Earnings Call Transcript - VAL Q4 2021

Operator, Operator

Good day, everyone and welcome to Valaris’ Fourth Quarter 2021 Results Conference Call. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Tim Richardson, Director of Investor Relations, who will moderate the call. Please go ahead, sir.

Tim Richardson, Director of Investor Relations

Welcome, everyone, to the Valaris fourth quarter 2021 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 at valaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations. As a reminder, we issued our most recent Fleet Status Report, which provides details on contracts across our rig fleet. An updated investor presentation will be available on our website after the call. Now, I will turn the call over to Anton Dibowitz, President and CEO.

Anton Dibowitz, President and CEO

Thanks, Tim. Good morning and afternoon to everyone and thank you for your interest in Valaris. During today’s call, I will start by highlighting some of our major accomplishments in 2021. Next, I will provide some commentary on the current state of the offshore drilling market and discuss how we are managing our fleet and our business to position ourselves for success. Finally, I will provide an update on ARO Drilling, our 50:50 joint venture with Saudi Aramco. After that, I will hand the call over to Darin to discuss our financial results and updated 2022 guidance. 2021 was an important year for Valaris. We re-listed on the New York Stock Exchange with the strongest balance sheets in the offshore drilling sector, providing the company with the best possible platform to thrive as we entered the early stages of an industry up-cycle. In order to succeed in this business, a solid financial foundation needs to be coupled with excellent operational performance and we focus every day on delivering safe, reliable and efficient operations to our customers. I would like to thank the Valaris team for continuing to deliver the strong performance that our customers have come to expect from us. This performance resulted in us achieving over 98% revenue efficiency over the course of 2021 and improving our personal safety performance by 25% as compared to 2020. This is particularly impressive considering the challenging working conditions faced by our offshore crews and support teams during the ongoing pandemic. Our strong operational performance translated into contracting success during 2021, with Valaris’ total contract backlog increasing to more than $2.4 billion from just over $1 billion at the beginning of 2021. And I congratulate the marketing team and the myriad of folks across the organization, who support them in these efforts on their collective achievements. These backlog additions have enhanced our earnings visibility and importantly have been added at increasing day rates, laying the foundation for improved financial performance as we put several reactivated rigs back to work on long-term contracts during the first half of this year. We currently have reactivation projects ongoing for 3 drillships and 1 semi-submersible, as well as a special periodic survey project for another semi-submersible. These are significant projects during normal conditions and are even more challenging considering global supply chain and personnel mobility issues arising from the pandemic. Our operations, engineering and supply chain teams are working together and with great effort to ensure that these projects are delivered on time and on budget. We are in the midst of a transitional period that will extend into the second quarter of this year as we incur significant reactivation costs to put 4 rigs back to work. However, we anticipate that financial results will improve meaningfully as these reactivations are completed. Finally, we continue to advance our sustainability efforts and we made some notable progress on this journey in 2021. Valaris now has a dedicated ESG board committee and is building an internal sustainability function that will direct our path forward. Last year, we released our Sixth Annual Sustainability Report, as well as an ESG position statement outlining the values and commitments supporting our purpose of providing responsible solutions that deliver energy to the world. We are committed to reducing emissions from our drilling operations and have implemented several solutions to help achieve this. To highlight just a couple of these, drillship DS-12 became the first vessel in the world to receive the ABS enhanced electrical system notation, EHS-E with respect to the vessel’s ability to optimize its power plant performance, enabling operations on fuel generators, and thereby reducing emissions. Also, jackup Valaris 123 was upgraded with a selective catalytic reduction or SCR system prior to working on a CO2 transport and storage project. When in operation, the SCR system is designed to eliminate almost all NOx emissions from the rig. Valaris now has SCR systems fitted on 4 drillships and 1 jackup. We will continue to make progress on our sustainability journey in 2022, with focus on reducing emissions from our operations and partnering with our customers on their ESG efforts. Turning now to the market, while renewable energy sources will continue to gain market share, the transition from fossil fuels to new sources of energy will be a protracted process. And we expect oil and gas production will be required for many years to come both to meet global energy demand and to help fund the transition to renewable sources. According to third-party research, peak oil demand is expected to occur in the late 2020s and peak gas demand in the late 2030s. Current sources of production will not be enough to meet this demand and therefore new exploration and production from unsanctioned projects will be required. Demand for hydrocarbons has rebounded strongly from the impact of COVID-19 and is forecast to exceed 2019 levels by late 2022. In recent years, E&P companies have generally prioritized shareholder returns and de-leveraging balance sheets over investment in new sources of production, resulting in OECD oil stocks well below the 5-year average. In addition, OPEC+ supply side measures and heightened geopolitical tensions have combined to drive oil prices higher, creating a constructive environment for investment in new offshore projects. Offshore upstream CapEx is expected to see double-digit growth over the next couple of years and offshore project sanctioning is expected 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. Increased upstream spending will lead to more demand for offshore drilling services. Research from Rystad indicates that floater demand is expected to increase at a compound annual growth rate of 7% over the next 5 years and this growth is expected to be driven by both exploration and development drilling. This is a strong signal of our customers’ conviction in the economics of deepwater projects and is positive for longer term demand for these rigs as new exploration activities will lead to future appraisal and development campaigns. We have seen tangible evidence of this improvement over the past 12 months as rig years awarded for benign environment floaters in 2021 more than doubled versus 2020 and we continue to see a strong pipeline of tenders and inquiries from our customers across each of the major deepwater basins in South America, West Africa and the Gulf of Mexico. Floater day rates have increased meaningfully over the past 12 months, particularly for high specification drillships. Active utilization for drillships is currently around 90% and we see limited available supply