Executive Summary / Key Takeaways

• Valaris Limited, a global leader in offshore contract drilling with the world's largest fleet, is strategically positioning its high-specification assets to capitalize on a robust offshore upcycle anticipated from 2026 onwards, despite some near-term market uncertainty and expected idle time in 2025.
• The company delivered strong operational and financial results in Q1 2025, with revenues increasing 18% year-over-year to $620.7 million and operating income surging 388% to $143.0 million, driven by higher utilization and day rates for its active fleet and gains from asset sales.
• Valaris is actively managing its fleet through rationalization of older, less competitive rigs (e.g., retirement of three semisubmersibles in Q1 2025) and prudently warm stacking high-spec assets expected to have gaps between contracts, demonstrating a commitment to cost control and waiting for attractive long-term opportunities.
• Recent contract awards, including significant backlog additions for floaters offshore West Africa and jackups across multiple key regions, alongside five-year extensions for ARO Drilling leased rigs, underscore the demand for Valaris's assets and bolster its contracted revenue base, which is nearly 99% booked for 2025 at the midpoint of guidance.
• Management forecasts full-year 2025 Adjusted EBITDA of $500 million to $560 million and expects to generate meaningful and sustained free cash flow from 2025 onwards, supporting its commitment to return capital to shareholders, while also managing potential risks including macroeconomic volatility, inflationary pressures, and ongoing legal/tax contingencies.

Setting the Stage: A Global Leader Navigating Cyclical Seas

Valaris Limited stands as a titan in the offshore contract drilling industry, commanding the world's largest fleet and operating across nearly every major offshore basin. Its portfolio is strategically weighted towards high-specification assets, featuring one of the newest ultra-deepwater fleets and a leading collection of premium jackup rigs. As of May 1, 2025, the company owned 49 rigs, complemented by a 50% equity interest in ARO Drilling, a significant joint venture with Saudi Aramco.

The offshore drilling market is inherently cyclical, heavily influenced by the fundamental supply and demand dynamics for hydrocarbons. While global demand for oil and gas continues to evolve, offshore production, particularly from deepwater fields, is expected to remain a critical component of the world's energy mix. This is underpinned by the compelling economics of large offshore reserves, which often boast breakeven prices well below current and forward commodity prices (with Rystad Energy estimating nearly 90% of undeveloped offshore reserves are profitable above $65/barrel Brent, and approximately 70% of deepwater programs sanctioned over the next three years having breakeven prices below $50/barrel equivalent).

Valaris's current strategic posture has been significantly shaped by its emergence from bankruptcy in 2021. This event catalyzed a focus on optimizing its balance sheet and fleet composition. A key element of this strategy has been the rationalization of older, less competitive assets while emphasizing high-specification rigs capable of handling complex drilling programs. This approach is a direct response to market trends favoring modern, efficient, and technologically advanced equipment, especially as rig attrition over the past decade has tightened the supply of capable units.

Central to Valaris's competitive positioning is its fleet's technological differentiation, particularly within its floater segment. The company's twelve seventh-generation drillships are equipped with advanced features like dual derricks, high hook load capacity, high-capacity thrusters, and two blowout preventers (BOPs). These technical specifications are not merely features; they translate directly into operational efficiencies that are amplified over multi-well development programs. For instance, dual derricks allow for concurrent operations, significantly reducing the time required per well. High hook load capacity enables the use of longer casing strings, simplifying well design and reducing costs for the customer. The presence of two BOPs enhances safety and operational flexibility. These capabilities position Valaris's rigs as preferred assets for complex deepwater projects, contributing directly to their competitive moat and ability to command higher day rates compared to older or less capable rigs. The company also invests in upgrades like Managed Pressure Drilling (MPD) capabilities and explores initiatives like Enhanced Hull Side Energy (EHSE) systems aimed at improving efficiency and lowering emissions, further enhancing the appeal and performance of its fleet. This technological edge is a critical factor in securing attractive, long-term contracts in a competitive landscape.

