Q4 2023 Valaris Ltd Earnings Call

Participants

Darin Gibbins; IR; Valaris Ltd

Anton Dibowitz; President & CEO; Valaris Ltd

Chris Weber; Chief Financial Officer, Senior Vice President; Valaris Ltd

Matt Lyne; Senior Vice President, CCO; Valaris Limited

Matthew Lyne

David Smith; Analyst; Pickering Energy Advisors

Christopher T. Weber

Eddie Kim; Analyst; Barclays

Fredrik Stene; Analyst; Clarksons Platou Securities

Gregory Lewis; Analyst; BTIG

Kurt Hallead; Analyst; Benchmark

Darren Gibbins

Presentation

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. During Q&A. If we experienced an interruption, we will do our best to continue, but may separately connect with analysts after the call. We appreciate your patience. I would now like to turn the conference over to Darren Gibbons, Vice President of Investor Relations and Treasurer. Please go ahead.

Darin Gibbins

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

Thanks, Darren. 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 continued to execute on the commercial front, with nearly $3 billion of new contract backlog secured during 2023, it meaningfully improved dayrates. Today we sit with total contract backlog of more than $3.9 billion and 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 continued 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'd 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. A particular note, we had several rigs celebrate safety milestones during the quarter, and I'd like to congratulate the Valaris Norway 72, 110 and one 15 for each reaching three years without a recordable incident, a fantastic achievement by these teams. We're equally proud of Valaris 110 for being award Total Energies and North Oil companies. 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-, 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 Ford 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 restart offshore upstream CapEx is expected to increase by 10% in 2024 and at a compound annual growth rate of 6% over the next three years.
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 upcycle. However, as we mentioned in our previous quarterly call, considering lengthening contract lead times, customer required 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 four hundreds as demonstrated by our two most recent drills fixtures, and we believe that they will continue to move higher over time as the remaining stacked and newbuild capacity continues to diminish and the total supply and demand balance for the titans.
We believe the two to three 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 at some contractors may be willing to accept a lower rate to secure 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 upcycle, 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 jack-up market in the world for the foreseeable future. We understand the recent announcement reflects the 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 two oil fields, South India and Manila. 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 nine 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 eight rigs leased to Arrow, our unconsolidated joint venture with Saudi Aramco with an additional two rigs scheduled to commence leases this year. For context, the charter revenue on all our lease rigs accounts for just 5% of our contract backlog. Ramco and the Kingdom remain fully committed to Arrow, including its newbuild 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 continued 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.

Matthew Lyne

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 (sic - press release, page 1, "$1.4 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, Volaris, DS-4 and DS-16.
DS-4 was awarded a nearly three year contract with Petrobras offshore Brazil and DS-16 received a two year contract extension with Oxy in the US Gulf of Mexico. Importantly, these contracts are expected to contribute to a meaningful improvement in financial results with dayrates transitioning from legacy rates in the low two hundreds to leading-edge dayrates.
We were 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, the shallow water market. Most notably, we received a three-year contract extension for Valaris-120 with Harbour Energy in the UK 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 six 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 one 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 drillships across the stacked 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 five rigs across its SAP on hand, Condor developments outstanding.
In addition, we anticipate that Petrobras are likely to come to market for additional rigs beyond the two active tenders. And we believe that these opportunities combined could increase the floater count offshore Brazil by up to three 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, DS-13 and DS-14, Brazil and Africa combined account for approximately two thirds 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 nine years. As a result, active utilization for jackups is approaching 95%, with leading edge dayrates 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 Polaris 247 offshore Australia at a market leading rate of 180,000 per day and a 300 day contract for the two 49 offshore Trinidad at approximately 163,000, representing a 30% increase over its current day rate.
We have had great contracting success in the 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 three year extension for Valaris 120 that I mentioned earlier provides a good indication of the strengthening commercial environment in the UK 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 two 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 that 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 a 110 day contract with ENI 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 two 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 Valaris-247 with 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 for Mad Dog and Thunder Horse. The two production platforms that we manage in the US Gulf of Mexico. 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 dayrates. 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.

Chris Weber

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 2024, and I also will provide updated guidance for the full year 2024.
Sarting 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 reactivation 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 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 contract.
Q4 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 non-cash 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 and 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, aero 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 maiden contract in November and more operating days for Aero 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, jackup revenues are expected to decrease due to idle time for several rigs, including the Valaris-107, 120, 123 and 247 three of these rigs are undergoing special periodic surveys and contract preparation prior to the start and 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 the 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 Aero. 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, newbuild 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 reactivations 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 four times higher than 2023 EBITDA, with the increase primarily driven by contract startups 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. Discover's SPS and contract preparation requirements as well as capital spares like 2023, 2024 is expected to be a heavy year for jack-up 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, three-year bareboat charter with Arrow.
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 spin that was expected to be incurred in the fourth quarter pushing into 2024.
Finally, we anticipate newbuild 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

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 upcycle and the outlook for Valaris is positive with increasing demand and constrained supply tightening the market.
Second, we continued to execute on our operating leverage in a disciplined and thoughtful manner by repricing rigs from legacy dayrates 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.

