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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
     WASHINGTON, D.C. 20549    
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________

Commission File Number 1-8097
 Valaris Limited
(Exact name of registrant as specified in its charter)
Bermuda98-1589854
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Clarendon House, 2 Church Street
HamiltonBermudaHM 11
(Address of principal executive offices)(Zip Code)
 
Registrant's telephone number, including area code:  +44 (0) 20 7659 4660
  
Securities registered pursuant to Section 12(b) of the Act:

Title of each classTicker Symbol(s)Name of each exchange on which registered
Common Shares, $0.01 par value shareVALNew York Stock Exchange
Warrants to purchase Common SharesVAL WSNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes         No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes    No 

As of April 26, 2024, there were 72,410,818 Common Shares of the registrant outstanding.



VALARIS LIMITED
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2024

 
  
  
  
  
  
  
  
  
  
  
  



FORWARD-LOOKING STATEMENTS
  
Statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include words or phrases such as "anticipate," "believe," "estimate," "expect," "intend," "likely," "plan," "project," "could," "may," "might," "should," "will" and similar words and specifically include statements regarding expected financial performance; expected utilization, day rates, revenues, operating expenses, cash flows, contract status, terms and duration, contract backlog, capital expenditures, insurance, financing and funding; the offshore drilling market, including supply and demand, customer drilling programs, stacking of rigs, effects of new rigs on the market and effect of the volatility of commodity prices; expected work commitments, awards, contracts and letters of intent; the availability, delivery, mobilization, contract commencement or relocation or other movement of rigs and the timing thereof; rig reactivations, enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; performance of our joint ventures, including our joint venture with Saudi Arabian Oil Company ("Saudi Aramco"); timing of the delivery of the Saudi Aramco Rowan Offshore Drilling Company ("ARO") newbuild rigs and the timing of additional ARO newbuild orders; divestitures of assets; general market, business and industry conditions, trends and outlook; general political conditions, including political tensions, conflicts and war; the impacts and effects of public health crises, pandemics and epidemics; future operations; the effectiveness of our cybersecurity programs; expectations regarding our sustainability targets and strategy; the impact of increasing regulatory complexity; the outcome of tax disputes, assessments and settlements; expense management; and the likely outcome of litigation, legal proceedings, investigations or insurance or other claims or contract disputes and the timing thereof.
Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:
delays in contract commencement dates or cancellation, suspension, renegotiation or termination with or without cause of drilling contracts or drilling programs as a result of general or industry-specific economic conditions, mechanical difficulties, performance, delays in the delivery of critical drilling equipment, failure of the customer to receive final investment decision (FID) for which the drilling rig was contracted or other reasons;
changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs or reactivation of stacked drilling rigs;
general economic and business conditions, including recessions, inflation, volatility affecting the banking system and financial markets and adverse changes in the level of international trade activity;
requirements to make significant expenditures in connection with rig reactivations, customer drilling requirements and to comply with governing laws or regulations in the regions we operate;
loss of a significant customer or customer contract, as well as customer consolidation and changes to customer strategy, including focusing on renewable energy projects;
our ability to attract and retain skilled personnel on commercially reasonable terms, whether due to labor regulations, rising wages, unionization, or otherwise, or to retain employees;
the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems, including our rig operating systems;
the adequacy of sources of liquidity for us and our customers;
risks inherent to drilling rig reactivations, repair, modification or upgrades, unexpected delays in equipment delivery, engineering, design or commissioning issues following delivery, or changes in the commencement, completion or service dates;
our ability to generate operational efficiencies from our shared services center and potential risks relating to the processing of transactions and recording of financial information;
downtime and other risks associated with offshore rig operations, including rig or equipment failure, damage and other unplanned repairs, the limited availability of transport vessels, hazards, self-imposed
1


drilling limitations and other delays due to severe storms and hurricanes and the limited availability or high cost of insurance coverage for certain offshore perils, such as hurricanes in the Gulf of Mexico or associated removal of wreckage or debris;
our customers cancelling or shortening the duration of our drilling contracts, cancelling future drilling programs and seeking pricing and other contract concessions from us;
decreases in levels of drilling activity and capital expenditures by our customers, whether as a result of the global capital markets and liquidity, prices of oil and natural gas, changes in tax policy (such as the U.K.’s windfall tax on oil and gas producers in the British North Sea), climate change concerns or otherwise, which may cause us to idle, stack or retire additional rigs;
impacts and effects of public health crises, pandemics and epidemics, the related public health measures implemented by governments worldwide, the duration and severity of the outbreak and its impact on global oil demand, the volatility in prices for oil and natural gas and the extent of disruptions to our operations;
disruptions to the operations and business of our key customers, suppliers and other counterparties, including impacts affecting our supply chain and logistics;
governmental action, terrorism, cyber-attacks, piracy, military action and political and economic uncertainties, including civil unrest, political demonstrations, mass strikes, or an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas, which may result in expropriation, nationalization, confiscation or deprivation or destruction of our assets; suspension and/or termination of contracts based on force majeure events or adverse environmental safety events; or volatility in prices of oil and natural gas;
disputes over production levels among members of the Organization of Petroleum Exporting Countries and other oil and gas producing nations (“OPEC+”), which could result in increased volatility in prices for oil and natural gas that could affect the markets for our services;
our ability to enter into, and the terms of, future drilling contracts, including contracts for newbuild rigs or acquired rigs, for rigs currently idled and for rigs whose contracts are expiring;
any failure to execute definitive contracts following announcements of letters of intent, letters of award or other expected work commitments;
the outcome of litigation, legal proceedings, investigations or other claims or contract disputes, including any inability to collect receivables or resolve significant contractual or day rate disputes, and any renegotiation, nullification, cancellation or breach of contracts with customers or other parties;
internal control risk due to changes in management, hiring of employees, employee reductions and our shared service center;
governmental regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations, limitations on new oil and gas leasing in U.S. federal lands and waters, and regulatory measures to limit or reduce greenhouse gas emissions ("GHG");
governmental policies that could reduce demand for hydrocarbons, including mandating or incentivizing the conversion from internal combustion engine powered vehicles to electric-powered vehicles;
forecasts or expectations regarding the global energy transition, including consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition;
increased scrutiny from regulators, market and industry participants, stakeholders and others in regard to our sustainability practices and reporting;
our ability to achieve our sustainability aspirations, targets, goals and commitments, or the impact of any changes to such matters;
potential impacts on our business resulting from climate-change or GHG legislation or regulations, and the impact on our business from climate-change related physical changes or changes in weather patterns;
2


new and future regulatory, legislative or permitting requirements, future lease sales, changes in laws, rules and regulations that have or may impose increased financial responsibility, additional oil spill abatement contingency plan capability requirements and other governmental actions that may result in claims of force majeure or otherwise adversely affect our existing drilling contracts, operations or financial results;
environmental or other liabilities, risks, damages or losses, whether related to storms, hurricanes or other weather-related events (including wreckage or debris removal), collisions, groundings, blowouts, fires, explosions, cyberattacks, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable;
tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws (including global minimum tax initiatives) and regulations, tax assessments and liabilities for taxes;
our ability to realize the expected benefits of our joint venture with Saudi Aramco, including our ability to fund any required capital contributions or to enforce any payment obligations of the joint venture pursuant to outstanding shareholder notes receivable and benefits of our other joint ventures;
the potentially dilutive impacts of warrants issued pursuant to the plan of reorganization;
the costs, disruption and diversion of our management's attention associated with campaigns by activist securityholders; and
adverse changes in foreign currency exchange rates.
In addition to the numerous risks, uncertainties and assumptions described above, you should also carefully read and consider "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I and "Item 1A. Risk Factors" in Part II of this report, "Item 1A. Risk Factors" in Part I and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our annual report on Form 10-K for the year ended December 31, 2023, which are available on the U.S. Securities and Exchange Commission website at www.sec.gov. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.
3



PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

4


VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended March 31,
20242023
OPERATING REVENUES$525.0 $430.1 
OPERATING EXPENSES
Contract drilling (exclusive of depreciation)444.8 377.2 
Depreciation26.8 23.3 
General and administrative26.5 24.4 
Total operating expenses498.1 424.9 
EQUITY IN EARNINGS OF ARO2.4 3.3 
OPERATING INCOME29.3 8.5 
OTHER INCOME (EXPENSE)
Interest income21.0 23.0 
Interest expense, net(17.7)(11.1)
Other, net5.8 0.6 
 9.1 12.5 
INCOME BEFORE INCOME TAXES38.4 21.0 
PROVISION (BENEFIT) FOR INCOME TAXES
Current income tax expense (benefit)10.9 (32.2)
Deferred income tax expense2.0 4.6 
 12.9 (27.6)
NET INCOME25.5 48.6 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (1.9)
NET INCOME ATTRIBUTABLE TO VALARIS$25.5 $46.7 
EARNINGS PER SHARE
Basic$0.35 $0.62 
Diluted$0.35 $0.61 
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic72.4 75.2 
Diluted73.6 76.4 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5


VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended March 31,
20242023
NET INCOME$25.5 $48.6 
OTHER COMPREHENSIVE LOSS, NET
Net reclassification adjustment for amounts recognized in net income as a component of net periodic pension benefit(0.2)(0.1)
Other0.1 (0.1)
NET OTHER COMPREHENSIVE LOSS(0.1)(0.2)
COMPREHENSIVE INCOME25.4 48.4 
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (1.9)
COMPREHENSIVE INCOME ATTRIBUTABLE TO VALARIS$25.4 $46.5 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6


VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value amounts)
March 31,
2024
December 31,
2023
(Unaudited)
ASSETS
CURRENT ASSETS  
    Cash and cash equivalents$494.1 $620.5 
    Restricted cash15.0 15.2 
    Accounts receivable, net510.9 459.3 
    Other current assets177.6 177.2 
Total current assets1,197.6 1,272.2 
PROPERTY AND EQUIPMENT, AT COST2,014.0 1,889.0 
    Less accumulated depreciation281.7 255.2 
       Property and equipment, net1,732.3 1,633.8 
LONG-TERM NOTES RECEIVABLE FROM ARO289.3 282.3 
INVESTMENT IN ARO126.8 124.4 
DEFERRED TAX ASSETS
854.8 855.1 
OTHER ASSETS153.6 154.4 
 $4,354.4 $4,322.2 
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES  
Accounts payable - trade$394.2 $400.1 
Accrued liabilities and other366.5 344.2 
Total current liabilities760.7 744.3 
LONG-TERM DEBT1,080.1 1,079.3 
DEFERRED TAX LIABILITIES
31.6 29.9 
OTHER LIABILITIES451.7 471.7 
Total liabilities2,324.1 2,325.2 
COMMITMENTS AND CONTINGENCIES
VALARIS SHAREHOLDERS' EQUITY  
Common shares, $0.01 par value, 700.0 shares authorized, 75.4 shares issued, 72.4 shares outstanding as of March 31, 2024 and December 31, 2023
0.8 0.8 
Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of March 31, 2024 and December 31, 2023
  
Stock warrants 16.4 16.4 
Additional paid-in capital1,127.7 1,119.8 
Retained earnings1,051.0 1,025.5 
Accumulated other comprehensive income25.1 25.2 
Treasury shares, at cost, 3.0 shares as of March 31, 2024 and December 31, 2023
(200.1)(200.1)
Total Valaris shareholders' equity2,020.9 1,987.6 
NONCONTROLLING INTERESTS9.4 9.4 
Total equity2,030.3 1,997.0 
 $4,354.4 $4,322.2 

The accompanying notes are an integral part of these condensed consolidated financial statements.
7


VALARIS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended March 31,
 20242023
OPERATING ACTIVITIES 
Net income$25.5 $48.6 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense26.8 23.3 
Share-based compensation expense8.0 5.7 
Accretion of discount on the Notes Receivable from ARO(7.0)(7.0)
Equity in earnings of ARO(2.4)(3.3)
Deferred income tax expense2.0 4.6 
Changes in contract liabilities(7.0)(20.8)
Changes in deferred costs2.2 0.5 
Other1.9 0.3 
 Changes in other operating assets and liabilities
(21.3)100.8 
   Contributions to pension plans and other post-retirement benefits(2.4)(1.0)
Net cash provided by operating activities26.3 151.7 
INVESTING ACTIVITIES 
Additions to property and equipment(151.3)(56.3)
Other
 0.1 
Net cash used in investing activities(151.3)(56.2)
FINANCING ACTIVITIES 
Other(1.6) 
Net cash used in financing activities(1.6) 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH(126.6)95.5 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD635.7 748.5 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD$509.1 $844.0 

The accompanying notes are an integral part of these condensed consolidated financial statements.
8


VALARIS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 -Unaudited Condensed Consolidated Financial Statements
 
We prepared the accompanying condensed consolidated financial statements of Valaris Limited and its subsidiaries (the "Company," "Valaris," "our," "we" or "us") in accordance with accounting principles generally accepted in the United States of America ("GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included in this report is unaudited but, in our opinion, includes all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The December 31, 2023 Condensed Consolidated Balance Sheet data was derived from our 2023 audited consolidated financial statements but does not include all disclosures required by GAAP. The preparation of our condensed consolidated financial statements requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.

Results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2024, or for any future period. We recommend these condensed consolidated financial statements be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 22, 2024 (our "Annual Report").

Summary of Significant Accounting Policies

Please refer to "Note 1. Description of the Business and Summary of Significant Accounting Policies" of our Consolidated Financial Statements from our Annual Report for the discussion of our significant accounting policies. Certain previously reported amounts have been reclassified to conform to the current year presentation.

New Accounting Pronouncements

Accounting pronouncements to be adopted

Improvements to Reportable Segment Disclosures - In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("Update 2023-07"), which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in Update 2023-07 require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. Annual disclosures are required for fiscal years beginning after December 15, 2023 and interim disclosures are required for periods within fiscal years beginning after December 15, 2024. Retrospective application is required for all prior periods presented, and early adoption is permitted. We are currently assessing the impact of the requirements on our condensed consolidated financial statements and disclosures.

