VALARIS LIMITED Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto included in "Item 1. Financial Statements" and with our annual report on Form 10-K for the year endedDecember 31, 2020 . The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" in Item 1A of our annual report and elsewhere in this quarterly report. See "Forward-Looking Statements." EXECUTIVE SUMMARY Our Business We are a leading provider of offshore contract drilling services to the international oil and gas industry. Following the sale of a jackup inApril 2021 , we currently own an offshore drilling rig fleet of 60 rigs, with drilling operations in almost every major offshore market across five continents. Our rig fleet includes 11 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 44 jackup rigs and a 50% equity interest inSaudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 joint venture with Saudi Aramco, which owns an additional seven rigs. We operate the world's largest fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet.
Chapter 11 Proceedings, Emergence from Chapter 11 and Fresh Start Accounting
OnAugust 19, 2020 (the "Petition Date"), Valaris plc ("Legacy Valaris" or "Predecessor") and certain of its direct and indirect subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in theBankruptcy Court under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the "Chapter 11 Cases"). In connection with the Chapter 11 Cases and the plan of reorganization, on and prior toApril 30, 2021 (the "Effective Date"), the Company effectuated certain restructuring transactions, pursuant to which Valaris was formed and, through a series of transactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other assets, of Legacy Valaris. On the Effective Date, we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated$7.1 billion of debt and obtained a$520.0 million capital injection by issuing the First Lien Notes. See " Note 11 - Debt" for additional information on the First Lien Notes. On the Effective Date. Legacy Valaris Class A ordinary shares were cancelled and common shares of Valaris with a nominal value of$0.01 per share ("Common Shares") were issued. Also, former holders of Legacy Valaris' equity were issued warrants (the "Warrants") to purchase Common Shares.. See " Note 12 - Shareholders' Equity" for additional information on the issuance of the Common Shares and Warrants. References to the financial position and results of operations of the "Successor" or "Successor Company " relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company " refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the "Company," "we," "us" or "our" in this Quarterly Report are to Valaris, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including Effective Date. 56 -------------------------------------------------------------------------------- Upon emergence from the Chapter 11 Cases, we qualified for and adopted fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date.
See " Note 2 - Chapter 11 Proceedings" and " Note 3 - Fresh Start Accounting" for additional details regarding the bankruptcy, our emergence and fresh start accounting.
Our Industry Operating results in the offshore contract drilling industry are highly cyclical and are directly related to the demand for and the available supply of drilling rigs. Low demand and excess supply can independently affect day rates and utilization of drilling rigs. Therefore, adverse changes in either of these factors can result in adverse changes in our industry. While the cost of moving a rig may cause the balance of supply and demand to vary somewhat between regions, significant variations between most regions are generally of a short-term nature due to rig mobility. As we entered 2020, we expected the volatility that began with the oil price decline in 2014 to continue over the near-term with the expectation that long-term oil prices would remain at levels sufficient to support a continued gradual recovery in the demand for offshore drilling services. We were focused on opportunities to put our rigs to work, manage liquidity, extend our financial runway, and reduce debt as we sought to navigate the extended market downturn and improve our balance sheet. Recognizing our ability to maintain a sufficient level of liquidity to meet our financial obligations depended upon our future performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control, we had significant financial flexibility within our capital structure to support our liability management efforts. However, starting in early 2020, the COVID-19 pandemic and the response thereto negatively impacted the macro-economic environment and global economy. Global oil demand fell sharply at the same time global oil supply increased as a result of certain oil producers competing for market share, leading to a supply glut. As a consequence, the price of Brent crude oil fell from around$60 per barrel at year-end 2019 to around$20 per barrel inmid-April 2020 . In response to dramatically reduced oil price expectations, our customers reviewed, and in most cases lowered significantly, their capital expenditure plans in light of revised pricing expectations. This caused our customers, primarily in the second and third quarters of 2020, to cancel or shorten the duration of many of our 2020 drilling contracts, cancel future drilling programs and seek pricing and other contract concessions which led to material operating losses and liquidity constraints for us. In 2020, the combined effects of the global COVID-19 pandemic, the significant decline in the demand for oil and the substantial surplus in the supply of oil resulted in significantly reduced demand and day rates for offshore drilling provided by the Company and increased uncertainty regarding long-term market conditions. These events had a significant adverse impact on our current and expected liquidity position and financial runway and led to the filing of the Chapter 11 Cases. 