Valaris Ltd (VAL) CEO Thomas Burke on Q2 2021 Results - Earnings Call Transcript

Valaris Ltd (NYSE:VAL) Q2 2021 Earnings Conference Call August 3, 2021 10:00 AM ET

Company Participants

Darin Gibbins - VP, IR & Treasurer

Thomas Burke - President, CEO & Director

Jonathan Baksht - EVP & CFO

Tim Richardson - Director, IR

Conference Call Participants

Connor Lynagh - Morgan Stanley

Gregory Lewis - BTIG

Fredrik Stene - Clarksons Platou

Operator

Good day, everyone, and welcome to Valaris' Second Quarter 2021 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Darin Gibbins, Vice President of Investor Relations and Treasurer, who will moderate the call. Please go ahead, sir.

Darin Gibbins

Welcome, everyone, to the Valaris Second Quarter 2021 Conference Call. With me today are President and CEO, Tom Burke; Executive Vice President and CFO, Jon Baksht; and other members of our executive management team.

We issued our press release, which is available on our website at valaris.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements.

During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations. As a reminder, we issued our most recent fleet status report, which provides details on contracts across our rig fleet, on August 2. An updated investor presentation is also available on our website.

Now I'll turn the call over to Tom Burke, President and CEO.

Thomas Burke

Thanks, Darin, and good morning, everyone. Welcome to the call, and thank you for your interest in Valaris. Today is the first quarterly earnings conference call for Valaris Limited. As you know, the company emerged from financial restructuring a little over 3 months ago. During today's call, I will provide a brief overview of Valaris and then provide some commentary on the current state of the offshore drilling market. I will then discuss recent Valaris contract wins, rig reactivations, our joint venture with Saudi Aramco and then comment on the overall industry landscape.

At the end of my comments, I will hand the call over to Jon Baksht, our CFO, for a financial update.

Valaris emerged from financial restructuring early this year on April 30, and it's been more than 15 months since our last quarterly conference call. Therefore, I will take a few moments to provide an overview of the company and to highlight why Valaris represents a compelling investment opportunity.

Valaris has the largest fleet of rigs in the offshore drilling business. More importantly, the company has the highest quality fleet in the industry, a statement supported by independent third-party rig rankings with half of our fleet of 60 rigs ranked in the top quartile of assets globally.

In addition, Valaris has an industry-leading operational platform underpinned by strong values and a purpose-driven culture. Valaris is focused on delivering operational excellence to its customers achieved through the 3 elements of our operational excellence framework: safety; reliability; and efficiency. Valaris' operations have unmatched scale and geographic reach with a presence in virtually all major offshore regions and the most extensive customer base of any offshore driller, including major IOCs, NOCs and independents.

Since the merger, more than 2 years ago, the company's organizational structure has transformed. As a result, Valaris now has an industry-leading cost structure that can quickly adapt to changes in the market environment. Finally, we have the strongest balance sheet in the offshore drilling sector. Valaris is the only major offshore driller with a net cash position. Jon will provide more details on our capital structure in his prepared remarks. The combination of these strengths leave Valaris well positioned to benefit from improving market conditions and capitalize on opportunities as they arise.

Now a brief operations update. To reiterate, at Valaris, we're highly focused on delivering safe, reliable and efficient operations to our customers. As I'm sure you can imagine the logistics of operating a global company during a pandemic is exceptionally challenging. I want to acknowledge the hard work and the resiliency of our offshore crews and support teams operating in this complex changing environment. Our personal safety performance has improved 23% in the first half of 2021 when compared to our 2020 full year performance, and we've not experienced any significant process safety events over the past 12 months. Our downtime performance has been strong so far in 2021. Our revenue efficiency for both our floater and jackup fleets is 99% year-to-date.

I'd now like to take a few moments to discuss the broader market conditions that affect our industry and more specific commentary on the offshore drilling sector. Spot Brent crude prices have recovered strongly in 2021 from the pullback in 2020 resulting from the COVID-19 pandemic. Prices have moved higher due to a healthy rebound in demand for hydrocarbons, OPEC+ supply agreements and a focus on capital discipline by U.S. onshore E&Ps. While we acknowledge there have been some recent volatility in commodity prices due to an increasing concerns around the COVID delta variant, coupled with July's OPEC+ agreement to increase output gradually, we are seeing clear evidence that the constructive oil price environment is driving the early stages of a recovery in demand for offshore drilling.

Given the long lead times for offshore projects, particularly those in deepwater, customers tend to be more focused on medium-term commodity prices rather than what is happening in the spot market. 2-year forward Brent crude prices are currently well above $60 per barrel, a level that is viewed as constructive for offshore project demand. As a result, according to third-party research, E&P offshore capital expenditures are expected to increase by approximately 8% in 2022 and 12% in 2023, aided by record levels of free cash flow for these operators. We are already seeing evidence of this improvement in contracting and tendering activity in 2021 as compared to 2020.

