Earnings Call: Q2 2021

Aug 3, 2021

Good day, everyone, and welcome to Valeris' Second Quarter 2021 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Darren Gibbons, Vice President of Investor Relations and Treasurer, who will moderate the call. Please go ahead, sir. Welcome everyone to the Volaris Second Quarter 2021 Conference Call. With me today are President and CEO, Tom Burke Executive Vice President and CFO, Jon Bakst and other members of our executive management team. We issued our press release, which is available on our website at valarus. 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 2nd. An updated investor presentation is also available on our website. Now, I'll turn the call over to Tom Burke, President and CEO. Thanks, Darren, and good morning, everyone. Welcome to the call, and thank you for your interest in Volaris. Today is the 1st quarterly earnings conference call for Volaris 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 Volaris and then provide some commentary on the current state of the offshore drilling market. I will then discuss recent Volaris 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 John Botch, our CFO, for a financial update. Volaris emerged from financial restructuring early this year on April 30th, 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 Volaris represents a compelling investment opportunity. Volaris 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 fleets of 60 rigs ranked in the top quartile of assets globally. In addition, Volaris has an industry leading operational platform underpinned by strong values and a purpose driven culture. Volaris focused on delivering operational excellence to its customers achieved through the three elements of our operational excellence framework: safety, reliability and efficiency. Volaris' 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, Volaris 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. Volaris is the only major offshore driller with a net cash position. John will provide more details on our capital structure in his prepared remarks. The combination of these strengths leave Volaris well positioned to benefit from improving market conditions and capitalize on opportunities as they arise. Now a brief operations update. To reiterate, at Volaris, 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 twenty twenty one 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 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-nineteen pandemic. Prices have moved higher due to a healthy rebound in demand for hydrocarbons, OPEC plus supply agreements and focus on capital discipline by U. S. Onshore E and 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 plus 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 3rd party research, E and 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 contract and tendering activity in 2021 as compared to 2020. According to 3rd party contracting data, the 9 floater rig years awarded in the first half of twenty twenty one are already double that in the first half of twenty twenty. 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. Volaris' fleet of 11 drill ships include some of the highest quality assets in the industry. I believe our team has done a great job 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 the 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-nineteen 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 STACK 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 Volaris 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 stack 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 it will cost in the range of €30,000,000 to 45,000,000 to reactivate each of our preservation stack floaters and €10,000,000 to €20,000,000 to reactivate each of our preservation stack jackups. Most of this cost will be operating expense recognized in the income statement related to key 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, Volaris was awarded 21 new contracts or contract extensions that announced a contracted backlog of over $1,300,000,000 To put that in perspective, our total contract backlog at the end of the Q1 was $1,100,000,000 As a result of these new contracts, Volaris' total contract backlog as of August 2nd was 2,200,000,000. Dollars In addition, ARO Drilling, our joint venture with Saudi Aramco, has total contract backlog of more than 950,000,000 dollars including contract backlog for its own rigs of approximately $820,000,000 If we look at our backlog on a combined basis, including a 50% share of ARO's owned rigs, our adjusted backlog totals $2,600,000,000 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 Volaris teams that have contributed to this expanding contracting success over the past few months. We've been particularly successful securing work for our drillship fleets, winning 7 new contracts, totaling approximately $1,000,000,000 in contract backlog across 5 different rigs. The Volaris DS-eleven 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 Volaris 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 into mid-twenty 24, and we're eager to see the project pass FID by the customer. The DS-eleven is currently preservation stacked in the Canary Islands and will be reactivated and mobilized the U. S. Gulf of Mexico for this program. Before mobilization, the DS-eleven 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 John will give more