of increasing activity with rig reactivations and contract startups, but we remain committed to maintaining our high levels of performance by adhering to our safe systems of work and continuing to develop the expertise of our people. We've implemented additional onboarding programs, including a new hire training program in the U.S. Gulf that utilizes one of our stacked rigs to introduce new personnel, especially those who are new to the industry, to the offshore working and living environment. Training and assessing foundational operational and safety protocols in an immersive offshore environment will help to better prepare these new employees for deployment onboard our working rigs. These types of measures are particularly important given the ongoing and expected future increases in activity levels in the industry. As we stated previously, the first half of 2022 was a transitional period for us as we incurred reactivation costs for 3 drillships and 1 semisubmersible back to work on multiyear contracts that were secured last year. I'm proud of the entire Valaris team for successfully executing these major reactivations concurrently, particularly considering the many challenges faced over the past year. These 4 rigs have now returned to work largely on time and within our prior reactivation cost guidance for these projects and will contribute to a meaningful increase in earnings in future periods. Turning now to the market. Despite the recent volatility in equity prices across the energy sector, the fundamental outlook for our industry remains highly constructive. The lack of investment in new sources of production over the past several years has contributed to a tight supply picture that has been exacerbated by geopolitical instability and an increased focus on energy security. Against this backdrop, spot Brent crude prices have been above $100 per barrel for most of the past 5 months, and medium- and longer-term commodity prices remain constructive for investment in offshore projects. Two-year forward Brent crude prices are currently above $80 per barrel and 5-year forward prices are above $70 per barrel, levels at which almost all undeveloped offshore resources are expected to be profitable. As a result of the supportive commodity price environment, offshore upstream CapEx is expected to see double-digit growth over the next couple of years. Additionally, offshore project sanctioning is anticipated to increase meaningfully over the same period, with more FIDs expected in 2022 and 2023 than any other year since the start of the industry downturn in 2014, according to industry research. The constructive macro environment and increased upstream spending have led to an increase in both contracting and tendering activity across both floater and jackup markets. On a trailing 12-month basis, rig years awarded for benign environment floaters are approximately 75% higher than the previous 12 months, and rig years of open demand at tender or pretender stage as of the quarter-end were approximately 65% and 40% higher than 6 months ago and 12 months ago, respectively. A meaningful portion of this increase is attributable to the large Petrobras tender for up to 8 rigs for long-term work offshore Brazil commencing in 2023. We anticipate that Brazil will be a significant driver of offshore demand over the next several years, and we are well positioned to benefit by adding a third rig to the strategic basin following our recent contract award for drillship Valaris DS-17. We continue to see a strong pipeline of tenders and inquiries from our customers in West Africa, where we have an excellent operating track record, with 3 drillships already operating in the region and a further 3 stacked drillships nearby in the Canary Islands. Finally, we also see several opportunities in the Gulf of Mexico, both on the U.S. and Mexican side of the Gulf, with the U.S. opportunities primarily requiring drillships, while the Mexican opportunities are well suited for our active semisubmersible in the region, Valaris DPS-5. It's worth noting that contracting lead times tend to be shorter, and therefore, demand visibility is lower in the U.S. Gulf compared to South America and West Africa, and we could see incremental demand appear quickly if the market remains strong. On the jackup side of the business, we have seen a notable increase in activity since the start of the year, primarily driven by increased demand in the Middle East. On a trailing 4-month basis, jackup rig years awarded are more than 70% higher than the previous 12 months. Furthermore, rig years of open demand at tender or pretender stage as of the quarter-end were approximately 10% and 30% higher than 6 months ago and 12 months ago, respectively. As a result, active utilization for jackups has increased to approximately 90%, and pricing and contract terms for modern benign environment jackups continue to improve. Recently, we were awarded a 4-year contract with Renishaw Petroleum for the VALARIS 115, which represents the largest backlog award for a benign environment jackup outside of the Middle East this year. We've also been awarded a 1-year extension with BP Offshore, Indonesia for VALARIS 106 and several shorter-term contracts for VALARIS 107 offshore Australia and VALARIS 144 in the U.S. Gulf, demonstrating the global nature of the recent pickup in activity. While the benign environment jackup market has improved meaningfully this year, we continue to see near-term softness in the harsh environment jackup market. We expect that this will continue into next year, and we may see some rigs go idle later this year as we enter the seasonally weaker winter months and rigs complete their current programs. However, we anticipate that an increase in project sanctioning expected offshore Norway later this year and a strong pipeline of activity in the U.K. North Sea for work commencing in mid-2023 and beyond will help to better balance the harsh environment jackup market in future years. Moving now to our fleet strategy. In 2021, we set out to build our contract backlog by reactivating our high-quality stacked rigs for long-term contracts at attractive economics. We achieved this goal by winning contracts for 4 of our preservation stacked floaters which have all now been reactivated and returned to work largely on time and within our reactivation cost guidance range on average. Having secured this backlog and given greater demand for our high-quality rigs, we increased our hurdle rates for future investments and will remain disciplined in only returning additional stacked rigs to the active fleet for opportunities that provide meaningful returns, such as our recent contract award for VALARIS DS-17. This 540-day contract with Equinor offshore Brazil has a total contract value of approximately $327 million, including an $86 million upfront payment to cover mobilization, capital upgrades and contributions towards our reactivation costs. We have proven our ability to win work and reactivate our preservation stacked assets, and we still have 11 high-quality modern assets remaining, including 3 uncontracted high-spec drillships VALARIS DS-7, DS-8 and DS-11. These rigs are well suited for many of the attractive opportunities we see in the market today, but we will remain disciplined in exercising our operational leverage. It is also worth noting that we have options to take delivery of newbuild drillships, VALARIS DS-13 and DS-14 by year-end 2023, at shipyard prices of approximately $119 million and $218 million, respectively, providing further operational leverage to the fluid market. Scale is beneficial for a driller as it allows onshore support costs to be spread over our larger fleet. Adding VALARIS DS-17 in Brazil will provide critical mass of 3 active floaters at each point of the Golden Triangle and is part of our strategy to focus our efforts on those basins that are expected to drive significant shares of future demand. We continue to regularly assess our fleet for retirement and divestiture candidates. During the quarter, we recorded a gain on asset sales of $135 million, primarily related to the sale of jackups VALARIS 113 and 114, which have been stacked for more than 6 years for a combined $125 million. We will continue to evaluate our fleet, whether for acquisitions or divestitures for opportunities to create shareholder value. Another source of shareholder value is ARO Drilling, our unconsolidated 50-50 joint venture with Saudi Aramco that owns and operates jackup drilling rigs in Saudi Arabia. Saudi Arabia is the largest market for jackup rigs in the world, with approximately 75 rigs either under contract or contracted for future work. This number is expected to increase to more than 90 after the completion of ongoing tenders, representing approximately 1 in 4 benign environment jack-ups currently contracted worldwide. We remain highly focused on highlighting the significant value inherent in ARO, and we have potential catalysts approaching with newbuild rigs 1 and 2 scheduled to be delivered in the first half of next year and orders for newbuild rigs 3 and 4 expected to be placed later this year. As a reminder, each of the new builds will be backed by an initial 8-year contract with Saudi Aramco at a day rate set to achieve a 6-year EBITDA payback on the total price of the rig. Following the initial contract, each new build will be contracted for at least 8 more years in aggregate, with pricing set every 3 years, utilizing a market pricing mechanism. Given the economics of the initial contracts, the new build rigs are expected to be financed by third-party financing and cash from ARO operations. ARO continues to actively explore financing options and expects financing to be secured prior to delivery of the first 2 new builds. We do not expect that either Valaris or Aramco will need to provide any additional financing to ARO to fund the newbuild program. Further information on ARO can be found in a separate investor presentation on the Valaris website. I'll conclude my remarks by reiterating some of the key points. First, we remain focused on extending our demonstrated track record of delivering safe and efficient operations to our customers and are taking additional steps to maintain our high standards of safety and operating performance in light of increasing activity. Second, the fundamental outlook for our industry remains highly constructive, as evidenced by increases in contracting and tendering activity across both floaters and jackups. And third, we have proven our ability to contract and effectively reactivate our high-quality stack rigs. We retain significant operational leverage to the improving market and will continue to reactivate further rigs for opportunities that provide meaningful returns on investment, such as the recently announced contract for VALARIS DS-17. In summary, Valaris is well positioned to capitalize on opportunities that arise during an industry upcycle. The Valaris management team and Board are highly focused on maximizing earnings and driving meaningful free cash flow by following our strategy of being value-driven, focused, and responsible in our decision-making. We'll now hand the call over to Darin to take you through the financials.