57 -------------------------------------------------------------------------------- By the middle of 2021, Brent crude oil prices climbed back to pre-COVID-19 pandemic levels, to approximately$73 per barrel inJune 2021 , and we observed a slight increase in customer tendering activity for both floaters and jackups beginning in the latter part of 2020. In earlyJuly 2021 , rising global demand for oil and continuing disputes about supply levels among members of OPEC+ sent Brent crude oil prices above$75 per barrel. Later inJuly 2021 , the members of OPEC+ agreed to phase out 5.8 million barrels of oil per day of oil production cuts bySeptember 2022 , effectively undoing production cuts put in place in response to the COVID-19 pandemic. After a brief decline following the announcement, oil prices returned to$74 per barrel by the end of July. The constructive oil price environment has led to an improvement in contracting and tendering activity in 2021 as compared to 2020. Benign environment floater rig years awarded in the first half of 2021 were nearly double that in the first half of 2020 and jackup rig years awarded increased by 15% when comparing the same periods. This increase in activity is particularly evident for drillships with several multi-year contracts awarded year to date. However, the global recovery from the COVID-19 pandemic remains uneven, and there is still a significant amount of uncertainty around the sustainability of the improvement in oil prices to support a recovery in demand for offshore drilling services. Additionally, the full impact that the pandemic and the volatility of oil prices will have on our results of operations, financial condition, liquidity and cash flows is uncertain due to numerous factors, including the duration and severity of the pandemic, the continued development, availability and effectiveness of the ongoing vaccine rollout, the general resumption of global economic activity along with the injection of substantial government monetary and fiscal stimulus and the sustainability of the improvements in oil prices and demand in the face of market volatility. To date, the COVID-19 pandemic has resulted in only limited operational downtime. Our rigs have had to shut down operations while crews are tested and incremental sanitation protocols are implemented and while crew changes have been restricted as replacement crews are quarantined. We continue to incur additional personnel, housing and logistics costs in order to mitigate the potential impacts of COVID-19 to our operations. In limited instances, we have been reimbursed for these costs by our customers. Our operations and business may be subject to further economic disruptions as a result of the spread of COVID-19 among our workforce, the extension or imposition of further public health measures affecting supply chain and logistics, and the impact of the pandemic on key customers, suppliers, and other counterparties. There can be no assurance that these, or other issues caused by the COVID-19 pandemic, will not materially affect our ability to operate our rigs in the future. We expect that these challenges will continue for drilling contractors as customers wait to gain additional clarity on the sustainability of improved commodity pricing. We believe the current market and macro-economic conditions will continue to create a challenging contracting environment through 2021, into 2022 and potentially beyond. Backlog Our backlog was$2.2 billion and$1.0 billion as ofAugust 2, 2021 andDecember 31, 2020 , respectively. Our backlog excludes ARO's backlog but includes backlog of$31.1 million and$74.7 million , respectively, from our rigs leased to ARO at the contractual rates. Contract rates with ARO are subject to adjustment resulting from the shareholder agreement. See " Note 5 -Equity Method Investment in ARO" for additional information. The increase to backlog is due to recent contract awards and contract extensions, partially offset by revenues realized. As revenues are realized and if we experience customer contract cancellations, we may experience declines in backlog, which would result in a decline in revenues and operating cash flows over the near-term. ARO backlog was$953.2 million and$347.5 million as ofAugust 2, 2021 andDecember 31, 2020 , respectively, inclusive of backlog on both ARO owned rigs and rigs leased from us. The increase in backlog is due to contracts awarded to five ARO owned rigs during the first quarter. As a 50/50 joint venture, when ARO realizes revenue from its backlog, 50% of the earnings thereon would be reflected in our results. The earnings from ARO backlog with respect to rigs leased from us will be net of, among other things, payments to us under bareboat charters for those rigs.
See "Item 1A. - Risk Factors" for risks related to the realization of our backlog.