details on this contract in his comments. Once these upgrades are complete, the DS-eleven will be one 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 Volaris DF-sixteen by Occidental in the U. S. Gulf of Mexico, which is expected to commence in the Q2 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 stack rigs ahead of worn rigs from competitors speaks volumes about our detailed preservation and reactivation procedures, as well as the strength of Velaris 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 NS-one. And I have no doubt that we will demonstrate this again with the DS-sixteen. We were also awarded a 3 year contract for the Volaris DS-eighteen with Chevron in the U. S. Gulf of Mexico during the quarter. This project is expected to commence in the Q1 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 Volaris DS-ten and Volaris DS-twelve in West Africa. The DS-ten 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-twelve 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 semi sub fleet over the past 3 months, totaling more than $150,000,000 in contract backlog. The Volaris DPS-one 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 Q1 of 2022 to execute the Enfield P and 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 Polaris 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 fifty-fifty 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 $820,000,000 ARO Drilling also leases 9 jackup rigs from Volaris 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 lease revenue represents nearly 100% margin for Volaris. Finally, ARO Drilling intends to build 20 jackups over the next decade with the first two scheduled to be delivered in the second half of twenty twenty two. The first two 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 an investor presentation that we posted on the Volaris 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 1st sustainability report in 2016, and we'll soon be issuing our latest sustainability report along with an ESG position statement. This is a topic that Volaris 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 in our 4 R class drillships, Volaris DS-fifteen through DS-eighteen. 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 jackups in conjunction with a 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 Volaris pays 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 Volaris merger in April 2019 and year end 2020, achieved annualized cost savings of more than $365,000,000 Given our track record of M and 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 it would explore any opportunities to do so. In summary, we believe that Volaris 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 Volaris 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 John. 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 1st quarterly conference call since emergence, particularly given the positive momentum we're seeing in the market and specifically for Volaris. 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 2nd quarter results as well as our outlook for Q3 and full year 2021, along with some comments on our new capital structure. I'd also like to highlight our 2nd quarter results press release. We have significantly enhanced the level of disclosure in the press release to provide additional transparency and to simplify 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 revenues, 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 and 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 Volaris has a compelling value proposition built on 4 key elements and that the best way to value Volaris 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 four elements as well as providing consolidated numbers. The four parts of the value proposition are: 1st, 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. 2nd, 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. 3rd, 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 non consolidated fifty-fifty 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 2nd 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 will call out any quarter over quarter variances that are materially impacted by Freshstart 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 2nd quarter results. Adjusted EBITDA was $17,000,000 compared to $28,000,000 in the prior quarter. Revenues for the 2nd quarter were $293,000,000 compared to $307,000,000 in the prior quarter. Excluding reimbursable items, revenues declined to $261,000,000 from $277,000,000 in the prior quarter, primarily due to fewer operating days for the floater fleet as drillships, Solaris DS-twelve and DS-fifteen experienced idle periods between contracts during the second quarter. This is partially offset by additional operating days for MS-one, JU-one hundred and seven and JU-two forty seven that returned to work during the Q2. Volaris DS-twelve and DS-fifteen have since returned to work with DS-twelve starting a contract with Total Energy's Offshore Ivory Coast in July and DS-fifteen also commencing work with Total Energy's Offshore Brazil in June. Contract drilling expense for the Q2 of $254,000,000 was largely in line with the prior quarter. Excluding reimbursable items, contract drilling expense of $236,000,000 was also largely consistent with the prior quarter. Rig reactivation costs totaled $24,000,000 in the 2nd quarter as compared to $11,000,000 in the prior