Thanks, Anton and good morning and afternoon, everyone. In my prepared remarks today, I will provide an overview of second quarter results, our outlook for the third quarter and updated guidance for full year '22, and then briefly review our financial position. I would also highlight our second quarter results press release which includes our trailing 5 quarters analysis for the income statement, balance sheet and cash flows, as well as various supplemental data. Additionally, we published an updated fleet status report last week and recently began disclosing individual contract day rates and other forms of compensation. We will continue to publish day rate and other compensation information for all contracts and contract extensions on a go-forward basis where contractually allowed. As Anton mentioned earlier, the return of 4 reactivated floaters to the active fleet is expected to significantly improve our financial results in future periods, and we were pleased to announce a fifth contract for one of our preservation stacked floaters, VALARIS DS-17, in early July. As mentioned on our first quarter conference call, reactivation costs for the 4 floaters reactivated to date are expected to average $40 million to $45 million per rig. This includes all costs to reactivate the rigs that do not include mobilization costs or costs for contract or region-specific upgrades for which we would generally expect to be compensated. We anticipate that future floater reactivations, including VALARIS DS-17, will be in the range of $65 million to $75 million on average. This estimate is higher than our reactivations to date, due largely to inflation, both in personnel and goods and services related, as well as the need for additional spare parts following the 4 reactivations already completed. Additionally, global supply chain issues are extending the time required to reactivate a floater to approximately 12 months versus 9 months previously, which is also contributing to an increase in expected reactivation costs. However, given the improving market and lack of available supply, the economics of returning a preservation stacked rig to work are meaningfully improved, as evidenced by the DS-17 contract which has a total contract value of $327 million, including $86 million prior to contract commencement to cover mobilization and capital upgrades, as well as a portion of the reactivation costs. The initial contract alone on the DS-17 is expected to provide a meaningful return on our net reactivation spend, and we will continue to seek further attractive opportunities to return our 3 remaining uncontracted drillships, VALARIS DS-7, DS-8, and DS-11, to the active fleet. As a reminder, the majority of reactivation costs are recognized in our income statement, with the remainder recognized as capital expenditures. As we have done previously, we have presented our results on both an EBITDA and EBITDAR basis, as we believe reactivation expenses should be treated like growth capital expenditures, with the income statement portion acted out of EBITDA when analyzing our results. Moving now to the second quarter results, adjusted EBITDA in the second quarter was $29 million compared to negative $31 million in the prior quarter. Adjusted EBITDAR, adding back onetime reactivation costs, was $54 million compared to $31 million in the prior quarter. While adjusted EBITDA for the second quarter was slightly higher than our prior guidance of approximately $25 million, there were a few large one-off items that impacted our second quarter results that I will discuss shortly. Revenues for the second quarter were $413 million compared to $318 million in the prior quarter. Excluding reimbursable items, revenues increased to $385 million from $291 million primarily due to a $51 million fee related to the termination of the VALARIS DS-11 contract, as well as higher utilization and average day rates for both the floater and jackup fleets. Aside from the DS-11 termination fee, floater revenues increased due to VALARIS DPS-1 and DS-16 returning to work following reactivation projects, and VALARIS DPS-5 returning to work following a special periodic survey. This was partially offset by idle time between contracts for VALARIS MS-1 and mobilization time for Valaris DS-12 which moved from its previous contract offshore Angola to its current operating location offshore Mauritania and Senegal in April. Jackup revenues increased primarily due to more operating days for VALARIS 249, which commenced a contract offshore New Zealand during the first quarter. This was partially offset by VALARIS 141 rolling off contract in April prior to the commencement of a 3-year airboat charter agreement with ARO Drilling that is expected to begin later this month. Contract drilling expense for the second quarter was $362 million compared to $331 million in the prior quarter. Excluding reimbursable items, contract drilling expense increased to $334 million from $305 million, primarily due to more operating days for the floater fleet, increased costs related to certain claims, and costs associated with the VALARIS DS-11 contract termination. This was partially offset by lower rig reactivation costs which decreased to $24 million in the second quarter from $61 million in the first quarter as reactivated rigs returned to work. As of quarter end, we increased our accrual with respect to certain litigation claims by approximately $25 million to reflect the change in the projected value of these claims against us. We also incurred one-time costs due to the termination of the VALARIS DS-11 contract and recognized an impairment charge of $35 million related to