Chapter 11 ) VALARIS PLC, Et Al.,1 ) Case No

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION ) In re: ) Chapter 11 ) VALARIS PLC, et al.,1 ) Case No. 20-34114 (MI) ) Debtors. ) (Jointly Administered) )

DEBTORS’ MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING AND APPROVING THE DEBTORS’ (A) KEY EMPLOYEE INCENTIVE PLAN AND (B) KEY EMPLOYEE RETENTION PLAN AND (II) GRANTING RELATED RELIEF

A hearing will be conducted on this matter on November 17, 2020 at 1:30 pm in Courtroom 404, 4th floor, 515 Rusk, Houston, TX 77002. You may participate in the hearing either in person or by audio/video connection.

Audio communication will be by use of the Court’s dial-in facility. You may access the facility at (832) 917-1510. You will be responsible for your own long-distance charges. Once connected, you will be asked to enter the conference room number. Judge Isgur’s conference room number is 954554.

You may view video via GoToMeeting. To use GoToMeeting, the court recommends that you download the free GoToMeeting application. To connect, you should enter the meeting code “JudgeIsgur” in the GoToMeeting app or click the link on Judge Isgur’s home page on the Southern District Of Texas Website. Once connected, click the settings icon in the upper right corner and enter your name under the personal information setting.

Hearing appearances must be made electronically in advance of the hearing. To make your electronic appearance, go to the Southern District of Texas Website and select “Bankruptcy Court” from the top menu. Select “Judges’ Procedures,” then “View Home Page” for Judge Isgur. Under “Electronic Appearance” select “Click Here To Submit Electronic Appearance.” Select the case name, complete the required fields and click “Submit” to complete your appearance.

If you object to the relief requested, you must respond in writing, specifically answering each paragraph of this pleading. Otherwise, the court may treat the pleading as unopposed and grant the relief requested.

The above-captioned debtors and debtors in possession (collectively, the “Debtors”)

1 A list of the Debtors in these chapter 11 cases may be obtained on the website of the Debtors’ claims and noticing agent at http://cases.stretto.com/Valaris. Debtor Ensco Incorporated’s principal place of business and the Debtors’ service address in these chapter 11 cases is 5847 San Felipe Street, Suite 3300, Houston, Texas 77057.

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respectfully state as follows in support of this motion (this “Motion”).

Preliminary Statement2

1. Historically, the Debtors’ success has been borne on the shoulders of their most important asset: their highly skilled, productive workforce. With a fleet of 63 rigs, the Debtors operate the industry’s largest modern offshore drilling fleet and maintain drilling operations in nearly every major offshore market. The Debtors’ fleet is among the most technologically advanced in the industry, requiring well-trained crews possessing specialized and project-specific knowledge to meet the requirements of customers like Saudi Aramco, BP plc, Chrysaor Holdings

Limited, Abu Dhabi National Oil Company, Lundin Energy, Royal Dutch Shell plc, and Eni S.p.A.

Indeed, the Debtors have been recognized in industry surveys for their operational excellence and customer satisfaction. To maintain such high standards and drive their financial performance, the

Debtors incentivized their employees through various compensation programs providing market-based financial incentives based on performance. Incentivizing and retaining this specialized workforce while the Debtors remain in chapter 11 is even more essential, as replacing these employees cannot occur without substantial costs and disrupting customer operations.

2. It is equally important to incentivize the Debtors’ management to achieve strong results while facing daunting industry challenges and operating in chapter 11. In March 2020, market conditions deteriorated as the COVID-19 global pandemic spread and efforts to stem its transmission decreased factory output and transportation demand, resulting in an 18 percent decline in daily global demand for crude oil. A price war between the Organization of the

Petroleum Exporting Countries and Russia exacerbated these conditions, causing even more surplus supply amidst decreasing energy demand. These strains have placed increasing demands

2 Capitalized terms used but not defined in this section have the meanings given to them elsewhere in the Motion.

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on the Debtors’ senior management team. They have been focused not only on weathering this storm, but also guiding the Debtors’ complex international business strategy while undertaking the extensive preparations required to file these chapter 11 cases. These executives’ experience, focus, and dedication to operating such a complex business efficiently, safely, and effectively in a volatile industry environment will continue to be critical to the overall success of the Debtors’ restructuring and maximizing recoveries for all stakeholders. Incentivizing these executives with market-based compensation programs that are aligned with the Debtors’ historical compensation programs for senior management is as necessary to the Debtors’ continued operational success.

3. This Motion therefore seeks approval of (1) the Debtors’ Key Employee Incentive

Plan (the “KEIP”), which includes twelve members of the Debtors’ senior management team; and

(2) the Debtors’ Key Employee Retention Plan (the “KERP,” and together with the KEIP, the “Compensation Plans”), which includes approximately 490 key non-insider employees. Like other similar-sized companies in the oil and gas industry, the Debtors historically utilized a number of incentive- and retention-based programs to ensure that all employees have a stake in, and the opportunity to benefit from, the company’s performance. In addition to cash-based programs, the

Debtors’ prepetition compensation programs also included stock awards for senior management and most employees participating in the proposed KERP. However, following the decline of the

Debtors’ stock price as result of the COVID-19 crisis, an oil price war, and long-term macroeconomic factors, the Debtors concluded that these prepetition stock awards no longer served their purpose of properly incentivizing the Debtors’ workforce.

4. As the Debtors approached filing for chapter 11, the Debtors worked with their advisors, including Alvarez & Marsal, LLC (“A&M”), as compensation advisor,3 to evaluate the

3 The Debtors also retained A&M as a financial advisor in these chapter 11 cases. See Docket No. 329.

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Debtors’ Compensation Plans. Leading this charge was the compensation committee

(the “Compensation Committee”) of the Debtors’ board of directors (the “Board”), which was comprised of five experienced directors, none of whom are beneficiaries of the Compensation

Plans. In formulating these plans, the Compensation Committee undertook a deliberative process, convening frequently with the Debtors’ advisors, to understand how to best incentivize the workforce in light of a likely in-court restructuring during 2020.

5. As a result of this process, the Debtors designed the Compensation Plans to achieve the desired operational performance while ensuring they were consistent with their own prepetition and industry practices, within the market range of compensation offered at comparable companies, and reasonable in terms of size and scope.4 Specifically, the participants in the Compensation

Plans are the same employees who were eligible to participate in the Debtors’ prepetition plans.

The incentive plan metrics—downtime, expense reductions, and safety—are common across the

Debtors’ competitors. At “target” performance levels, the members of senior management participating in the KEIP will see a 7.9 percent reduction on average in their total compensation from 2019 levels. Indeed, the total direct compensation under the Debtors’ plans at “target” is

6 percent lower under the Compensation Plans—$99.3 million, comprised of the $19.1 million under the KEIP and the $80.2 million under the KERP—than it was under the Debtors’ 2019 prepetition plans ($105.0 million). The “target” cost per participant is at the 31st percentile for the

KEIP and the 70th percentile for the KERP—both firmly within market. Thus, the Compensation

Plans will encourage and reward achievement of performance targets established by the Board, focus key employees on value-maximization for the benefit of all stakeholders, and offer total

4 Unless noted otherwise, the term “market” means at or below the 75th percentile of the applicable peer group examined by A&M.

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compensation opportunities consistent with prior years and the market based on court-approved plans for similarly situated companies.

6. Importantly, the Compensation Plans comply with the Bankruptcy Code. No retention payments are made to insiders. Payments under the KEIP and incentive payments under the KERP are made only if participants achieve objective performance goals. These goals represent difficult-to-reach targets and challenging, incentive-based benchmarks that, if met, will bring real benefit to the estate and all stakeholders. In short, the Compensation Plans are reasonable and well within the Debtors’ business judgment. The Debtors request the Court authorize the Debtors to implement the Compensation Plans.