According to third-party contracting data, benign floater rig years awarded in the first half of 2021 are already double that in the first half of 2020; and jackup rig years awarded increased by 15% over the same period. This increase in activity is particularly evident for high-specification drillships, especially in the golden triangle of the Gulf of Mexico, South America and West Africa.

U.S. Gulf operators have expedited drillship selections this year in anticipation of a lack of supply in early 2022, which has played a key role in pushing day rates in this market higher. We've also seen a noticeable acceleration of deepwater tendering in West Africa, where activity fell to an all-time low in 2020. Valaris' fleet of 11 drillships includes some of the highest quality assets in the industry. I believe our team has done a great job of securing new contracts for some of these rigs, which I will discuss in more detail shortly.

While the recovery in the jackup market is more muted than floaters, we are seeing active tendering in Southeast Asia, the Middle East, Northwest Europe and Latin America, which could lead to further improvements in these segments of the market.

I would now like to take some time to explain our fleet strategy, particularly our approach to retiring, stacking and more recently reactivating rigs. In early 2020, we saw a sudden and unforeseen decline in demand for offshore drilling rigs as the impact of the COVID-19 pandemic on demand for hydrocarbons led to contract terminations, suspensions and project delays.

Given the uncertain outlook at the time and the oil price of around $40 per barrel or lower for much of the year, we made the decision to retire 16 assets in 2020, including 3 6th generation drillships, all built within the last 10 years and 6 semi subs, 4 of which were aged 12 years or less. Retiring such modern assets was not an easy decision to make. However, when we objectively reviewed our fleet against the outlook for global demand, we determined that some of these assets may not work again for several years, if at all. Therefore, we felt it prudent not to invest any further cash in keeping these rigs stacked.

In addition to retirements, we carefully preservation stacked a large portion of the remaining floater fleet to help preserve cash in the near term while maintaining option value on their future cash flows in a market recovery. We currently have 19 rigs within our stacked fleet comprised of 9 floaters and 10 jackups. These rigs are mostly high-quality modern assets with a significant useful life remaining, including 4 drillships ranked in the top quartile of global floaters and 5 jackups ranked in the top quartile of global jackups. The quality of these rigs and our detailed rig-specific reactivation procedures gives us confidence that Valaris rigs will be at the front of the queue when demand supports bringing back stack rigs, and we're beginning to see evidence of this with some of our recent contract awards. We'll continue to take a disciplined approach to reactivations with stacked rigs only returned to the active fleet when there is visibility into work at attractive economics.

In most cases, we expect the initial contract to pay for the reactivation costs and have solid prospects for longer-term work. We anticipate that will cost in the range of $30 million to $45 million to reactivate each of our preservation stacked floaters, and $10 million to $20 million to reactivate each of our preservation stacked jack-ups. Most of this cost will be operating expense recognized in the income statement related to deep preservation activities, including reinstalling key pieces of equipment and crewing up the rigs. Any customer required capital upgrades would be incremental to these estimates, and we would expect to be compensated for these customer-specific enhancements.

I'll now spend a few minutes talking about our recent contracting activity. During the 3 months since emergence, Valaris was awarded 21 new contracts or contract extensions that amounts a contracted backlog of over $1.3 billion. To put that in perspective, our total contract backlog at the end of the first quarter was $1.1 billion.

As a result of these new contracts, Valaris' total contract backlog as of August 2, was $2.2 billion. In addition, ARO Drilling, our joint venture with Saudi Aramco has a total contract backlog of more than $950 million including contract backlog for its owned rigs of approximately $820 million. If we look at our backlog on a combined basis, including a 50% share of ARO's owned rigs, our adjusted backlog totals $2.6 billion. These contract awards further demonstrate our strong customer relationships across a broad range of IOCs, NOCs and independents as well as our constant focus on operational excellence.

I'd like to take the opportunity to recognize all the Valaris teams that have contributed to this expanding contracting success over the past few months. We've been particularly successful in securing work for our drillship fleet, winning 7 new contracts totaling approximately $1 billion in contract backlog across 5 different rigs. The Valaris DS-11 was recently awarded an estimated 3.5-year contract by Total E&P USA, Inc. to execute the high-pressure North Platte development drilling campaign. This is an important contract for Valaris that really showcases our technical capabilities. I'm delighted how our technical operations and marketing teams have worked so closely with this important customer for over 24 months to understand their requirements and to develop an efficient and effective solution to help develop the North Platte field.

The drilling phase of this contract is expected to commence in mid-2024, and we're eager to see the project pass FID by the customer. The DS-11 is currently preservation stacked in the Canary Islands and will be reactivated and mobilized in the U.S. Gulf of Mexico for this program. Before mobilization, the DS-11 will undergo significant upgrades in preparation for this work, including the installation of 20,000 psi well control equipment. A substantial portion of these cost upgrades and associated equipment purchases will be collected prior to mobilizing the rig for the drilling phase of the program.