capital expenditures incurred to date on the DS-11 upgrade project. Moving to our store base costs, general and administrative expense of $19 million was in line with the prior quarter, and onshore support costs, which are included within contract drilling expense in the income statement, increased slightly to $30 million from $29 million. The sum of these two categories provides our total onshore support costs which increased modestly to $49 million in the second quarter from $48 million in the prior quarter. Depreciation expense decreased marginally to $22 million from $23 million in the prior quarter. Other income increased to $149 million in the second quarter from $9 million in the prior quarter. Second quarter other income included a gain on the sale of assets of $135 million, primarily related to the sale of jackups VALARIS 113, 114, and 36, as well as additional proceeds received in the second quarter on the sale of a rig in a prior year compared to a $2 million gain on the sale of assets related to the sale of jackup VALARIS 67 in the prior quarter. Tax expense was $20 million in the second quarter compared to a tax benefit of $1 million in the first quarter. The second quarter tax provision included $6 million of discrete tax expense primarily related to income from the DS-11 contract termination. The first quarter tax provision included a $15 million discrete tax benefit primarily related to a reduction in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Adjusted for discrete items, tax expense of $14 million in the second quarter was in line with the first quarter. By way of an update, we still expect to receive a tax refund of $97 million related to the CARES Act, though the timing of this receipt remains uncertain. Moving now to our third quarter 2022 outlook. We expect total revenues will be in the range of $430 million to $440 million as compared to $413 million in the second quarter. Third quarter revenues are anticipated to benefit from a full quarter of revenue for reactivated rigs, Valaris DPS-1 and DS-16, and a partial quarter for VALARIS DS-4 and DS-9, which commenced their contracts in July with Exxon offshore Angola and Petrobras offshore Brazil, respectively. As a result of these contract start-ups, total and active utilization for the floater fleet is anticipated to increase meaningfully in the third quarter and beyond. We anticipate that third quarter contract drilling expense will be in the range of $335 million to $345 million as compared to $362 million in the second quarter, including approximately $31 million of onshore support costs. The expected decrease is primarily driven by one-time costs incurred in the second quarter and lower reactivation costs, which are anticipated to be partially offset by higher operating costs reflecting higher activity levels, particularly for the floater fleet. Finally, third quarter general and administrative expense is expected to be $21 million to $23 million compared to $19 million in the prior quarter. Adjusted EBITDA for the third quarter is expected to be $70 million to $75 million compared to $29 million in the second quarter, and adjusted EBITDAR is expected to be $80 million to $85 million compared to $54 million in the second quarter. Reactivation costs in the third quarter relate primarily to the beginning of the DS-17 reactivation project. Moving now to capital expenditures. Second quarter CapEx was $61 million, of which $15 million was maintenance CapEx and $46 million related to enhancements and upgrades. Enhancements and upgrades include $8 million of reactivation costs and $38 million of contract or region-specific upgrades, including $22 million for Valaris DS-11, which was impaired following the contract termination. Third quarter CapEx is expected to be $50 million to $55 million, of which $25 million to $30 million is expected to be maintenance CapEx and the remainder is expected for enhancements and upgrades. The enhancements and upgrades are primarily related to the completion of the Valaris DS-4 and DS-9 reactivation projects. Moving now to full year 2022 guidance. Revenues are expected to be $1.57 billion to $1.6 billion. Contract drilling expense is anticipated to be $1.35 billion to $1.38 billion, inclusive of $105 million to $110 million of reactivation expense, approximately $20 million of which is anticipated in the second half of the year, primarily related to the reactivation of Valaris DS-17. We continue to estimate G&A expense of $80 million to $85 million, which combined with $120 million to $125 million of support costs included within contract drilling expense, provides total onshore support costs of approximately $200 million to $210 million in 2022, unchanged from our prior guidance. The sum of these items provides adjusted EBITDA of $130 million to $150 million and adjusted EBITDAR of $240 million to $260 million for full year 2022. Adjusted EBITDA for the second half of the year is expected to be $135 million to $155 million as compared to negative $2 million in the first half, and adjusted EBITDAR for the second half of the year is expected to be $155 million to $175 million as compared to $84 million in the first half. Administrating the expected improvement in financial performance in the second half of the year and beyond, following a transitional period in which we incurred reactivation costs to put several rigs back to work. Our 2022 adjusted EBITDA guidance is lower than our prior guidance of $160 million to $190 million, primarily due to increased costs related to certain claims, reactivation costs for Valaris DS-17 which were not contemplated in our prior guidance, and