Offshore Earnings Thoughts: Valaris (VAL).
My take on the big sister of the offshore service sector.
Welcome back to the ROI club.
Today’s update is again focused on the deep-value/high torque end of my portfolio’s barbell.
There are 3 stocks in the offshore oil services which I own in size and whom I’ve dubbed the 3 sisters of offshore drilling: VAL, RIG and BORR.
Today’s topic is the most straightforward play imho, VAL.
The overriding thesis here is quite simple. I expect a commodity bull market particularly in the energy sector with the two main causative factors being the sustained dearth in CAPEX over the last decade now appearing to collide head-on with highly inflationary monetary policies.
As far as I’m aware, it’s highly unusual to have the chance to buy assets at both a discount to their expected cashflows and their asset value in public markets. Yet the starvation of capital into the sector thanks to ideology rather than economics presents us with just such an occasion here.
Over the next week I’ll leave my notes on where each of the 3 sisters currently stands after earnings updates and my revised valuations where appropriate.
Valaris Limited (VAL)
Revenue increased to $610 million, up from $525 million in Q1 2024
Adjusted EBITDAR (including reactivation expenses) was $150 million, up from $84 million in Q1.
$4.3 Billion in backlog revenue now, up 42% YOY.
This line in particular caught my eye:
“Contract drilling expense decreased to $439 million from $445 million in the first quarter 2024. Excluding reimbursable items, contract drilling expense decreased to $407 million from $414 million in the first quarter primarily due to lower reactivation expense..”
I estimate their EBITDA 2024 at ~$500 million, which could possibly double in 2025 when most of their contracts are due to expire ergo current pricing (EV of $5.2B) suggests one is paying 4-5x next year’s EBITDA with a high likelihood of 2025 showing positive free cashflow for the first time in over a decade.
All things appear to support my idea voiced in this video back in Jan, stating that 2H 2025 is likely to be a breakout for VAL.
Whilst replacement cost remains a moving target here’s my back of the envelope for the ‘steel value’ of the company:
Rough estimate:
16 floaters x $1 billion = $16 billion
33 modern jackups x $250 million = $8.25 billion
Total estimated new build replacement value: Approximately $24.25 billion.
Today’s Enterprise Value = $5.2 Billion.
Fleet Status
The North Sea jackup fleet is nearly fully booked for 2025, with less than one year of availability across two active rigs
The company is focused on building contract backlog with attractive rates and filling uncontracted days in 2024 while securing work for 2025 and beyond
The global offshore drilling market continues to improve, with the contracted benign environment floater count reaching its highest point since late 2016 and jackup utilization near 95%.
VAL’s management are expected to sign contracts without pushing too hard for higher day rates, use that contracted revenue to secure finance with which to employ a buy back strategy (which makes sense when your shares trade at ~20% of their steel value).
My sense is that they will tighten the market and cause day rates to rise on the back of a saturated global fleet for drillships which is likely to be one hell of a tailwind for the second sister, who I’ll discuss next time - Transocean.
Disclaimer: This publication is intended solely for documenting my personal journey with trading and investments for income and travel purposes. I am not a certified financial advisor nor am I a financial professional and none of the content provided should be construed as investment advice. It is essential to conduct your own thorough research and consult a registered financial service provider for appropriate guidance. I cannot guarantee the accuracy or completeness of the information presented. Any actions taken based on the information shared in any of my work are done at your own risk and discretion.
Great stuff Ben. Consider also tracking (scrap value or value of fleet in 2nd hand market). Data is out there. Take houses , for example, you can say that it costs a lot more to build the new home and so you are getting a steal, but the bank is really only going to look at what the can sell it for in the event of foreclosure (bankruptcy). All the new build replacemnt cost tells you is that you aren’t going to get competition from a company coming in with a brand new fleet, but it doesn t necessarily mean that’s what your fleet is worth. Your company is worth what you can sell it for (thus 2nd hand or scrap prices) , or the sum of the future cash flows from business. New build parity day rate is relevant to track though—until the day rates hit that hurdle, you won’t be seeing added supply/new build competition, and you can conclude if demand increase the day rate will increase. Not sure how current day rates compare with new build parity, but would be useful to know. Appreciate your excellent work and thoughts!
Thanks for your update on youtube the other day. I'm curious what you think of the warrants? I was buying them around $11 but now not so sure if it's the best play.