Valaris Ltd

NYSE:VAL

Earnings Call Analysis

Revenues Rise, Share Buybacks Up, & Optimism on Rates

The company's projected Q1 revenue is $490 to $500 million, an increase from the previous quarter's $484 million, reflecting startups of contract rigs but offset by jack-up rig downtime. Adjusted EBITDA is expected to range $30 to $40 million, with Q1 CapEx forecasted at $145 to $155 million. Annual guidance remains at $2.3 to $2.4 billion in revenue, $1.65 to $1.75 billion in drilling expenses, and $105 to $110 million in G&A with full-year CapEx between $390 and $430 million. Share buybacks continue with $200 million in shares already repurchased in 2023, and a share repurchase program doubled from $300 to $600 million, reflecting a belief in undervalued stock price. Lastly, the market perspectives suggest leading-edge day rates for floaters are poised to rise over time.

Confidence in the Current Upcycle and Positive Outlook for Valaris

Valaris starts off illustrating a strong belief in the continuing upcycle, signified by the rising demand and constrained supply in the offshore drilling market, which tightens the market conditions. This buoyancy is reflected in their performance, with their total contract backlog escalating by nearly 60% over the past year, reaching more than $3.9 billion. They have secured about $3 billion in new contracts in 2023, indicating a robust commercial execution. This extensive backlog underscores their projection of significant improvements in their financial outcomes for 2024.

Rising Day Rates and Share Repurchase Program

Another facet of their positive momentum is nearly $3 billion worth of new contracts acquired in 2023 at substantially improved day rates, demonstrating market strength. Furthermore, Valaris underscores their dedication to shareholder returns, emphasizing the $200 million repurchased shares in 2023 and an increase in the share repurchase authorization, from $300 million to $600 million, as a move aligning with their framework of capital return.

Operational Excellence and Reactivation Success

Operational efficiency and safety achievements are highlighted by several rigs marking milestones, manifesting in awards for excellence. The proactiveness of the Valaris team is illustrated through the ahead-of-schedule reactivation and contract commencement of VALARIS DS-8 with Petrobras. This is part of a series of successful drillship reactivations, which forms a critical component of Valaris's growth trajectory. Their expertise in complex projects is a driving force behind their optimistic financial expectations for subsequent years.

Market Dynamics: Commodity Prices and Upstream CapEx

Valaris expresses that robust commodity prices support continuous investment in offshore long-cycle projects, with approximately 90% of undeveloped offshore reserves expected to be profitable at a Brent forward price around $70 per barrel. This is bolstered by the anticipated rise in offshore upstream CapEx by 10% in 2024 and a 6% compound annual growth rate over the next three years. These conditions fuel the opportunities in the floater market, suggesting a sustained up cycle, although schedule gaps are foreseen across the industry due to logistical factors.

Financial Performance and EBITDA Guidance

Valaris's financial performance for the quarter included an adjusted EBITDA of $58 million, with EBITDA expectations remaining within the guidance range of $500 million to $600 million for 2024. This steadfast guidance reflects their confidence in the company's profitability trajectory and the underpinning effect of newly acquired contracts on the impending fiscal results.

Cash Position and Commitment to Shareholder Capital Return

As of the end of the discussed quarter, the company had $636 million in cash and cash equivalents, demonstrating solid liquidity. Despite the decline in cash due to capital expenditures and share repurchases, their revolving credit facility ensures liquidity of just over $1 billion. The doubling of the share repurchase authorization attests to Valaris's pledge to returning value to shareholders, which remains their stated preference, barring any opportunity that offers a higher accretional value.

Expectations for Rig Reactivation and Utilization

Concluding the call, Valaris stresses the importance of maintaining high utilization of their active fleet and being strategic with reactivation decisions based on robust returns. They anticipate strong and sustained free cash flow in the coming years with an intent to reward shareholders, reflective of their optimistic market perspective and successful contracting efforts.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Valaris Fourth Quarter 2023 Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

Today, we are experiencing national AT&T coverage issues. Should the presentation be interrupted at any time, we will attempt to reconnect and continue. [Operator Instructions]

I would now like to turn the conference over to Darin Gibbins, Vice President of Investor Relations and Treasurer. Please go ahead.

[Darin Gibbins, executive]

Welcome, everyone, to the Valaris Fourth Quarter 2023 Conference Call. With me today are President and CEO, Anton Dibowitz; Senior Vice President and CFO, Chris Weber; Senior Vice President and CCO, Matt Lyne; 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, last week, 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'll turn the call over to Anton Dibowitz, President and CEO.

[Anton Dibowitz, executive]

Thanks, Darin, and good morning and afternoon to everyone. During today's call, I will begin with an overview of our performance during the quarter, then provide some high-level commentary on the outlook for the offshore drilling market and finish with an update on our capital return program. I'll then hand the call over to Matt to discuss the floater and jackup markets in more detail and provide an overview of our recent contracting success and our contracting outlook for 2024. After that, Chris will discuss our financial results and guidance, before I wrap up the call with some closing comments.