delayed contract commencements, partially offset by the net impact of the Valaris DS-11 contract termination. In terms of our value drivers, our updated guidance translates to expected full year 2022 operating margin, exclusive of onshore support and G&A expense of $300 million to $320 million for the active fleet, and $410 million to $430 million when adjusting for one-time reactivation costs of $105 million to $110 million. Operating margin for our leased and managed rigs is expected to be $75 million to $80 million, and we expect carrying costs of approximately $45 million for this team. We expect that 2022 capital expenditures will be $200 million to $210 million, which is lower than our prior guidance of $225 million to $250 million, primarily due to the removal of any remaining CapEx for the Valaris DS-11 2000 upgrade following the contract termination, partially offset by CapEx for VALARIS DS-17 as we reactivate the rig for a contract that is expected to start in mid-2023. Capital expenditures for the second half of 2022 are expected to be $100 million to $110 million, including approximately $55 million to $60 million of maintenance CapEx and $45 million to $50 million of enhancements and upgrades. Enhancements and upgrades include remaining costs for reactivated drillships, Valaris DS-4, DS-9, and DS-16, as well as costs for VALARIS DS-17. We anticipate the capital upgrades exclusive of capitalized reactivation costs for Valaris DS-17 will total approximately $55 million. These upgrades will be fully reimbursed by the customer and include the addition of managed pressure drilling as well as upgrades to the choking kill line and riser tensioner equipment. Approximately $10 million is expected to be incurred in 2022, with the remainder in the first half of 2023. Our guidance continues to assume reactivations announced to date, but does not include any potential incremental reactivations for the rest of the stacked fleet. While second half 2022 CapEx is expected to be in the range of $100 million to $110 million, we anticipate receiving approximately $90 million in upfront payments from customers over the remainder of the year related to capital reimbursements and mobilization fees. To be clear, this is in addition to the $51 million termination fee received in July related to DS-11. As a reminder, these and any other upfront customer payments and the related revenues are not included in the contract backlog, average day rates or adjusted EBITDA reported in our quarterly filings. For some of our contracts, these represent a meaningful portion of the total contract value. While we anticipate that financial results will improve meaningfully in the second half of this year, there may still be some volatility in earnings over the next several quarters, depending on the timing of reactivation costs for Valaris DS-17, reactivation costs for any additional rigs we may reactivate and whether we find work for some of our harsh environment jack-up rigs that are set to roll off contract later this year. Now, I'll move to the second quarter results as well as the third quarter and full year 2022 outlook for ARO Drilling, our 50-50 joint venture with Saudi Aramco. ARO EBITDA increased to $31 million in the second quarter from $22 million in the prior quarter, primarily due to an increase in utilization in the second quarter. ARO's third quarter 2022 EBITDA is expected to decrease to $16 million to $18 million, primarily due to lower revenues as a result of out-of-service days related to planned maintenance for certain rigs and higher contract drilling expenses associated with this maintenance. ARO's full year 2022 EBITDA is expected to be in the range of $85 million to $95 million. Finally, I will provide a brief overview of our financial position. As of quarter end, we had cash and cash equivalents of $554 million, plus $24 million of restricted cash, representing a $31 million decrease during the quarter. This was primarily due to an increase in net working capital and $61 million of capital expenditures in the quarter. The increase in net working capital was due primarily to a ramp-up in operating activities and the $51 million DS-11 termination fee that was in accounts receivable at quarter end and subsequently collected in July. These were partially offset by $145 million of net proceeds from the sale of assets, primarily related to jackups VALARIS 113 and 114. In closing, we will continue to be highly disciplined in exercising our operational leverage by judiciously returning our high-quality stacked rigs to the active fleet only for opportunities that provide meaningful returns. Our recent contract award for Valaris DS-17 demonstrates the strength of contract economics for our high-quality rigs in the current market and provides a glimpse of the future earnings potential of the Valaris fleet. We remain focused on executing on our key priorities: first, winning additional backlog for the active fleet; and second, reactivating our high-quality stacked rigs for opportunities that provide meaningful returns. We will also look to act opportunistically to create shareholder value through M&A or additional asset transactions if they make sense, and we will maintain our focus on having an industry-leading cost structure and a strong balance sheet. By executing on these priorities, we will maximize earnings and drive meaningful free cash flow as the market recovers and employ a disciplined approach to capital allocation, including returns to shareholders when free cash flow generation supports them. We've now reached the end of our prepared remarks. Operator, please open the line for questions.