9


Improvements to Income Tax Disclosures - In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("Update 2023-09"), which expands income tax disclosure requirements to include additional information related to the rate reconciliation of our effective tax rates to statutory rates as well as additional disaggregation of taxes paid. The amendments in Update 2023-09 also remove disclosures related to certain unrecognized tax benefits and deferred taxes. Update 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments are required to be applied on a prospective basis, with an option to apply the guidance retrospectively. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.

With the exception of the updated standards discussed above, there have been no accounting pronouncements issued and not yet effective that have significance, or potential significance, to our condensed consolidated financial statements.

Note 2 -Revenue from Contracts with Customers
 
Our drilling contracts with customers provide a drilling rig and drilling services on a day rate contract basis. Under day rate contracts, we provide a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation generally for the mobilization, demobilization, and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.

Our drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigs that are not distinct performance obligations within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.

The remaining duration of our drilling contracts based on those in place as of March 31, 2024 was between approximately 1 month and 5 years.

Contract Assets and Liabilities

Contract assets represent amounts recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable.

Contract liabilities generally represent fees received for mobilization, capital upgrades or in the case of our 50/50 unconsolidated joint venture with Saudi Aramco, represent the difference between the amounts billed under the bareboat charter arrangements and lease revenues earned. See “Note 3 – Equity Method Investment in ARO" for additional details regarding our balances with ARO.

Contract assets and liabilities are presented net on our Condensed Consolidated Balance Sheets on a contract-by-contract basis. Current contract assets and liabilities are included in Other current assets and Accrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in Other assets and Other liabilities, respectively, on our Condensed Consolidated Balance Sheets.

10


The following table summarizes our contract assets and contract liabilities (in millions):
 March 31, 2024 December 31, 2023
Current contract assets$2.3 $1.5 
Noncurrent contract assets$5.8 $4.5 
Current contract liabilities (deferred revenue)$122.3 $116.2 
Noncurrent contract liabilities (deferred revenue)$36.2 $37.6 

Changes in contract assets and liabilities during the period are as follows (in millions):
 Contract AssetsContract Liabilities
Balance as of December 31, 2023$6.0 $153.8 
Revenue recognized in advance of right to bill customer2.6 — 
Increase due to revenue deferred during the period— 42.5 
Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance— (33.1)
Decrease due to amortization of deferred revenue added during the period— (4.7)
Decrease due to transfer to receivables and payables during the period(0.5)— 
Balance as of March 31, 2024$8.1 $158.5 

Deferred Contract Costs

Costs incurred for upfront rig mobilizations and certain contract preparations are attributable to our future performance obligation under each respective drilling contract. These costs are deferred and amortized on a straight-line basis over the contract term. Deferred contract costs are included in Other current assets and Other assets on our Condensed Consolidated Balance Sheets and totaled $85.3 million and $85.1 million as of March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024 and 2023, amortization of such costs totaled $23.4 million and $20.0 million, respectively.

Deferred Certification Costs

We must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. Deferred regulatory certification and compliance costs were included in Other current assets and Other assets on our Condensed Consolidated Balance Sheets and totaled $12.1 million and $14.5 million as of March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024 and 2023, amortization of such costs totaled $3.1 million and $2.7 million, respectively.

11


Future Amortization of Contract Liabilities and Deferred Costs

The table below reflects the expected future amortization of our contract liabilities and deferred costs recorded as of March 31, 2024. In the case of our contract liabilities related to our bareboat charter arrangements with ARO, the contract liability is not amortized and as such, the amount is reflected in the table below at the end of the current lease term. See "Note 3 - Equity Method Investment in ARO" for additional information on ARO and related arrangements.
(In millions)
 Remaining 2024202520262027 and Thereafter Total
Amortization of contract liabilities$107.4 $31.1 $17.7 $2.3 $158.5 
Amortization of deferred costs$68.6 $18.1 $9.9 $0.8 $97.4 

Note 3 -Equity Method Investment in ARO

Background
    
ARO is a 50/50 unconsolidated joint venture between the Company and Saudi Aramco that owns and operates jackup drilling rigs in Saudi Arabia. As of March 31, 2024, ARO owns eight jackup rigs, has one newbuild jackup rig on order, and leases nine rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO.

The shareholder agreement governing the joint venture specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. In January 2020, ARO ordered the first two newbuild jackups, the first of which, Kingdom 1, was delivered and commenced operations in the fourth quarter of 2023, and the second is expected to be delivered in the second quarter of 2024. ARO is expected to commit to orders for two additional newbuild jackups in the near term. In connection with these plans, we have a potential obligation to fund ARO for newbuild jackup rigs. See "Note 11 - Contingencies" for additional information.

Summarized Financial Information

The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the ARO-owned jackup rigs as well as the rigs leased from us. Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. See additional discussion below regarding these related-party transactions.

Summarized financial information for ARO is as follows (in millions):
Three Months Ended March 31,
20242023
Revenues$138.3 $123.6 
Operating expenses
Contract drilling (exclusive of depreciation)98.3 90.9 
Depreciation19.0 15.0 
General and administrative5.8 4.6 
Operating income15.2 13.1 
Other expense, net13.1 10.4 
Provision for income taxes3.7 1.9 
Net income (loss)$(1.6)$0.8 

12


March 31, 2024December 31, 2023
Cash and cash equivalents$69.5 $92.9 
Other current assets198.3 184.0 
Non-current assets1,094.2 1,081.0 
Total assets$1,362.0 $1,357.9 
Current liabilities$135.0 $136.0 
Non-current liabilities1,057.6 1,056.8 
Total liabilities$1,192.6 $1,192.8 

Equity in Earnings of ARO

We account for our interest in ARO using the equity method of accounting and only recognize our portion of ARO's net income, adjusted for basis differences as discussed below, in Equity in earnings of ARO in our Condensed Consolidated Statements of Operations.

Our equity method investment in ARO was recorded at its estimated fair value in fresh start accounting upon emergence from bankruptcy in 2021. We computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's U.S. GAAP financial statements ("basis differences") at that date. These basis differences primarily related to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were determined to have favorable terms relative to market terms as of the measurement date.

Basis differences are amortized over the remaining life of the assets or liabilities to which they relate and are recognized as an adjustment to the Equity in earnings of ARO in our Condensed Consolidated Statements of Operations. The amortization of those basis differences is combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):
Three Months Ended March 31,
20242023
50% interest in ARO net income (loss)$(0.8)$0.4 
Amortization of basis differences3.2 2.9 
Equity in earnings of ARO$2.4 $3.3 

13


Related-Party Transactions

During the three months ended March 31, 2024 and 2023, revenues recognized by us related to the Lease Agreements were $19.0 million and $18.8 million, respectively.

Our balances related to the ARO lease agreements were as follows (in millions):

March 31, 2024December 31, 2023
Amounts receivable (1)
$27.5 $10.2 
Contract liabilities(2)
$16.8 $15.9 
Accounts payable(2)
$58.7 $57.7 

(1)Amounts receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheets.
(2)The per day bareboat charter amount in the Lease Agreements is subject to adjustment based on actual performance of the respective rig and therefore, the corresponding contract liabilities are subject to adjustment during the lease term. Upon completion of the lease term, such amount becomes a payable to or a receivable from ARO.