Before I discuss the quarter, I want to highlight some key points about our business that we will cover in more detail during this call. First, we remain confident in the strength and duration of this upcycle, and the outlook for Valaris is positive, with increasing demand and constrained supply tightening the market.

Second, we continue to execute on the commercial front, with nearly $3 billion of new contract backlog secured during 2023, at meaningfully improved day rates. Today, we sit with total contract backlog of more than $3.9 billion, a nearly 60% increase from 12 months ago. And our contracted revenue coverage of more than 90% in 2024 underpins the meaningful improvement we expect in this year's financial results.

Third, we are maintaining our 2024 EBITDA guidance range of $500 million to $600 million. And finally, we continue to demonstrate our commitment to returning capital to shareholders. We repurchased $200 million of shares in 2023, and we are now increasing our share repurchase authorization from $300 million to $600 million.

Starting with operations. Operating safely and efficiently remains our top priority, and we ended the year with positive momentum, with the fourth quarter safety performance being the strongest of the year. We remain focused on continued improvement, and I would like to thank all our offshore crews and onshore personnel for their dedication to following our safe systems of work and keeping safety top of mind wherever we operate around the world.

Of particular note, we had several rigs celebrate safety milestones during the quarter, and I'd like to congratulate the Valaris Norway 72, 110 and 115 for each reaching 3 years without a recordable incident, a fantastic achievement by these teams.

We're equally proud of VALARIS 110 for being awarded TotalEnergies' and North Oil Company's global jackup rig of the Year. A great example of our focus on safe and efficient operations and our collaborative approach to working with our customers.

I also want to congratulate the entire Valaris team for the successful reactivation of VALARIS DS-8. The team completed the reactivation and executed a best-in-class importation into Brazil and customer acceptance with Petrobras, enabling the rig to commence its contract ahead of schedule. This marked the fifth drillship reactivation that we've completed since early 2022 and our second during 2023, following the start-up of DS-17 in September. We continue to make good progress on reactivating DS-7 and look forward to adding another drillship to the active fleet later this year for a 2.5-year contract offshore West Africa.

Our industry-leading ability to execute these complex projects has been an important part of our growth story and a key driver for the meaningful improvement that we expect to see in our financial results in 2024 and beyond.

Moving to our financial performance for the quarter. We generated adjusted EBITDA of $58 million and adjusted EBITDAR, adding back onetime reactivation costs of $96 million. Chris will provide further details on our financial results and guidance a little later.

Turning our attention to the market. Commodity prices remain supportive for continued investment in long-cycle offshore projects, with the 5-year [ Brent ] forward price around $70 per barrel, a level at which approximately 90% of undeveloped offshore reserves are expected to be profitable. In addition, growing global demand for hydrocarbons means that these barrels will be needed to meet the world's energy needs.

According to data from [ Restat, ] offshore upstream CapEx is expected to increase by 10% in 2024 and at a compound annual growth rate of 6% over the next 3 years.

The floater market continues to develop positively. This is evident in the customer activity we are seeing, with a growing pipeline of opportunities that are providing increased term with longer lead times, a great sign for the duration of the current up cycle. However, as we mentioned in our previous quarterly call, considering lengthening contract lead times, customer acquired upgrades and repositioning rigs for work, we would expect to see some gaps in schedules across the industry during 2024.

Looking at pricing, leading-edge day rates continue to be in the mid- to high 400s, as demonstrated by our 2 most recent drillship fixtures, and we believe that they will continue to move higher over time, as the remaining stacked and new build capacity continues to diminish and the total supply and demand balance further tightens.

We believe that 2- to 3-year programs are likely to be awarded at or close to leading-edge rates, while we may see lower rates for some of the 5-year plus opportunities, as some contractors may be willing to accept a lower rate to secure a long-term duration and backlog.

Similarly, we may see somewhat lower rates on shorter-term gap fill jobs to avoid rigs becoming idle. For Valaris, we are focused on maximizing the profitability of our fleet by keeping our active rigs highly utilized and securing the best contract economics possible in each unique bidding situation.

Our recent purchase of newbuild drillships, VALARIS DS-13 and DS-14 at highly attractive prices, demonstrates our confidence in the strength and duration of the up cycle. And we will be disciplined in waiting for the right opportunities to reactivate these rigs and VALARIS DS-11.

Moving to shallow water. While the recent announcement from Saudi Arabia has created some uncertainty, we remain positive on the outlook for the jack-up market. First, we expect that Saudi Arabia will continue to be the largest jackup market in the world for the foreseeable future. We understand the recent announcement reflects a change in the timing and pace at which Saudi will develop their resources, given that they currently hold about 3 million barrels of spare capacity.

The delay in increasing maximum sustainable capacity from 12 million to 13 million barrels per day is expected to be focused on the expansion of just 2 oilfields: Safaniyah and Manifa, and we do not think it changes the Kingdom's long-term view on the need for these resources, given their expectations for growing oil demand.