I would note that these upfront payments are not included in the average day rates or contract backlog figures disclosed in our recent fleet status report, and Jon will give more details on this contract in his comments.

Once these upgrades are complete, the DS-11 will be 1 of only 3 drillships in the global fleet capable of drilling in 20,000 psi pressure environments. We've also recently been awarded a 2-year contract for the Valaris DS-16 by Occidental in the U.S. Gulf of Mexico, which is expected to commence in the second quarter of 2022. The rig is also preservation stacked in the Canary Islands and will be reactivated and mobilized to the U.S. Gulf of Mexico for the project. The fact that we were able to secure this contract for one of our preservation stacked rigs ahead of 1 rig from competitors, speaks volumes about our detailed preservation and reactivation procedures as well as the strength of Valaris operations.

We have proven our capability to successfully reactivate rigs from preservation stacks and return them to high levels of operational performance, including most recently the MS-1, and I have no doubt that we will demonstrate this again with the DS-16. We were also awarded a 3-year contract for the Valaris DS-18 with Chevron in the U.S. Gulf of Mexico during the quarter. This project is expected to commence in the first quarter of 2022 in direct continuation to the rig's existing contract with the same customer. This contract award is a testament to the technical capabilities of the rig and the excellent operational and safety performance of its crew and secures long-term work with a major customer in an important deepwater market.

The 4 other drillship contracts have been awarded to the Valaris DS-10 and Valaris DS-12 in West Africa. The DS-10 has secured additional work with Shell and Total Energies in Nigeria, where our joint venture with a local drilling contractor, OES, puts us in a strong position in this market. The DS-12 is scheduled to work in the Ivory Coast for Total Energies as well as in Angola, Mauritania and Senegal for BP over the next 6 quarters.

We've won 3 new contracts or extensions for our semisub fleet over the past 3 months, totaling more than $150 million in contract backlog. The VALARIS DPS-1 has been awarded 2 contracts with Woodside offshore Australia with a combined duration of approximately 2 years. The rig will mobilize to Australia in the first quarter of 2022 to execute the Enfield P&A program and then move on to the Scarborough development, which we anticipate will receive FID approval soon.

Finally, we have also been awarded 11 new contracts or extensions for our jackup fleet over the past 3 months. This includes projects in Norway, Thailand and the Middle East, including a 3-year contract for Valaris 110 with North Oil Company offshore Qatar and several contract extensions with Saudi Aramco, both for rigs we operate directly as well as rigs leased to ARO Drilling.

I'll now provide a brief update on ARO Drilling. As a reminder, ARO Drilling is a 50-50 joint venture with Saudi Aramco, the largest customer for jackups in the world. ARO Drilling owns a fleet of 7 jackups operating under contracts with Saudi Aramco with contract backlog of approximately $820 million. ARO Drilling also leases 9 jackup rigs from Valaris through bareboat charter arrangements, each operating under contracts with Saudi Aramco. ARO Drilling recently signed short-term extensions for 2 of the leased rigs and negotiations are ongoing related to longer-term extensions for most of these assets. Substantially all operating costs for the leased rigs are incurred by ARO Drilling, meaning that the leased revenue represents nearly 100% margin for Valaris. Finally, ARO Drilling intends to build 20 jackups over the next decade with the first 2 scheduled to be delivered in the second half of 2022.

The first 2 jackups are being built in the UAE and thereafter, new rigs will be built at the King Salman Global Maritime Industries Complex in Saudi Arabia. Each of the new builds are backed by long-term contracts with Saudi Aramco at attractive economics. Further information on ARO Drilling can be found in the investor presentation that we posted on the Valaris website in conjunction with our earnings press release.

I'd now like to spend a few moments talking about offshore drilling and its place within the energy transition. We operate in a heavily regulated marine environment and have had a significant focus on sustainability for several years, publishing our first sustainability report in 2016 and will soon be issuing our latest sustainability report, along with an ESG position statement. This is a topic that Valaris takes seriously, and we now have a dedicated Board ESG committee as well as an internal cross-functional green sustainability group that is focused on advancing green solutions within our operations. For example, we have a selective catalytic reduction, or SCR system, installed on our 4 R-class drillships, VALARIS DS-15 through DS-18. When in operation, the SCR system would eliminate almost all NOx and SOx emissions from these rigs. Additionally, we're exploring adding this system to one of our jack-ups in conjunction with the potential transport and carbon capture storage project.

The following topic I'd like to address in my prepared remarks is the landscape for offshore drillers. One of the most common questions from investors over the past couple of months has been whether we expect to see further consolidation. Whether or not Valaris plays a part, we view consolidation in the industry as positive for several reasons. One of the most evident benefits is cost savings. For example, in the period between closing the Valaris merger in April 2019 and year-end 2020, we achieved annualized cost savings of more than $365 million.