58
--------------------------------------------------------------------------------BUSINESS ENVIRONMENT Floaters The floater contracting environment remains challenging due to limited demand and excess supply. Floater demand declined materially in March andApril 2020 , as our customers reduced capital expenditures particularly for capital-intensive, long-lead deepwater projects in the wake of oil price declines from around$60 per barrel at year-end 2019 to around$20 per barrel inmid-April 2020 . This caused our customers, primarily in the second and third quarters of 2020, to cancel or delay drilling programs, to terminate drilling contracts and to request contract concessions. We have observed a slight increase in customer tendering activity for floaters that commenced in the latter part of 2020. However, the global recovery from the COVID-19 pandemic remains uneven, and there is still a significant amount of uncertainty around the sustainability of the improvement in oil prices to support a recovery in demand for offshore drilling services. Our backlog for our floater segment was$1.4 billion and$163.7 million as ofAugust 2, 2021 andDecember 31, 2020 , respectively. The increase in our backlog was due to the addition of backlog from new contract awards and contract extensions, partially offset by revenues realized. Utilization for our floaters was 22% during the second quarter of 2021 compared to 29% in the first quarter of 2021. Average day rates were approximately$197,000 during the second quarter of 2021 compared to approximately$198,000 in the first quarter of 2021. There are approximately 21 newbuild drillships and benign environment semisubmersible rigs reported to be under construction, of which five are scheduled to be delivered before the end of 2021. Most newbuild floaters are uncontracted. Several newbuild deliveries have been delayed into future years, and we expect that more uncontracted newbuilds will be delayed or cancelled. Drilling contractors have retired approximately 130 benign environment floaters since the beginning of 2014. Six benign environment floaters older than 20 years of age are currently idle, eight additional benign environment floaters older than 20 years have contracts that will expire within six months without follow-on work, and there are a further 15 benign environment floaters that have been stacked for more than three years. Operating costs associated with keeping these rigs idle as well as expenditures required to re-certify some of these aging rigs may prove cost prohibitive. Drilling contractors will likely elect to scrap or cold-stack some or all of these rigs. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized.
Jackups
During 2020, demand for jackups declined in light of increased market uncertainty. This caused our customers, primarily in the second and third quarters of 2020, to cancel or delay drilling programs, to terminate drilling contracts and to request contract concessions. We have observed a slight increase in customer tendering activity for jackups that commenced in the latter part of 2020. However, the global recovery from the COVID-19 pandemic remains uneven, and there is still a significant amount of uncertainty around the sustainability of the improvement in oil prices to support a recovery in demand for offshore drilling services. Our backlog for our jackup segment was$767.2 million and$737.6 million as ofAugust 2, 2021 andDecember 31, 2020 , respectively. The increase in our backlog was due to the addition of backlog from new contract awards and contract extensions, partially offset by revenues realized. Utilization for our jackups was 54% during the second quarter compared to 50% in the first quarter of 2021. Average day rates were approximately$99,000 during the second quarter compared to approximately$95,000 in the first quarter of 2021. 59 -------------------------------------------------------------------------------- There are approximately 34 newbuild jackup rigs reported to be under construction, of which 12 are scheduled to be delivered before the end of 2021. Most newbuild jackups are uncontracted. Over the past year, some jackup orders have been cancelled, and many newbuild jackups have been delayed. We expect that scheduled jackup deliveries will continue to be delayed until more rigs are contracted. Drilling contractors have retired approximately 140 jackups since the beginning of the downturn. Approximately 80 jackups older than 30 years are idle, 30 jackups that are 30 years or older have contracts expiring within the next six months without follow-on work, and there are a further 65 jackups that have been stacked for more than three years. Expenditures required to re-certify some of these aging rigs may prove cost prohibitive and drilling contractors may instead elect to scrap or cold-stack these rigs. We expect jackup scrapping and cold-stacking to continue for the remainder of 2021. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized.