Second, the global jackup market is extremely tight, with active utilization approaching 95% and the contracted rig count at its highest level in nearly 9 years, and we continue to see incremental demand coming to market outside of Saudi Arabia, which Matt will talk about a little bit later.

And finally, approximately 90 contracted jackups representing more than 20% of the contracted global jackup fleet by at least 40 years old. Meaning, it is likely that some of these rigs will be retired, and the overall number of jackups in the global fleet will decline further over time.

Regarding our business, we have 8 rigs leased to ARO, our unconsolidated joint venture with Saudi Aramco, with an additional 2 rigs scheduled to commence leases this year. For context, the charter revenue on all our leased rigs accounts for just 5% of our contract backlog. Aramco and the Kingdom remain fully committed to ARO, including its new build program, which is a cornerstone project of the Saudi Vision 2030 program. And we think that the recent Saudi announcement will have minimal, if any, impact on our business.

Moving now to an update on our capital return program. We expect to deliver significant earnings and cash flow growth over the next few years, as we reprice rigs to market day rates and reactivated rigs go back to work. And we intend to return all future free cash flow to shareholders, unless there is a better or more value accretive use for it.

We continue to demonstrate our commitment to returning capital to shareholders. Last year, we authorized a $300 million share repurchase program and returned $200 million to shareholders, and we are now increasing the authorization to $600 million, providing increased capacity to opportunistically repurchase shares.

Now I'll hand the call over to Matt to discuss the floater and jackup markets in more detail and to provide an overview of our recent contracting success and our contracting outlook for 2024.

[Matt Lyne, executive]

Thanks, Anton, and good morning and afternoon, everyone. Since the beginning of the fourth quarter, we have secured new contracts and extensions, with an associated contract backlog of approximately $1.5 billion. These awards have increased our total backlog to more than $3.9 billion, representing an almost 60% increase over the past 12 months.

More than $1 billion of this new backlog is for the floater fleet, including multiyear contracts for drillships, VALARIS DS-4 and DS-16. DS-4 was awarded a nearly 3-year contract with Petrobras offshore Brazil and DS-16 received a 2-year contract extension with Oxy in the U.S. Gulf of Mexico. Importantly, these contracts are expected to contribute to a meaningful improvement in financial results, with day rates transitioning from legacy rates in the low 200s, to leading-edge day rates.

We are also awarded several new jackup contracts across the North Sea, Trinidad and Australia, which combined added nearly $500 million in backlog, demonstrating the broad-based strength of the shallow water market. Most notably, we received a 3-year contract extension for VALARIS 120 with Harbour Energy in the U.K. North Sea. This extension is expected to commence in the third quarter of 2025, at a day rate that is meaningfully higher than the current spot rates, indicative of an improving North Sea jackup market.

Moving now to some commentary on our major markets, starting with floaters. The contracted benign environment floater count reached 123 during the fourth quarter, its highest point since late 2016. And utilization for the active sixth and seventh generation drillships was at 93%.

We continue to see a strong pipeline of opportunities for floaters, and we are currently tracking approximately 30 prospects, each with an expected duration of greater than 1 year, that are estimated to commence before the end of 2026. We anticipate that approximately half of these opportunities will need to be met by either incremental reactivations of stacked and stranded newbuilds or active rigs moving regions. This compares favorably to a pool of approximately 10 drill ships across the stacked and newbuild fleet that are considered likely reactivation candidates in today's market.

In terms of timing, we estimate that a handful of these 30 opportunities will commence later this year, with the remainder likely to be evenly weighted between 2025 and 2026.

We continue to see Brazil being a key driver of ultra-deepwater floater demand. And Petrobras currently has opportunities for 5 rigs across its [ Sepi and Hankador ] developments outstanding. In addition, we anticipate that Petrobras are likely to come to market for additional rigs beyond the 2 active tenders, and we believe that these opportunities combined could increase the floater count offshore Brazil by up to 3 additional rigs.

We are currently tracking more than a dozen opportunities off the coast of Africa. We are excited by the prospect of increased activity in this region, with several large IOCs expected to add rigs over the next few years, including some long-term programs that could cover multiple operating locations that may be attractive opportunities for both our active fleet and the DS-11, 13 and 14.

Brazil and Africa combined account for approximately 2/3 of the total opportunities with the remainder spread across other parts of South America, Southeast Asia and the Gulf of Mexico, and primarily with large IOCs.

On the jackup side of the business, demand continues to steadily increase, with the contracted jackup count now at its highest level in almost 9 years. As a result, active utilization for jack-ups is approaching 95%, with leading-edge day rates firmly established above 150,000 in several regions.

We expect to see solid demand growth over the next few years in the broader Middle East, Southeast Asia and West Africa that could absorb in the range of 10 to 15 incremental rigs.