Relief Requested

7. The Debtors seek entry of an order (the “Order”), substantially in the attached form, approving the Debtors’ Compensation Plans and granting related relief. In support of this Motion, the Debtors submit the Declaration of Brian Cumberland in Support of Debtors’ Motion for Entry of an Order (I) Authorizing and Approving the Debtors’ (A) Key Employee Incentive Plan and

(B) Key Employee Retention Plan and (II) Granting Related Relief, attached as Exhibit A,

(the “Cumberland Declaration”).

Jurisdiction and Venue

8. The United States Bankruptcy Court for the Southern District of Texas

(the “Court”) has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). The Debtors confirm their consent, pursuant to rule 7008 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), to the entry of an order by the Court.

9. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

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10. The bases for the relief requested herein are sections 105(a), 363(b), 363(c),

503(c)(1), and 503(c)(3) of title 11 of the United States Code (the “Bankruptcy Code”),

Bankruptcy Rules 6003 and 6004, and rules 4001 and 9014 of the Bankruptcy Local Rules for the

Southern District of Texas (the “Bankruptcy Local Rules”).

Key Employee Incentive Plan

I. Overview of KEIP.

11. The participants in the KEIP are twelve members of the Debtors’ senior management team (each a “KEIP Participant” and collectively, the “KEIP Participants”). These participants have played, and will continue to play, a central role in the overall strategy and direction of the Debtors’ business enterprise as well as the Debtors’ restructuring. The KEIP

Participants are (a) Thomas Burke, President and Chief Executive Officer; (b) Jonathan Baksht,

Executive Vice President and Chief Financial Officer; (c) Gilles Luca, Senior Vice President and

Chief Operating Officer; (d) Michael McGuinty, Senior Vice President, General Counsel and

Secretary; (e) Alan Quintero, Senior Vice President, Business Development; (f) Kelly McHenry,

Vice President, Business Development; (g) John Winton, Vice President, Human Resources and

Transformation; (h) David Armour, Vice President, Tax; (i) Darin Gibbins, Vice President,

Treasury and Investor Relations; (j) Spiros Georgas, Vice President, Finance; (k) Colleen Grable,

Corporate Controller; and (l) Elizabeth Darby, Chief Compliance Officer. The KEIP Participants may be considered “insiders” under the Bankruptcy Code.

12. Consistent with their historical compensation practices, the Debtors continue to believe that appropriate, incentive-based compensation opportunities remain an important tool to drive performance for this management group. The proposed award opportunities reflect A&M’s benchmarking analysis versus the Debtors’ industry peers, as well as A&M’s examination of

14 comparable key employee incentive plans approved in chapter 11 cases involving energy

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companies with revenues exceeding $500 million that filed petitions in the last six years

(collectively, the “KEIP Peer Group” or “KEIP Market”).5 The Debtors’ proposed award opportunities (and performance targets) were also vetted by the Compensation Committee, the full

Board, and the Debtors’ management team and advisors.

13. The proposed KEIP contains the following primary design features:

 KEIP Awards. Each KEIP award will be a cash amount provided (to the extent earned based on actual performance) upon the conclusion of each performance period described below. Potential payments are tied to achieving specified performance metrics for each performance period and subject to the participant’s continued employment through the end of that performance period (except as provided below).

 Performance Targets. KEIP payouts will be based on four performance metrics: personal safety achievement targets weighted at 15 percent, process safety achievement targets weighted at 15 percent, rig downtime achievement targets weighted at 30 percent, and expense reduction achievement targets weighted at 40 percent. Although the Debtors historically included EBITDA as a performance metric, they determined that using EBITDA targets for the KEIP would not appropriately track operational performance given the difficulty of forecasting EBITDA goals during the current volatility and macroeconomic challenges facing the Debtors. All major participants in the Debtors’ industry are facing such challenges, which are outside management’s control. The Debtors’ approach to their performance targets is consistent with market practice for designing incentive plan metrics for industries experiencing significant structural challenges negatively impacting profitability—including the offshore drilling industry during the COVID-19 pandemic.

 KEIP Payout Ranges. The KEIP will provide for potential payments representing a range from 50 percent of target payment for threshold performance and up to 150 percent of target payment for maximum performance.6 Linear interpolation of the KEIP payment will be applied for achievement of performance metrics between the values shown below.

5 The 14 companies constituting the KEIP Peer Group are Alpha Natural Resources, Inc., Breitburn Energy Partners LP, Bristow Group Inc., C&J Energy Services Ltd., California Resources Corporation, Diamond Offshore Drilling, Inc., Energy Future Holdings Corp., FirstEnergy Solutions Corp., LINN Energy, LLC, Pacific Drilling S.A., Peabody Energy Corporation, Sabine Oil & Gas Corporation, Samson Resources Corporation, and Ultra Petroleum Corp.

6 Under their 2019 executive cash incentive program, the Debtors awarded a payment of up to 200 percent of target for maximum performance. This was reduced to 150 percent under the KEIP.

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 Performance Periods. Safety, rig downtime, and expense reduction performance metrics will be measured for each of three independent performance periods representing the fourth fiscal quarter of 2020 and the first and second fiscal quarters of 2021. Achievement of the metrics for each period will be considered independently of performance for other periods (subject to the catch-up feature discussed below).

 KEIP Payment Timing. The KEIP awards attributed to the second and third fiscal quarters of 2020 were paid at target performance levels prior to the Petition Date.7 Thereafter, payments will be made as soon as practical after each performance period to the extent earned.

 Catch-up Feature. In addition to the measurement of safety, rig downtime, and expense reduction performance for each quarterly performance period, performance will be measured on a cumulative basis at the end of the second fiscal quarter of 2021 and a “catch-up” payment will be made to the extent the Debtors’ cumulative performance and earned payouts exceed the quarterly payouts to date. For example, if the Debtors failed to meet the “target” performance metric for expense reductions in the second quarter of 2020, but subsequently achieved overall expense reductions equating to 175 percent of this metric (which is capped at 150 percent), the Debtors would make a catch- up payment to cover the difference between the payment amount actually achieved and the payment originally made in the second quarter of 2020.

 Termination of Employment. If the Debtors terminate a participant’s employment without “cause” or due to death or disability, the participant will be entitled to a pro-rata portion of the KEIP payment that would otherwise have been earned for such performance period based on actual performance during the performance period. If the Debtors terminate a participant’s employment for any other reason (including voluntary termination and termination for cause), any remaining unpaid portion of the KEIP payment will be forfeited.

 KEIP Renewal. The KEIP will continue for the fourth fiscal quarter of 2020 and first and second fiscal quarters of 2021 regardless of the Debtors’ emergence.

14. If approved, the KEIP would provide aggregate (for all participants) threshold, target, and maximum opportunities of approximately $3,660,654, $7,321,309, and $10,981,963,

7 For avoidance of doubt, the Debtors are not requesting to pay KEIP awards attributed to the second and third fiscal quarters of 2020. Each KEIP Participant’s award for the fourth fiscal quarter of 2020 is also subject to a reduction if the actual performance in the second and third fiscal quarters of 2020 is below target.