quarter. These costs primarily related to the reactivation of LARUS JU249 and JU 121 from preservation stack. JU 249 is scheduled to start a 400 day contract with OMZ Offshore New Zealand towards the end of the year, and JU 121 recently commenced a 2 year contract with Harbour Energy in the UK North Sea. As a result, EBITDAR, which adds back one time reactivation costs, was $41,000,000 in the 2nd quarter compared to $39,000,000 in the prior quarter. Adjusted EBITDARPS, which adds back one time reactivation and preservation costs, as well as carrying costs for the STACK fleet was $58,000,000 compared to $57,000,000 in the prior quarter. General and administrative expense declined to $19,000,000 from $24,000,000 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 $29,000,000 from $32,000,000 in the Q1. The sum of these two categories provides our total onshore support costs, which declined to $48,000,000 in the 2nd quarter from $56,000,000 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 $200,000,000 as compared to approximately $440,000,000 at the time of the Volaris 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 $54,000,000 in the 2nd quarter from $122,000,000 in the Q1 due to fresh start accounting adjustments, which significantly reduced the carrying value of property and equipment on the balance sheet. Other expense was $3,500,000,000 in the 2nd quarter compared with $30,000,000 in the prior quarter. The sequential quarter increase was due to reorganization items and fresh start accounting adjustments in the predecessor period of the Q2. 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 a $9,200,000,000 loss on fresh start adjustments. This is partially offset by $6,100,000,000 gain on liabilities subject to compromise as nearly all of the predecessor company's long term debt was converted into equity of the successor company. Please refer to our Q2 2021 Form 10 Q filing that can be found on the Investors page of the Volaris website for further details regarding reorganization items and fresh start accounting. We had a tax benefit of less than $1,000,000 in the Q2 of 2021 compared to tax expense of $32,000,000 in the prior quarter. The 2nd quarter tax provision included $13,000,000 of discrete tax benefit primarily related to Freshstart accounting adjustments, whereas the prior quarter tax provision included $20,000,000 of discrete tax expense related to uncertain tax positions taken for prior years. Adjusted for discrete items, tax expense of $12,000,000 in the 2nd quarter was in line with the prior quarter. Now moving to our Q3 2021 outlook. We anticipate that adjusted EBITDA for the 3rd quarter will be in line with 2nd quarter adjusted EBITDA of $17,000,000 Adjusted EBITDAR and adjusted EBITDARPS are also expected to be in line with the prior quarter in the range of $40,000,000 to $45,000,000 and $55,000,000 to $60,000,000 respectively. We expect total revenues will be in the range of 3.15 dollars to $325,000,000 as compared to $293,000,000 in the 2nd quarter. The sequential quarter increase is primarily expected to be driven by higher revenues from the floater fleet as DS-twelve and DS-fifteen return to work, as well as a full quarter impact of MS-one being under contract. We anticipate the 3rd quarter contract drilling expense will be in the range of $285,000,000 to $295,000,000 as compared to $254,000,000 in the 2nd 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 Q3 are expected to be approximately $25,000,000 primarily related to jackup Volaris Ju 249 and semisubmersible Volaris DPS1, which was recently awarded 2 contracts with Woodside Offshore Australia with a combined duration of approximately 2 years. Amortization items in the Q3 are expected to be a net expense of $4,000,000 This is primarily the impact of amortized mobilization expense, partially offset by some mobilization revenue. Note that this $4,000,000 net amortized expense is added back when calculating adjusted EBITDA. General and administrative expenses anticipated to be approximately $21,000,000 Now I'll move to 2nd quarter results and 3rd quarter outlook for ARO Drilling, our non consolidated fifty-fifty joint venture with Saudi Aramco. Aero EBITDA was $28,000,000 in the 2nd quarter compared to $33,000,000 in the prior quarter. While revenues increased to $125,000,000 from $123,000,000 in the prior quarter, contract drilling expense also increased to $93,000,000 from $86,000,000 primarily due to higher personnel costs. Era's 3rd quarter EBITDA is expected to be approximately $15,000,000 This 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 Volaris 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 $250,000,000 to $260,000,000 This includes one time reactivation costs of $90,000,000 to $100,000,000 Operating margin for leased and managed rigs is expected to be in the range of $75,000,000 to $85,000,000 while ongoing holding costs and one time preservation costs of the STACK fleet are expected to total approximately $60,000,000 to $70,000,000 Onshore support costs that are included in contract drilling expense on a consolidated basis are expected to be between $110,000,000 $120,000,000 for 2021 and full year G and A expense is anticipated to be $80,000,000 to $85,000,000 Summing all the parts, we arrive at an estimated full year 2021 adjusted EBITDA for Volaris of approximately $60,000,000 to $70,000,000 Adding back one time reactivation costs of $90,000,000 