The strength of the global jackup market is evidenced by some of our recent contract awards, including a second contract for the VALARIS 247 offshore Australia, at a market-leading rate of $180,000 per day, and a 300-day contract for the 249 offshore Trinidad at approximately $163,000, representing a 30% increase over its current day rate.

We have had great contracting success in North Sea. Having secured new contracts and extensions, with associated backlog of more than $420 million since the beginning of the fourth quarter. Contract awards for the VALARIS Stavanger 121 and 123 mean that our active North Sea fleet is now fully sold out for 2024. And we are in active discussions for opportunities commencing in '25 and beyond.

The 3-year extension for VALARIS 120 that I mentioned earlier provides a good indication of the strengthening commercial environment in the U.K. North Sea from 2025 onwards.

Our contract wins since the start of the fourth quarter have further improved our 2024 contract coverage. On the floater side, we now have just 2 of our 13 active floaters, the DS-10 and the DPS-5, with near-term contract availability. DS-10 is due to complete its existing contract with Shell offshore Nigeria towards the end of the first quarter. And we believe the rig is well placed for long-term opportunities in the region that are expected to commence in late 2024 or early 2025.

In the interim, we are actively pursuing short-term opportunities that could fill some of the potential gap.

DPS-5 is currently mobilizing for its 110-day contract with the NI offshore Mexico. We are in active discussions regarding opportunities in the region, but anticipate the rig will experience some idle time in the second half of the year.

On the jackup side, our remaining contract availability in 2024 is down to just 2 rigs, the VALARIS 247 and the 144. Recently, we have seen encouraging developments around environmental permit approvals for projects offshore Australia. And as a result, we now have good line of sight into future work for the VALARIS247. For the VALARIS 144, we continue to pursue near-term opportunities in the Gulf of Mexico, while looking for longer-term opportunities outside of the region.

Finally, we are in advanced discussions with BP related to contract extensions from Mad Dog and Thunder Horse, the 2 production platforms that we manage in the U.S. Gulf of Mexico, and we expect to finalize these extensions soon.

In summary, we are extremely pleased with our contracting success in 2023, adding nearly $3 billion in new contract backlog during the year and meaningfully improved day rates. We remain laser focused on filling our remaining uncontracted days in 2024 and securing attractive contracts for work commencing in 2025 and beyond.

I will now hand over the call to Chris, to take you through the financials.

[Christopher Weber, executive]

Thanks, Matt, and good morning and afternoon, everyone. In my prepared remarks, I will provide an overview of the fourth quarter results, our outlook for the first quarter of 2024 and I also will provide updated guidance for the full year 2024.

Starting with our fourth quarter results. Revenue was $484 million, up from $455 million in the prior quarter and adjusted EBITDA was $58 million, up from $40 million in the prior quarter. Adjusted EBITDAR, which adds back reactivation expense, was $96 million, up from $91 million in the prior quarter. Adjusted EBITDA increased primarily due to more operating days across the fleet and lower reactation expense.

In the fourth quarter, we had more operating days for VALARIS DS-17, which commenced its contract with Equinor offshore Brazil in early September, following its reactivation. We also had more operating days for jackups, VALARIS 107, 249 and the Norway, all of which [ incurred ] some idle time during the prior quarter.

These benefits were partially offset by fewer operating days in the fourth quarter for VALARIS DS-12, due to mobilization and a brief shipyard visit between contracts, as well as jackups VALARIS 76 and 123, both of which completed contracts during the fourth quarter and are undergoing contract preparation and planned maintenance work prior to the start of their next contracts.

Fourth quarter reactivation expense was $39 million compared to $51 million in the prior quarter, primarily due to lower reactivation expense for VALARIS DS-8, which commenced its contract with Petrobras offshore Brazil at year-end, partially offset by higher reactivation expense for VALARIS DS-7, which is expected to commence its contract offshore West Africa in mid-2024.

One item to note is that fourth quarter income tax was a $790 million benefit. This is due to an $800 million noncash benefit that resulted from a change in valuation allowance for certain deferred tax assets. Given our constructive outlook, we now believe it is likely that we will be able to utilize these assets over time.

Cash flow from operations in the fourth quarter was $97 million and capital expenditures were $463 million, including $348 million related to the purchase of newbuild drillships, VALARIS DS-13 and DS-14, which is comprised of the purchase price for the rigs in the costs incurred to prepare them for mobilization from South Korea to Las Palmas.

We had cash and cash equivalents of $636 million at the end of the quarter. Cash declined by $422 million during the quarter due to capital expenditures, primarily the purchase of DS-13 and DS-14 as well as share repurchases. These were partially offset by $97 million of cash generated from operations.

Our $375 million revolving credit facility remains fully available, providing total liquidity of just over $1 billion at the end of the quarter.

In the fourth quarter, we repurchased $50 million of shares, taking our full year repurchases to $200 million, representing 3 million shares or approximately 4% of the total outstanding share count.

Now I'll provide a brief overview of ARO Drilling's financials. As a reminder, ARO is not consolidated in the financial results of Valaris.

