Property and Equipment

6 Months Ended

Jun. 30, 2022

Property, Plant and Equipment [Abstract]

Property and equipment consisted of the following (in millions):



	June 30, 2022		December 31, 2021
Drilling rigs and equipment	$	973.7	$	886.9
Work-in-progress	30.5		35.6
Other	38.4		34.5
	$	1,042.6	$	957.0

Assets held-for-use

On a quarterly basis, we evaluate the carrying value of our property and equipment to identify events or changes in circumstances ("triggering events") that indicate the carrying value may not be recoverable. For rigs whose carrying values are determined not to be recoverable, we record an impairment for the difference between their fair values and carrying values.

Successor

In June 2022, the drilling contract previously awarded to VALARIS DS-11 was terminated. As of the date of termination, we had incurred costs to upgrade the rig pursuant to the requirements of the contract. Costs incurred related to these capital upgrades were included in work-in-progress and upon termination were determined to be impaired. We recorded a pre-tax, non-cash loss on impairment in the second quarter of 2022 of $34.5 million. See "Note 2 - Revenue from Contracts with Customers" for additional information regarding the termination.

Predecessor

During the first quarter of 2021, as a result of challenging market conditions for certain of our floaters, we revised our near-term operating assumptions which resulted in a triggering event for purposes of evaluating impairment. We determined that the estimated undiscounted cash flows were not sufficient to recover the carrying values for certain rigs and concluded they were impaired as of March 31, 2021.

Based on the asset impairment analysis performed as of March 31, 2021, we recorded a pre-tax, non-cash loss on impairment in the first quarter of 2021 for certain floaters totaling $756.5 million, inclusive of $5.6 million of gains reclassified from accumulated other comprehensive income into loss on impairment associated with related cash flow hedges. We measured the fair value of these assets to be $26.0 million at the time of impairment by applying either an income approach, using projected discounted cash flows or estimated sales price. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including, in the case of an income approach, assumptions regarding future day rates, utilization, operating costs and capital requirements. In instances where we applied an income approach, forecasted day rates and utilization took into account then current market conditions and our anticipated business outlook.

Assets held-for-sale and Assets sold

Our business strategy has been to focus on ultra-deepwater floater and premium jackup operations and de-emphasize other assets and operations that are not part of our long-term strategic plan or that no longer meet our standards for economic returns. We continue to focus on our fleet management strategy in light of the composition of our rig fleet. While taking into account certain restrictions on the sales of assets under our Indenture dated April 30, 2021 that governs our First Lien Notes (the “Indenture”), as part of our strategy, we may act opportunistically from time to time to monetize assets to enhance stakeholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of lower-specification or non-core rigs. To this end, we continually assess our rig portfolio and actively work with rig brokers to market certain rigs. See “Note 8 – Debt" for additional information on restrictions on the sales of assets.

On a quarterly basis, we assess whether any long-lived assets meets the criteria established for held-for-sale classification on our balance sheet. Assets classified as held-for-sale are recorded at fair value, less costs to sell. We measure the fair value of our assets held-for-sale by applying a market approach based on unobservable third-party estimated prices that would be received in exchange for the assets in an orderly transaction between market participants or a negotiated sales price. We reassess the fair value of our held-for-sale assets on a quarterly basis and adjust the carrying value, as necessary. No assets were considered as held-for-sale on our Condensed Consolidated Balance Sheets as of June 30, 2022, or December 31, 2021.

Successor

In April 2022, VALARIS 113 and VALARIS 114 were sold resulting in a combined pre-tax gain on sale of $120.0 million, and in May 2022, VALARIS 36 was sold resulting in a pre-tax gain on sale of $8.5 million. Also in May 2022, we received additional proceeds of $7.0 million on our 2020 sale of VALARIS 68 resulting from post-sale conditions of that sale agreement. These incremental proceeds were recorded as a pre-tax gain on sale. Gains on sales are included in Other, net on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022.

VALARIS 67 was sold in March 2022, resulting in a pre-tax gain of $2.0 million, which is included in Other, net on the Condensed Consolidated Statements of Operations for the six months ended June 30, 2022 (Successor).

Predecessor

VALARIS 101 was sold in April 2021, resulting in a pre-tax gain of $5.3 million, which is included in Other, net on the Condensed Consolidated Statements of Operations for the one month and four months ended April 30, 2021 (Predecessor).

Our Australia office building was sold in March 2021, resulting in an immaterial pre-tax gain, which is included in Other, net on the Condensed Consolidated Statements of Operations for the four months ended April 30, 2021 (Predecessor).