Valaris Limited (NYSE:VAL): A Compelling Offshore Drilling Play with Robust Fundamentals

Published on September 24, 2024 | Ticker: VAL

Valaris Limited (NYSE:VAL) is the industry leader in offshore drilling services, operating a high-quality rig fleet across all water depths and geographies. The company's strong performance in the first quarter of 2024, coupled with its positive outlook for the remainder of the year, make it a compelling investment opportunity in the offshore drilling space.

Financials

Valaris reported impressive financial results for the first quarter of 2024, with revenue of $525.0 million and net income of $25.5 million. This represents a 22% increase in revenue compared to the same period in the prior year, driven by higher day rates and increased utilization across the company's floater and jackup fleets. The company's annual revenue for 2023 reached $1.78 billion, while net income for the year totaled $865.4 million.

The company's strong operational execution was reflected in its adjusted EBITDA of $54.0 million for the first quarter, which was better than guidance due to higher-than-expected revenue efficiency. Adjusted EBITDAR, which adds back one-time reactivation costs, was $84.0 million for the quarter. For the full year 2023, Valaris generated $267.5 million in operating cash flow and reported negative free cash flow of $428.6 million, primarily due to increased capital expenditures related to rig reactivations and upgrades.

Liquidity

Valaris maintains a strong liquidity position, with $509.0 million in cash and cash equivalents as of the end of the first quarter of 2024. The company also has access to a $375.0 million revolving credit facility, providing total liquidity of $884.0 million. This robust financial flexibility allows Valaris to fund its capital expenditures and pursue growth opportunities.

The company's capital allocation strategy is focused on returning value to shareholders. In 2023, Valaris returned $200.0 million to shareholders through its share repurchase program. Earlier this year, the board increased the repurchase authorization to $600.0 million, and the company intends to use it opportunistically. Looking ahead, Valaris expects to generate meaningful and sustained free cash flow in 2025 and beyond, and plans to return all future free cash flow to shareholders unless there is a better or more value-accretive use for it.

Operational Highlights and Market Outlook

Valaris' operational performance in the first quarter was excellent, with no lost-time incidents and fleet-wide revenue efficiency of 97%. The company's strong safety culture and focus on operational excellence have been key drivers of its success.

The offshore drilling market continues to improve, with Brent crude oil prices trading in the $70-$90 per barrel range and OPEC+ managing supply to keep the market in balance. This constructive oil price environment has led to an increase in contracting and tendering activity, supporting the current upcycle for the industry.

In the floater market, the contracted benign environment floater count increased to 127 rigs during the first quarter, the highest level since late 2016. Marketed utilization for the global 6th and 7th generation drillship fleet, which comprises 12 of Valaris' 13 drillships, currently stands at 90% and has exceeded 90% since early 2023. This has resulted in a continued improvement in average day rates for new contracts, which have increased from approximately $450,000 in the second half of 2023 to approximately $480,000 through the first four months of 2024.

In the jackup market, global marketed utilization is approaching 95%, with leading-edge day rates in the mid- to high $100,000 range in several regions. While the suspension of 22 jackup rigs by Saudi Aramco may lead to some near-term pressure on day rates, Valaris believes that approximately half of these rigs are likely to be competitive in other high-specification benign environment markets, and that there will be sufficient incremental demand to absorb them in an orderly fashion.

Contracting Activity and Backlog

Valaris has been successful in securing new contracts and extensions, increasing its total backlog to more than $4.0 billion as of the end of the first quarter of 2024, a 43% increase over the past 12 months. Recent awards include a multi-year contract offshore Angola for the VALARIS 144 jackup at a leading-edge day rate, along with three-year extensions for the Mad Dog and Thunder Horse managed rigs in the U.S. Gulf of Mexico.

For the floater fleet, Valaris has seen priced options exercised on the VALARIS DS-9 offshore Angola and the VALARIS DS-17 offshore Brazil, extending these firm programs into mid-2025. The company is also in active discussions for the remaining rigs with either existing customers or other operators with work programs expected to commence in 2025.

On the jackup side, with the VALARIS 144 recently contracted, the company's only rig with meaningful contract availability in 2024 is the VALARIS 143, which Valaris is pursuing opportunities for outside of Saudi Arabia. Excluding rigs with priced options, Valaris has four jackups with available days in 2025 and is in active discussions regarding programs that would keep these rigs busy through next year.

Guidance and Outlook

For the second quarter of 2024, Valaris expects total revenues in the range of $580.0 million to $600.0 million, up from $525.0 million in the first quarter. Adjusted EBITDA is expected to be $85.0 million to $105.0 million, including approximately $10.0 million of reactivation expense for the VALARIS DS-7.

For the full year 2024, Valaris' revenue is almost entirely contracted, except for the VALARIS DS-10 and DPS-5. The company's EBITDA guidance range of $500.0 million to $600.0 million contemplates some uncontracted time for these rigs in the second half of the year. Valaris is actively pursuing opportunities to secure work for these rigs to achieve the midpoint of the EBITDA guidance range.

Capital expenditures for 2024 are expected to total $420.0 million to $460.0 million, with approximately $55.0 million expected to be reimbursed through upfront customer payments. The increase in the guidance range is due to contract preparation and survey costs for the VALARIS 144 ahead of its recently announced multi-year contract offshore Angola.

Conclusion

Valaris' strong operational performance, robust financial position, and positive market outlook make it a compelling investment opportunity in the offshore drilling sector. The company's focus on high-specification assets, successful contracting activity, and disciplined capital allocation strategy position it well to capitalize on the improving industry fundamentals and deliver value to shareholders. With a diversified rig fleet, global footprint, and experienced management team, Valaris is poised to continue its industry-leading position in the years ahead.

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