THE VALSPAR CORP Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying unaudited
consolidated financial statements as of
EXECUTIVE SUMMARY
Our Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry. Exclusive of two rigs under construction and one rig marked for retirement and classified as held-for-sale, we currently own and operate an offshore drilling rig fleet of 73 rigs, with drilling operations in almost every major offshore market across six continents. Inclusive of rigs under construction, our fleet includes 16 drillships, eight dynamically positioned semisubmersible rigs, one moored semisubmersible rigs and 50 jackup rigs, nine of which are leased to our 50/50 joint venture with Saudi Aramco. We operate the world's largest fleet amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet.
Our Industry
Operating results in the offshore contract drilling industry are highly cyclical and are directly related to the demand for drilling rigs and the available supply of drilling rigs. Low demand and excess supply can independently affect day rates and utilization of drilling rigs. Therefore, adverse changes in either of these factors can result in adverse changes in our industry. While the cost of moving a rig may cause the balance of supply and demand to vary somewhat between regions, significant variations between regions are generally of a short-term nature due to rig mobility.
During the first quarter, the coronavirus global pandemic and the response
thereto has negatively impacted the macro-economic environment and global
economy. Global oil demand has fallen sharply at the same time global oil supply
has increased as a result of certain oil producers competing for market share,
leading to a supply glut. As a consequence, the price of Brent crude oil has
fallen from around
The full impact that the pandemic and the precipitous decline in oil prices will have on our results of operations, financial condition, liquidity and cash flows is uncertain due to numerous factors, including the duration and severity of the outbreak, the duration of the price decline, and the extent of disruptions to our operations. To date, there have been various impacts from the pandemic and drop in oil prices, including contract cancellations or the cancellation of drilling programs by operators, contract concessions, stacking rigs, inability to change crews due to travel restrictions, and workforce reductions. Our operations and business may be subject to further disruptions as a result of the spread of coronavirus among our workforce, the extension or imposition of further public health measures affecting supply chain and logistics, and the impact of the pandemic on key customers, suppliers, and other counterparties.
We expect that the remainder of 2020 will be a challenging year for contractors as customers wait to gain additional clarity on commodity pricing and seek to reduce costs in the near-term by attempting to renegotiate existing contract terms. We believe the current market and macro-economic conditions will create a challenging contracting environment through at least 2021.
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Backlog
Our backlog was
As we finalize negotiations of contract concessions with our customers,
above-market rate contracts expire and revenues are realized, we may experience
further declines in backlog, which would result in a decline in revenues and
operating cash flows over the near-term. Contract backlog was adjusted for
drilling contracts signed, terminated or concessions granted after each
respective balance sheet date but prior to filing each annual and quarterly
report on
BUSINESS ENVIRONMENT
Floaters
The floater contracting environment remains challenging due to limited demand,
excess newbuild supply and the recent precipitous fall in oil prices. Floater
demand has declined materially in March and
In
As a result of the incident, the operator terminated the contract. The
termination results in a decline in our contracted revenue backlog of
approximately
During the first quarter of 2020, VALARIS DS-7 was awarded a five-well contract
that is expected to commence in
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The
There are approximately 30 newbuild drillships and semisubmersible rigs reported to be under construction, of which nine are scheduled to be delivered before the end of 2020. Most newbuild floaters are uncontracted. Several newbuild deliveries have been delayed into future years, and we expect that more uncontracted newbuilds will be delayed or cancelled.
Drilling contractors have retired approximately 140 floaters since the beginning of 2014. Approximately 10 floaters older than 30 years of age are currently idle, approximately 10 additional floaters older than 30 years have contracts that will expire by end of 2020 without follow-on work. Additional rigs are expected to become idle as a result of recent market events. Operating costs associated with keeping these rigs idle as well as expenditures required to re-certify these aging rigs may prove cost prohibitive. Drilling contractors will likely elect to scrap or cold-stack some or all of these rigs.
Jackups
Despite recent gains in the jackup market, demand for jackups has declined in light of increased market uncertainty. During 2020, we have received notices of termination, requests for concessions, cancellation and/or deferral of drilling programs by operators, and we expect to receive additional termination and/or deferral notices during the pendency of the current market environment. To date, the coronavirus pandemic has not resulted in any forced shutdowns of our rigs due to quarantines or an inability to staff our rigs due to travel restrictions or stay-at-home orders, however, we are incurring additional costs in order to mitigate these impacts to our operations. There can be no assurance, however, that these, or other issues caused by the coronavirus pandemic, will not materially affect our ability to operate our rigs in the future.
During the first quarter of 2020, the VALARIS JU-109 contract was terminated.
In
The VALARIS JU-68 was sold in
There are approximately 50 newbuild jackup rigs reported to be under construction, of which 30 are scheduled to be delivered before the end of 2020. Most newbuild jackups are uncontracted. Over the past year, some jackup orders have been cancelled, and many newbuild jackups have been delayed. We expect that scheduled jackup deliveries will continue to be delayed until more rigs are contracted.
Drilling contractors have retired approximately 100 jackups since the beginning of the downturn. Approximately 90 jackups older than 30 years are idle and 40 jackups that are 30 years or older have contracts expiring by the end of 2020 without follow-on work. Expenditures required to re-certify these aging rigs may prove cost prohibitive and drilling contractors may instead elect to scrap or cold-stack these rigs. We expect jackup scrapping and cold-stacking to continue for the remainder of 2020.