to $100,000,000 gets to EBITDAR of $155,000,000 to $165,000,000 Further adjusting for one time preservation costs as well as holding costs for the STACK fleet, full year 2021 adjusted EBITDARPS for Volaris is estimated in the range of $220,000,000 to $230,000,000 Finally, we anticipate the full year 2021 EBITDA for Arrow will be in the range of $105,000,000 to $110,000,000 We anticipate Arrow's EBITDA growing in 2022 with the delivery of its first two newbuild rigs expected in the second half of twenty twenty two, 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. Era is already a highly cash generative business with a cash balance of $318,000,000 as of June 30, 2021, which is an $80,000,000 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 Arrow Operations and 3rd party financing non recourse to Volaris. Now, we'll move to capital expenditures. Total capital expenditures for full year 2021 are expected to be in the range of $85,000,000 to $95,000,000 comprised of $30,000,000 to $35,000,000 of maintenance CapEx $50,000,000 to $55,000,000 of enhancements and upgrades, of which approximately $15,000,000 to $20,000,000 is expected to be for the first stages of the required upgrades on the DS-eleven for the North Platte campaign and less than $5,000,000 of capitalized interest and other costs. In addition, the remaining upgrade costs for the DS-eleven for the North Platte project is expected to be over $200,000,000 A significant portion of the total upgrade costs will be covered by the customer prior to the start of drilling operations with the fine 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 Velars for the upgrade investments in the event of termination. Velarce currently has no newbuild capital commitments. However, earlier this year, we entered into an amended agreement with 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 Volaris with the option to take delivery of either or both newbuild drillships, Volaris DS-thirteen and DS-fourteen on or before December 31, 2023. Under the amended agreements with the shipyard, the purchase price for the rigs are estimated to be approximately $119,000,000 for DS-thirteen $218,000,000 for DS-fourteen. If Volaris 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 Volaris. 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, Polaris has the strongest balance sheet in the offshore drilling sector, and we are the only major offshore driller with a net cash position. As of June 30, 2021, we had a cash and cash equivalents balance of $609,000,000 plus $53,000,000 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 $550,000,000 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 pick the entire interest payment. Interest payments are due semi annually on May 1 November 1st, and we must decide the interest payment option 30 days prior to the beginning of the interest payment period. The first interest payment of $23,000,000 will be paid in cash in the 4th quarter. The note also provides the period pursuit debt basket of $275,000,000 and junior secured debt capacity of the greater of $200,000,000 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 2 times pro form a adjusted interest coverage ratio. It was important to us through our restructuring process to ensure we merged 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. Our first question will come from Conor Lynagh with Morgan Stanley. Please go ahead. Yes, thanks. Obviously, a lot of the debate around your longer term earnings power comes back to these 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 2 years from now, etcetera? Hey, Conor. This is Tom. So, yes, I'll give that a first comment and then maybe see if John 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 and step by step. As 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 drill ships. 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 John, do you have anything to add to that? Maybe just a couple of other points just to highlight for Conor that if you look at the 9 floaters that we have stacked today, all the 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-sixteen with today's announcement. The DS-eleven will require it's a bit of its own animal given the 20 ks upgrade. So that will take some time. But I would point out that once now that the DS-eleven and DS-sixteen are spoken for, we have 5 additional drill ships 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 costs 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. Thanks, Tom. Yes. Thanks for that. Sort of related and also I guess extends to the Arrow new builds. 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 new build costs at Arrow? Well, let me think I'll answer that. So, on the first two rigs, we clearly have locked in pricing, and those rigs are well under construction. So there's no real there's no and that turnkey from the shipyard. So there's no cost inflation on those. For Rigs 34, I think it's yet to be determined because we've gone out or rather I'd say Arrow has gone out to the shipyard and they're in the process of reviewing those. I would say that there are as you know, there aren't many newbuild programs where OEMs can put equipment in the market. So, people want the work. So, we haven't seen any significant pricing changes yet on the newbuild program, ARO, but it's probably a little premature to say as we haven't seen the pricing on Rigs 34 yet. Got it. And that comment that you haven't really seen a lot of component inflation would hold for the contemplated reactivation as well? Yes. We've seen some inflation, but actually, as much around inflation as 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. Right. Makes sense. Okay. Thank you. I'll turn it back. Hey, Connor. Thank you for the questions. Our next question will come from Greg Lewis with BTIG. Please go ahead. 