Our first question today will come from Greg Lewis with BTIG.

I wanted to discuss the three rigs that are set to come off contract in the spring of 2023. I have a couple of questions regarding them. First, do any of these rigs have existing options that would extend their work beyond that date? Additionally, considering these rigs are located in West Africa and Brazil, can you provide any insights on potential opportunities for them? Specifically, I'm interested in duration and while I don't expect you to disclose pricing, any information on how to think about these rigs given that they have been on contract for some time and rates have increased would be helpful.

Greg, that’s a good question. We are indeed discussing floaters. Specifically, we're referring to the drillships, particularly DS-15 in Brazil, which has some options available. Given the price and the activity levels in Brazil, we have high expectations that this rig will continue to work with Total. In West Africa, there are many intriguing opportunities as well. There's a robust pipeline of tenders emerging. Our main focus is to identify the right chance for those rigs to engage. There is certainly a lot of work available; it’s a favorable time for having rigs accessible in the market while balancing the right longer-term projects. Recent contracts we've observed indicate that the market for floating term fixtures is around the 18-month to 2-year range, with some extending to 3 and 4 years, particularly in Brazil. It may involve a mix of taking short-term jobs to connect to the right long-term prospects. While we would prefer to transition directly into the next long-term opportunity, we will have to observe how that unfolds. There is definite interest; these rigs are appealing, they possess an excellent operational history, and customers who utilize them are satisfied. We'll see how the market develops.