for many of the opportunities that are scheduled to commence in late 2022 and early 2023. As a result, we expect continued improvement in day rates for most drillship opportunities commencing during this time period. Jackup demand also improved in 2021 albeit at a slower pace than floaters with the rig years awarded up by more than 20% year-over-year. While we have seen a recent increase in opportunities for modern benign environment jackups, primarily in the Middle East and Southeast Asia, pricing power remains more limited versus high specification floaters due to the highly fragmented nature of supply and competition from local contractors in many of these markets. We continued to see some softness in the harsh environment jackup market. However, we anticipate this will be a transitory issue, with an increase in project sanctioning expected offshore Norway in 2022 that will help to balance the harsh environment jackup market in future years. Against this market backdrop, we will continue to actively manage our fleet and contracting activities to best position Valaris for success. In 2021, we set out to build our contract backlog first by securing additional work for our active rigs and second by reactivating some of our high-quality stacked fleet for long-term contracts. We achieved this goal and as a result have increased our contract backlog to more than $2.4 billion from just over $1 billion at the beginning of 2021. So, we are currently incurring reactivation costs to put several rigs back to work. The earnings power of our fleet will increase as these rigs commence new contracts before the end of the second quarter. Drillships DS-4, DS-9 and DS-16 and semi-submersible DPS-1 are expected to contribute combined annualized EBITDA of more than $100 million once they commence their new contracts. In addition, we expect to receive upfront payments of approximately $60 million associated with these contracts that will be amortized over the contract period and will not be recognized in EBITDA. Included in our backlog is approximately $428 million related to an 8-well contract awarded by TotalEnergies to drillship DS-11 for work on the North Platte deepwater project in the U.S. Gulf of Mexico. Earlier this month, TotalEnergies decided not to sanction and therefore withdraw from the North Platte project. We are in constructive discussions with TotalEnergies and its partner on the project, Equinor, to determine next steps. To be clear, TotalEnergies has not terminated the drilling contract. Should it choose to do so, the early termination fee and contractual reimbursements would be more than sufficient to cover expenses incurred and commitments made by Valaris. Further, given that the commencement of operations was not scheduled until mid-2024, we are confident that there would be other attractive projects for a high specification drillship like DS-11 based on the opportunities and day rates we are seeing in the market today. We have proven our ability to win work for preservation stacked assets with 4 long-term drillship contracts awarded in the second half of 2021 and we still have 13 high-quality modern assets remaining, including 3 uncontracted high specification drillships, DS-7, DS-8 and DS-17 that provide operational leverage to this improving market. These rigs are stacked in clusters to minimize holding costs and maximize the option value on future cash flows. We will be disciplined in exercising this leverage and will only return these assets to the active fleet for opportunities that provide meaningful returns. It is also worth noting that we have options to take delivery of newbuild drillships DS-13 and DS-14 by year end 2023 for a purchase price of approximately $119 million and $218 million respectively providing further operational leverage to the floater market. We will continue to take a rational approach to fleet management, including regularly assessing the stacked fleet for retirement and divestiture candidates, where we believe the future option value does not merit incurring further holding costs. In this regard, we have retired 1 additional jackup since the third quarter call bringing to 18, the total number of rigs retired since the beginning of 2020. Lastly, I will touch on ARO Drilling, our 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 drilling rigs in the world and ARO and Valaris combined hold nearly a 40% share of Saudi Aramco’s offshore rigs currently under contract. ARO is an important strategic asset for Valaris. We not only have a 50% equity interest in the joint venture, but also have notes receivable totaling $443 million from ARO. However, since it is an unconsolidated joint venture, we believe that many investors and analysts do not fully appreciate the value inherent in ARO. ARO owns a fleet of 7 jackup rigs operating under long-term contracts with Saudi Aramco that have associated contract backlog of more than $1 billion. Two of these rigs were recently awarded 5-year contract extensions and all 7 owned rigs are now contracted into 2026. ARO currently leases an additional 7 jackups from Valaris through bareboat charter arrangements, each also operating under contracts to Saudi Aramco. ARO recently signed 3-year extensions for 4 of these rigs and Valaris 140 will be added to the ARO leased fleet in the first quarter, while legacy jackup Valaris 36 is expected to be returned to Valaris and retired upon completion of its current contract in March. Substantially, all operating costs for the leased rigs are incurred by ARO, meaning the lease revenue represents nearly 100% margin for Valaris. Finally, ARO intends to add 20 newbuild jackups to its fleet over the next decade. The first of these newbuild rigs is scheduled to be delivered in the fourth quarter of this year, with the second rig expected either late in the fourth quarter or in the first quarter of next year. Good progress continues to be made on construction of the new maritime yard in Saudi, with each of the subsequent newbuilds to be built there and ARO is expected to place orders for newbuild rigs 3 and 4 later this year. Each of the newbuilds will be backed by long-term contracts with Saudi Aramco at attractive economics. Given these economics, the newbuild rigs are expected to be financed by cash from ARO operations and third-party financing. ARO is actively exploring financing options for the newbuilds and financing is expected to be secured prior to delivery of the first rig later this year. We do not expect that 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. In conclusion, I’d like to reiterate some of the key points from my prepared remarks. First, our best-in-class operational track record and solid financial foundation provide Valaris with a great platform to thrive during the industry upcycle. Second, Valaris meaningfully increased contract backlog in 2021, but still retains significant operational leverage to capitalize on the improving floater market. Third, while we currently are in the midst of a transitional period as we reactivate stacked rigs, we expect financial results will improve meaningfully as those reactivations are completed. And finally, 2022 is expected to be a significant year in the history of our joint venture, ARO Drilling, with the expected delivery of at least 1 and possibly 2 newbuilds, orders placed for a further 2 rigs and financing secured to fund the growth of ARO. In summary, Valaris is well-positioned to capitalize on opportunities that arise as we enter the beginning of an industry upcycle. I will now hand the call over to Darin to take you through the financials.