ARO EBITDA increased to $39 million in the fourth quarter from $24 million in the prior quarter, primarily due to new build jackup Kingdom 1, commencing its main contract in November and more operating days for ARO 4001, following some out-of-service days for planned maintenance during the third quarter.

Moving now to our first quarter 2024 outlook. We expect total revenues will be in the range of $490 million to $500 million, as compared to $484 million in the fourth quarter.

Floater revenues are expected to increase due to contract startups for VALARIS DS-8 and DS-12. However, jack-up revenues are expected to decrease due to idle time for several rigs, including VALARIS 107, 120, 123 and 247. Three of these rigs are undergoing special periodic surveys and contract preparations prior to the start of their next contracts, including VALARIS 247 which, after leaving the shipyard, will mobilize from the North Sea to Australia ahead of its next job. Each of these rigs are scheduled to commence new contracts before the end of the second quarter.

We expect that contract drilling expense will be $430 million to $440 million as compared to $402 million in the fourth quarter. This is primarily due to the addition of operating costs for VALARIS DS-8 and DS-12, following their recent contract startups, as well as costs associated with the jackup SPS and contract preparation work that I just mentioned. In addition, we rolled out offshore wage increases in certain regions at the beginning of the year.

General and administrative expense is expected to be approximately $27 million, up from $24 million in the prior quarter. As a result, we expect adjusted EBITDA to range between $30 million to $40 million, including $25 million to $30 million of reactivation expense for VALARIS DS-7, ahead of its expected contract commencement in the second quarter.

CapEx in the first quarter is expected to be $145 million to $155 million. Maintenance and upgrade CapEx is expected to be approximately $70 million, including upgrades to VALARIS 76 and 108, ahead of their long-term bareboat charters to ARO.

Reactivation and associated contract-specific CapEx is expected to be approximately $50 million, including $20 million of reactivation spend that was previously anticipated in late 2023.

Finally, new build CapEx is expected to be approximately $30 million, primarily related to mobilization costs from South Korea to Las Palmas for VALARIS DS-13 and DS-14.

I'll now provide our current financial guidance for the full year 2024. Consistent with the preliminary guidance provided on the third quarter call, our full year 2024 guidance does not account for any incremental reactivation for contracts that have yet to be executed.

We currently forecast revenues of $2.3 billion to $2.4 billion, contract drilling expense of $1.65 billion to $1.75 billion and G&A expense of $105 million to $110 million.

As Anton mentioned, we are maintaining our full year adjusted EBITDA guidance of $500 million to $600 million. And this includes reactivation expense of approximately $40 million. At the midpoint, this is approximately 4x higher than 2023 EBITDA, with the increase primarily driven by contract start-ups for reactivated drillships, rigs rolling to higher day rate contracts during the year and increased earnings from our North Sea jackup fleet.

Given our contract wins in the fourth quarter, we now have 92% of our 2024 revenue contracted at the midpoint of our revenue guidance range.

As we look across the year, revenues and EBITDA are expected to increase meaningfully in the second quarter compared to the first quarter, primarily due to several jackups starting new contracts, following SPS and contract preparation work. Further improvement is expected in the second half of the year, primarily due to VALARIS DS-7, which is scheduled to start its contract late in the second quarter, following its reactivation and certain rigs rolling to higher day rate contracts.

Full year 2024 capital expenditures are expected to range from $390 million to $430 million compared to our prior guidance of $325 million to $365 million, inclusive of the new build CapEx we announced late last year upon delivery of DS-13 and DS-14. The increase is primarily due to contract preparation costs, which are largely reimbursable and the timing of spend.

Maintenance and upgrade CapEx is expected to be approximately $290 million, with about $55 million being reimbursable. This covers SPS and contract preparation requirements as well as capital spares.

Like 2023, 2024 is expected to be a heavy year for jackup SPS projects. The $40 million increase in maintenance and upgrade CapEx compared to our preliminary guidance is largely related to contract preparation work for VALARIS DS-4's contract with Petrobras, which we announced in December as well as preparation work for 108, 3-year bareboat charter with ARO. This incremental CapEx is largely reimbursable through upfront fees.

Reactivation and contract-specific CapEx is expected to be approximately $80 million, which is $20 million higher than our preliminary guidance, due to spend that was expected to be incurred in the fourth quarter pushing into 2024.

Finally, we anticipate new build CapEx of approximately $40 million, primarily related to the mobilization of VALARIS DS-13 and DS-14 from South Korea to Las Palmas.

That concludes my review of our financial results and guidance. I'll now hand the call back to Anton for some closing remarks.

[Anton Dibowitz, executive]

Thanks, Chris. I'll conclude by reiterating some of the key points from our prepared remarks. First, we remain confident in the strength and duration of this up cycle, and the outlook for Valaris is positive, with increasing demand and constrained supply tightening the market.