Divestitures
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 First Lien Notes, 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 older, lower-specification or non-core rigs. RESULTS OF OPERATIONS We are not able to compare the results of operations for the month endedApril 30, 2021 (the "Q2 Predecessor Period") and four-month period endedApril 30, 2021 (the "H1 Predecessor Period" and, together with the Q2 Predecessor Period, the "2021 Predecessor Periods") to any of the previous periods reported in the condensed consolidated financial statements, and we do not believe reviewing this period in isolation would be useful in identifying any trends in or reaching any conclusions regarding our overall operating performance. We believe that the discussion of our results of operations for the two-months endedJune 30, 2021 (the "Successor Period") combined with the 2021 Predecessor Periods provide more meaningful comparisons to the comparable periods in 2020 and are more useful in understanding operational trends. These combined results do not comply with GAAP and have not been prepared as pro forma results under applicableSEC rules, but are presented because we believe they provide the most meaningful comparison of our results to prior periods. 60 -------------------------------------------------------------------------------- The following table summarizes our Condensed Consolidated Results of Operations (in millions): Combined Successor Predecessor (Non-GAAP) Predecessor Three Months Two Months Ended One Month Ended Ended June 30, Three Months Ended June 30, 2021 April 30, 2021 2021 June 30, 2020 Revenues $ 202.8 $ 90.3$ 293.1 $ 388.8 Operating expenses Contract drilling (exclusive of depreciation) 168.7 85.6 254.3 370.7 Loss on impairment - - - 838.0 Depreciation 16.6 37.5 54.1 131.5 General and administrative 12.7 6.4 19.1 62.6 Total operating expenses 198.0 129.5 327.5 1,402.8 Equity in earnings (losses) of ARO 4.8 1.2 6.0 (5.2) Operating income (loss) 9.6 (38.0) (28.4) (1,019.2) Other income (expense), net 1.4 (3,533.7) (3,532.3) (105.4) Provision (benefit) for income taxes 15.1 (15.5) (0.4) (15.8) Net loss (4.1) (3,556.2) (3,560.3) (1,108.8) Net income (loss) attributable to noncontrolling interests (2.1) (.8) (2.9) 1.4 Net loss attributable to Valaris $ (6.2)$ (3,557.0) $ (3,563.2) $ (1,107.4) Combined Successor Predecessor (Non-GAAP) Predecessor Two Months Ended Four Months Ended Six Month Ended Six Months Ended June 30, 2021 April 30, 2021 June 30, 2021 June 30, 2020 Revenues$ 202.8 $ 397.4$ 600.2 $ 845.4 Operating expenses Contract drilling (exclusive of depreciation) 168.7 337.8 506.5 846.7 Loss on impairment - 756.5 756.5 3,646.2 Depreciation 16.6 159.6 176.2 296.0 General and administrative 12.7 30.7 43.4 116.0 Total operating expenses 198.0 1,284.6 1,482.6 4,904.9 Equity in earnings (losses) of ARO 4.8 3.1 7.9 (11.5) Operating income (loss) 9.6 (884.1) (874.5) (4,071.0) Other income (expense), net 1.4 (3,563.5) (3,562.1) (213.3) Provision (benefit) for income taxes 15.1 16.2 31.3 (167.8) Net loss (4.1) (4,463.8) (4,467.9) (4,116.5) Net income (loss) attributable to noncontrolling interests (2.1) (3.2) (5.3) 2.8 Net loss attributable to Valaris $ (6.2)$ (4,467.0) $ (4,473.2) $ (4,113.7) 61
--------------------------------------------------------------------------------
Overview
Revenues decreased$95.7 million , or 25%, for the combined Successor and Predecessor results for the three months endedJune 30, 2021 , as compared to the prior year quarter primarily due to$64.1 million from fewer days under contract across our fleet,$46.3 million due to termination fees received for certain rigs in the prior year quarter,$14.1 million from the sale of VALARIS JU-84, VALARIS JU-87 and VALARIS JU-101 which operated in the prior year quarter, and$4.0 million due to lower revenues earned under the Lease Agreements and Secondment Agreement with ARO. This decline was partially offset by a$33.5 million increase in revenue for certain rigs with higher average day rates for the combined three months endedJune 30, 2021 as compared to the prior year quarter. Revenues decreased$245.2 million , or 29%, for the combined Successor and Predecessor results for