Question and Answer Session

Operator

And now we will now begin the question-and-answer session. (Operator Instructions)
Sir, Today's first question comes from David Smith from Pickering Energy Advisors. Please go ahead and

David Smith

Thanks, Good morning. Congratulations on the quarter.

Christopher T. Weber

Thanks. David

Anton Dibowitz

Thanks. David

David Smith

It does seem that there's a healthy number of opportunities for and floater program starting in the next 12 to 24 months. And I'm curious how you think about bidding potential reactivation versus an active drillship on this kind of how you see the trade-off between putting another drillship to work versus locking in duration and minimizing potential? Right. (inaudible).

Anton Dibowitz

Hi Dav, look, I think we've been pretty clear Our first priority is to keep our active fleet highly, highly utilized and there are great opportunities for us to do that. When it comes to stock 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 the 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, and you know, 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 three of the 13 or 14 and 11.
But again, you know, 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 on ice as demand continues to increase, we're waiting for the right opportunity. But we have 10 rigs once the seven goes to work in the middle of this year working, you know, that's a fair stretch away from where we were a couple of years ago with just four 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

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

Christopher T. Weber

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. What the additional capacity for repurchases you think just 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

And 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 fit here.

David Smith

Thank you. I'll circle back in the queue.

Christopher T. Weber

Thanks.

Operator

Thank you. The next question comes from Eddie Kim with Barclays.

Eddie Kim

Hi, good morning. And just wanted to ask about how you see the trends in dairy floaters have been in that mid to high four hundreds for about six to eight months. Now you mentioned in your remarks that you believe dayrates will continue to move higher over time. We did highlight some potential for maybe some lower day rates on a 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

Hi, Eddie, I'll start this off, 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, and the contracting durations are increasing, and 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 today. 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 are picking up a rig and to satisfy their some of their demand with the idea that they can pick it up for rates that that are favorable to them and for obviously reasons to avoid a avoid alternative. So, we see that as a really strong mark in the 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 that we offer to continue.
I think that on I mean, we're always reticent. I know everybody wants us to predict when we're 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 economics, 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 say we shouldn't take a single data point and extrapolate it that there are not going to be gaps in programs given, you know, 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 continue to grind higher over time.

Eddie Kim

Got it. Got it. Great.

Christopher T. Weber

Thank you for that. And 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 today announcement probably doesn't change the Kingdom long term view as you as you mentioned, but I have to think it could impact our needs in '25 and '26.
Just in that context, do you think we could see Saudi jack-up rig count decline a bit over the next two years? Before trending higher afterwards? And look, could this mean for your four or so leased rigs that come off contract at the end of this year?

Anton Dibowitz

Yeah, it's a good question. I think you have it. I think you have characterized quite well. I look at this stage. It's a little bit early to say what, if any, the exact impact is going to be on Saudi rig count. But you know, 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 the company, and many families are to oil focused fields, but they fully expect to develop resources and in their own in their own predictions.
The increasing demand for four for oil and gas over time. I think what's really important is that the overall global jack up market is really tight right now after utilization approaching 95% and the total rig count at its highest level in almost nine years.
So, we see incremental demand coming to market outside the Middle East. And in fact, in the Middle East as well with the 10 to 15 incremental rigs. So if and it's a big gap still to be seen if there are rigs that that are relocated from Saudi, there is incremental demand, you know, to take on those rigs.
If you look at our fleet, we have eight arrows, an unconsolidated joint venture Valaris. We have eight rigs leased in there. We have two additional rigs going in there. These are new contracts for Arrow. So we'll have new lease contracts going in there this year. Saudi Ramco and the Kingdom remain fully committed to the aero joint venture.
The newbuild program that we have at IMI. Is a cornerstone project of the Saudi 2030 vision and two of our rigs that we have leased and are operating on gas fields, which is not the focus. And if you look at all the remainder of those rigs, that's around 5% of our backlog. So we're very comfortable with our, but our position and the go-forward position, you know, in Saudi and also the global jackup market.

Eddie Kim

Got it. Great. Thanks for that caller and Anton, I'll turn it back.

Operator

Thank you. The next question is from Fredrik Stene from Clarksons Platou Securitie.