Second, we continue to execute on our operating leverage in a disciplined and thoughtful manner, by repricing rigs from legacy day rates to much higher market rates and successfully delivering reactivated rigs with attractive contracts.

Our recent contracting success, including the addition of approximately $1.5 billion in new contract backlog since the beginning of the fourth quarter, has increased our contracted revenue coverage to more than 90% in 2024, underpinning the meaningful improvement expected in this year's financial results.

And finally, we continue to demonstrate our commitment to returning capital to shareholders by repurchasing $200 million of shares in 2023 and now increasing our share repurchase authorization from $300 million to $600 million.

We expect to generate meaningful and sustained free cash flow over the next few years, and we intend to return it all to shareholders, unless there is a better or more value accretive use for it.

We've now reached the end of our prepared remarks. Operator, please open the line for questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from David Smith with Heikkinen Energy Advisors.

[David Smith, analyst]

Congratulations on the quarter. It does seem that there's a healthy amount of opportunities for term floater program starting in the next 12 to 24 months. And I'm curious, how you think about bidding a potential reactivation versus an active drillship on these, kind of how you see the trade-off between putting another drillship to work versus locking in duration and minimizing potential white space for the active fleet?

[Anton Dibowitz, executive]

I can -- Dave, look, I think we've been pretty clear. Our first priority is to keep our active fleet highly utilized, and there are great opportunities for us to do that. When it comes to stack capacity, the 13, 14 and 11, I think we've been clear that we expect to get a meaningful return on reactivation costs, around $100 million, maybe with inflation pushing up above those numbers right now.

And given where leading-edge day rates are now, the fact that you're generating about $100 million in EBITDA, as long as we can get a term contract, we see some opportunities to do that as well. We have people talking to us and interest in all 3 of the 13, 14 and 11, but again, our first priority is to keep the active fleet highly utilized on attractive contracts, and then look for the incremental opportunities that we see coming to market as demand continues to increase. Waiting for the right opportunity.

Look, we have 10 rigs. Once the 7 goes to work in the middle of this year, working. That's a fair stretch away from where we were a couple of years ago with just 4 of our ships working. And we're willing to be patient, given the positive momentum we see in the market to wait for the right opportunity to put those rigs to work.

[David Smith, analyst]

I appreciate that. And a follow-up question, if I may. Nice to see the execution of the $200 million of share repurchases through year-end, and nicer to see the authorization doubled to $600 million. How should we think about the pace at which you might use that authorization going forward?

[Christopher Weber, executive]

Yes, Dave, this is Chris. Appreciate the question. We remain committed to returning capital to shareholders. As Anton mentioned, we returned $200 million of capital to shareholders last year through share repurchases on a $300 million authorization. Our Board just doubled that authorization to $600 million from $300 million. This is an open-ended authorization. And with the additional capacity for repurchases, I think this gives us the ability to opportunistically repurchase shares in '24 and into '25, and this is all part of our commitment to returning capital to our shareholders.

[Anton Dibowitz, executive]

We believe we trade at a discount to our intrinsic value. We put the increased authorization into place for a purpose. We intend to use it, and we're going to be opportunistic about it.

[Operator]

The next question comes from Eddie Kim with Barclays.

[Unknown Analyst]

Just wanted to ask about how you see the trend in day rate

[Audio Gap]

floaters have been in that mid- to high 400s for about 6 to 8 months now. You mentioned in your remarks that you believe day rates will continue to move higher over time, but did highlight some potential for maybe some lower day rates on longer-term work and even some shorter-term gap fill work.

So just taking all that together, would it be fair to say leading-edge levels could hold flat through year-end before starting to trend higher again next year? Just how are you thinking about the trend here?

[Matt Lyne, executive]

Eddie, I'll start this off. It's Matt. I mean I think if we take a look at the market fundamentals over the last 12 to 18 months, we've seen increase in lead time for tenders, which means customers are coming out further in advance of when they expect to commence. The contracting durations are increasing. These are all data points that support the longevity of this market. And I think probably one of the most recent data points is that we're now seeing majors picking up rigs on what I would classify as speculative supply or speculative demand, depending on which side you look at it from.

So what that means is if you look at the JV that was announced recently, Total, they -- while we know they have a long string of development opportunities around the world, it's unlikely they have approval on all of those programs. So they're picking up rigs or picking up [ a ] rig to satisfy their -- some of their demand with the idea that they can pick it up for rates that are favorable to them for, obviously, reasons to avoid alternatives.

So we see that as a really strong mark in the business, where speculative demand is starting to pick back up again. So the read across day rates is that, that illustrates the strength in the market. And so we see the trend and the range that we offer to continue.

[Anton Dibowitz, executive]

Eddie, this is Anton. I mean we're always reticent. I know everybody wants us to predict when are we going to get to that next milestone and prognostication is a difficult art. But what I will say, if you look back over quarters, leading-edge day rates continue to grind higher on average. The market continues to tighten. The simple economic supply and demand. The market continues to tighten. There are less attractive assets sitting on the sidelines and incremental demand coming to market, and that will drive day rates higher over time.