Given our track record of M&A and successfully integrating companies, we already benefit from scale, being the largest offshore driller in the industry. That said, we're highly focused on driving shareholder value, and we would explore any opportunities to do so. In summary, we believe that Valaris is well positioned to benefit from the opportunities we see in the market today. We will continue to focus on winning work for our active fleet and returning some of our high-quality stack rigs to work as and when attractive opportunities arise. I'm incredibly proud of what Valaris has achieved during our restructuring and in the 3 months since emergence from Chapter 11. I'm really excited to see what the future holds for the company.

And with that, I'll hand the call over to Jon.

Jonathan Baksht

Thanks, Tom, and good morning, everyone. First, I'd like to echo Tom's sentiment that it's great to be back speaking to everyone on our first quarterly conference call since emergence, particularly given the positive momentum we're seeing in the market and specifically for Valaris. The volume of recent contract awards and associated backlog, particularly for the floater fleet, will help to lay the foundation for an expected improvement in financial results and cash generation in 2022 and beyond. In our most recent fleet status report published yesterday, you can see an encouraging view for floater day rate progression over the next few years with average day rates increasing meaningfully each year.

In my prepared remarks today, I'll provide an overview of second quarter results as well as our outlook for third quarter and full year 2021, along with some comments on our new capital structure. I'd also like to highlight our second quarter results press release. We have significantly enhanced the level of disclosure in the press release to provide additional transparency and a simplified trend analysis. You'll find a trailing 5-quarter analysis for the income statement, balance sheet and cash flows as well as supplemental data by asset category for revenue, contract backlog, available and operating days, utilization and average day rates. It includes further visibility into offshore gross margins by asset category. We have broken out onshore support costs that are incurred supporting rig operations which are a part of contract drilling expense on a consolidated basis and include non-G&A items such as our regional support basis.

We provided more visibility into the cash generation of the active fleet with breakouts for reactivation, preservation and stacking costs. You'll see these as add-backs to EBITDA or EBITDAR or EBITDARPS, for short. We believe these metrics are helpful for investors as they provide the best proxy for the cash generation of the active fleet.

We believe that Valaris has a compelling value proposition built on 4 key elements and that the best way to value Valaris is on a sum-of-the-parts basis. As a result, when discussing our full year 2021 financial guidance, I'll provide separate guidance for each of the 4 elements as well as providing consolidated numbers. The 4 parts of the value proposition are: first, the active fleet of 32 rigs that is generating positive cash flow today. We define the active fleet as any rigs that are not preservation stacked; second, our leased and managed rigs comprised of 9 rigs we currently lease to ARO under bareboat charter agreements and 2 rigs that we manage on behalf of the customer in the U.S. Gulf; third, the stacked fleet, which includes many high specification assets, several of which were stacked last year during weaker market conditions, as Tom discussed; and finally, ARO Drilling, our nonconsolidated 50-50 joint venture with Saudi Aramco, which is a cash-generative business with significant growth prospects.

Because we emerged from financial restructuring at the end of April, the second quarter results include 1 month related to the predecessor company and 2 months for the successor company. During my review, I will compare the combined second quarter results, which are non-GAAP, with the prior quarter as I believe that this comparison provides the most meaningful basis to analyze our results, and I'll call out any quarter-over-quarter variances that are materially impacted by fresh start accounting. Reconciliations between non-GAAP combined numbers and GAAP numbers for the predecessor and successor periods are provided in our quarterly results press release.

Now I'll review the second quarter results. Adjusted EBITDA was $17 million compared to $28 million in the prior quarter. Revenues for the second quarter were $293 million compared to $307 million in the prior quarter. Excluding reimbursable items, revenues declined to $261 million from $277 million in the prior quarter, primarily due to fewer operating days for the floater fleet as drillships VALARIS DS-12 and DS-15 experienced idle periods between contracts during the second quarter. This is partially offset by additional operating days for MS-1, JU-107 and JU-247 that returned to work during the second quarter. VALARIS DS-12 and DS-15 have since returned to work with DS-12 starting a contract with Total Energy's offshore Ivory Coast in July. And DS-15, also commencing work with Total Energy's offshore Brazil in June.

Contract drilling expense for the second quarter of $254 million was largely in line with the prior quarter. Excluding reimbursable items, contract drilling expense of $236 million was also largely consistent with the prior quarter. Rig reactivation costs totaled $24 million in the second quarter as compared to $11 million in the prior quarter. These costs primarily related to the reactivation of VALARIS JU-249 and JU-121 from preservation stack. JU-249 is scheduled to start a 400-day contract with ONZ, Offshore New Zealand, towards the end of the year, and JU-121 recently commenced a 2-year contract with Harbor Energy in the U.K. North Sea.