During 2017 and 2018, the Company contributed assets to ARO in exchange for the 10-year Notes Receivable from ARO. The Notes Receivable, as amended in December 2023, bear interest based on a one-year term SOFR, set as of the end of the year prior to the year applicable, plus 2.10%. The Notes Receivable from ARO were adjusted to their estimated fair value in fresh start accounting upon emergence from bankruptcy in 2021 and the resulting discount to the principal amount is being amortized using the effective interest method to interest income over the remaining terms of the notes.

The principal amount and discount of the Notes Receivable from ARO were as follows (in millions):

March 31, 2024December 31, 2023
Principal amount$402.7 $402.7 
Discount(113.4)(120.4)
Carrying value$289.3 $282.3 
Interest receivable(1)(2)
$7.0 $ 

(1)Our interest receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheets.
(2)We collected our 2023 interest on the Notes Receivable from ARO in cash prior to December 31, 2023, and as such, there was no interest receivable from ARO as of December 31, 2023.

14


Interest income earned on the Notes Receivable from ARO was as follows (in millions):

Three Months Ended March 31,
20242023
Interest income$7.0 $7.5 
Non-cash amortization (1)
7.0 7.0 
Total interest income on the Notes Receivable from ARO$14.0 $14.5 

(1)Represents the amortization of the discount on the Notes Receivable from ARO using the effective interest method to interest income over the term of the notes.

Note 4 -Fair Value Measurements

The carrying values and estimated fair values of certain of our financial instruments were as follows (in millions):
March 31, 2024December 31, 2023
Carrying Value  Estimated Fair Value  Carrying ValueEstimated Fair Value  
Second Lien Notes (1)
$1,080.1 $1,134.0 $1,079.3 $1,126.1 
Long-term notes receivable from ARO (2)
$289.3 $424.0 $282.3 $423.5 

(1)The estimated fair value of the 8.375% Senior Secured Second Lien Notes due 2030 (the "Second Lien Notes") was determined using quoted market prices, which are level 1 inputs.

(2)The estimated fair value of our Notes Receivable from ARO was estimated using an income approach to value the forecasted cash flows attributed to the Notes Receivable from ARO using a discount rate based on a comparable yield with a country-specific risk premium, which are considered to be level 2 inputs.

The estimated fair values of our cash and cash equivalents, restricted cash, accounts receivable and trade payables approximated their carrying values as of March 31, 2024 and December 31, 2023.

Note 5 -Property and Equipment

Property and equipment consisted of the following (in millions):
March 31, 2024December 31, 2023
Drilling rigs and equipment$1,378.0 $1,312.5 
Work-in-progress596.4 537.0 
Other39.6 39.5 
$2,014.0 $1,889.0 

15


Note 6 -Pension and Other Post-retirement Benefits

We have defined-benefit pension plans and retiree medical plans that provide post-retirement health and life insurance benefits.

The components of net periodic pension and retiree medical income were as follows (in millions):
Three Months Ended March 31,
 20242023
Interest cost$7.4 $7.7 
Expected return on plan assets(7.9)(7.7)
Amortization of net gain(0.2)(0.1)
Net periodic pension and retiree medical income (1)
$(0.7)$(0.1)

(1)Included in Other, net, in our Condensed Consolidated Statements of Operations.


Note 7 -Earnings Per Share
 
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and includes the effect of all potentially dilutive stock equivalents, including warrants, restricted stock unit awards and performance stock unit awards.

The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the three months ended March 31, 2024 and 2023 (in millions):

Three Months Ended March 31,
 20242023
Income attributable to our shares $25.5 $46.7 
Weighted average shares outstanding:
Basic72.4 75.2 
Effect of stock equivalents1.2 1.2 
Diluted73.6 76.4 

Anti-dilutive share awards totaling 75,000 and 8,000 were excluded from the computation of diluted EPS for the three months ended March 31, 2024 and 2023, respectively.

We had 5,470,950 warrants outstanding (the "Warrants") as of March 31, 2024 to purchase common shares of Valaris Limited (the "Common Shares"), which are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant and expire on April 29, 2028. The exercise of these Warrants into Common Shares would have a dilutive effect to the holdings of Valaris Limited's existing shareholders. These warrants are anti-dilutive for all periods presented.

16


Note 8 -Debt

Second Lien Notes

On April 19, 2023, the Company and Valaris Finance Company LLC (“Valaris Finance”), a wholly-owned subsidiary, issued and sold, at par, $700.0 million aggregate principal amount of Second Lien Notes (the "Initial Second Lien Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). On August 21, 2023, the Company and Valaris Finance issued, at 100.75% of par, an additional $400.0 million aggregate principal amount of Second Lien Notes (the "Additional Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act. The Initial Second Lien Notes and the Additional Notes form a single series and are collectively referred to as the "Second Lien Notes".

The Second Lien Notes were issued under the Indenture, dated as of April 19, 2023 (the "Indenture"), and will mature on April 30, 2030. The Second Lien Notes bear an interest rate of 8.375% per annum and interest is payable semi-annually in arrears on April 30 and October 30 of each year.

As of March 31, 2024, we were in compliance with our covenants under the Indenture.

Senior Secured Revolving Credit Facility

On April 3, 2023, the Company entered into a senior secured revolving credit agreement (the “Credit Agreement”). The Credit Agreement provides for commitments permitting borrowings of up to $375.0 million (which may be increased, subject to the agreement of lenders to provide such additional commitments and the satisfaction of certain conditions, by an additional $200.0 million pursuant to the terms of the Credit Agreement) and includes a $150.0 million sublimit for the issuance of letters of credit. Valaris Finance and certain other subsidiaries of the Company guarantee the Company's obligations under the Credit Agreement, and the lenders have a first priority lien on the assets securing the Credit Agreement.

Amounts borrowed under the Credit Agreement are subject to an interest rate per annum equal to, at our option, either (a) a base rate determined as the greatest of (i) a prime rate, (ii) the federal funds rate plus 0.5% and (iii) Term SOFR (as defined in the Credit Agreement) for a one month interest period plus 1.1% (such base rate to be subject to a 1% floor) or (b) Term SOFR plus 0.10% (subject to a 0% floor), plus, in each case of clauses (a) and (b) above, an applicable margin ranging from 1.50% to 3.00% and 2.50% to 4.00%, respectively, based on the credit ratings that are one notch higher than the corporate family ratings provided by Standard & Poor’s Financial Services LLC (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”) with respect to Valaris Limited.

Additionally, we are required to pay a quarterly commitment fee to the lenders under the Credit Agreement with respect to the average daily unutilized commitments thereunder at a rate ranging from 0.375% to 0.75% depending on the credit ratings that are one notch higher than the corporate family ratings provided by S&P and Moody’s with respect to Valaris Limited. With respect to each letter of credit issued pursuant to the Credit Agreement, we are required to pay a letter of credit fee equal to the applicable margin in effect for Term SOFR loans and a fronting fee in an amount to be mutually agreed between us and the issuer of such letter of credit.