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respectively. The individual award opportunities available to each KEIP Participant are summarized as follows:

Individual KEIP Values8 Threshold Target Maximum Award Award Award Participant’s Title Opportunity Opportunity Opportunity President and Chief Executive Officer $1,474,875 $2,949,750 $4,424,625

Executive Vice President and Chief Financial Officer $522,188 $1,044,375 $1,566,563

Senior Vice President, Chief Operating Officer $434,532 $869,064 $1,303,596

Senior Vice President, General Counsel and Secretary $372,375 $744,750 $1,117,125

Senior Vice President, Business Development $348,000 $696,000 $1,044,000

Vice President, Business Development $64,125 $128,250 $192,375

Vice President, Human Resources and Transformation $89,963 $179,926 $269,889

Vice President, Tax $83,753 $167,506 $251,259

Vice President, Treasury and Investor Relations $102,978 $205,957 $308,935

Vice President, Finance $74,758 $149,515 $224,273

Corporate Controller $52,080 $104,160 $156,241

Chief Compliance Officer $41,028 $82,055 $123,083

Total Award Values $3,660,654 $7,321,309 $10,981,963

15. The compensation opportunities that the KEIP provides will result in KEIP

Participants receiving below median compensation per participant, on average, based on the KEIP

Peer Group assuming target payouts under the plan. Notably, the target cost as a percent of prepetition assets would be the lowest of the 14 companies in the KEIP Peer Group. The target cost per participant is at the 31st percentile of KEIP Market, while the target total cost of the KEIP would be at the 72nd percentile of KEIP Market (primarily driven by the KEIP’s higher number of participants, which ranks at the 81st percentile of KEIP Market). Moreover, the 2020 target

8 No payments will be made if the Debtors fail to achieve a threshold-level performance.

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total direct compensation for all KEIP Participants in the aggregate would fall between the 25th and 50th percentile of the peer group developed between the Debtors and their prior executive compensation advisor, Frederic W. Cook & Co., Inc. (“F.W. Cook”), which consists of 20 energy companies with revenues between $525 million and $13,005 million that the Debtors used for executive compensation benchmarking purposes (the “Exec Comp Peer Group”).9 The 2020 target total direct compensation for the KEIP Participants in the aggregate would be a 7.9 percent decrease year-over-year from 2019 total direct compensation. Of note, the Debtors’ CEO voluntarily reduced his base salary and target incentive payments by 10 percent effective January

1, 2020.

II. The Performance Targets.

16. Under the KEIP, awards are payable only upon the Debtors achieving certain operational performance targets during the course of the program related to safety, downtime, and expense reductions. Achievement of the performance targets will require substantial effort from the KEIP Participants; there is no guarantee that the Debtors will meet any of these targets in this volatile business environment. As one of the Debtors’ competitors observed, there has been a

“structurally reduced demand for offshore rigs,” the “offshore drilling market is extremely oversupplied,” and “government-imposed or voluntary social distancing and quarantining, reduced travel, and remote work policies” as a result of the COVID-19 pandemic “have altered, and are

9 The 20 companies comprising the Exec Comp Peer Group are Diamond Offshore Drilling Inc, Helmerich & Payne, Inc., Hess Corp, KBR, Inc., Kosmos Energy Ltd., Marathon Oil Corp, McDermott International Inc, Murphy Oil Corp, National Oilwell Vacro, Inc., Noble Energy Inc, Noble Corp plc, Oceaneering International Inc, Patterson UTI Energy Inc, Precision Drilling Corp, SMB Offshore N.V., Superior Energy Services, Talos Energy Inc., TechnipFMC plc, Transocean Ltd. and W&T Offshore, Inc. The compensation data for the Exec Comp Peer Group was updated to include the latest publicly available data on these companies, including post-COVID-19 reductions in compensation and any bankruptcy-related compensation changes, and supplemented with executive compensation survey data from sources including Mercer Energy Benchmark, Mercer General Benchmark, and ECI Energy Surveys.

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expected to have a significant negative effect on oil consumption.” In re Noble Corp. plc,

No. 20-33826, Dkt. No. 28, R. Barker Decl. at 19 (Bankr. S.D. Tex. Aug. 1, 2020). The “continued decreased demand for crude oil and historically low oil prices have resulted in the postponement or cancellation of a large number of offshore exploration and development projects, which has had a negative impact on offshore rig demand” and fostered “continued uncertainty in the market.” Id.

17. Given this uncertainty, the Compensation Committee designed these performance targets in consultation with the Debtors’ restructuring advisors and an independent review of the total compensation award levels to ensure that KEIP awards reflect goals that both incentivize and reward achievement of the Board’s performance targets. Simply put, these metrics are not

“layups.” For example, the Debtors’ “threshold” metric for personal safety was not met in seven of the last 13 months, and the “target” metric was not met in 11 of the last 13 months. The “target” jackup downtime rate metric has not been met for the last three months. The “target” floater downtime rate was not met from March through June 2020. In terms of cost reductions, the

Debtors by August 2019 had already reduced nearly $165 million in merger-related synergies following the April 2019 merger between Rowan Companies plc and Ensco plc. Yet, the Debtors’

“target” plan requires a total of $311 million of cost reductions by the second quarter of 2021.

These are ambitious, difficult to reach goals. For these reasons, the parties supporting the Debtors’ restructuring support agreement (the “Restructuring Support Parties”) fully support the KEIP.

III. The Need for a KEIP.

18. In light of severe business pressures in the offshore drilling market and additional challenges of the chapter 11 filing, it is critical that the Debtors implement the KEIP to ensure that senior management remains incentivized to maximize value for all stakeholders. Each KEIP

Participant possesses critical knowledge related to the Debtors’ business and the intricacies and risks of executing the Debtors’ cross-border strategies in major offshore drilling markets. The

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dedication of the Debtors’ senior management team will help communicate stability throughout all facets of the Debtors’ operations, as well as to customers, vendors, suppliers, and other parties who work alongside the Debtors.

19. In recent months, the KEIP Participants have seen a substantial increase in their workloads without a corresponding increase in their compensation. In fact, even if the KEIP is approved, the 2020 total direct compensation of the Debtors’ CEO at target would decrease by

24.6 percent year over year from 2019, and rank between the 25th and 50th percentiles of the Exec

Comp Peer Group total direct compensation at target. Several of the KEIP Participants would also see declines in total direct compensation compared to 2019. Yet, despite the reduction in their total direct compensation, the Debtors’ senior executives have continued to perform their preexisting job functions and taken on more responsibilities as a result of the chapter 11 process.

The KEIP Participants’ responsibilities now include developing and implementing the Debtors’ reorganization strategy, participating in Court hearings, continuing to negotiate with stakeholders and other parties, reviewing Court filings, and responding to creditor inquiries and requests from the United States Trustee for the Southern District of Texas. The chapter 11 process also has required the KEIP Participants to take a more proactive approach in engaging with their customers, vendors, and employees to ensure they understand and believe the “business as usual” message of this balance sheet restructuring so that the Debtors can continue to deliver successful results for the Debtors’ customers and stakeholders. The KEIP Participants have also had to undertake the difficult work of reducing headcount and scale of the Debtors’ operations in ways that maintain operational integrity and avoiding long-term harm to the business.

20. The increased burden placed on the KEIP Participants has been further exacerbated by the COVID-19 crisis. Keeping the company’s global operations functioning has required

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management to respond to constantly changing outbreak conditions—and the corresponding reactions from governments—around the world. For example, international travel restrictions have significantly complicated the Debtors’ ability to staff crews on rigs operating far from crew- members’ residences. Visa services for some governments have been suspended. Crews have been stranded abroad, including one crew in Qatar for over 200 days. In response to regulatory quarantine requirements, customer restrictions, and the Debtors’ own safety protocols, employee work periods have increased in an effort to prevent the virus’ spread from infiltrating operating rigs. While typical offshore crews historically worked for 28 days on and 28 days off, many crews now are scheduled to work for 8 weeks at a time, reflecting a 14-day quarantine period prior to traveling offshore, 28 days of work, and another 14-day quarantine period when returning to shore.

Furthermore, drilling rigs’ close living quarters have required new safety protocols to protect employees during this pandemic. Managing these significant and dramatic changes to the Debtors’ business has required the diligence, coordination, and talent of the Debtors’ management team.

21. The KEIP Participants have met these challenges head on. And while the Debtors are committed to continuing to do so, providing incentive opportunities through the KEIP will enable the Debtors to not only achieve, but possibly exceed, their near-term operational goals for the benefit of the Debtors, the Debtors’ estates, and all parties in interest. Specifically, having high safety standards is both a moral and economic imperative for the Debtors and their management team. Safety incidents on rigs can involve loss of life, personal injury, environmental damage, shutting down operations, loss of revenue, destruction of property, litigation, and negative publicity. In contrast, safety is good business: a strong safety performance record helps the

Debtors win new customer contracts. Thus, incentivizing the KEIP Participants to ensure safety on a personal and process level is top of mind across all members of their organization, paramount

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to the health of the Debtors’ business, and accretive to the ultimate value of their estates. Similarly, the KEIP performance metric of minimizing rig downtime translates to greater utilization of the

Debtors’ fleet at contracted day rates, which will contribute liquidity to the Debtors’ estates and reinforce the Debtors’ customer relationships. Likewise, the KEIP performance metric of reducing expenses will promote lean, synergistic operations by encouraging removal of redundant costs between onshore and offshore operations. Operating a safe, lower cost, higher revenue generating business amply benefits the Debtors and their stakeholders.