As a result, EBITDAR, which adds back onetime reactivation costs, was $41 million in the second quarter compared to $39 million in the prior quarter. Adjusted EBITDARPS, which adds back onetime reactivation and preservation costs as well as carrying costs for the stacked fleet, was $58 million compared to $57 million in the prior quarter. General and administrative expense declined to $19 million from $24 million in the prior quarter primarily due to a reduction in personnel and related costs. Onshore support costs, which are included within contract drilling expense in the consolidated statement of operations, also declined to $29 million from $32 million in the first quarter. The sum of these 2 categories provides our total onshore support cost, which declined to $48 million in the second quarter from $56 million in the prior quarter.

As Tom mentioned earlier, we are highly focused on streamlining the onshore support structure to make it flexible and scalable to meet the changing needs of our operations. We have made significant progress in this regard as our run rate annualized onshore support costs are now below $200 million as compared to approximately $440 million at the time of the Valaris merger in April 2019, and we will continue to look to ways to optimize our onshore support structure to benefit our operations and maximize cash flow.

Depreciation expense declined to $54 million in the second quarter from $122 million in the first quarter due to fresh start accounting adjustments, which significantly reduced the carrying value of property and equipment on the balance sheet. Other expense was $3.5 billion in the second quarter compared with $30 million in the prior quarter. The sequential quarter increase was due to reorganization items and fresh start accounting adjustments in the predecessor period of the second quarter. Under fresh start accounting, the fair value of the company's net assets was derived from the estimated enterprise value at the time of emergence, resulting in $9.2 billion loss on fresh start adjustments. This is partially offset by a $6.1 billion gain on liability subject to compromise that nearly all of the predecessor company's long-term debt was converted into equity of the successor company.

Please refer to our second quarter 2021 Form 10-Q filing that can be found on the Investors page of the Valaris website for further details regarding reorganization items and fresh start accounting. We had a tax benefit of less than $1 million in the second quarter of 2021 compared to tax expense of $32 million in the prior quarter. The second quarter tax provision included $13 million of discrete tax benefit primarily related to fresh start accounting adjustments, whereas the prior quarter tax provision included $20 million of discrete tax expense related to uncertain tax positions taken for prior years. Adjusted for discrete items, tax expense of $12 million in the second quarter was in line with the prior quarter.

Now moving to our third quarter 2021 outlook. We anticipate that adjusted EBITDA for the third quarter will be in line with second quarter adjusted EBITDA of $17 million. Adjusted EBITDAR and adjusted EBITDARPs are also expected to be in line with the prior quarter in the range of $40 million to $45 million and $55 million to $60 million, respectively. We expect total revenues will be in the range of $315 million to $325 million as compared to $293 million in the second quarter. This sequential quarter increase is primarily expected to be driven by higher revenues from the floater fleet as DS-12 and DS-15 returned to work as well as a full quarter impact of MS-1 being under contract. We anticipate the third quarter contract drilling expense will be in the range of $285 million to $295 million as compared to $254 million in the second quarter.

The sequential quarter increase is primarily due to an expected increase in utilization across both the floater and jackup fleets. Reactivation costs in the third quarter are expected to be approximately $25 million primarily related to jackup VALARIS JU-249 and semisubmersible VALARIS DPS-1, which was recently awarded 2 contracts with Woodside offshore Australia with a combined duration of approximately 2 years. Amortization items in the third quarter are expected to be a net expense of $4 million. This is primarily the impact of amortized mobilization expense, partially offset by some mobilization revenue. Note that this $4 million net amortized expense is added back when calculating adjusted EBITDA. General and administrative expense is anticipated to be approximately $21 million.

Now I'll move to second quarter results and third quarter outlook for ARO Drilling, our nonconsolidated 50-50 joint venture with Saudi Aramco. ARO EBITDA was $28 million in the second quarter compared to $33 million in the prior quarter. While revenues increased to $125 million from $123 million in the prior quarter, contract drilling expense also increased to $93 million from $86 million primarily due to higher personnel costs. ARO's third quarter EBITDA is expected to be approximately $15 million. The sequential quarter decline in EBITDA is due to planned out-of-service days across a few rigs and the expected completion of contracts for 3 leased rigs in August.

I'd like to now provide an update on our full year 2021 guidance. As mentioned earlier, I'll provide full year guidance broken down by the 4 value drivers that I mentioned earlier so that investors can fully evaluate Valaris on a sum-of-the-parts basis.

First, operating margin, excluding onshore support costs for the active fleet, is expected to be in the range of $250 million to $260 million. This includes onetime reactivation cost of $90 million to $100 million. Operating margin for leased and managed rigs is expected to be in the range of $75 million to $85 million, while ongoing holding costs and onetime preservation costs for the stacked fleet are expected to total approximately $60 million to $70 million. Onshore support costs that are included in contract drilling expense on a consolidated basis are expected to be between $110 million and $120 million for 2021, and full year G&A expense is anticipated to be $80 million to $85 million.