the six months endedJune 30, 2021 , as compared to the prior year period primarily due to$188.1 million from fewer days under contract across our fleet,$47.4 million from the sale of VALARIS 5004, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88 and VALARIS JU-101 which operated in the prior year quarter,$46.3 million due to termination fees received for certain rigs in prior year period, and$29.9 million due to lower revenues earned under the Secondment Agreement, Lease Agreements and Transition Services agreement with ARO. This decline was partially offset by a$58.5 million increase in revenue for certain rigs with higher average day rates for the combined six months endedJune 30, 2021 as compared to the prior year period. Contract drilling expense decreased$116.4 million , or 31%, for the combined Successor and Predecessor results for the three months endedJune 30, 2021 , as compared to the prior year quarter, primarily due to$84.3 million of lower cost on idle rigs,$28.0 million from rigs sold between the comparative periods, and reduced cost resulting primarily from spend control efforts. Contract drilling expense decreased$340.2 million , or 40%, for the combined Successor and Predecessor results for the six months endedJune 30, 2021 , as compared to the prior year period primarily due to$193.2 million of lower cost on idle rigs,$52.5 million from rigs sold between the comparative periods, and reduced cost resulting primarily from spend control efforts. Additionally, there was a decline of$18.6 million related to the Secondment Agreement with ARO as almost all remaining seconded employees became employees of ARO during the second quarter of 2020. During the second quarter of 2020, we recorded non-cash losses on impairment totaling$838.0 million with respect to certain assets in our fleet. See " Note 7 - Property and Equipment" for additional information. During the four months endedApril 30, 2021 and the six months endedJune 30, 2020 , we recorded non-cash losses on impairment totaling$756.5 million and$3.6 billion , respectively, with respect to certain assets in our fleet. See " Note 7 - Property and Equipment" for additional information. Depreciation expense decreased$77.4 million , or 59%, for the combined Successor and Predecessor results for the three months endedJune 30, 2021 as compared to the prior year quarter, primarily due to the reduction in values of property and equipment from the application of fresh start accounting. Depreciation expense decreased$119.8 million , or 40%, for the combined Successor and Predecessor results for the six months endedJune 30, 2021 , as compared to the prior year period primarily due to reduction in values of property and equipment from the application of fresh start accounting and due to lower depreciation expense on certain non-core assets which were impaired in the first and second quarters of 2020, some of which were subsequently sold in 2020. General and administrative expenses decreased by$43.5 million or 69%, and$72.6 million or 63%, for the combined Successor and Predecessor results for the combined Successor and Predecessor results for the three and six months endedJune 30, 2021 , respectively, as compared to the prior year comparative periods. The decline is related to charges in the prior year periods for professional fees incurred in relation to the Chapter 11 Cases, but 62 --------------------------------------------------------------------------------
prior to the Petition Date, professional fees associated with shareholder activism defense, organizational change initiatives, as well as merger integration related costs.
Other expense, net, increased$3,426.9 million and$3,348.8 million for the combined Successor and Predecessor results for the three and six months endedJune 30, 2021 , respectively, as compared to the prior year comparative periods, primarily due reorganization items incurred in the current year directly related to the Chapter 11 Cases. See " Note 2 - Chapter 11 Proceedings" for details related to reorganization items. This increase was partially offset by a reduction in interest expense as we discontinued accruing interest on our outstanding debt after the Petition Date.