Key Employee Retention Plan

I. Overview of KERP.

22. The Debtors employ approximately 3,500 personnel worldwide, excluding contract employees. The KERP participants are 490 key non-insider employees (each a “KERP

Participant,” and collectively the “KERP Participants”) whose knowledge and experience are essential to preserving operational stability and maximizing estate value. These employees include highly trained and knowledgeable personnel that would be extremely difficult to replace without a negative effect on the Debtors’ business. Indeed, since the beginning of 2020, several key employees at the senior manager level and above have resigned from the Debtors (including two vice presidents, two directors, and an associate general counsel, among others). Given the increasing demands placed upon the potential KERP Participants during the chapter 11 cases, providing compensation designed to motivate key employees to remain with the Debtors throughout the restructuring process is essential. For these and other reasons, the Restructuring

Support Parties support the KERP.

23. Due to the importance of the KERP Participants to the success of the Debtors’ businesses, the Debtors and their advisors developed a compensation plan designed to offer

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competitive, fair compensation that motivates the KERP Participants to remain with the Debtors through the chapter 11 process. The key terms of the KERP are summarized as follows:

 Eligible Participants. The KERP awards will be provided to approximately 490 non-insiders who were eligible under the Company’s prepetition incentive plans based on grade level and position. Although some of the potential KERP Participants have titles like “director,” “vice president,” or “chief,” none is an “insider” of the Debtors. Specifically, the KERP Participants do not include any employee who (a) is appointed or hired directly by the Board; (b) reports directly to the Board or CEO; (c) regularly attends Board meetings; (d) exercises managerial control over, or has responsibility for, the Debtors’ operations as a whole; or (e) dictates the Debtors’ overall corporate policy, governance, or disposition of corporate assets.

 KERP Structure. The KERP program is comprised of a retention component (the “Retention Component”) and an incentive component (the “Incentive Component”), the latter of which has the same program attributes as the KEIP.

 KERP Awards. KERP awards are comprised of awards under the Retention Component and the Incentive Component, with each component equally weighted at 50 percent. The Retention Component represents fixed cash amounts payable in three postpetition installments based on continued employment of the KERP Participant through the applicable payment dates. Approximately $3.3 million of the available Retention Component awards will be allocated quarterly. The Retention Component will continue for the fourth fiscal quarter of 2020 through the second quarter of 2021 regardless of the Debtors’ emergence date. Each Incentive Component award will be a cash amount provided (to the extent earned) upon the conclusion of each of the performance periods. Potential payments under the Incentive Component are based on achievement of the same specified performance metrics used by the Debtors for the KEIP program and subject to continued employment of the KERP Participant through the end of each performance period (except as provided below).

 Performance Targets (Incentive Component only). Incentive Component payouts will be based on the same four performance metrics as the KEIP: personal safety achievement target weighted at 15 percent, process safety achievement target weighted at 15 percent, rig downtime trailing twelve-month achievement target weighted at 30 percent, and expense reduction achievement target weighted at 40 percent.

 Performance Periods (Incentive Component only). Safety, rig downtime, and expense reduction performance metrics will be measured for each of three independent performance periods during 2020 and 2021 representing the fourth fiscal quarter of 2020 and the first and second fiscal quarters of 2021.

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Achievement of performance for each period will be considered independently of performance for other periods (subject to the catch-up feature described below).

 KERP Payout Ranges (Incentive Component only). The Incentive Component will provide for potential payments representing a range from 50 percent of target payment for threshold performance and up to 150 percent of target payment for maximum performance. Linear interpolation of the Incentive Component payment will be applied for achievement of performance metrics between the values shown below.

 Maximum Amount of KERP. The total amount of the KERP will not exceed $24.2 million, which represents an aggregate of the total cost of the Retention Component (i.e., approximately $9.8 million) and the maximum cost of the Incentive Component (i.e., approximately $14.3 million).

 Payment Dates. Each KERP Participant will be paid at the most practical payroll processing date, but in no event later than 45 days following the quarter end. The Retention Component and Incentive Component awards attributed to the second and third fiscal quarters of 2020 were paid prior to the Petition Date at target levels.10 Thereafter, Incentive Component payments will be made as soon as practical following each performance period.

 Catch-up Feature (Incentive Component only). In addition to the measurement of safety performance, rig downtime, and expense reduction for each quarterly performance period, performance will be measured on a cumulative basis at the end of each quarter and a “catch-up” payment will be made to the extent the Debtors’ performance over the course of the program and earned payouts exceed the quarterly payouts to date. These payments will be capped at target for each quarter except that maximum payments can be made if the Debtors’ performance satisfies the metric on a cumulative basis measured at the end of the second fiscal quarter of 2021.

 Discretionary Pool (Retention Component only). Under the Retention Component, $500,000 will be granted to new hires, promotions, and job changes at the Company’s chief executive officer’s discretion.

 Termination of Employment. Future Retention Component payments will be forfeited following termination of a participant’s employment for any reason. With respect to the Incentive Component, if the Debtors terminate a participant’s employment without “cause,” the participant will be entitled to a pro-rata portion of the Incentive Component payment that would otherwise have been earned for such performance period based on actual performance

10 Just as under the KEIP, each KERP Participant’s Incentive Component award for the fourth fiscal quarter of 2020 is subject to a reduction if the actual performance in the second and third fiscal quarters of 2020 is below target.

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during that period. If the Debtors terminate a participant’s employment for any other reason (including voluntary termination and termination for cause), any remaining unpaid portion of the Incentive Component payment will be forfeited.

 KERP Renewal. The KERP will continue for the fourth fiscal quarter of 2020 and first and second fiscal quarters of 2021 regardless of the Debtors’ emergence.

II. Reasonableness of the KERP.

24. The Debtors and their advisors evaluated whether the KERP’s design, structure, and cost are reasonable and consistent with market practice—keeping in mind their goals of maximizing the estates’ value and ensuring operations are conducted in an effective, safe, and stable manner through emergence from chapter 11. In particular, A&M analyzed 14 comparable non-insider plans approved in recent chapter 11 cases with a total asset size greater than

$500 million and more than 200 participants (collectively, the “KERP Peer Group” or “KERP

Market” and, together with KEIP Peer Group, the “Compensation Plans Peer Groups”).11 As a payout of prepetition assets, the KERP awards rank at the 14th percentile of the KERP Market.

When comparing both the total cost and total cost per participant, the KERP awards correspond to the 70th percentile of the KERP Market—well within market. These higher percentiles are explained by the Debtors’ size, which results in the Debtors having a greater number of employees at, for example, the vice president-level, and thus more employees earning compensation commensurate with that title than almost all of the other companies in the KERP Peer Group.

25. In addition to these market checks, the KERP represents a continuation of the

Debtors’ prepetition broad-based employee incentive opportunities. Notwithstanding a year-over-

11 The 14 companies constituting the KERP Peer Group are Breitburn Energy Partners LP, Energy XXI, FirstEnergy Solutions Corp., LINN Energy, LLC, Payless Inc., Real Industry Inc. (Real Alloy), Samson Resources Corporation, Sears Holdings Corporation, Southern Foods Group, LLC (Dean Foods), McDermott International, Inc., California Resources Corporation, Frontier Communications, Westinghouse Electric Company LLC, and Westmoreland Coal Company.

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year 4.9 percent decrease in the aggregate of the KERP Participants’ total direct compensation between 2019 and 2020, the KERP enables the Debtors to keep compensation levels relatively flat from the prior year. The KERP also includes an installment payout feature based on multiple retention periods corresponding with a consistent schedule—a common feature in the KERP Peer

Group. Furthermore, the KERP’s installments are quarterly, which provides a greater retentive effect on the KERP Participants than the annual payments under the Debtors’ prepetition program.