Darin Gibbins, Interim CFO and Vice President Investor Relations and Treasurer

Thanks, Anton and good morning and afternoon to everyone. In my prepared remarks today, I will provide an overview of fourth quarter results, our outlook for the first quarter, and updated guidance for full year 2022. In addition, I will briefly review our financial position and capital structure. I would also like to highlight our fourth quarter results press release, which includes a trailing 5-quarter analysis for the income statement, balance sheet and cash flows as well as various supplemental data. As Anton mentioned earlier, we are currently in a transitional period while we incur one-time reactivation costs to return 3 drillships and 1 semi-submersible to the working fleet. We continue to estimate these reactivations will cost $30 million to $45 million, while future floater reactivations will likely be at the top of or higher than that range depending on when they are reactivated. We also estimate $15 million to $20 million to reactivate a preservation stacked jackup. As a reminder, these estimates include all costs to reactivate the rig, but do not include mobilization costs or costs for contract or region-specific upgrades for which we would generally expect to be compensated. Most of these 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 that investors should consider reactivation expenses like growth capital expenditures and back out the income statement portion from EBITDA when analyzing our results. Valaris’ compelling value proposition is built on four key components and we believe that the best way to value Valaris is on a sum of the parts basis. We have presented analysis in our press release broken out by these four components. First, the active fleet of 34 rigs, which includes rigs currently being reactivated and that are generating positive cash flow today; second, our leased and managed rigs, comprised of 7 rigs we leased to ARO Drilling under bareboat charter agreements and 2 rigs that we manage on behalf of a customer in the U.S. Gulf of Mexico; third, the stacked fleet, which includes many high specification assets, which we have already demonstrated the ability to win work for; and finally, ARO Drilling, our unconsolidated 50:50 joint venture with Saudi Aramco. Moving now to the fourth quarter results, adjusted EBITDA declined to $3 million from $30 million in the prior quarter and adjusted EBITDAR, which adds back one-time reactivation costs was $40 million compared to $49 million in the prior quarter. Revenues for the fourth quarter were $306 million compared to $327 million in the prior quarter. This was lower than our guidance primarily due to unplanned downtime for the floater fleet and delayed contract startups for 3 jackups. Excluding reimbursable items, revenues declined to $269 million from $293 million, primarily due to fewer operating days and lower average day rates for the jackup fleet. In the jackup segment, Valaris Norway, Viking and 144 experienced idle time between contracts and average day rates for the harsh environment jackup fleet declined primarily due to Valaris Norway moving from drilling operations offshore Norway to accommodation mode in the UK North Sea given the lack of near-term opportunities on the Norwegian continental shelf. This was partially offset by higher revenues from Valaris 76, which returned to operations late in the third quarter following a suspension period. In the floater segment, the sequential quarter decline was primarily due to Valaris MS-1 starting a short-term contract at a lower day rate during the fourth quarter and fewer operating days for Valaris DPS-5, which completed a contract during the fourth quarter and is currently undergoing a 5-year survey prior to starting a new contract that is expected to commence in the first quarter of 2022. This was partially offset by more operating days for Volaris DS-12, which is currently working offshore Angola with BP, but was idle for a majority of the third quarter. Contract drilling expense for the fourth quarter was $285 million compared to $275 million in the prior quarter. Excluding reimbursable items, contract drilling expense increased to $264 million from $255 million primarily due to higher rig reactivation costs, which increased to $37 million in the fourth quarter from $19 million in the prior quarter as we prepare several rigs for contracts that are expected to commence in the first half of 2022. Fourth quarter reactivation costs were primarily related to the Valaris DS-4, DS-16 and DPS-1 as well as a smaller portion on DS-9 and jackup Valaris 249, which recently commenced a 400-day contract offshore New Zealand. Fourth quarter reactivation costs were approximately $7 million higher than our prior guidance, accounting for a portion of our EBITDA underperformance in the fourth quarter. This reflects an acceleration of certain work scopes on our reactivation projects rather than cost overruns as we proactively manage the projects in the face of global supply chain challenges. General