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Divestitures
Our business strategy has been to focus on ultra-deepwater floater and premium
jackup operations and de-emphasize other assets and operations that are not part
of our long-term strategic plan or that no longer meet our standards for
economic returns. In the fourth quarter of 2019, we began marketing the
We continue to focus on our fleet management strategy in light of the composition of our rig fleet. As part of this strategy, we may act opportunistically from time to time to monetize assets to enhance shareholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of older, lower-specification or non-core rigs.
RESULTS OF OPERATIONS
The following table summarizes our condensed consolidated results of operations
for the three-month periods ended
Three Months Ended March 31,
2020 2019(1)
Revenues $ 456.6 $ 405.9
Operating expenses
Contract drilling (exclusive of depreciation) 476.0 332.6
Loss on impairment 2,808.2 -
Depreciation 164.5 125.0
General and administrative 53.4 29.6
Total operating expenses 3,502.1 487.2
Equity in earnings of ARO (6.3 ) -
Operating loss (3,051.8 ) (81.3 )
Other income (expense), net (107.9 ) (75.2 )
Provision (benefit) for income taxes (152.0 ) 31.5
Net loss (3,007.7 ) (188.0 )
Net (income) loss attributable to noncontrolling
interests 1.4 (2.4 )
Net loss attributable to Valaris $ (3,006.3 ) $ (190.4 )
(1) The 2019 period does not include the results of the Rowan transaction as
it closed in April 2019 .
Overview
Revenues increased
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Contract drilling expense increased
During the first quarter of 2020, we recorded a non-cash loss on impairment of
Depreciation expense increased
General and administrative expenses increased by
Other expense increased
Rig Counts, Utilization and Average
The following table summarizes our and ARO's offshore drilling rigs as ofMarch 31, 2020 and 2019: 2020 2019 Floaters(1) 24 22 Jackups(2) 41 33 Other(3) 9 - Under construction(4) 2 3 Held-for-sale 1 1 Total Valaris 77 59 ARO(5) 7 - (1) During 2019, we added four drillships from the Rowan Transaction and soldVALARIS 5006. During the first quarter of 2020, we soldVALARIS 6002. (2) During 2019, we added 10 jackups from the Rowan Transaction, exclusive of rigs leased to ARO that are included in Other, accepted delivery of VALARIS JU-123, classified VALARIS-JU 70 as held-for-sale and soldVALARIS JU-96. In the first quarter of 2020, we sold VALARIS JU-68. (3) During 2019, we added nine jackups from the Rowan Transaction that are leased to ARO. (4) During 2019, we accepted the delivery of VALARIS JU-123. (5) This represents the seven rigs owned by ARO. 47
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The following table summarizes our and ARO's rig utilization and average day
rates by reportable segment for the three-month periods ended
Three Months Ended
March 31,
2020 2019
Rig Utilization(1)
Floaters 38 % 43 %
Jackups 61 % 68 %
Other (2) 100 % 100 %
Total Valaris 59 % 60 %
ARO 90 % -
Average Day Rates (3)
Floaters $ 195,541 $ 240,440
Jackups 81,492 72,146
Other (2) 42,343 82,712
Total Valaris $ 94,784 $ 118,733
ARO $ 108,873 $ -
(1) Rig utilization is derived by dividing the number of days under contract
by the number of days in the period. Days under contract equals the total
number of days that rigs have earned and recognized day rate revenue,
including days associated with early contract terminations, compensated
downtime and mobilizations. When revenue is deferred and amortized over a
future period, for example, when we receive fees while mobilizing to
commence a new contract or while being upgraded in a shipyard, the related
days are excluded from days under contract.
For newly-constructed or acquired rigs, the number of days in the period begins upon commencement of drilling operations for rigs with a contract or when the rig becomes available for drilling operations for rigs without a contract.
(2) Includes our two management services contracts and our nine rigs leased to
ARO under bareboat charter contracts.
(3) Average day rates are derived by dividing contract drilling revenues,
adjusted to exclude certain types of non-recurring reimbursable
revenues, lump-sum revenues and revenues attributable to amortization of
drilling contract intangibles, by the aggregate number of contract days,
adjusted to exclude contract days associated with certain mobilizations,
demobilizations and shipyard contracts.
Detailed explanations of our operating results, including discussions of revenues, contract drilling expense and depreciation expense by segment, are provided below.
Operating Income by Segment
Prior to the Rowan Transaction, our business consisted of three operating segments: (1) Floaters, which included our drillships and semisubmersible rigs, (2) Jackups and (3) Other, which consisted only of our management services provided on rigs owned by third-parties. Our Floaters and Jackups segments were also reportable segments.
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As a result of the Rowan Transaction, we concluded that we would maintain the
aforementioned segment structure while adding ARO as a reportable segment for
the new combined company. We also concluded that the activities associated with
our arrangements with ARO, consisting of our Transition Services Agreement, Rig
Lease Agreements and Secondment Agreement, do not constitute reportable segments
and are therefore included within Other in the following segment disclosures.
Substantially all of the expenses incurred associated with our Transition
Services Agreement are included in general and administrative under "Reconciling
Items" in the table set forth below.
General and administrative expense and depreciation expense incurred by our
corporate office are not allocated to our operating segments for purposes of
measuring segment operating income (loss) and are included in "Reconciling
Items." The full operating results included below for ARO (representing only
results of ARO from the Transaction Date) are not included within our
consolidated results and thus deducted under "Reconciling Items" and replaced
with our equity in earnings of ARO. See " Note 4 -
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