I would just quickly what I would add. We have started disclosing options in the fleet status report. So you can see both DS-10 and DS-15 do have options.

Yes. I wanted to ask about reactivations. Considering the lead times, which are upwards of 12 months, it seems that reactivations are likely being pushed into 2024. Have there been any discussions yet, either with Valaris or among industry peers, regarding rig operators talking to customers about potentially securing long-term contracts for work in 2024 and beyond? Could we expect announcements of reactivations in the next couple of quarters, or are we still in the early stages of this process?

No, I would say that we're having discussions about term contracts that include reactivation. Just for perspective, when we reactivated the 4 major reactivations last year, we were planning on the order of 9 months for those reactivations. And as I said in my prepared remarks, very proud of the team for actually delivering on time and on budget overall on those projects because this is an industry that's replete with horror stories when it comes to reactivating rigs. The one thing this organization does extremely well is deliver rigs and operational prowess to deliver those rigs back to the market. Right now, we're planning on about 12 months. That's what we're planning on for the DS-17, given longer lead times and supply chain challenges. But the opportunities that we're having discussions with customers, obviously, as you said, we have some short-term rigs rolling off during '23 and we're looking at those. But a number of the opportunities that we're bidding and tendering are all the way through '23. For example, if you look at where the Petrobras tenders are. A number of opportunities are being discussed for late '23 and moving into '24; so there's a range. I think our customers are well aware, based on our discussions with them, of the lead times that it is going to take to bring additional capacity back to market and they're planning accordingly.

And our next question will come from Fredrik Stene with Clarksons Platou Securities.

Congratulations on another quarter. My question relates to how we should think about your remaining stacked assets and also the 2 newbuilds that you have at the yard. I think maybe even more so, this is something that should be viewed in conjunction with what's going on in Brazil right now. Obviously, your comments are quite forward-leading in terms of how that region is going to contribute to demand going forward. So I was wondering if you could call it had any preferences around how you would build in these stacked assets and are you already looking at opportunities for those 2 rigs at the yard? If you are, do you have any idea of how long it would take them to get ready to drill before or after they’re delivered? And do you have any flexibility on that delivery date, etc.? Anything that you could kind of give me on that front would be super helpful.