III. The Incentive Component Performance Targets.

26. Under the KERP’s Incentive Component, awards are payable only upon the

Debtors’ achievement of operational performance targets during the course of the program.

Achievement of the performance targets will also require substantial effort from the KERP

Participants. The Compensation Committee, with the aid of Debtors’ restructuring advisors, carefully developed the performance targets to ensure they represent an appropriate “reach” to drive performance without presenting unattainable goals that thwart the incentivizing purpose of the plan. The Compensation Committee chose the same performance targets for the Incentive

Component as those used in the KEIP program to further align the interests of the Debtors’ employees and senior management team. Thus, the Debtors will reward these key employees for their heightened efforts to ensure that rig downtime is minimized, expense reduction is maximized, and safety is prioritized to the betterment of the Debtors’ business and the value of their estates.

Basis for Relief

27. The Debtors respectfully request that the Court grant this Motion for two primary reasons. First, the Compensation Plans are an ordinary-course continuation of the Debtors’ prepetition compensation practices that constitute a sound exercise of the Debtors’ business judgment and are in the best interests of the Debtors’ estates. See, e.g., In re Dana Corp.,

358 B.R. 567, 581 (Bankr. S.D.N.Y. 2006). Second, the Compensation Plans comply with the

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requirements of sections 503(b) and (c) of the Bankruptcy Code. The Compensation Plans’ performance targets are “difficult to reach” goals that are both incentivizing and tied to objectives that are directly aligned with the ultimate interests of all stakeholders. For these reasons, payments under the Compensation Plans are fully justified by the facts and circumstances of the Debtors’ chapter 11 cases, and should be approved.

I. The Compensation Plans are Ordinary Course Transactions Under Section 363(c) of The Bankruptcy Code.

28. Under section 363(c)(1) of the Bankruptcy Code, a debtor in possession may “enter into transactions … in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.” 11 U.S.C.

§ 363(c)(1). Courts in the Fifth Circuit and elsewhere apply a two-prong test to determine if a transaction is in the ordinary course of a debtor’s business. See, e.g., In re Patriot Place, Ltd.,

486 B.R. 773, 793 (Bankr. W.D. Tex. 2013) (applying the “horizontal” and “vertical” tests); In re

Dana Corp., 358 B.R. at 576-77; In re Johns-Manville Corp., 60 B.R. 612, 616, 618 (Bankr.

S.D.N.Y. 1986). Under the horizontal dimension test, the Court analyzes if the “transaction was of the sort commonly undertaken by companies in the industry.” Patriot Place, 486 B.R. at 793;

In re Cowin, 2014 WL 1168714, at *40 n.55 (Bankr. S.D. Tex. 2014) (noting the “horizontal dimension test” is also known as the “comparable businesses” test). Under the vertical dimension test, the Court analyzes if a hypothetical creditor would view the transaction as an ordinary or unusual business practice. Cowin, 2014 WL 1168714, at *41, 40 n.55 (noting the “vertical dimension test” is also known as the “creditor expectation test”). If the “transaction is an ordinary one in the debtor’s business operation” looking at the debtor’s prepetition practices, a hypothetical creditor would not expect notice and a hearing with the opportunity to object. Id.

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29. First, the Compensation Plans satisfy the horizontal dimension test because they are consistent with such plans within the Debtors’ industry. See In re Blitz U.S.A. Inc.,

475 B.R. 209, 215 (Bankr. D. Del. 2012) (approving incentive bonus plans under Section 363(c)(1) where the debtor sought to continue prepetition plans and incentive-based bonus plans that were common in the industry). To establish a reference point for the competitiveness of Compensation

Plans, the Compensation Committee examined the Compensation Plans Peer Groups’ compensation practices. A&M also evaluated the KEIP Participants’ compensation against the 20 energy companies with revenues between $525 million and $13,005 million that make up the Exec

Comp Peer Group. To measure the reasonableness of the KEIP, A&M analyzed incentive plans approved in chapter 11 cases involving energy companies with revenues exceeding $500 million that had filed for chapter 11 since 2014. A&M also examined non-insider compensation plans approved in the chapter 11 cases for 14 companies with at least 200 participants, prepetition assets greater than $500 million, and that filed petitions since 2016. Against these different measures, both the KEIP and KERP fall well within the norm of the industry practice.

30. For example, the Debtors’ performance metrics of safety (30 percent), downtime

(30 percent), and expense reduction (40 percent) are similar to those used by KEIP Peer Group companies like Diamond Offshore Drilling, Inc., whose metrics are safety (20 percent), rig efficiency or uptime (40 percent), and overhead expense reduction (40 percent). The Debtors’ metrics are also consistent with the post-COVID compensation programs put in place at other competitors, like Noble Corporation plc (“Noble”) and Pacific Drilling S.A. (“Pacific”). Pacific and Noble both use safety as performance metrics, while Noble also uses downtime as a metric.

Furthermore, the 2020 target total direct compensation for all KEIP Participants in aggregate falls between the 25th and 50th percentile of the Exec Comp Peer Group—underscoring the

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reasonableness of total direct compensation available under the KEIP. Likewise, the KERP awards rank at the 14th percentile of the KERP Market as a payout of prepetition assets.

31. Second, the Compensation Plans meet the vertical dimension test because they represent a substantial continuation of the Debtors’ prepetition compensation practices. See also

Dana Corp., 358 B.R. at 579 (finding debtor’s postpetition incentive program was a “refinement” of historical practices and therefore within the ordinary course of debtor’s business). The Debtors have historically offered incentive-based cash and stock awards based on the achievement of performance targets that include safety and downtime. Those metrics continue as part of the

Compensation Plans. However, given the offshore drilling market volatility leading up the petition date due to factors well beyond the Debtors’ control, the Board replaced the historical incentive- based metrics of EBITDA and synergy achievement (related to the 2019 merger between Rowan

Companies plc and Ensco) with metrics related to expense reductions. That approach makes perfect sense in light of the Debtors’ focus on preserving value for the estate in the midst of an

“extremely oversupplied” market, “structurally reduced demand for offshore rigs,” and continuing uncertainty due to oil price volatility and demand as a result of a global pandemic. In re Noble

Corp. plc, No. 20-33826, Dkt. No. 28, R. Barker Decl. at 19-20 (Bankr. S.D. Tex. Aug. 1, 2020).

Similarly, the Debtors have historically offered cash bonus plans to supplement the employees’ salary compensation. Because of the macroeconomic conditions challenging the Debtors’ stock price, the Compensation Plans are entirely cash-based and do not include stock awards. Moreover, the KEIP target awards and KERP target awards are generally in line with an employee’s prepetition target annual and long-term incentive opportunities (including prior retention awards).

32. Because the Compensation Plans are consistent with both the Debtors’ prepetition practice and industry practice for companies in and out of chapter 11, the Debtors respectfully

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request that the Court approve the Compensation Plans as ordinary course transactions pursuant to section 363(c) of the Bankruptcy Code.

II. Implementing the Compensation Plans is a Proper Exercise of The Debtors’ Sound Business Judgment Under Section 363(b) of the Bankruptcy Code.

33. Even assuming the Compensation Plans are not ordinary course transactions, the

Compensation Plans constitute a sound exercise of the Debtors’ business judgment. Section

363(b)(1) of the Bankruptcy Code provides that a debtor “after notice and a hearing, may use, sell or lease, other than in the ordinary course of business, property of the estate.”

