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Boldly First Boldly First 2019 ANNUAL REPORT & UNITED KINGDOM STATUTORY ACCOUNTS SHAREHOLDER INFORMATION TABLE OF CONTENTS Annual General Meeting CEO Letter to Shareholders The annual general meeting of shareholders will be held at 110 Cannon Street, London EC4N 6EU, United Kingdom, Forward-Looking Statements at 12:00 p.m. London time, on 15 June 2020. Contract Drilling Fleet .............................2 Transfer Agent Selected Financial Data .............................5 Registered holders of our shares may direct their questions to Computershare. Market for Registrant’s Common Equity, Computershare Trust Company, N.A. Related Shareholder Matters and Issuer P.O. Box 43001 Purchases of Equity Securities .......................6 Providence, RI 02940-3001 Management’s Discussion and Analysis of Email: [email protected] Financial Condition and Results of Operations .........8 Hours: Monday through Friday, 8:30 a.m. to 6 p.m. (ET) Business Environment ............................11 Corporate Governance, Board and Board Committees Results of Operations .............................14 The corporate governance section of our website, www.valaris. Liquidity and Capital Resources ....................23 com, contains information regarding (i) the composition of our Board of Directors and board committees, (ii) corporate Market Risk ....................................35 governance in general, (iii) shareholder communications Critical Accounting Policies and Estimates . 35 with the Board, (iv) the Valaris Code of Business Conduct, New Accounting Pronouncements ...................39 (v) the Valaris Corporate Governance Policy, (vi) Ethics Hotline reporting provisions, and (vii) the charters of the Financial Statements and Supplementary Data board committees. A direct link to the company’s SEC filings, Management’s Report on Internal Control.............40 including reports required under Section 16 of the Securities Exchange Act of 1934, is located in the Investors section. Over Financial Reporting..........................40 Copies of these documents may be obtained without charge by Reports of Independent Registered contacting Valaris’ Investor Relations Department. Reasonable Public Accounting Firm ...........................44 expenses will be charged for copies of exhibits listed in the Consolidated Statements of Operations ...............46 back of SEC Forms 10-K and 10-Q. Please list the exhibits you would like to receive and submit your request in writing Consolidated Statements of Comprehensive to Valaris’ Investor Relations Department at the address Income (Loss)...................................47 below. We will notify you of the cost and furnish the requested Consolidated Balance Sheets . 48 exhibits upon receipt of payment. Consolidated Statements of Cash Flows ..............49 Valaris Investor Relations Department Notes to Consolidated Financial Statements ...........50 5847 San Felipe, Suite 3300 Houston, Texas 77057-3008 Changes In and Disagreements with Accountants (713) 789-1400 on Accounting and Financial Disclosure .............118 www.valaris.com United Kingdom Statutory Accounts Board of Directors and Officers Dear Fellow Shareholders, Over the past year, the company has undergone a tremendous amount of change as we continue navigating dynamic market conditions. In April 2019, we merged two leading offshore drillers – Ensco and Rowan – to form a larger, more diverse organization that would become Valaris. By coming together, we created a leader in offshore drilling services with the world’s largest rig fleet and global operations. I am writing to update you on the company’s priorities and provide my perspectives on the outlook for our industry. Integration & Synergies One of the compelling rationales for the merger was the realization of significant synergies from effectively combining the two legacy organizations. I am pleased to report that we have made significant headway in executing our integration plans and delivering on these synergies. The focus of our integration plan was to bring the companies together with minimal disruptions to the business while achieving $165 million of combinational synergies on an annual run-rate basis. As of the end of 2019, we had completed more than 80% of our onshore merger activities and were roughly halfway through our rig-based integration. We reached 80% of our synergy target, with an annual run-rate synergy capture of approximately $135 million. This synergy capture is a significant accomplishment, and I would like to thank our employees for their unrelenting commitment and dedication towards achieving these milestones. While there is more to be done to complete the original integration plan, we are looking beyond that and working to make Valaris an even more effective organization as the industry cost leader. To this end, we kicked off the next phase in our integration plan, which focused on improving performance and building organizational capabilities. Through this process, we are making Valaris more agile and responsive as an organization, which will help us to harness the company’s potential. As a result of this next phase of the integration, we announced late last year that we expect to achieve further cost savings that will exceed $100 million on an annual run-rate basis by mid-2021. Combined with the initially targeted merger synergies, these additional savings would result in capturing cost savings or recurring EBITDA improvements of at least $265 million per year as compared to pre-merger levels. Fleet Management With Valaris’ enhanced scale following the merger, we are better able to serve a variety of customer needs in key offshore regions around the world. While the company has a diverse rig fleet, we are focused on the most modern offshore drilling assets. Modern rigs are best suited to meet the highly technical needs of our customers, who continue to prefer these rigs as evidenced by significantly higher levels of utilization compared to older assets. In 2019, we signed new contracts and extensions for our core group of modern shallow-water jackups and deepwater floaters that added more than $1.6 billion of contracted revenue backlog. In addition, we continued to take appropriate action to retire older rigs from the global drilling supply. In the past year, we retired 5 jackups and 2 floaters, bringing the total retirements from Valaris and its predecessor companies to 32 rigs since July 2014. Financial Management Another area of significant focus for the company is managing our costs in light of market conditions. The company pursued this focus in several ways, including removing older, less capable assets from our rig fleet to reduce stacking costs. We also scrutinized all investments in our rig fleet and reduced planned capital expenditures. To enhance the governance of our capital structure and financial strategies, our Board of Directors formed a Finance Committee last year and a Special Committee in early 2020. Our Finance Committee includes three newly appointed directors that bolster the Board’s oversight capabilities due to the depth of their experience in equity and debt capital markets. Our Special Committee will assist the Board in evaluating potential transactions in light of the industry challenges described below. ARO Drilling ARO Drilling is Valaris’ 50/50 joint venture with Saudi Aramco, which owns and operates offshore drilling rigs for the largest customer for jackups in the world. In total, ARO Drilling operates a fleet of 16 jackups, seven of which are owned by ARO Drilling and another nine that are leased from Valaris. Valaris operates another seven jack-ups in Saudi Arabia independent of ARO Drilling. The most meaningful driver of ARO Drilling’s long-term value creation potential is through its newbuild construction program. ARO Drilling recently reached a significant milestone with the order of its first two newbuild rigs earlier this year. Upon delivery, each rig will commence an eight-year contract with Saudi Aramco with operating day rates that effectively pay back the rigs’ construction costs in the first six years of these contracts. After completing these initial eight-year contracts, each rig will receive an additional eight-year contract provided it meets specific technical requirements and a preference for new contracts working for Saudi Aramco after that. This newbuild program is expected to provide visible fleet and cash flow growth for ARO Drilling and its shareholders in the years to come. We look forward to working alongside ARO Drilling and Saudi Aramco on this critical program so that we deliver on the long-term potential of this strategic partnership. Industry Outlook As we look forward, we expect the broader offshore drilling industry to face substantial challenges. While the market for rigs showed some signs of improvement as we began the year, more recent events have significantly impacted the supply and demand balance for hydrocarbons and created volatility in the commodity markets. In turn, this has led many customers of offshore drilling services to lower their 2020 capital expenditure plans meaningfully. In light of these market conditions, we are focusing our efforts on what is within our control. First and foremost, we must continue delivering safe and reliable services to customers. Second, we will take appropriate actions so that we are the industry cost leader. In an oversupplied and highly competitive market like the one we now find ourselves in, we must remain focused on differentiating Valaris
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