Summing all the parts, we arrived at an estimated full year 2021 adjusted EBITDA for Valaris of approximately $60 million to $70 million. Adding back onetime reactivation costs of $90 million to $100 million gets to EBITDAR of $155 million to $165 million. Further adjusting for onetime preservation costs, as well as holding costs for the stacked fleet, full year 2021 adjusted EBITDARPS for Valaris is estimated in the range of $220 million to $230 million.

Finally, we anticipate the full year 2021 EBITDA for ARO will be in the range of $105 million to $110 million. We anticipate ARO's EBITDA growing in 2022 with the delivery of its first 2 newbuild rigs expected in the second half of 2022, which will commence initial 8-year contracts with Aramco at a day rate that will provide a 6-year EBITDA payback on the newbuild construction costs. ARO is already a highly cash-generative business with a cash balance of $318 million as of June 30, 2021, which is an $80 million increase since the end of 2020. The 20 rig newbuild program backed by attractive long-term contracts with Saudi Aramco provides for significant growth prospects. As a reminder, these newbuild rigs are expected to be financed by cash from ARO operations and third-party financing nonrecourse to Valaris.

Now I'll move to capital expenditures. Total capital expenditures for full year 2021 are expected to be in the range of $85 million to $95 million, comprised of $30 million to $35 million of maintenance CapEx, $50 million to $55 million of enhancements and upgrades, of which approximately $15 million to $20 million is expected to be for the first stages of the required upgrades on the DS-11 for the North Platte campaign, and less than $5 million of capitalized interest and other costs.

In addition, the remaining upgrade cost for the DS-11 for the North Platte project is expected to be over $200 million. A significant portion of the total upgrade cost will be covered by the customer prior to the start of drilling operations with defined project milestone payments, while the remaining part will be recovered over the duration of the operations. Payments for the rig upgrades are excluded from our contract backlog and average day rates. The contract includes provisions that require the customer to reimburse Valaris for the upgrade investments in the event of termination.

Valaris currently has no new build capital commitments. However, earlier this year, we entered into an amended agreement with the DSME that removed the company guarantee on our 2 newbuild drillship contracts in exchange for certain concessions which effectively leaves each newbuild in its own special purpose vehicle. This provides Valaris with the option to take delivery of either or both newbuild drillships, VALARIS DS-13 and DS-14 on or before December 31, 2023. Under the amended agreements with the shipyard, the purchase price for the rigs are estimated to be approximately $119 million for DS-13 and $218 million for DS-14. If Valaris selects not to purchase the rigs, we have no further obligations to the shipyard.

I'll also note that during the Chapter 11 process, we released long-term financial projections for Valaris. And while we are not providing updated guidance beyond 2021, the outlook for the company and the offshore drilling sector as a whole has improved meaningfully since then.

Finally, I'd like to provide a brief overview of our capital structure. Post restructuring, Valaris has the strongest balance sheet in the offshore drilling sector, and we're the only major offshore driller with a net cash position. As of June 30, 2021, we had a cash and cash equivalent balance of $609 million plus $53 million of restricted cash. Our capital structure is straightforward with only one tranche of debt in the form of a senior secured note due in 2028 with a face value of $550 million. The coupon for the note is 8.25% if paid in cash; 10.25% if paid half cash, half PIK; and 12% if we elect to PIK the entire interest payment. Interest payments are due semiannually on May 1 and November 1, and we must decide the interest payment option 30 days prior to the beginning of the interest payment period.

The first interest payment of $23 million will be paid in cash in the fourth quarter. The note also provides a pari passu debt basket of $275 million and junior secured debt capacity of the greater of $200 million or 8% of total assets.

Finally, our note allows for the flexibility to contribute all of our floating rigs to an unrestricted subsidiary and release their liens subject to meeting a 2x pro forma adjusted interest coverage ratio. It was important to us through our restructuring process to ensure we emerge with a strong and sustainable capital structure, with the strongest balance sheet in the industry and the flexibility provided for in our senior secured notes. We feel we are in a prime position to take advantage of contracting and strategic opportunities as they arise.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question will come from Connor Lynagh with Morgan Stanley.

Connor Lynagh

Obviously, a lot of debate around your longer-term earnings power comes back to the stacked rigs. So good to see you putting them to work. I guess - just as you look at the remaining stacked rigs, how - can you talk through sort of how you've come up with your reactivation cost estimates? And certainly, we've seen from some competitors reactivation costs have drifted a bit higher versus what they had initially expected. So just curious how convicted you are? And how we might think about how that might change if you reactivate a rig a year from now versus two years from now, et cetera?