11 U.S.C. § 363(b)(1). A debtor must show that the decision to use the property outside of the ordinary course of business was based on the debtor’s business judgment. See In re Institutional

Creditors of Cont’l Air Lines, Inc. v. Cont’l Air Lines, Inc. (In re Cont’l Air Lines), 780 F.2d 1223,

1226 (5th Cir. 1986) (“For a debtor in possession or trustee to satisfy its fiduciary duty to the debtor, creditors and equity holders, there must be some articulated business justification for using, selling, or leasing the property outside the ordinary course of business.”); In re Viking Offshore

(USA), Inc., 2008 WL 1930056, at *2 (Bankr. S.D. Tex. Apr. 30 2008) (applying the business judgment rule to determine whether the debtors’ proposed bonuses were justified outside the ordinary course of business); see also In re Mesa Air Grp., Inc., 2010 WL 3810899, at *3

(Bankr. S.D.N.Y. Sept. 24, 2010) (employee bonus programs can be approved as “valid exercise of their business judgment” under section 363(b)).

34. Courts give great deference to a debtor’s business judgment. “The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Official Comm. of Subordinated Bondholders v. Integrated Res.,

Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992). “Where the debtor articulates

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a reasonable basis for its business decisions (as distinct from a decision made arbitrarily or capriciously), courts will generally not entertain objections to the debtor’s conduct.”

Johns-Manville, 60 B.R. at 616; see also In re Tower Air, Inc., 416 F.3d 229, 238 (3d Cir. 2005)

(“Overcoming the presumptions of the business judgment rule on the merits is a near-Herculean task.”). That is because “[c]ourts are loath to interfere with corporate decisions absent a showing of bad faith, self-interest, or gross negligence.” In re Integrated Res., Inc., 147 B.R. at 656.

35. There is no question that the Debtors possess an articulable business purpose to implement the Compensation Plan. The KEIP Participants and KERP Participants are integral to the day-to-day operations of the Debtors’ business, and experiencing increasing demands as a result of this challenging market and the Debtors’ filing for chapter 11. The KEIP and Incentive

Component of the KERP are linked to specific performance-based targets for the Company overall that are designed to drive the Debtors’ operational objectives and create value for the estates. The

Debtors also cannot easily replace the KERP Participants without adversely affecting the Debtors’ operations or restructuring efforts. Moreover, the cost of the Compensation Plans is reasonable for the size and earnings potential of the Debtors. Indeed, the target cost of the KEIP is

0.04 percent of the Debtors’ prepetition assets, the lowest of the 14 companies in the KEIP Peer

Group, and the target cost of the KERP is .11 percent of the Debtors’ prepetition assets, which ranks at the 14th percentile of KERP Market. The programs apply to only a fraction of the Debtors’ employees. And the Compensation Plans, developed in reliance on an independent compensation consultant and the Debtors’ restructuring advisors, were reviewed and approved by the

Compensation Committee, none of whose members are current KEIP Participants, prospective

KEIP Participants, or employees of the Debtors. On every dimension, implementing the

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Compensation Plans is a valid exercise of the Debtors’ business judgment that, respectfully, the

Court should be approve.

III. The Compensation Plans are Justified by The Facts and Circumstances of These Chapter 11 Cases.

36. Section 503(c)(3) of the Bankruptcy Code prohibits certain transfers made to managers, consultants, and others that are not justified by the facts and circumstances of a bankruptcy case. See 11 U.S.C. § 503(c)(3). Certain courts have held that section 503(c)(3)’s

“facts and circumstances” justification test “creates a standard no different that the business judgment standard under section 363(b) of the Bankruptcy Code.” In re Velo Holdings, Inc.,

472 B.R. 201, 212 (Bankr. S.D.N.Y. 2012); In re Alpha Nat. Res., Inc., 546 B.R. 348, 356

(Bankr. E.D. Va. 2016) (“a majority of courts … agree that the ‘facts and circumstances’ test of

503(c)(3) is identical to the business judgment standard under 363(b)(1)”); In re Patriot Coal

Corp., 492 B.R. 518, 530–31 (Bankr. E.D. Mo. 2013) (using the business judgment test to analyze an incentive plan under section 503(c)(3)); Dana Corp., 358 B.R. at 576–77 (describing six factors to evaluate if a compensation plan meets the “sound business judgment test” under section 503(c)(3)). Other courts have determined that section 503(c)(3) requires the court “to make its own determination that the transaction will serve the interests of creditors and the debtor’s estate.” In re Pilgrim’s Pride Corp., 401 B.R. 229, 237 (Bankr. N.D. Tex. 2009). A court should make this determination based on whether the proposed compensation plan is justified on the facts of a particular case. Id.

37. Under either the business judgment standard or the standard proposed by Pilgrim’s

Pride, courts have analyzed compensation plans using the six factors identified in Dana

Corporation to determine whether a compensation proposal is permitted by 503(c)(3). See, e.g.,

In re FirstEnergy Sol. Corp., 591 B.R. 688, 698 (Bankr. N.D. Ohio 2018) (analyzing a proposed

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KERP using the Dana Corp. factors without deciding whether section 503(c)(3) modifies the business judgment standard); Patriot Coal, 492 B.R. at 531 (applying the business judgment standard and analyzing an insider incentive plan and a non-insider retention plan using the Dana

Corp. factors). The six factors ask:

 Is there a reasonable relationship between the plan proposed and the results to be obtained?

 Is the cost of the plan reasonable in the context of the debtor’s assets, liabilities, and earning potential?

 Is the scope of the plan fair and reasonable, does it apply to all employees, or does it discriminate unfairly?

 Is the plan or proposal consistent with industry standards?

 What were the due diligence efforts of the debtor in investigating the need for a plan, analyzing which key employees need to be incentivized, what is available, and what is generally applicable in a particular industry?

 Did the debtor receive independent counsel in performing due diligence and in creating and authorizing the incentive compensation?

Dana Corp., 358 B.R. at 576–77; see also In re Residential Capital, LLC, 491 B.R. 73, 85−86

(Bankr. S.D.N.Y. 2013) (applying the Dana Corp. factors to the debtors’ retention plan for non-insiders and approving the plan as an exercise of sound business judgment).

38. No single factor is dispositive, and a court has discretion to weigh each factor based on the specific facts and circumstances before it. See, e.g., FirstEnergy Sol. Corp., 591 B.R. at

697 (stating the Dana Corp. factors are “neither exhaustive nor of inherently equal weight”). Even the total absence of a factor may be permissible, so long as the Debtors’ interests are sufficiently protected. See In re Borders Grp. Inc., 453 B.R. 459, 477 (Bankr. S.D.N.Y. 2011) (finding the lack of independent counsel was “not fatal” where the presence of other factors ensured “that the

[d]ebtors’ interests were sufficiently protected”); In re Glob. Aviation Holdings Inc., 478 B.R. 142,

154 (Bankr. E.D.N.Y. 2012) (noting “the relatively modest size of the proposed bonus payouts

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made the retention of independent legal counsel economically inefficient”). The Debtors respectfully submit that the Compensation Plans satisfy the standards set forth above.

A. The KEIP is Justified by The Facts and Circumstances of These Chapter 11 Cases.

39. The KEIP incentivizes management to achieve results that will benefit all of the

Debtors’ stakeholders. As discussed above, there is no guarantee the Debtors will meet any of their performance targets in light of severe market headwinds and volatility, including the structurally reduced demand for offshore drilling rigs, the significant oversupply of rigs, reduced customer capital budgets, and the uncertain ongoing impact of the COVID-19 pandemic on oil consumption and prices. Experience over the last 13 months shows the Debtors have not always met their performance goals, which is why achieving these targets will require substantial effort from the KEIP Participants. To drive performance against this uncertainty, the KEIP is a sound exercise of the Debtors’ business judgment and is justified by the facts and circumstances of these chapter 11 cases.

i. The KEIP is Calculated to Achieve the Desired Performance. The KEIP is tied to the Debtors’ ability to meet and exceed threshold safety, rig downtime, and expense reduction performance metrics, each of which are tied to the stability and future success of the Debtors’ business. By minimizing rig downtime, the Debtors will achieve greater revenue that can generate liquidity to fund operations during these chapter 11 cases. By reducing expenses, the Debtors will promote a leaner operating model and offer greater return and scale on their ordinary course operations for the benefit of their creditors and other key stakeholders. And by rewarding KEIP Participants for maintaining and improving on the Debtors’ safety record, the Debtors will safeguard their greatest assets–their workforce–and minimize disruption to their businesses, ensuring their position as a leading competitive player in the offshore drilling industry.