and administrative expense declined to $18 million from $27 million in the prior quarter primarily due to severance costs related to the departure of three senior executives during the third quarter. Onshore support costs, which are included within contract drilling expense in the income statement increased to $28 million from $27 million. The sum of these two categories provides our total onshore support costs, which declined to $46 million in the fourth quarter from $54 million in the prior quarter. Depreciation expense marginally increased to $25 million from $24 million in the prior quarter. Other income was $21 million in the fourth quarter compared to other expense of $2 million in the prior quarter. Fourth quarter other income included a $21 million gain on sale of assets related to the sale of jackups, Valaris 22, 37 and 142 compared to a gain-on-sale of assets of less than $1 million in the prior quarter. We will continue to assess our fleet for retirement and divestiture candidates and where it makes economic sense to do so we will sell rigs or responsibly retire them. Tax benefit of $31 million in the fourth quarter compared to a tax expense of $53 million in the prior quarter. The fourth quarter tax provision included $30 million of discrete tax benefits primarily related to a reduction in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and deferred tax benefits associated with Swiss Tax Reform. The prior quarter tax provision included $39 million of discrete tax expense primarily related to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Adjusted for discrete items, tax benefit of $1 million in the fourth quarter compared with tax expense of $14 million in the prior quarter. The decrease in tax expense is primarily due to a reduction in valuation allowances on deferred tax assets. Additionally, we still expect to receive a tax refund of $97 million related to the CARES Act though the timing of this receipt is uncertain. Moving now to our first quarter 2022 outlook, we expect total revenues will be in the range of $295 million to $310 million as compared to $306 million in the fourth quarter. First quarter revenues are anticipated to benefit from jackup Valaris 249, which commenced a contract offshore New Zealand this month as well as more operating days for jackups Valaris Norway, 117 and 144 that all started new contracts late in the fourth quarter. These are expected to be largely offset by fewer operating days for semi-submersible Valaris DPS-5, which is currently undergoing a special survey in advance of its next contract that is scheduled to start late in the first quarter as well as some idle time between contracts for Valaris MS-1, Viking and 107. We anticipate that first quarter contract drilling expense will be in the range of $310 million to $320 million as compared to $285 million in the fourth quarter. The expected sequential quarter increase is primarily driven by one-off items. These include higher reactivation costs, which are expected to increase to $45 million to $50 million in the first quarter from $37 million in the fourth quarter as we ramp up reactivation activities for the 4 floaters that are scheduled to start contracts before the end of the second quarter, along with special survey costs for Valaris DPS-5 in advance of the rig commencing several months of firm work. Finally, first quarter general and administrative expense is expected to be $18 million to $20 million as compared to $18 million in the fourth quarter. As a result, adjusted EBITDA for the first quarter is expected to be negative $25 million to $30 million as compared to positive $3 million in the fourth quarter. Adjusted EBITDAR is expected to be approximately $20 million in the first quarter as compared to $40 million in the fourth quarter. Moving now to capital expenditures, fourth quarter CapEx was $27 million, of which $10 million was maintenance CapEx, $9 million related to reactivation projects and $8 million was enhancement CapEx primarily related to the Valaris DS-11 20K upgrade. As a result, total capital expenditures for full year 2021 were $59 million below our prior guidance primarily due to deferrals of certain CapEx into 2022. I will now provide an update on the 2022 preliminary financial guidance that I gave on the third quarter conference call. This guidance assumes reactivations announced to-date, but does not include any potential incremental reactivations for the rest of the stacked fleet. As Anton noted, we will be highly disciplined when evaluating opportunities for future reactivations. Based on current contract lead times, particularly for floaters, if we were to reactivate additional rigs in 2022, it would have a negative impact on 2022 EBITDA and CapEx, but would increase earnings and cash flows in future years. Revenues are expected to be $1.45 billion to $1.55 billion in 2022, up from $1.23 billion in 2021. Revenues are anticipated to increase primarily due to a combination of higher utilization and day rates from the floater fleet. Contract drilling