But that is not to say when we shouldn't take a single data point and extrapolate it, that there are not going to be gaps in programs given increasing lead times to contracts and repositioning rigs for work in attractive markets and needing to do upgrades. But overall, we were positive on the market and rates will continue to grind higher over time.

[Unknown Analyst]

Got it. Got it. Great. My follow-up is just on the Saudi capacity expansion curtailment. So they've had a big increase in their jack-up rig count over the past 12 months to around, I believe, 85 jackups to date. The announcement probably doesn't change the Kingdom's long-term view, as you mentioned, but I have to think it could impact our needs in '25 and '26.

So just in that context, do you think we could see Saudi's jackup rig count decline a bit over the next 2 years before trending higher afterwards? And what could this mean for your 4 or so leased rigs that come off contract at the end of this year?

[Anton Dibowitz, executive]

Yes, it's a good question. I think you have it characterized quite well. Look, at this stage, it's a little bit early to say what, if any, the exact impact is going to be on Saudi's rig count. But in my prepared remarks, I said as far as our business, we believe it will have minimal to any impact on our business. They delayed the expansion of Safaniyah and Manifa, these are 2 oil-focused fields. But they fully expect to develop resources and in their own predictions, see increasing demand for oil and gas over time.

I think what's really important is that the overall global jackup market is really tight right now. Active utilization approaching 95% and the total rig count at its highest level in almost 9 years. So we see incremental demand coming to market outside the Middle East and in fact, in the Middle East as well, with 10 to 15 incremental rigs.

So if, and it's a big if, it's still to be seen. If there are rigs that are relocated from Saudi, there is incremental demand to take on those rigs.

If you look at our fleet, we have 8 -- ARO is an unconsolidated joint venture. Valaris, we have 8 rigs leased in there. We have 2 additional rigs going in there. These are new contracts for ARO. So we'll have new lease contracts going in there this year.

Saudi Aramco and the Kingdom remain fully committed to the ARO joint venture. The new build program that we have at [ IMI ] is a cornerstone project of the Saudi 2030 vision. Two of our rigs that we have leased in are operating on gas fields, which is not the focus. And if you look at the remainder of those rigs, it's around 5% of our back. So we're very comfortable with our position, and the go-forward position in [indiscernible] and also the global jackup market.

[Operator]

The next question is from Fredrik, Clarkson Platou Securities.

[Fredrik Stene, analyst]

I wanted to circle back to the capital. And as you said and announced that you've now opened up for 300 more million, and I totally agree that share repurchases for you guys is a good thing right now, given where your steel values are, at least in my framework.

However, I wanted to challenge you a bit in a way on the addition to -- you say you want to return all free cash flow to shareholders and then you have that unless there is a better way for more value-accretive use for it. And then you could potentially end up chasing value forever and not getting sent out in a way. Is there a stop to that? If you've done the DS-11, 13 and 14, is that kind of at the point where you'll look for no more value and say that now is the time to distribute each center? Could it be value accretion beyond those 3 rigs as well?

[Anton Dibowitz, executive]

It's a good question. And we expect to deliver significant earnings and cash flow growth over the next couple of years. We're heading into well into an up cycle, and we expect it to continue. And I think we've been very clear about our intention for what we're going to do with that increased earnings and cash flow growth. And return it all to shareholders.

It's never a great idea to make absolute statements, right? And so I wouldn't read too much into that caveat. Our job is to maximize shareholder growth. And there may be things that make sense for us to invest in, in keeping with that, whether it's additional MPD systems or a very attractive opportunity to buy an asset. I'm just throwing examples out there.

So having absolute statements is never a great idea, but let's be very clear on what our shareholder return policy is. When we're generating significant amounts of cash, we intend to return it all to shareholders, unless there is clearly a better value accretive use for that cash.

[Fredrik Stene, analyst]

That's very helpful. Just one more for me. You have -- clearly, at least in my world, the DS-11, 13 and 14 are the 3 rigs that you should prioritize to take out, if any. But there are some other stacked jackups semis, et cetera, across your fleet. Or have you come to a point for some of these assets, where you would more actively consider scrapping them or selling them for nondrilling use? Or is this still something you would call it keep on your balance just for future optionality?

[Anton Dibowitz, executive]

Look, I think for us, we prioritize getting ships back to work. That's a capital allocation question. The returns talked earlier, previous question about the reactivation cost versus where leading-edge day rates are and the ability to return on that reactivation cost and on attractive contracts.

For jackups, internationally, the durations of the contracts, even though the numbers are a lot smaller, have made it a more difficult capital allocation or a less attractive capital allocation decision. But we do have those jackups. We do see jackup durations increasing, which means increasingly, there may be some opportunities for some of those assets.

But right now, given where we see the momentum in the market, the 3, the 6 and our jack-ups are options for us and with positive growth in the market, we think there are attractive options for us to hold right now.