Fredrik Stene

Hey, guys. Hope all is well, I wanted to circle back to the capital return policy, as you said, and announced today now opened up for $300 more millions. And I totally agree that share repurchases are for you guys. This is a good thing right now given where your steel values are, at least in my framework.
However, I wanted to it's challenged a bit in a way on the addition to that you say you want to return all free cash flow to shareholders and then you have that unless there's a better way for more value accretive use for it. And then you could potentially end up or chasing value forever and not getting sent out in a way is there.
So that's if you've done the DS 11, 13 and 14, is that kind of at the point where you look for no more value and say that now with the time to distribute each cent or could it be value accretion beyond those three rigs as well.

Anton Dibowitz

It's a good question, and we expect to deliver significant earnings and cash flow growth over the next couple of years. We we're heading into, you know, well into an upcycle, 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 we return it all to shareholders.
Yeah, 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, you know, there may be things that make sense for us to invest in in keeping with that, whether it's, you know, additional MPD systems or a very attractive opportunity to buy an asset. I'm just throwing examples out there. So, you'll have an absolute statement 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 about value, accretive use for that cash.

Fredrik Stene

Thank you very much. That's very helpful. And just one more for me. You have and clearly at least in my world, the 11, 13 and 14 are the three rigs that you should prioritize to prioritize to take out if any, but there are some other stacked jack-ups, semis, etcetera, across your fleet. Are you come to a point for some of these assets where you would more actively consider scrapping them or selling them for non-drilling use? Or is this still something you would Coley's keep on your balance sheet just for future optionality?

Anton Dibowitz

And look, I think for us, we prioritize getting ships back to work. That's a capital allocation question. The returns talked earlier a previous question about, you know, the reactivation cost versus where leading-edge day rates are and the ability to return on that reactivation cost and win on attractive contracts for jackups.
You know, 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 P&O durations and 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 markets, you know, the three, the six and our jackups are options for us and with me are positive. But growth in the market. We think there are attractive options for us to hold right now.

Fredrik Stene

All right. Thank you very much. Thank you for taking my question and have a good day.

Anton Dibowitz

Absolutely. Thanks a lot for the question.

Operator

Thank you. The next question comes from Gregory Lewis with BTIG.

Gregory Lewis

Thank you and good morning and thanks for taking my questions. I guess most of my questions have been asked on. So I was kind of curious on your views on, you know, like total announced that 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 on? Thanks.

Anton Dibowitz

Look I think it's a great sign for the market in general, as Matt said earlier, that, you know, operators are looking for the first time in a long time at contracting rates well beyond programs that they have approved or FID'd. And it speaks to their view of the market that the market's going to continue to tighten and where day rates are going to be going.
And so it's an attractive, it's attractive opportunity and I think is 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. And 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 and it's in its own right. And you know, if it makes sense and is and is value accretive to shareholders and fits into the portfolio. We would absolutely look and engage in something like that, but it depends on the commercial opportunity that's available.

Gregory Lewis

Super helpful. Thank you. Very much.

Anton Dibowitz

Thank you.

Operator

The next question comes from Kurt Hallead with Benchmark.

Kurt Hallead

Hey, good morning.

Anton Dibowitz

Hey, good morning.

Kurt Hallead

Thanks for the thanks for the updates. Some I'm kind of curious in the context where you have now, as you mentioned, you have three drill ships that can be activated bought into the market, maybe a couple of semisubmersibles, but obviously the yes, 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 rates over the course of the past 12 months, the industry, the drillers have been very much on 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, 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

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

Kurt Hallead

Okay, that's good color. So, on 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. And then some of that was due to concerns about pace of contracting activity slowing down and pretty much of the concept around leading edge rates.
Yes, stalling out that maybe temporarily, but stalling out on the left, you I know 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 you. It seems like you guys are in the driver's seat and the newer companies, things that still have some element of leverage to keep a lid on pricing. So what do you think that play here and look,

Anton Dibowitz

I mean, stalling out of stalling out or taking a pause versus being solid with leading edge day rates. You know, generating $100 million annually of EBITDA. You know is in a good market and incremental demand continues to come to market. You know that the number of attractive sidelined 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 up in obviously 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 1113 and the 14. And we're going to be patient and disciplined about bringing that capacity back to the market.

Kurt Hallead

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

Anton Dibowitz

Yeah, No, a 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. And we think having both accents and so on from a dividend would obviously want to have that be at a level that is sustainable through the cycle, but we think both are good, good components of a capital return policy.
Can appreciate that.

Kurt Hallead

Thanks.

Operator

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

Darren Gibbins

Thanks, Sanjay, 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.