As of March 31, 2024, we were in compliance in all material respects with our covenants under the Credit Agreement. We had no amounts outstanding under the Credit Agreement as of March 31, 2024.

17


Note 9 -Shareholders' Equity

Activity in our various shareholders' equity accounts for the three months ended March 31, 2024 and 2023 were as follows (in millions):

 Shares 
Issued
Par ValueAdditional
Paid-in
Capital
WarrantsRetained EarningsAOCI Treasury
Shares
Non-controlling
Interest
BALANCE, December 31, 202375.4 $0.8 $1,119.8 $16.4 $1,025.5 $25.2 $(200.1)$9.4 
Net income— — — — 25.5 — —  
Share-based compensation cost— — 8.0 — — — — — 
Net changes in pension and other postretirement benefits— — — — — (0.2)— — 
Shares withheld for taxes on vesting of share-based awards
— — (0.1)— — — — — 
Net other comprehensive income— — — — — 0.1 — — 
BALANCE, March 31, 202475.4 $0.8 $1,127.7 $16.4 $1,051.0 $25.1 $(200.1)$9.4 

 Shares 
Issued
Par ValueAdditional
Paid-in
Capital
WarrantsRetained EarningsAOCI Treasury
Shares
Non-controlling
Interest
BALANCE, December 31, 2022
75.2 $0.8 $1,097.9 $16.4 $160.1 $14.7 $ $8.0 
Net income— — — — 46.7 — — 1.9 
Share-based compensation cost— — 5.7 — — — — — 
Net changes in pension and other postretirement benefits
— — — — — (0.1)— — 
Net other comprehensive loss— — — — — (0.1)— — 
BALANCE, March 31, 2023
75.2 $0.8 $1,103.6 $16.4 $206.8 $14.5 $ $9.9 

Share Repurchase Program

In 2022, our board of directors authorized a share repurchase program (the "Share Repurchase Program") under which we may purchase up to $100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million and in February 2024, authorized a further increase to $600.0 million. The share repurchase program does not have a fixed expiration, may be modified, suspended or discontinued at any time and any repurchases made pursuant to the share repurchase program are subject to compliance with applicable covenants and restrictions under our financing agreements. There were no share repurchases during each of the three months ended March 31, 2024 and 2023. As of March 31, 2024, we had approximately $400.0 million available for share repurchases pursuant to the Share Repurchase Program.

18


Note 10 -Income Taxes
 
Historically, we calculated our provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period. We determined that since small changes in estimated pre-tax income or loss would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate of income taxes for the three months ended March 31, 2024 and 2023, and therefore, we used a discrete effective tax rate method to calculate income taxes for each of these periods. We will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.

Discrete income tax benefit for the three months ended March 31, 2024 was $6.6 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, partially offset by the resolution of prior period tax matters. Discrete income tax benefit for the three months ended March 31, 2023 was $43.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Excluding the aforementioned discrete tax items, income tax expense for the three months ended March 31, 2024 and 2023 was $19.5 million and $16.2 million, respectively.

Luxembourg Tax Assessments

In December 2023, one of the Company’s Luxembourg subsidiaries received tax assessments for fiscal years 2019, 2020, 2021 and 2023. In February 2024, the Luxembourg tax authorities rescinded the portion of the assessment relating to 2023, resulting in a revised aggregate tax assessment of approximately €60.0 million (approximately $63.0 million converted at current period-end exchange rates). We recorded a liability for uncertain tax positions for this amount during the fourth quarter of 2023 and contested the validity and amount of the assessments. In April 2024, we received a favorable decision from the Luxembourg tax authorities stating that the assessments for the 2019-2021 tax years are not enforceable. As a result, we will reverse the uncertain tax position liability for the previously issued assessments and recognize a tax benefit of approximately $63.0 million in our condensed consolidated statements of operations during the second quarter of 2024.

Tax Legislation
      
The Organization for Economic Co-operation and Development issued Pillar Two rules introducing a new global minimum tax of 15% applied on a country-by-country basis effective on January 1, 2024. Certain jurisdictions have enacted new tax laws to align with the recommendations under Pillar Two while other jurisdictions have proposed or are actively considering changes to existing tax laws based on the new rules. The impact of the Pillar Two model rules which have been enacted to date was not significant to our condensed consolidated financial statements for the three months ended March 31, 2024. There remains uncertainty as to how global legislation relating to Pillar Two will evolve and we will continue to monitor developments related to this initiative and the potential impact on future periods.

19


Note 11 -Contingencies

ARO Newbuild Funding Obligations

In connection with our 50/50 unconsolidated joint venture, we have a potential obligation to fund ARO for newbuild jackup rigs. The shareholder agreement governing the joint venture specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. The joint venture partners intend for the newbuild jackup rigs to be financed out of available cash on hand and from ARO's operations and/or funds available from third-party financing. The first newbuild jackup, Kingdom 1, was delivered and commenced operations in the fourth quarter of 2023, and the second is expected to be delivered in the second quarter of 2024. In January 2020, ARO paid 25% of the purchase price from cash on hand for each of the two newbuilds, and in October 2023, entered into a $359.0 million term loan to finance the remaining payments due upon delivery and for general corporate purposes. The term loan matures in eight years following the related drawdown under the term loan and requires equal quarterly amortization payments during the term, with a 50% balloon payment due at maturity. The term loan bears interest based on the three-month SOFR plus a margin ranging from 1.25% to 1.4%. Our Notes Receivable from ARO are subordinated and junior in right of payment to ARO’s term loan. In the event ARO has insufficient cash or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Beginning with the delivery of the second newbuild, each partner's commitment shall be reduced by the lesser of the actual cost of each newbuild rig or $250.0 million, on a proportionate basis.

Letters of Credit

In the ordinary course of business with customers and others, we have entered into letters of credit to guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Letters of credit outstanding as of March 31, 2024 totaled $97.2 million and are issued under facilities provided by various banks and other financial institutions, but none were issued under the Credit Agreement. Obligations under these letters of credit are not normally called, as we typically comply with the underlying performance requirements. As of March 31, 2024, we had collateral deposits in the amount of $13.2 million with respect to these agreements.

Patent Litigation

In December 2022, a subsidiary of Transocean Ltd. commenced an arbitration proceeding against us alleging breach of a license agreement related to certain dual-activity drilling patents. We are unable to estimate our potential exposure, if any, to the proceeding at this time but do not believe that our ultimate liability, if any, resulting from this proceeding will have a material effect on our consolidated financial condition, results of operations or cash flows. We do not believe that we have breached the license agreement and intend to defend ourselves vigorously against this claim.