ii. The Cost of the KEIP is Reasonable. The estimated aggregate payout at target performance levels under the KEIP is $7,321,309. Compared to court-approved incentive plans of the Debtors’ chapter 11 peers, the target cost of the KEIP would be at the 72nd percentile of KEIP Market (primarily driven by the KEIP’s large number of participants), with the target cost per participant at the 31st percentile of KEIP Market. The KEIP Participants’

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2020 target total direct compensation for all participants in the aggregate would fall between the 25th and 50th percentiles of the Exec Comp Peer Group.

iii. The Scope of the KEIP is Reasonable. The KEIP is reasonably limited to senior management whose efforts are critical to the Debtors’ restructuring and maximizing the value of the Debtors’ estates. The scope of the KEIP is fair, reasonable, and does not discriminate unfairly among the KEIP Participants.

iv. The KEIP is Consistent with Industry Practices. In addition to the proxy data collected from the Exec Comp Peer Group, A&M gathered external market compensation data from several data sources, encompassing a representative database of compensation information for comparable industries and the labor market for executives, including from Mercer Energy Benchmark, Mercer General Benchmark, and ECI Energy Surveys. Absent the KEIP, A&M determined that KEIP Participants would be compensated well below industry standards for their positions. The KEIP Participants’ base salaries plus the potential KEIP payouts raise the KEIP Participants’ 2020 total direct compensation to be within the 25th and 50th percentiles of the Exec Comp Peer Group, an appropriate range of total direct compensation for the Debtors’ industry.

v. The Debtors Performed Due Diligence in Developing the KEIP. The Debtors retained and relied on A&M in developing the KEIP. This process involved a review of the market and peer group data, including data regarding the structure and specific performance metrics ultimately included in the KEIP.

vi. The Debtors Received Independent Counsel in Developing the KEIP. The Debtors utilized specialized professionals from the executive compensation group at A&M to evaluate a potential incentive plan, and engaged their legal advisors regarding the development and implementation of the KEIP. The active involvement of the Debtors’ advisors and the selection of objective targets in developing the KEIP ensures it appropriately and fairly incentivizes the KEIP Participants.

B. The KERP Is Justified by the Facts and Circumstances of These Chapter 11 Cases.

40. The Debtors’ KERP is also a sound exercise of the Debtors’ business judgment and is justified by the facts and circumstances of these chapter 11 cases.

i. The KERP is Calculated to Achieve the Desired Performance. The KERP was carefully designed by the Debtors and their advisors to ensure that key, non-insider employees are fairly compensated and remain with the

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Debtors through the conclusion of the chapter 11 case. Through the KERP, these employees’ 2020 total direct compensation would be relatively flat year over year, whereas any significant reduction in that compensation might prompt those KERP Participants’ voluntary departure during the chapter 11 cases. Likewise, by switching from the annual payout of incentive bonuses under the Debtors’ prepetition program to quarterly installments, the KERP will encourage KERP Participants to remain with the Debtors through multiple shorter periods. The KERP and the desired retention outcome are strongly correlated. Further, the Incentive Component is tied to the Debtors’ ability to meet and exceed safety, rig downtime, and expense reduction performance metrics, each of which bolster the stability and future success of the Debtors’ business. Thus, the Incentive Component ensures the Debtors achieve their near-term operating performance and restructuring goals.

ii. The Cost of the KERP Is Reasonable. The KERP’s estimated total cost on average is $6,445,595 per quarter and the total cost will not exceed $24,200,000. The KERP awards correspond to the 14th percentile of KERP Market based on the payout as a percentage of prepetition assets, the 70th percentile based on the total cost, and the 70th percentile based on cost per participant. Furthermore, the KERP’s proposed total direct compensation at target level for 2020 represents a 4.9 percent decrease in the aggregate from the prior year. The KERP Participant pool includes many highly skilled, highly trained employees necessary to the Debtors’ success while in chapter 11, reinforcing the reasonableness of these costs.

iii. The Scope of the KERP is Fair and Reasonable. The 490 KERP Participants represent a small portion of the Debtors’ total employee base. The KERP Participants include all onshore employees who have historically received incentive-based payments under the Debtors’ prepetition compensation programs. Incentivizing these same employees as part of the KERP is a natural extension of the Debtors’ prepetition practice. The scope of the KERP is fair and reasonable because the participants’ retention is necessary to the Debtors’ restructuring process.

iv. The KERP is Consistent with Industry Standards. The Debtors and their advisors undertook a benchmarking analysis examining non-insider compensation plans of 14 companies that filed petitions since 2016 and had prepetition assets greater than $500 million and at least 200 participants. A&M’s comparison of the KERP’s structure and terms with this peer groups’ plans confirmed that the KERP is consistent with market practices, including the specific performance metrics that the Debtors selected and the Debtors’ decision to try to match the KERP Participants’ prior year compensation. A&M also observed that more recent non-insider bankruptcy retention plans have included larger participant pools, quarterly award payments, and integration of an incentive component into the design of a retention program—all features of the KERP.

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v. The Debtors Performed Due Diligence in Developing the KERP. The Debtors actively sought the advice of A&M and their other advisors in designing an appropriate retention plan for their non-insider employees. The Debtors also engaged their advisors in the selection process to ensure that no KERP Participant was an “insider” and that each KERP Participant was essential to the Debtors’ ongoing business, restructuring processes.

vi. The Debtors Received Independent Counsel in Developing the KERP. A&M and the Debtors’ legal advisors counseled the Compensation Committee regarding the development and implementation of the KERP.

41. Because implementing the Compensation Plans will motivate the Debtors’ employees to the benefit of all parties in interest, the KEIP and the KERP reflect a sound exercise of the Debtors’ business judgment and are justified by the facts and circumstances of these chapter

11 cases. Accordingly, the KEIP and KERP satisfy section 503(c)(3) of the Bankruptcy Code.

IV. Section 503(c)(1) Is Inapplicable to The Compensation Plans.

42. Section 503(c)(1) of the Bankruptcy Code generally prohibits payments to

“insiders” made for the sole or primary purpose of inducing the “insider” to remain with a debtor’s business—i.e., those insider plans that are essentially “pay to stay” plans. See, e.g., Borders Grp.,

453 B.R. at 471. The Compensation Plans are not barred under section 503(c)(1).

A. Section 503(c)(1) Is Inapplicable to The KEIP.

43. Section 503(c)(1) of the Bankruptcy Code does not apply to performance-based incentive plans. See, e.g., Velo Holdings, 472 B.R. at 209 (finding an incentive-based plan alleviated the need for a section 503(c)(1) analysis); Borders Grp., 453 B.R. at 471 (finding “the

Debtors [had] met their burden of establishing that the [compensation program was] incentivizing, thereby alleviating the need for a section 503(c)(1) analysis”). In determining if a compensation plan is primarily incentivizing, courts consider whether the plan is “designed to motivate insiders to rise to a challenge or merely report to work.” In re Hawker Beechcraft, Inc., 479 B.R. 308, 313

(Bankr. S.D.N.Y. 2012). “[I]ncentivizing plans with some components that arguably have a

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retentive effect do not necessarily violate section 503(c).” Dana Corp., 358 B.R. at 572; see also

Glob. Home Prod., 369 B.R 778, 786 (Bankr. D. Del. 2007) (“The fact … that all compensation has a retention element does not reduce the Court’s conviction that [the] Debtors’ primary goal

[is] to create value by motivating performance.”). Rather, the focus remains on whether the plan is, on the whole, incentivizing in nature by demanding a “reach” before an award opportunity is achieved. Dana Corp., 358 B.R. at 581.