In comparison to peers like Transocean (RIG), which also boasts a high-spec fleet including 7th and 8th generation rigs, Valaris competes effectively by leveraging its operational excellence and the technical capabilities of its own modern assets. While Transocean may lead in the sheer number of the absolute newest generation rigs, Valaris's strategic focus ensures its high-spec fleet is well-equipped for the majority of demanding deepwater tenders. In the jackup market, where Valaris holds a leading premium fleet position, its scaled presence in key benign environments like the North Sea, Australia, and Trinidad, along with its integral role in the ARO Drilling JV in Saudi Arabia, provides a competitive advantage. This allows Valaris to maintain solid day rates in these regions, even as overall global jackup utilization has moderated slightly due to factors like Saudi rig suspensions, which have primarily impacted older or less internationally competitive units.

Performance Reflecting Strategy and Market Dynamics

Valaris's financial performance in the first quarter of 2025 underscores the impact of its strategic focus on high-specification assets and operational efficiency. Total operating revenues reached $620.7 million for the three months ended March 31, 2025, an increase of 18% compared to $525.0 million in the prior year period. This growth was primarily driven by increased utilization and higher average daily revenues across the fleet. Specifically, the VALARIS DS-7, a reactivated seventh-generation drillship, contributed significantly with $41.5 million in incremental revenue following its contract commencement in May 2024. The remaining fleet also saw a $62.0 million increase from higher average day rates as rigs rolled onto new, more favorable contracts. A $7.3 million contract termination fee for the VALARIS 247 jackup further boosted revenue. These gains were partially offset by a $24.6 million decrease from fewer operating days for certain rigs, notably the VALARIS DS-10 and VALARIS DPS-5 semisubmersible, which were warm stacked after completing contracts in the latter half of 2024.

Operating expenses saw a notable decrease, falling 4% year-over-year to $480.3 million. This was primarily due to lower contract drilling expenses, which decreased by $29.8 million, or 7%. Key drivers included $15.0 million in lower operating costs associated with the warm stacking of VALARIS DPS-5 and VALARIS DS-10, and a $14.5 million net decrease in costs for VALARIS DS-7 (reflecting high reactivation costs in the prior year period versus ongoing operating costs in the current quarter). Lower mobilization costs for other rigs also contributed to the reduction. This demonstrates the effectiveness of the company's cost management strategy, particularly the decision to warm stack rigs between contracts.

The combination of strong revenue growth and reduced operating expenses resulted in a significant improvement in profitability. Operating income for Q1 2025 surged to $143.0 million, a remarkable 388% increase from $29.3 million in the prior year period. Net income attributable to Valaris also saw substantial growth, rising to $37.9 million from $25.5 million. It is important to note that the Q1 2025 results included a $7.8 million loss on impairment related to the decision to retire three semisubmersible rigs and a significant $168.8 million discrete deferred tax expense from the establishment of a valuation allowance related to these retirements. Excluding this discrete tax item, adjusted net income would have been approximately $128 million, highlighting the underlying operational profitability.

Liquidity remains solid. As of March 31, 2025, cash and cash equivalents stood at $441.4 million. The company also has a $375 million revolving credit facility, which was fully available as of April 25, 2025, providing total liquidity of approximately $830 million.

Capital expenditures totaled $100.2 million in Q1 2025, primarily for maintenance and upgrades. The company has no debt principal payments due until 2030, providing financial flexibility. Cash flow from operating activities was robust at $155.9 million in Q1 2025, benefiting from operating income and tax refunds, demonstrating the business's ability to generate cash.