Brazil Administrative Proceeding

In July 2023, we received notice of an administrative proceeding initiated against us in Brazil. Specifically, the Federal Court of Accounts ("TCU") is seeking from us, Samsung Heavy Industries (“SHI”) and others, on a joint and several basis, a total of approximately BRL 601.0 million (approximately $120.0 million at the current quarter-end exchange rates) in damages that TCU asserts arose from the overbilling to Petrobras in 2015 in relation to the drilling services agreement with Petrobras for VALARIS DS-5 (the “DSA”). As fully disclosed in our prior periodic reports, the DSA was previously the subject of (1) investigations by the SEC and the U.S. Department of Justice, each of which closed their investigation of us in 2018 without any enforcement action, (2) an arbitration proceeding against SHI in which we prevailed resulting in SHI making a $200.0 million cash payment to us in December 2019, and (3) a settlement with Petrobras normalizing our business relations in August 2018. We plan to vigorously defend ourselves against the allegations made by the TCU. We are unable to estimate our potential exposure, if any, at this time.
20



Other Matters

In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows.

Note 12 -Segment Information
 
Our business consists of four operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (4) Other, which consists of management services on rigs owned by third parties and the activities associated with our arrangements with ARO under the Lease Agreements. Floaters, Jackups and ARO are also reportable segments.

Our onshore support costs included within Contract drilling expenses are not allocated to our operating segments for purposes of measuring segment operating income (loss) and as such, those costs are included in “Reconciling Items.” Further, 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". We measure segment assets as Property and equipment, net.

The full operating results included below for ARO are not included within our consolidated results and thus are deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See "Note 3 - Equity Method Investment in ARO" for additional information on ARO and related arrangements. Similarly, the Property and equipment, net balances presented below for ARO are not included within our condensed consolidated balance sheets and thus are also deducted under "Reconciling Items."

Segment information for the three months ended March 31, 2024 and 2023, respectively, are presented below (in millions):

Three Months Ended March 31, 2024
FloatersJackupsAROOtherReconciling ItemsConsolidated Total
Revenues$324.4 $152.3 $138.3 $48.3 $(138.3)$525.0 
Operating expenses
Contract drilling (exclusive of depreciation)253.4 133.9 98.3 22.2 (63.0)444.8 
Depreciation13.2 10.4 19.0 1.3 (17.1)26.8 
General and administrative  5.8  20.7 26.5 
Equity in earnings of ARO    2.4 2.4 
Operating income$57.8 $8.0 $15.2 $24.8 $(76.5)$29.3 
Property and equipment, net$1,080.6 $493.8 $1,050.1 $86.5 $(978.7)$1,732.3 

21


Three Months Ended March 31, 2023
FloatersJackupsAROOtherReconciling ItemsConsolidated Total
Revenues$214.8 $169.8 $123.6 $45.5 $(123.6)$430.1 
Operating expenses
Contract drilling (exclusive of depreciation)174.6 148.9 90.9 20.2 (57.4)377.2 
Depreciation13.0 9.0 15.0 1.3 (15.0)23.3 
General and administrative  4.6  19.8 24.4 
Equity in earnings of ARO    3.3 3.3 
Operating income$27.2 $11.9 $13.1 $24.0 $(67.7)$8.5 
Property and equipment, net$515.7 $404.1 $788.6 $55.6 $(748.5)$1,015.5 

Information about Geographic Areas

As of March 31, 2024, the geographic distribution of our and ARO's drilling rigs was as follows:
FloatersJackupsOtherTotal ValarisARO
Middle East & Africa3 4 9 16 8 
Europe
4 12  16  
North & South America
9 7  16  
Asia & Pacific Rim2 3  5  
Total18 26 9 53 8 

We provide management services in the U.S. Gulf of Mexico on two rigs owned by a third party not included in the table above.

ARO has ordered one newbuild jackup, which is under construction in the Middle East and expected to be delivered in the second quarter of 2024. This rig is not included in the table above.

Note 13 -Supplemental Financial Information

Condensed Consolidated Balance Sheet Information

Accounts receivable, net, consisted of the following (in millions):
March 31, 2024December 31, 2023
Trade$426.4 $375.2 
Income tax receivables85.2 83.2 
Other15.0 16.2 
 526.6 474.6 
Allowance for doubtful accounts(15.7)(15.3)
 $510.9 $459.3 

22


Other current assets consisted of the following (in millions):
March 31, 2024December 31, 2023
Deferred costs$76.7 $75.3 
Prepaid taxes52.7 49.1 
Prepaid expenses16.6 23.6 
Other31.6 29.2 
 $177.6 $177.2 
        
Accrued liabilities and other consisted of the following (in millions):
March 31, 2024December 31, 2023
Current contract liabilities (deferred revenues)$122.3 $116.2 
Personnel costs69.1 76.6 
Income and other taxes payable61.7 52.9 
Accrued interest38.4 15.4 
Lease liabilities29.5 27.2 
Accrued claims15.0 20.4 
Other30.5 35.5 
 $366.5 $344.2 
        
Other liabilities consisted of the following (in millions):
March 31, 2024December 31, 2023
Unrecognized tax benefits (inclusive of interest and penalties)$206.4 $224.0 
Pension and other post-retirement benefits139.5 141.6 
Lease liabilities
49.8 48.9 
Noncurrent contract liabilities (deferred revenues)36.2 37.6 
Other19.8 19.6 
 $451.7 $471.7 

Condensed Consolidated Statements of Operations Information

Other, net consisted of the following (in millions):

Three Months Ended March 31,
20242023
Net foreign currency exchange gains$5.4 $0.5 
Net periodic pension and retiree medical income0.7 0.1 
Other expense(0.3) 
$5.8 $0.6 

Condensed Consolidated Statement of Cash Flows Information

Our restricted cash consists primarily of $13.2 million and $12.6 million of collateral on letters of credit at March 31, 2024 and December 31, 2023, respectively. See "Note 11 - Contingencies" for more information regarding our letters of credit.

23


Concentration of Risk

Credit Risk - We are exposed to credit risk relating to our cash and cash equivalents and receivables from customers. Our cash and cash equivalents are primarily held by various well-capitalized and credit-worthy financial institutions. We monitor the credit ratings of these institutions and limit the amount of exposure to any one institution and therefore, do not believe a significant credit risk exists for these balances. We mitigate our credit risk relating to receivables from customers, which consist primarily of major international, government-owned and independent oil and gas companies, by performing ongoing credit evaluations. We also maintain reserves for potential credit losses, which generally have been within our expectations.

Customer Concentration - Consolidated revenues with customers that individually contributed 10% or more of revenue in either of the three months ended March 31, 2024 and 2023 were as follows:

Three Months Ended March 31, 2024Three Months Ended March 31, 2023
FloatersJackupsOtherTotalFloatersJackupsOtherTotal
BP plc
6 %4 %6 %16 %2 %5 %6 %13 %
Equinor ASA
11 % % %11 % % % % %
Eni S.p.A
2 %5 % %7 %7 %7 % %14 %
Other customers (1)
43 %20 %3 %66 %41 %27 %5 %73 %
62 %29 %9 %100 %50 %39 %11 %100 %

(1)Other customers includes customers that individually contributed to less than 10% of our total revenues.