Thomas Burke

This is Tom. So yes, I'll give that a first comment and then maybe see if Jon has anything to add. So when we preserve a rig, we have a detailed preservation plan, which is quite considerable, and it also contemplates the reactivation of the rig in significant detail step by step. And the - and typically, we stop the special survey on some components of the rig through the class society, not all, but some components. And our project group does reviews of these activation plans and we do inspections of the rigs. And as you know, some rigs, we actually have crews on, even though they're preserved, we have crews on them on full time. And so we are continually updating those, the activation plans, particularly of the drillships. And so I would say that we do have - we do feel good about the cost that we've given out. It varies by rig. The cost that we give out does not include the mobilization, which, of course, will vary depending on where we're taking the rig.

And finally, I'd say that over time, the reactivation costs will go up and - but not tremendously. So Jon, do you have anything to add to that?

Jonathan Baksht

Maybe just a couple of other points just to highlight for Connor that if you look at the 9 floaters that we have stacked today, all but 2 of them have been stacked for less than 18 months. And so as you look at the estimates and the duration, to the part that you mentioned in your question, yes, the longer that a rig is stacked, the more expensive it will be to reactivate. We're reactivating the DS-16 with today's announcement. The DS-11 will require - it's a bit of its own animal, given the 20,000 upgrade. So that will take some time. But I would point out that once - now that DS-11 and DS-16 are spoken for, we have 5 additional drillships that are ranked in either Q1 or Q2 of rig ranking quartiles. And so they are very attractive rigs and have not been stacked for very long. And so from a marketability standpoint, if we were to reactivate those in the near term, near to medium term, we would expect the reactivation cost to be on the lower side. And then I'd also just add that today, our active fleet is - of drillships is 100% utilized. And so if we're looking at additional opportunities for contracting, we do have available capacity in a stacked fleet with very high-quality rigs.

Connor Lynagh

Sort of related and also, I guess, extends to the ARO newbuilds. But given that you are sort of tapping the supply chain a bit more and I assume, buying new components as well as steel. Just curious if you could discuss if, to what extent, it's occurring at all, you're seeing inflation affect reactivation costs and/or the expected newbuild costs at ARO.

Thomas Burke

Well, let me think and I'll answer that. So on the first 2 rigs, we clearly have locked in pricing and those rigs are well under construction. So there's no real - there's no - and they're turnkey from the shipyards, so there's no cost inflation on those. For rig 3 and 4, I think it's yet to be determined because we've gone out - or rather I'd say ARO has gone out to the shipyard and they're in the process of reviewing those. I would say that there are - as you know, Connor, there aren't many new build programs where OEMs can put new equipment in the market.

So people want the work. So we haven't seen any significant pricing changes yet on the newbuild program at ARO, but it's probably a little premature to say as we haven't seen the pricing on rig 3 and 4 yet.

Connor Lynagh

Got it. And that comment that you haven't really seen a lot of component inflation would hold for the contemplated reactivations as well?

Thomas Burke

Yes, we've seen some inflation. But actually, it's much around inflation as it is lead times. So on certain components, for example, drill pipe. And if you want it quickly, it will be expensive. But if you order it ahead of time, the pricing hasn't moved that much. So - and a lot of the reactivation isn't actually replacing equipment. It's on preserving it.

Operator

Our next question will come from Greg Lewis with BTIG.

Gregory Lewis

I was hoping we could talk a little bit about - congrats on a lot of these, the few multiyear contracts you've been able to kind of cobble together here in the last couple of months. Do you get the sense that like - obviously, these were competitive bidding processes? Do you get the sense that a lot of this has to do with - obviously, you guys - these rigs are all high-quality rigs, but is it almost like, hey, with that Chevron contract, we were already there and kind of that gives us kind of - we're in the catbird seat, and with that, we're able to maybe push pricing a little bit higher just because of the transition to bring in a new driller would cost more than market rates? Is that kind of the right way to think about it? Or it's more competitive and that really maybe is not that real advantage of being there already?

Thomas Burke

I'd say on the Chevron example, we were already there and the rig was performing well. So we were on a shorter-term contract, as you know, but it was well - it was working well. And I think Chevron - and we actually had an opportunity for that rig to go somewhere else. So we went to Chevron and talked to them about it. They're really pleased with the performance, and we agreed an improved rate, quite significantly improved rates.

So it's definitely - there is an incumbency advantage there for sure on the Chevron contract.

Gregory Lewis

Okay. Great. And then just pivoting a little bit. Clearly, there's a lot of discussions around M&A in the space. It's interesting, I mean, you guys clearly during the previous cycle were pretty active in M&A. It seems like for now, maybe Valaris, at least when you see the media news, is maybe sitting this out. Tom, could you talk a little bit about that? Is that maybe a function of you're looking at the valuation of your stock and kind of just - kind of curious, maybe you guys are active in doing the diligence and maybe the media is just not picking it up? Or is it just kind of Valaris is approaching at least this part of the cycle a little differently than it has maybe in the past?