[Operator]

The next question comes from Greg Lewis with BTIG.

[Gregory Lewis, analyst]

I guess most of my questions have been asked. So I was kind of curious on your views, like Total announced that rig joint venture with Vantage. Just knowing that Valaris and previously, Ensco, have really had a good long-term relationship for Total for years. I'm curious if that was something you actually looked at or considered, and kind of your view on the potential opportunity for those types of JVs going forward?

[Anton Dibowitz, executive]

Look, I think it's a great sign for the market, in general, as Matt said earlier, that operators are looking for the first time in a long time at contracting rigs well beyond programs that they have approved or [ FIDed ] and it speaks to their view of the market that the market is going to continue to tighten and where day rates are going to be going. So it's an attractive opportunity, and I think it's a great sign for where the market is going.

We will absolutely -- part of having -- it's important to have scale in this business. And part of having scale in this business means you can take a portfolio approach. So we have 10 ships that are working or looking to go to work. Yes, we would be willing to look at an opportunity to secure long-term backlog and baseload backlog for a long period of time and then be opportunistic, more opportunistic on some of our other assets. But we look at each opportunity and bidding situation in its own rights. And if it makes sense and is value accretive to shareholders and fits into the portfolio, we would absolutely look at engaging something like that. But it depends on the commercial opportunity that's available.

[Operator]

The next question comes from Kurt Hallead with Benchmark.

[Kurt Hallead, analyst]

Some -- I'm kind of curious in the context, right, you have now, as you mentioned, 3 drillships that can be activated and brought into the market, maybe a couple of semisubmersibles, but obviously, the focus of the market is on the ultra-deepwater ships, right?

Now my question really relates to this, right? As you've gone through this process of activating rigs over the course of the past 12 months, the industry, the drillers have been very much focused on making sure that they get some upfront payment for the activation of these assets. So I'm just kind of curious as we roll forward with less fewer activations, but as you mentioned in kind of contract prep opportunities are the offshore drillers and you, in particular, in a position to continue to demand upfront payments from your customers for the contract prep work that's going to happen.

[Anton Dibowitz, executive]

Yes, absolutely. As the market continues to tighten, we absolutely continue to have that opportunity. I think we kind of led the charge on that in seeking upfront payments. It's -- we look at the opportunity based on the economics of the opportunity, and getting a significant upfront payment, one, it's not subject to kind of operational downtime risk and it helps the cash flow profile and helps the economics of a job. We have a different cost of capital versus our customers. And if not all operators are amenable to it, some of them like it and would prefer to pay cash upfront and maybe get a lower headline day rate, but we look at the economics of the job. So I think there are opportunities for significant upfront payments are as much there, if not more than they ever have been.

[Kurt Hallead, analyst]

Okay. That's good color. So as you guys are very much aware, right, the investor community has been a little bit reticent to continue to put money flow into offshore drillers broadly. Some of that was due to concerns about the pace of contracting activity slowing down and pretty much the concept around leading-edge rates stalling out or maybe temporarily, but falling out, [ nonetheless ].

You addressed both elements of that in your prepared comments. But what is the -- if demand is so tight and the outlook for demand exceeds supply, I don't know. I mean, it does beg the question like -- it seems like you guys are in the driver seat and the oil companies seem to still have some element of, I don't know, leverage to keep a lid on pricing. So what do you think is that play here?

[Anton Dibowitz, executive]

Look, I mean, stalling out or taking a pause versus being solid with leading-edge day rates generating $100 million annually of EBITDA, is a really good market and incremental demand continues to come to market. The number of attractive sideline capacity in the form of stack rigs continues to dwindle around 10 today. So I think this is a process that plays out over time. And we fully expect there, as the supply-demand balance continues to tighten, there to be continued pressure on day rates and day rates to move higher over time. It's going to be -- we see a long duration cycle, and we just need to play it out and be disciplined as we play into that cycle, which is why we have the 11, the 13 and the 14, and we're going to be patient and disciplined about bringing that capacity back to the market.

[Kurt Hallead, analyst]

Right. Okay. And then lastly on shareholder distributions, you made it clear that you think your stock is undervalued, which is why you're going to buy back stock. Obviously, if the market starts to recognize the inherent value, [indiscernible] starts begging the question as to whether or not you may consider a dividend. So can you just give us a an update on how you're thinking about the dynamics between share repo and the dividend strategy longer term?

[Unknown Executive]

Yes. No, Kurt, great question. As we said, when this business really starts generating sustained and meaningful free cash flow, which we don't think we're that far away from, we think having both

[Audio Gap]

makes sense. And so from a dividend would obviously want to have that be at a level that sustainable through the cycle, but we think both are good components of a capital return policy.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to Darin Gibbins for any closing remarks.

[Darin Gibbins, executive]

Thanks, MJ, and thank you to everyone on the call, for your interest in Valaris. We look forward to speaking with you again when we report our first quarter 2024 results. Have a great rest of your day.

[Operator]

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