Geographic Concentration - For purposes of our geographic disclosure, we attribute revenues to the geographic location where such revenues are earned. Consolidated revenues for locations that individually had 10% or more of revenue were as follows (in millions):

Three Months Ended March 31, 2024Three Months Ended March 31, 2023
FloatersJackupsOtherTotalFloatersJackupsOtherTotal
Brazil
$131.1 $ $ $131.1 $37.1 $ $ $37.1 
U.S. Gulf of Mexico56.8 9.4 28.5 94.7 41.7 8.2 26.1 76.0 
United Kingdom 72.2  72.2  53.5  53.5 
Australia43.0 4.7  47.7 37.7 12.9  50.6 
Other countries (1)
93.5 66.0 19.8 179.3 98.3 95.2 19.4 212.9 
$324.4 $152.3 $48.3 $525.0 $214.8 $169.8 $45.5 $430.1 

(1)Other countries includes locations that individually contributed to less than 10% of our total revenues.

24


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
    
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto included in "Item 1. Financial Statements" and with our annual report on Form 10-K for the year ended December 31, 2023. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report and elsewhere in this quarterly report. See “Forward-Looking Statements.”

EXECUTIVE SUMMARY

Our Business

We are a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. We own the world's largest offshore drilling rig fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in ARO, our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.

Our Industry

Operating results in the offshore contract drilling industry are highly cyclical and are directly related to the demand for 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 most regions are generally of a short-term nature due to rig mobility.

Demand for offshore drilling is impacted by fundamental supply and demand dynamics for crude oil. Since late 2022, Brent crude oil prices have been largely trading in a range between $70 and $90 per barrel, with OPEC+ members managing supply in an effort to keep the market in balance. The constructive oil price environment has led to an improvement in contracting and tendering activity and we believe is supportive of the current upcycle for our industry.

Rig attrition in the industry over the last decade, particularly for floaters, has resulted in a smaller global fleet of rigs that is available to meet customer demands. In addition, demand for offshore drilling services continues to improve as evidenced by increasing global utilization and day rates for offshore drilling rigs. Consequently, our outlook for the offshore drilling business is positive.

Inflationary pressures remain elevated and have resulted in increased personnel costs as well as in the prices of goods and services required to operate our rigs or execute capital projects. We expect that our costs will continue to rise in the near term and although certain of our long-term contracts contain provisions for escalating costs, we cannot predict with certainty our ability to successfully claim recoveries of higher costs from our customers under these contractual stipulations. Despite the inflationary trends, we continue to see recovery in our industry.

25


Backlog

Our contract drilling backlog reflects commitments, represented by signed drilling contracts, and is calculated by multiplying the contracted operating day rate by the contract period. The contracted day rate excludes certain types of lump sum fees for rig mobilization, demobilization, contract preparation, as well as customer reimbursables and bonus opportunities. Our backlog excludes ARO's backlog, but includes backlog from our rigs leased to ARO at the contractual rates, which are subject to adjustment under the terms of the shareholder agreement governing the joint venture (the "Shareholder Agreement").

The ARO backlog presented below is 100% of ARO's backlog and is inclusive of backlog on both ARO owned rigs and rigs leased from us. As an unconsolidated 50/50 joint venture, when ARO realizes revenue from its backlog, 50% of the earnings thereon would be reflected in our results in equity in earnings of ARO in our Condensed Consolidated Statement of Operations. The earnings from ARO backlog with respect to rigs leased from us will be net of, among other things, payments to us under bareboat charters for those rigs. See "Note 3 - Equity Method Investment in ARO" to our condensed consolidated financial statements included in "Item 1. Financial Statements" for additional information.

The following table summarizes our and ARO's contract backlog of business as of April 30, 2024 and February 15, 2024 (in millions):
April 30, 2024February 15, 2024
Floaters (1)
$2,404.6 $2,531.7 
Jackups(2)
1,184.9 1,167.4 
Other (3)
427.7 222.3 
Total
$4,017.2 $3,921.4 
ARO (4)
$1,982.2 $2,138.1 

(1)The decrease for Floaters is primarily due to revenues realized. This was partially offset by a six-month contract extension for VALARIS DS-9 offshore Angola and a 60-day contract extension for VALARIS DS-17 offshore Brazil, which resulted in incremental aggregate backlog of approximately $70.0 million.

(2)The increase for Jackups is due to a 770-day contract award for VALARIS 144, which resulted in incremental aggregate backlog of approximately $144.0 million. This increase was partially offset by revenues realized.

(3)Other includes the backlog for our managed rig services and the bareboat charter backlog for the jackup rigs leased to ARO to fulfill contracts between ARO and Saudi Aramco. Substantially all the operating costs for jackups leased to ARO through the bareboat charter agreements will be borne by ARO. The increase in Other is due to three-year contract extensions for our managed rigs, which resulted in incremental aggregate backlog of approximately $245.0 million, partially offset by revenues realized.

(4)The decrease in ARO backlog is due to revenues realized and a reduction of backlog of approximately $18.0 million attributable to the VALARIS 143 contract, which is expected to be terminated effective in May 2024 based on a suspension notice received in April.

26


BUSINESS ENVIRONMENT
 
Floaters

In recent years, the more constructive oil price environment has led to an improvement in contracting and tendering activity for floaters. The number of contracted benign environment floaters has increased to 127 at March 31, 2024 from a low of 101 in early 2021, contributing to a 13% increase in global utilization, from 73% to 86%, for the industry's marketed fleet over the same period. This increase in activity is particularly evident for 6th and 7th generation drillships, such as those included in our floater fleet. Utilization for the global marketed 6th and 7th generation drillship fleet is currently at 90% and has met or exceeded 90% since early 2023, resulting in a meaningful improvement in day rates for this class of assets.

Since the beginning of 2022, we have completed the reactivation of five previously stacked drillships and one stacked semisubmersible for attractive contracts, and we are currently reactivating another stacked drillship, VALARIS DS-7, for a long-term contract offshore West Africa expected to commence in mid-2024.

From a supply perspective, as of March 31, 2024, the number of benign environment floaters including stacked rigs declined by 41% to 166 from a peak of 281 in late 2014. Across the stacked drillship fleet and newbuild drillships remaining at South Korean shipyards, we believe there are only ten uncontracted drillships remaining that are likely reactivation candidates over the next few years, including VALARIS DS-11, VALARIS DS-13 and VALARIS DS-14. We anticipate that continued floater demand growth will further reduce available drillship capacity. Also, given the expected high construction cost and lack of shipyard capacity, we do not believe that market conditions are supportive of floater newbuild construction for the foreseeable future.

Jackups
Contracting and tendering activity for jackups has improved in recent years as a result of the more constructive oil price environment, and we have seen a corresponding increase in utilization. The number of contracted jackups has increased to 412 at March 31, 2024 from a low of 341 in early 2021, contributing to a 16% increase in global utilization, from 78% to 94%, for the industry's marketed fleet over the same period, which has led to a meaningful increase in day rates for jackups.
In early 2024, Saudi Arabia announced that they plan to maintain maximum sustainable capacity at 12 million barrels per day rather than pursuing their previously stated aim of increasing capacity to 13 million barrels per day. Following this announcement, Aramco sent contract suspension notices to several offshore drillers to suspend its contracts, which included notice to ARO with respect only to its contract for VALARIS 143, one of our nine jackups leased to ARO. Since the announcement, certain offshore drillers, including ARO, have announced contract suspensions for a total of 22 rigs, which represents 5% of the marketed jackup fleet. We believe that approximately half of these rigs are likely to be competitive in other higher-specification, benign environment regions and expect there to be sufficient incremental demand in these regions to absorb them in an orderly manner.