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 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 the drilling maybe is not that real advantage being there already? I'd say, on the Chevron example, we were already there and the rig was performing well. So, we were on shorter term contracts, as you know. But, it was well and 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 rate. So, it's definitely there's an incumbency advantage there for sure on the Chevron contract. Okay, great. And then just pivoting a little bit. Clearly, there's a lot of discussions around M and A in this space. 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 Polaris is approaching at least this part of the cycle a little differently than it has be in the past? Sure. I'll give you some comments on that and then I'll ask John to make some comments as well. So, when I think about our history on M and A, we have do have quite a track record with the Pride, the Atwood acquisitions and the EnscoRowan mergers. So, we know how to do M and 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 in the Company, I think that absolute focus on driving shareholder value. And, we are we will look at things, we'll contemplate. There is a program inside the Company where we look at a lot of stuff, but really focus 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 certainly we'll 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. Thank you, John. Thank you for that. Super helpful. Yes. Go ahead. John is not going to make a comment on that. Go ahead, Greg. Other questions? I was just going to I don't have anything really to add, Tom. I think you covered it well. 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, 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, but we'll be disciplined. Our next question will come from Surmak Sami with Clarksons Platou Securities. Please go ahead. Fred Reich here from Clarksons And happy to have you back on the regular conference call through here. And also 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-eleven and DS-sixteen 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 we've had on many of them being really no obstacle at all? And I guess the answer is partially yes. Since you've got new contracts, but it would be interesting to hear if you've experienced any differences between whatever assets you've been, etcetera, around that? Just trying to get a sense on what customers are willing to take at this point. Yes. Frederick, it's good to talk to you as well. And thanks for coming on the call, Frederick. 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 than 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 some of what the reactivation plans are, and give them confidence in contracting the rigs. We look at our track record and 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 operators experience of the asset also has a way into the decision. So, customers have actually used a rig before and feel comfortable about how it sits, and they will also, even though it's preserved, they have an interest in using it again. I think that really sort of covers it. Yes. No, that's super helpful. Just a final one for me, touching upon ARO. You've, I think, here, in case from my own discussions been in the industry, people really appreciate a higher degree of disclosures that you've done now recently trying to turn what you should also buy into something more tangible and understandable. So I was wondering, I'm sorry if you mentioned it, but I had to turn a drum earlier. Have you kind of considered now that you or your balance sheet is in shape this shareholder knows and the way that you're kind of financially exposed to our Is there any plans there to potentially pay out and even refinance that shareholder loan or something like that? Just to try to, make, I guess, make value in that pocket more reasonable? Yes. So, Patrick, you're going in and out a little bit there, but I think I got the gist of your question. I'm going to 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 note to help drive Volaris shareholder value? It was coming in and out a little bit, Frederic. But, that's the question, right? Yes. That's right. 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 it's performing well. And John talked through its financial performance. It doesn't 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 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 to that end. And John 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 note paybacks or anything like that. But certainly, I think we're very interested in exploring. Guys. Have a good day. Bye. Thanks very much, Fred. Appreciate it. Thank you. 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. Thanks, Matt. And thank you to everyone on the call for your interest in Volaris. We look forward to speaking with you again when we report our Q3 2021 results. Hope you have a great rest of your day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.