Sure, Fredrik. No, thanks for the question. Look, our priority is always to make sure that we have a high degree of utilization on the active fleet to the question we just had, which is making sure we don't have significant gaps on rigs that are active on water, on the fleet and to roll those first. After that, we start looking at the stacked rigs which we've demonstrated the ability to bring back to market. So TSV, DS-8, DS-11 and looking for work for those. I would say that DS-13 and DS-14 as new builds come after that. We have until the end of 2023 in order to make those decisions. I think in order of timing, you're looking on par with the reactivation of a cold stacked rig to bring that rig back to market. There have been some discussions with customers. Some customers would like to take out a new build or have some very specific contract or technical requirements. But as far as we look through our priority list, it's about being disciplined about when we take rigs out for new opportunities, making sure that there are attractive opportunities that generate significant cash and it does start with rolling the active fleet and then going into the attractive kind of stacked rigs and then looking at the newbuild options. That being said, just north of $119 million, the DS-13 is certainly a remaining purchase price that you would say was in money, and likely you could look at DS-14 the same way. But everything else being equal, those are probably later on, on the stream for us.

I had seemed to be a bit trouble with the line. I'm not sure if that's on my side or not. So you're a bit choppy, but of the U.S. line maybe work better on the transcript there? And if not, we can just rework back later. So I get the full story.

Happy to follow up offline.

And our next question will come from David Smith with Pickering Energy Partners.

Seeing something on the floater side, it feels like we haven’t seen in a while which is longer contract terms at higher and higher lead day rates. It seems clear that there is more demand for deepwater churn from operators. I’m curious from what you’re seeing if that’s a greater mix of demand for multi-well development programs or is it a shift where turn demand is coming more from operators that they’re seeing for availability shrink and they’re locking in rigs to ensure that they have the availability to execute plans for ‘23 and ‘24.

That's a good question, David. I think what we have seen is there is an increasing activity level. There is a tender pipeline. But what we have not seen is overall a significant increase in contract durations. I think everybody, including on the customer side, has been quite thoughtful about making long-term commitments, although they have work and they see it in their pipeline. Other than that, the Petrobras tender that's out right now, one of the losses for four-year contracts is about the longest contract terms we've seen really that folks are looking for. But even on kind of step-out developments in those development programs, deepwater, ultradeep rigs are more in the order of two years plus options or three years. I think that's fairly indicative of where the market is, and we haven't reached the place in the market where folks are securing beyond that in order to lock down their rigs. I think part of that is because there are still some attractive stacked rigs available and can be brought back to the market. Part of it is also after a very difficult 7 years of people being a little more cautious about making very long-term commitments on rig programs. But that doesn't take away from the fundamentals and the overall strength that we see in the market. I was looking at some data this morning, for example, about the mix between exploration and development. If you talk about in order of round numbers, 90 ultra-deepwater floaters are in the market. About 30 of those are working on exploration programs. Now, they're not all rank exploration by this data and some of them are step-outs, but the fact that exploration is happening is another good sign for us in the market. But yes, you're correct in your observation that the overall contract terms in length and durations are not where they were at the height of the last market cycles, but we're still getting into a developing growing market. So let's see how that plays out.

I appreciate it. And the follow-up is, in the past, when we’ve seen visible demand grow while forward availability shrinks, we tend to see more demand come through direct negotiations versus the tender process. So I’m curious about what you’re seeing in the mix of your conversations, if it’s predominantly within tenders, or if you’re seeing a greater mix of direct negotiations.

There's definitely been more discussion in and around tenders about direct negotiations. I think there's also a geographic component to it. And I think we did make some statements in the prepared remarks. In more regulated environments, for example, in Brazil and especially West Africa, if you look at Angola and Nigeria, the tender processes are required. When you look at the Gulf of Mexico, there's much shorter-term visibility just because direct negotiations are much more prevalent. So it is somewhere, as we said, where we can see, while in discussions, you can see the additional demand and folks have a need for the rigs; you may see additional demand and more direct negotiations. Historically, they have been, and they will be, more direct negotiations. I think there’s a real geographic component as well to it.

And there are no further questions at this time. So this will conclude the question-and-answer session. I'd like to turn the conference back over to Tim Richardson for any closing remarks.

Thanks, Karl, and thank you to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our third quarter results. Have a good day.

And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.