From a supply perspective, as of March 31, 2024, the number of jackups declined by 8% to 497 from a peak of 542 in early 2015. While the number of jackups has decreased less than floaters, 32% of the current jackup fleet is more than 30 years of age with limited useful lives remaining. Further, we believe that some of the jackups that are currently idle are not competitive, either due to their age or length of time stacked. Expenditures required to reactivate some of these rigs may prove cost prohibitive and drilling contractors may instead elect to scrap certain rigs. Excluding ARO's newbuild program, there are only 16 newbuild jackups remaining at shipyards, of which 11 are at Chinese shipyards, many of which are expected to be used locally in China.


27


RESULTS OF OPERATIONS

Management believes the comparison of the most recently completed quarter to the immediately preceding quarter provides more relevant information needed to understand and analyze the business. As such, as permitted under applicable SEC rules, we have elected to discuss any material changes in our results of operations by including a comparison of our most recently completed fiscal quarter ended March 31, 2024 (the "current quarter") to the immediately preceding fiscal quarter ended December 31, 2023 (the "preceding quarter"). We also continue to discuss any material changes in our results of operations for the three months ended March 31, 2024 compared to the corresponding period of the preceding fiscal year (the "prior year quarter"), as required under the applicable SEC rules.

Three Months Ended March 31, 2024 Compared to Three Months Ended December 31, 2023

The following table summarizes our Condensed Consolidated Results of Operations for the three months ended March 31, 2024 and December 31, 2023 (in millions, except percentages):

Three Months EndedChange% Change
March 31,
2024
December 31,
2023
Revenues$525.0 $483.8 $41.2 %
Operating expenses
Contract drilling (exclusive of depreciation)444.8 402.0 42.8 11 %
Depreciation26.8 27.5 (0.7)(3)%
General and administrative26.5 24.3 2.2 %
Total operating expenses498.1 453.8 44.3 10 %
Equity in earnings of ARO2.4 8.3 (5.9)(71)%
Operating income29.3 38.3 (9.0)(23)%
Other income, net9.1 — 9.1 NM
Provision (benefit) for income taxes12.9 (790.2)803.1 (102)%
Net income25.5 828.5 (803.0)(97)%
Net loss attributable to noncontrolling interests— 6.7 (6.7)NM
Net income attributable to Valaris$25.5 $835.2 $(809.7)(97)%
NM - Not meaningful

Revenue increased in the current quarter, compared to the preceding quarter, primarily due to $30.2 million of incremental revenue earned for VALARIS DS-8, which completed its reactivation and commenced a new contract late in the preceding quarter and a $4.6 million increase from revenues earned from lease agreements with ARO. For the remaining fleet, there were net increases of $8.2 million and $3.0 million from higher average daily revenue and customer reimbursable revenue, respectively, partially offset by a net decrease of $4.8 million from fewer operating days.

Contract drilling expense increased in the current quarter, compared to the preceding quarter, primarily due to a $16.9 million increase in repair costs associated with contract preparation, special periodic surveys for certain rigs and other scheduled repairs and maintenance. In addition, there were $8.0 million of higher costs related to certain claims, $7.3 million of incremental costs for VALARIS DS-8, a $4.0 million increase in VALARIS DS-7 reactivation costs and a $2.8 million increase in reimbursable costs.

Other income, net, increased primarily due to a $12.3 million increase in foreign currency gains and a $4.0 million decrease in interest expense, partially offset by a $6.2 million decrease in interest income.

28


Discrete income tax benefits for the current quarter and preceding quarter were $6.6 million and $2.5 million, respectively and were primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, partially offset by the resolution of prior period tax matters. Excluding the aforementioned discrete tax items, income tax expense increased to $19.5 million for the current quarter from $787.7 million tax benefit for the preceding quarter, primarily due to a $799.5 million deferred tax benefit recognized in the preceding quarter to reduce our valuation allowance on deferred tax assets.

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

The following table summarizes our Condensed Consolidated Results of Operations for the three months ended March 31, 2024 and 2023 (in millions, except percentages):

Three Months EndedChange% Change
March 31,
2024
March 31,
2023
Revenues$525.0 $430.1 $94.9 22 %
Operating expenses
Contract drilling (exclusive of depreciation)444.8 377.2 67.6 18 %
Depreciation26.8 23.3 3.5 15 %
General and administrative26.5 24.4 2.1 %
Total operating expenses498.1 424.9 73.2 17 %
Equity in earnings of ARO2.4 3.3 (0.9)(27)%
Operating income29.3 8.5 20.8 245 %
Other income, net9.1 12.5 (3.4)(27)%
Provision (benefit) for income taxes12.9 (27.6)40.5 (147)%
Net income25.5 48.6 (23.1)(48)%
Net income attributable to noncontrolling interests— (1.9)1.9 NM
Net income attributable to Valaris$25.5 $46.7 $(21.2)(45)%
NM - Not meaningful

Revenues increased in the current quarter, compared to the prior year quarter, primarily due to $86.7 million of incremental revenue earned for VALARIS DS-17 and VALARIS DS-8, which both commenced contracts following reactivation in the second half of 2023. For the remaining fleet, there were increases of $20.8 million and $8.0 million from higher average daily revenue and customer reimbursable revenue, respectively, partially offset by a net decrease of $21.9 million from fewer operating days.

Contract drilling expense increased in the current quarter, compared to the prior year quarter, primarily due to $47.5 million of incremental costs incurred for VALARIS DS-17 and VALARIS DS-8. For the remaining fleet, personnel-related costs for rigs that operated in both comparative periods increased $16.4 million, partially driven by wage increases in certain regions and incentive compensation costs, and there were also increases of $8.2 million attributable to reimbursable expense, $3.3 million of costs associated with integrated services, $3.1 million related to costs for certain claims and $2.2 million in reactivation costs. These increases were partially offset by a $20.8 million decrease in costs for certain jackups that were idle or between contracts in the current quarter.

Depreciation expense increased primarily due to new assets placed in service for certain rigs that underwent reactivation projects and capital upgrades.

Other income, net, decreased primarily due to a $6.6 million increase in interest expense and a $2.0 million decrease in interest income, partially offset by a $4.9 million increase in foreign currency gains.

29


Discrete income tax benefit for the current quarter was $6.6 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, partially offset by the resolution of prior period tax matters. Discrete income tax benefit for the prior year quarter was $43.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Excluding the aforementioned discrete tax items, income tax expense for the current quarter and prior year quarter was $19.5 million and $16.2 million, respectively.

Rig Counts, Utilization and Average Daily Revenue
 
The following table summarizes the total and active offshore drilling rigs for Valaris and ARO as of the following dates:
 March 31,
2024
December 31,
2023
March 31,
2023
Total Fleet
Floaters (1)
18 1816 
Jackups(2)
26 2728 
Other(3)
8
Total Fleet - Valaris53 53 52 
ARO(4)
8
Active Fleet(5)
Floaters(6)
13 1312 
Jackups(2)
19