Rig Counts, Utilization and Average
The following table summarizes our and ARO's offshore drilling rigs as ofJune 30, 2021 and 2020: 2021 2020 Floaters(1) 16 17 Jackups(2) 34 39 Other(3) 9 9 Held-for-sale(2)(4) 1 7 Total Valaris 60 72 Valaris - Under construction(5) 2 2 ARO(6) 7 7 ARO - Under construction (7) 2 2 (1)During the fourth quarter of 2020, we sold VALARIS 8504. (2)During the third quarter of 2020, we sold VALARIS JU-87 and during the fourth quarter of 2020, we sold VALARIS JU-84 and VALARIS JU-88. During the second quarter of 2021, we sold VALARIS 101 and classified VALARIS 100 as held-for-sale. (3)This represents the nine rigs leased to ARO through bareboat charter agreements whereby substantially all operating costs are incurred by ARO. All jackup rigs leased to ARO are under three-year contracts with Saudi Aramco. (4)During the third quarter of 2020, we sold VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS DS-3, VALARIS DS-5, VALARIS DS-6 and JU-105. (5)We have an option to take delivery of VALARIS DS-13 and VALARIS DS-14, on or beforeDecember 31, 2023 . The purchase price for the rigs are estimated to be approximately$119.1 million and$218.3 million , respectively, assuming aDecember 31, 2023 delivery date. Delivery can be requested any time prior toDecember 31, 2023 with a downward purchase price adjustment based on predetermined terms. If we elect not to purchase the rigs, we have no further obligations to the shipyard. (6)This represents the seven jackup rigs owned by ARO which are operating under long-term contracts with Saudi Aramco. (7)During 2020, ARO ordered two newbuild jackup rigs scheduled for delivery in 2022. 63 --------------------------------------------------------------------------------
The following table summarizes our and ARO's rig utilization and average day rates by reportable segment were as follows (in millions):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Rig Utilization(1)
Floaters 22 % 25 % 26 % 32 %
Jackups 54 % 54 % 53 % 60 %
Other (2) 100 % 100 % 100 % 100 %
Total Valaris 54 % 52 % 54 % 57 %
ARO 89 % 97 % 89 % 93 %
Average Day Rates (3)
Floaters $ 197,150 $ 172,313 $ 197,905 $ 188,107
Jackups 98,685 86,058 97,476 83,539
Other (2) 30,633 37,368 31,137 39,855
Total Valaris $ 86,861 $ 83,912 $ 88,091 $ 90,846
ARO $ 95,773 $ 103,049 $ 94,485 $ 105,843
(1)Rig utilization is derived by dividing the number of days under contract by
the number of days in the period. Days under contract equals the total number of
days that rigs have earned and recognized day rate revenue, including days
associated with early contract terminations, compensated downtime and
mobilizations and excluding suspension periods. When revenue is deferred and
amortized over a future period, for example, when we receive fees while
mobilizing to commence a new contract or while being upgraded in a shipyard, the
related days are excluded from days under contract. Beginning in 2021, our
method for calculating rig utilization has been updated to remove the impact of
suspension periods. To the extent applicable, comparative period calculations
have been retroactively adjusted.
For newly-constructed or acquired rigs, the number of days in the period begins
upon commencement of drilling operations for rigs with a contract or when the
rig becomes available for drilling operations for rigs without a contract.
(2)Includes our two management services contracts and our nine rigs leased to ARO under bareboat charter contracts.
(3)Average day rates are derived by dividing contract drilling revenues,
adjusted to exclude certain types of non-recurring reimbursable
revenues, lump-sum revenues, revenues earned during suspension periods and
revenues attributable to amortization of drilling contract intangibles, by the
aggregate number of contract days, adjusted to exclude contract days associated
with certain suspension periods, mobilizations, demobilizations and shipyard
contracts. Beginning in 2021, our method for calculating average day rates has
been updated to remove the impact of suspension periods. To the extent
applicable, comparative period calculations have been retroactively adjusted.
64
--------------------------------------------------------------------------------Detailed explanations of our operating results, including discussions of revenues, contract drilling expense and depreciation expense by segment, are provided below.
Operating Income by Segment
Our business consists of four operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (4) Other, which consists of management services on rigs owned by third-parties and the activities associated with our arrangements with ARO under the Rig Lease Agreements, the Secondment Agreement and the Transition Services Agreement. Floaters, Jackups and ARO are also reportable segments. Upon emergence, we ceased allocation of our onshore support costs included within contract drilling expenses to our operating segments for purposes of measuring segment operating income (loss) and as such, those costs are included in "Reconciling Items". We have adjusted the historical periods to conform with current period presentation. Further, general and administrative expense and depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income (loss) and are included in "Reconciling Items." Substantially all of the expenses incurred associated with our Transition Services Agreement are included in general and administrative under "Reconciling Items" in the table set forth below. The full operating results included below for ARO are not included within our consolidated results and thus deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See " Note 5 - Equity Method Investment in ARO" for additional information on ARO and related arrangements.
Segment information was as follows (in millions):
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