expense is anticipated to be $1.23 billion to $1.28 billion, inclusive of approximately $70 million to $80 million of reactivation expense, nearly all of which are expected to be incurred in the first half of the year related to the reactivation of drillships DS-4, DS-9 and DS-16 as well as semisubmersible DPS-1. G&A expense is anticipated to be $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. The sum of these items provides adjusted EBITDA of $165 million to $195 million and adjusted EBITDAR, which again adds back one-time reactivation costs of $240 million to $270 million. The midpoint of these estimates is approximately $25 million higher than the guidance provided on the third quarter call, primarily due to improved visibility of 2022 revenues as a result of the contracts awarded since our last conference call. In terms of our value drivers, this translates to expected full year 2022 operating margin exclusive of onshore support and G&A expense of $325 million to $350 million for the active fleet, or $400 million to $425 million when adjusting for one-time reactivation costs of $70 million to $80 million. Operating margin of $80 million to $85 million for leased and managed rigs and carrying costs of approximately $40 million for the stacked fleet. 2022 CapEx is expected to be in the range of $225 million to $250 million. The midpoint of this range is approximately $12 million higher than the midpoint of guidance provided on the third quarter call, primarily due to deferrals from 2021. Our 2022 CapEx guidance includes approximately $85 million to $95 million of maintenance CapEx and $145 million to $155 million of enhancements and upgrades. The enhancements and upgrades include $25 million to $30 million of reactivation costs, $45 million to $50 million of contract or region specific upgrades, primarily for rigs that are being reactivated and $70 million to $75 million related to the Valaris DS-11. I would note that the contract for DS-11 requires the rig to be upgraded with 20,000 psi well control equipment. And in the event of termination, the early termination fee and contractual reimbursements would be more than sufficient to cover expenses and commitments incurred by Valaris. We anticipate receiving approximately $155 million in upfront payments from customers in 2022, related to capital reimbursements and mobilization fees, of which approximately $90 million is associated with 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 for EBITDA reported in our quarterly filings. And for some of our contracts, these represent a meaningful portion of the total contract value. Based on this guidance and our current market outlook, we expect that financial results will improve meaningfully as we complete our fourth quarter reactivations in the first half of the year. Now, I will move to fourth quarter results as well as the first quarter and full year 2022 outlook for ARO Drilling, our 50-50 joint venture with Saudi Aramco. As a reminder ARO is not consolidated in the financial results of Valaris. ARO EBITDA was $11 million in the fourth quarter compared to $18 million in the prior quarter. This was primarily due to fewer operating days across the fleet as two leased rigs completed contracts in the third quarter, and unplanned downtime events on a few rigs in the fourth quarter. ARO’s first quarter 2022 EBITDA is expected to increase to approximately $20 million, primarily due to an anticipated increase in utilizations during the first quarter as several rigs incurred out of service days related to both planned maintenance and unplanned downtime events during the fourth quarter. ARO’s full year 2022 EBITDA is expected to be in the range of $90 million to $100 million as compared to $91 million in 2021. Finally, I will provide a brief overview of our financial position. Valaris has the strongest balance sheet in the offshore drilling sector. As of year-end 2021, we had cash and cash equivalents of $609 million plus $36 million of restricted cash. We have only one tranche of debt, a $550 million senior secured note due in 2028. The coupon for the note is 8.25% if paid in cash, 10.25% if paid half cash, half debt, and 12% if we elect to pay the entire interest payment in debt. The first interest payment of $23 million was paid in cash during the fourth quarter, and we will pay the next installment in cash in May of this year. Additionally, the note provides a pari passu debt basket of $275 million and junior secured debt capacity of the greater of $200 million, or 8% of total assets. Our strong financial foundation, best-in-class operational performance and high-quality fleet positioned us well to capitalize on contracting and strategic opportunities as they arise. We will continue to be disciplined in our allocation of capital as we focus on driving increased earnings and cash flow from our growing active fleet and evaluate opportunities to reactivate our high quality stacked fleet. We have now reached the end of our prepared remarks. Operator, please open the line for questions.