44. Because the KEIP is incentive-based, section 503(c)(1) of the Bankruptcy Code does not apply. The KEIP provides award opportunities only if the KEIP Participants satisfy threshold levels of performance tagged to metrics that are subject to considerable challenges in these chapter 11 cases. As discussed above, the Debtors have been unable to satisfy the target criteria for several performance metrics during multiple months over the last year. While the KEIP

Participants are integral to the Debtors’ restructuring process, they cannot obtain an award simply as a result of “showing up.” Cf. Hawker Beechcraft, 479 B.R. at 315 (denying KEIP approval where lower threshold was attainable so long as debtor did not encounter “any ‘whoopsies.’”).

Instead, the KEIP Participants must achieve results for the benefit of all of the Debtors’ stakeholders to be compensated.

B. Section 503(c)(1) Is Inapplicable to The KERP.

45. Section 101(31) of the Bankruptcy Code provides that where a debtor is a corporation, insiders include any “(i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor … or (iv) relative of a … director, officer or person in control of the debtor.” 11 U.S.C. § 101(31)(B). An employee may be an “insider” if such employee has “at least a controlling interest in the debtor or … exercise[s] sufficient authority over the debtor so as to unqualifiably dictate corporate policy and the disposition of corporate assets.” Velo Holdings,

472 B.R. at 208 (citations omitted). An employee’s job title, alone, does not make that employee

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an “insider.” See Borders Grp., 453 B.R. at 469 (noting “[c]ompanies often give employees the title ‘director’ or ‘director- level,’ but do not give them decision-making authority akin to an executive” and concluding certain “director level” employees in that case were not insiders).

46. Here, none of the KERP Participants are “insiders” under section 101(31) of the

Code. The KERP Participants lack discretionary control over substantial budgetary amounts as well as significant control with respect to the Debtors’ corporate policies or governance. None of these employees was hired or appointed by the Debtors’ Board or reports directly to the Board.

Thus, although certain KERP Participants hold titles like “director,” “vice president,” or “chief,” none is an “insider” of the Debtors, which renders section 503(c)(1) inapplicable to the KERP.

Notice

47. The Debtors will provide notice of this Motion to: (a) the United States Trustee for the Southern District of Texas; (b) counsel to the Committee; (c) the administrative agent under the Debtors’ revolving credit facility, and its counsel; (d) the indenture trustees for each of the

Debtors’ unsecured notes, and their respective counsel; (e) the Office of the United States Attorney for the Southern District of Texas; (f) the state attorneys general for states in which the Debtors conduct business; (g) the Internal Revenue Service; (h) the Securities and Exchange Commission;

(i) the Environmental Protection Agency and similar state environmental agencies for states in which the Debtors conduct business; (j) any party that has requested notice pursuant to Bankruptcy

Rule 2002; and (k) any other party entitled to notice pursuant to Bankruptcy Local Rule 9013-1(d).

A copy of this Motion is also available on the website of the Debtors’ notice and claims agent at http://cases.stretto.com/Valaris. In light of the nature of the relief requested, the Debtors submit that no other or further notice is required.

Conclusion

The Debtors request that the Court enter the Order, granting the relief requested herein and

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such other relief as the Court deems appropriate under the circumstances.

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October 20, 2020

/s/ Matthew D. Cavenaugh JACKSON WALKER, L.L.P. KIRKLAND & ELLIS LLP Matthew D. Cavenaugh (TX Bar No. 24062656) Anup Sathy, P.C. (pro hac vice) Kristhy M. Peguero (TX Bar No. 24102776) Ross M. Kwasteniet, P.C. (pro hac vice) Genevieve Graham (TX Bar No. 24085340) Jeffrey J. Zeiger, P.C. (pro hac vice) 1401 McKinney Street, Suite 1900 Spencer A. Winters (pro hac vice) Houston, TX 77010 Jason A. Feld (pro hac vice) Telephone: (713) 752-4200 300 North LaSalle Street Facsimile: (713) 752-4221 Chicago, IL 60654 [email protected] Telephone: (312) 862-2000 [email protected] Facsimile: (312) 862-2200 [email protected] [email protected] [email protected] Co-Counsel to the Debtors and Debtors in [email protected] Possession [email protected] [email protected]

Co-Counsel to the Debtors and Debtors in Possession

33 Case 20-34114 Document 537 Filed in TXSB on 10/20/20 Page 34 of 34

CERTIFICATE OF SERVICE

I certify that on October 20, 2020, I caused a copy of the foregoing document to be served by the Electronic Case Filing System for the United States Bankruptcy Court for the Southern District of Texas.

/s/ Matthew D. Cavenaugh Matthew D. Cavenaugh

Case 20-34114 Document 537-1 Filed in TXSB on 10/20/20 Page 1 of 3

IN THE UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION ) In re: ) Chapter 11 ) VALARIS PLC, et al.,1 ) Case No. 20-34114 (MI) ) Debtors. ) (Jointly Administered) ) ) Re: Docket No. __

ORDER AUTHORIZING AND APPROVING THE DEBTORS’ MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING AND APPROVING THE DEBTORS’ (A) KEY EMPLOYEE INCENTIVE PLAN AND (B) KEY EMPLOYEE RETENTION PLAN AND (II) GRANTING RELATED RELIEF

Upon the motion (the “Motion”)2 of the above-captioned debtors and debtors in possession

(collectively, the “Debtors”) for entry of an order (this “Order”) authorizing and approving the

Debtors’ Compensation Plans all as more fully set forth in the Motion; and upon the Cumberland

Declaration; and this Court having jurisdiction over this matter pursuant to 28 U.S.C. § 1334; this

Court having found that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2); and this Court having found that it may enter a final order consistent with Article III of the United States

Constitution; and this Court having found that venue of this proceeding and the Motion in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409; and this Court having found that the relief requested in the Motion is in the best interests of the Debtors’ estates, their creditors, and other parties in interest; and this Court having found that the Debtors’ notice of the Motion and opportunity for a hearing on the Motion were appropriate under the circumstances and no other

2 Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Motion.

Case 20-34114 Document 537-1 Filed in TXSB on 10/20/20 Page 2 of 3

notice need be provided; and this Court having reviewed the Motion and having heard the statements in support of the relief requested therein at a hearing before this Court (the “Hearing”); and this Court having determined that the legal and factual bases set forth in the Motion and at the

Hearing establish just cause for the relief granted herein; and upon all of the proceedings had before this Court; and after due deliberation and sufficient cause appearing therefor, it is HEREBY

ORDERED THAT:

1. The KEIP is authorized and approved in its entirety.

2. The KERP is authorized and approved in its entirety.

3. The Debtors are authorized, pursuant to sections 363(b), 363(c), and 503(c) of the

Bankruptcy Code, to take all actions necessary to implement the KEIP and the KERP on the terms and conditions set forth in the Motion, including making any payments that come due pursuant to the terms thereof during these chapter 11 cases and without the need for further Court approval.

4. Notwithstanding the relief granted herein or any action taken hereunder, nothing contained in this Order shall create any rights in favor of, or enhance the status of, any claim held by any employee or other person or entity.

5. Notice of the Motion satisfies the requirements of Bankruptcy Rule 6004(a).

6. Notwithstanding Bankruptcy Rule 6004(h), the terms and conditions of this Order are immediately effective and enforceable upon its entry.

7. Notwithstanding the relief granted in this Order, any payment made or to be made by the Debtors pursuant to the authority granted herein shall be subject to and in compliance with the order entered by the Court approving the Debtors’ entry into postpetition debtor in possession financing facility and any budget or cash flow forecasts in connection therewith (the “DIP Order”).

To the extent there is any inconsistency between the terms of the DIP Order and any action taken

2 Case 20-34114 Document 537-1 Filed in TXSB on 10/20/20 Page 3 of 3

or proposed to be taken hereunder, the terms of the DIP Order shall control. For the avoidance of doubt, the Debtors are not authorized to make any payments pursuant to this Order to, or on behalf of, a non-debtor affiliate except as permitted by the Approved Budget (as defined in the DIP

Order).

8. This Court retains exclusive jurisdiction with respect to all matters arising from or related to the implementation, interpretation, and enforcement of this Order.

Houston, Texas Dated: ______, 2020

MARVIN ISGUR UNITED STATES BANKRUPTCY JUDGE