Thomas Burke

Sure. I'll give you some comments on that, and then I'll ask Jon to make some comments as well. So when I think about our history on M&A, we have - do have quite a track record with the Pride, the Atwood acquisitions and the Ensco Rowan merger. So we know how to do M&A, and we've got the right tools, and we certainly know how to do it. We are only out of Chapter 11 sort of 90 days or so. So definitely, it's sort of early days yet. But I would say, as far as the Board of Directors and the company, I think the absolute focus on driving shareholder value. And we are - we will look at things. We'll contemplate - there's a program inside the company where we look at a lot of stuff, but really focused on shareholder value. And so if we think it will drive shareholder value, we will be all over it.

And if we don't think it will, then we certainly would stand back. But certainly, I wouldn't say that we are stood back from any kind of process. We're certainly looking at lots of opportunities, as you would expect us to be, but just focused on value creation for our shareholders.

Go ahead. Jon's not going to make a comment on that. Go ahead, Greg. Other questions?

Jonathan Baksht

I was just going to - I don't have anything really to add, Tom. I think you covered it - covered it well. To use your words, Greg, sitting this one out. I think we're not sitting this one out, but we are going to be disciplined in how we evaluate opportunities. And we are going to - and as Tom mentioned, the Board is very focused on driving shareholder value. So the opportunities we look at will certainly fit into that category, and we'll evaluate them. That will be disciplined.

Operator

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

Fredrik Stene

Fredrik here from Clarksons. Congratulations on these new long-term contracts. So I was just - even though you have touched a bit upon it already, I was wondering, in your discussions with customers, and now I'm talking particularly about the DS-11 and DS-16 and potentially other things you have going on with your stacked assets. Have you been experiencing any pushbacks just due to the fact that these assets have been stacked? Or is this relatively short stacking period that you've had, many of them being really no obstacles at all. And I guess the answer is partially yes, since we've gotten new contracts, but it would be interesting to hear if you've experienced any differences between whatever assets you've bid, et cetera, around that. Just trying to get a sense on what customers are willing to take at this point.

Thomas Burke

Yes, Fredrik. It's good to talk to you as well, and thanks for coming on the call, Fredrik. So I'd say this just at a high level, when we think about what the customers want, certainly a hot rig, a warm rig is more attractive, perhaps, all things being equal in a preservation stacked rig. However, our customers are pretty sophisticated, and they've got some very experienced operations people that go out and inspect rigs and look at plans. And so when we talk to them about when we bid on contracts, we do lay out for what the reactivation plans are and give them confidence in contracting the rigs. We look at our track record, show them what we've done and talk them through the steps and it gets them comfortable. I'd also think that the specific asset and the operator's experience of the asset also has - and has a way into the decision. So if customers have actually used a rig before and feel comfortable about it, then they will also - even though it's preserved, they'll have an interest in using it again. I think I really sort of covered it.

Fredrik Stene

That's super helpful. Just a final one for me. Touching upon ARO. You - I think from my own discussions with investors, people really appreciate a higher degree of disclosures as you have done now recently trying to turn what you often talk about into something more tangible and understandable. So I was wondering - I'm sorry if you mentioned it, but I had phone trouble earlier. Have you kind of figured, now that you - or on your balance sheet is in proper shape this shareholding loan and the way that you're kind of financially exposed to ARO. Is there any plans there to potentially pay out and even there refinance that shareholder loan or something like that, just to try to, I guess, make value in that pocket more reasonable?

Thomas Burke

Yes. So Fredrik, you are going in and out a little bit there, but I think I got the gist of your question. I will repeat it back to you. So as we think about - as you think about ARO, are we thinking about a dividend or paying down the shareholder notes to help drive Valaris shareholder value. It was coming in and out a little bit, Fredrik. But that's the question, right?

Fredrik Stene

Yes.

Thomas Burke

Okay. So what I would say with ARO is, certainly, the company is just 4 - 3.5, 4 years old. So it's early in its history. And I would also say that we are - and but it is performing well, and Jon talked through its financial performance. It does have a newbuild program in front of it. And certainly, we are about to - as I mentioned in my remarks, we're about to move from the yard in the UAE to a yard in Saudi Arabia. So that's a big change. But I think that the company is well positioned and firing on all cylinders. And certainly, I think there's a desire amongst the shareholders to put in place an appropriate capital structure, and we are certainly having conversations with Saudi Aramco to that end. And Jon is on the Finance Committee with Saudi Aramco, the ARO Drilling Finance Committee, Saudi Aramco finance executives.

So I would say that there's certainly a desire to look at the capital structure. Having said that, we are looking at it carefully and there aren't any immediate plans for any shareholder - no paybacks or anything like that. But certainly, something we're very interested in exploring.

Operator

There are no further questions at this time. I will turn the call over to Tim Richardson, Director of Investor Relations, for any closing remarks.

Tim Richardson

Thanks, Matt, and thank you to everyone on the call for your interest in Valaris. We look forward to speaking with you again when we report our third quarter 2021 results. Hope you have a great rest of your day.

Operator

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