Operator, Operator

We will now begin the question-and-answer session. Instructions for participants: to ask a question, please press star then one on your telephone keypad. The first question comes from Greg Lewis with BTIG. Please go ahead.

Greg Lewis, Analyst (BTIG)

Yes. Hi. Thank you and good morning, everybody. I had a few questions. One should be pretty brief, and is around OpEx. Clearly, we are activating rigs. Valaris isn’t the only company; the downturn has been pretty challenging. Most of the industry over the last couple of years has really done a good job of getting floater OpEx down quite low relative to where we think about a peak or normalized level. As you think about the cadence of that over the next 12 months, 18 months, 24 months, as we are reactivating rigs and maybe there is a scarcity of crewing, how should we think about average OpEx in the medium term for the fleet?

Darin Gibbins, Interim CFO and Vice President Investor Relations and Treasurer

Good morning, Greg, this is Darin. I appreciate the question. As you referenced, during the downturn many in the industry reduced OpEx significantly. We are seeing certain inflationary pressures as activity is ramping up, particularly on the floater side and in certain regions. We have baked what we are seeing into our guidance going forward. I don’t think we are going back to the peak OpEx levels of the 2012-2013 timeframe. It will be lower than that, but we are seeing a bit of inflation off the lows we reached during the downturn.

Anton Dibowitz, President and CEO

Let me just add to that. Darin covered it well. There are a couple of ways to look at it. On the floater side, inflationary pressures move with activity, and it varies by market where we see activity levels. The tendency for shorter-term contracts over the last few years allows us to re-price our contracts, and especially in a very constructive floater market that we are seeing today, the increase in day rates more than offsets the inflationary pressures we are seeing. As the market improves and we gain more leverage in our contract negotiations, when we are in extremely long-term contracts we will seek to build contractual protections or mitigations into those term contracts to manage that. But yes, inflation is a challenge for us in the market today, and as Darin said, it is included in our guidance as our best estimate for the upcoming year.

Greg Lewis, Analyst (BTIG)

Great, thanks. And then, a tougher one on North Platte. As I guess it’s a shift basins to West Africa. It does seem like there are a couple of attractive tenders in that market with potential startup dates later this year. Historically, the companies that had been active were fairly well positioned in West Africa. As you think about the opportunities in West Africa, I have two questions. One is, is there any reason why we could see those expected tenders being pushed out into next year?

Anton Dibowitz, President and CEO

It depends on supply of rigs and on the regulatory processes in the jurisdictions. Generally, West Africa has a longer tender cycle and is highly regulated, so operators plan in advance and will seek to secure rigs on their intended timeline. That said, timing can be affected by regulatory approvals, local company processes, or availability of rigs. Activity levels are picking up in Angola and Nigeria after the downturn, and there have been some interesting finds in West Africa, which supports demand going forward. So while some opportunities could be influenced by timing, there is a lot of constructive activity in the region.

Greg Lewis, Analyst (BTIG)

Great, thank you very much for the time.

Anton Dibowitz, President and CEO

Sure.

Operator, Operator

The next question comes from Fredrik Stene with Clarksons. Please go ahead.

Fredrik Stene, Analyst (Clarksons)

Hey, guys, Fredrik here and congratulations on the quarter. I think you covered quite a few of my questions in the prepared remarks with relation to DS-11 and the cancellation fee, etcetera, because I guess you are not just going to straight up tell us what it is, right?

Anton Dibowitz, President and CEO

No, we are not. And I should go back to DS-11 and reiterate a couple of things we have said. TotalEnergies has said that they are not going to proceed with the project and are in the process of handing it over to their co-venture partner Equinor. We have not received a termination notice. Should we receive one, we would be well compensated in excess of what we would be reimbursed and what our commitments are under the project. We also haven’t been informed yet of any timing delay, although we will have to see how that plays out. Equinor has stated that they intend to proceed with the project. We are in constructive discussions with both partners and there is a team working on the transition. We will have to see how this unfolds. DS-11 was planned to go to work after its upgrades in mid-2024, so it is 2.5 years from now. DS-11 is an attractive high specification ship for today’s market, and given the time between now and its expected startup and the constructive market overall, we will work with the partners to determine next steps. We feel good about the future of the rig, regardless.

Fredrik Stene, Analyst (Clarksons)

That’s very good color. Just a quick follow-up on that: is it possible now—and I have also seen Equinor say they would like to proceed—that the contract is transferred directly from Total to Equinor, or does it in either situation have to be some sort of renegotiation or a new contract even though the terms might be the same?

Anton Dibowitz, President and CEO

We are not going to get into contract details, but we have a contract and there is a process for the operatorship to be transferred along with the drilling contract. We will have to see how that plays out, but the contract is currently in full force and effect and there is an opportunity to determine next steps with the partners.

Fredrik Stene, Analyst (Clarksons)

That’s very helpful. Second question relates to the general market status, particularly for floaters. I think at least in the U.S. Gulf of Mexico things are moving faster than I originally expected. There seems to be differences between regions, but when you are approaching 90% utilization, it’s fair to assume that this will tighten pretty quickly. I was just wondering in terms of what you are seeing and how you are affected: do you think we could see $500k in day rates for drillships starting in 2023? What’s your view on the momentum we are seeing now and where capital might go at some point?

Anton Dibowitz, President and CEO

There has been a huge amount of momentum in the floater market over the last year. If you think about where contracts were at the start of last year in the high-100s, the increase over the past year has been significant. Each job is unique—time, location, desired start, and duration all matter—so not every contract is equal. The number of drillships available for late 2022 and early 2023 is extremely limited. If customers want to contract in that timeframe, there will likely be a price premium. Where this goes over the next year we will have to see, but we feel very good about the market and our position. We have been successful in re-contracting our stacked ships over the last year. We have two drillships that have been stacked for less than two years and, as we have said, we seek to set a base load and get rigs working in the first half of this year. We will be disciplined about returning capacity to the market, allowing the market to develop before adding more. Overall, we are optimistic and constructive about the markets going forward.

Fredrik Stene, Analyst (Clarksons)

Thanks. Appreciate all the comments. Thank you very much.

Operator, Operator

There are no further questions at this time. I would like to turn the call back to Tim Richardson.

Tim Richardson, Director of Investor Relations

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

Operator, Operator

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