Strategic Initiatives and Outlook

Valaris's strategic initiatives are firmly aligned with capitalizing on the anticipated offshore market recovery and enhancing shareholder value. A core component of this is ongoing fleet rationalization. In Q1 2025, the company approved the retirement of three semisubmersible rigs (VALARIS DPS-3, DPS-5, and DPS-6), which were subsequently sold for recycling in April 2025 for $10 million in cash proceeds. This follows the retirement of twelve floaters over the preceding five years, underscoring the commitment to high-grading the fleet and reducing holding costs. The sale of the VALARIS 75 jackup and an Angola office building in Q1 2025 also contributed $27 million in pre-tax gains, demonstrating opportunistic asset monetization.

The ARO Drilling joint venture remains a significant strategic asset. ARO continues its newbuild program, ordering the third newbuild jackup, Kingdom 3.00, in October 2024 for approximately $300 million. While Valaris has a potential funding obligation up to $1.10 billion for the newbuild program (reduced after Kingdom 2.00 delivery), the partners intend for ARO to self-fund through cash flow and third-party financing. Critically, five Valaris-owned jackups leased to ARO recently received five-year contract extensions, adding approximately $407 million to Valaris's backlog and $1.2 billion to ARO's backlog. This secures long-term work for these rigs into 2030 and reinforces the value of the ARO partnership.

Looking ahead, management's outlook is centered on securing attractive long-term contracts for its high-specification fleet, particularly for opportunities commencing in 2026 and beyond. The company is actively tracking approximately 25 floater opportunities with durations of at least one year and expected start dates in 2026 or 2027. Key regions for these opportunities include West Africa and Brazil. While the pace of contracting slowed in early 2024, leading to some demand deferrals into future periods, management remains confident in the materialization of this pipeline. They are willing to exercise strategic patience, accepting some idle time for rigs completing contracts in 2025 (such as DS-12, DS-15, and DS-18) and actively managing costs through warm stacking, rather than chasing potentially less attractive near-term work. This approach is designed to position the rigs for optimal long-term contracts in the anticipated stronger market.

For the full year 2025, Valaris has narrowed its Adjusted EBITDA guidance range to $500 million to $560 million, reaffirming the midpoint of $530 million. Total revenues are expected to be between $2.15 billion and $2.25 billion, with the midpoint being nearly 99% contracted following the ARO extensions. Full-year capital expenditures are projected to be $375 million to $415 million, an increase from prior guidance partly due to ARO leased rig shipyard days being pulled forward. Approximately $75 million of this CapEx is expected to be offset by upfront customer payments. Cash taxes are anticipated to be around 15% of EBITDA. Management expects to generate meaningful and sustained free cash flow from 2025 onwards, supporting its commitment to return capital to shareholders, including through its existing share repurchase program which has $275 million remaining capacity.

Risks and Challenges

While the outlook for offshore drilling appears constructive from 2026, Valaris faces several risks and challenges. Increased macroeconomic uncertainty, driven by factors like potential tariffs and changes in OPEC+ production levels, could negatively impact oil prices and, consequently, demand and pricing for drilling services. Inflationary pressures continue to increase operating costs, and the ability to fully recover these costs through contract escalations is not guaranteed.

The cyclical nature of the industry means that adverse changes in rig supply and demand could negatively affect utilization and day rates. The recent suspension of contracts by Saudi Aramco for 33 jackups, including three Valaris rigs leased to ARO (VALARIS 143, 147, 148), highlights regional market sensitivities and has contributed to downward pressure on day rates in certain benign environments. While management is in discussions regarding potential alternative suspensions for the 147 and 148, the situation underscores the risk of contract terminations or renegotiations.

Operational risks inherent in offshore drilling, such as equipment failure, severe weather, and accidents, can lead to downtime, increased costs, and potential liabilities. The company is also subject to various legal and tax contingencies. The ongoing patent litigation with a Transocean subsidiary, for which Valaris accrued $25 million in 2024, carries an uncertain outcome. Tax assessments in jurisdictions like Malaysia also present potential liabilities, although the company is vigorously contesting them. The establishment of a significant valuation allowance on deferred tax assets in Q1 2025 reflects uncertainty regarding the timing and amount of future taxable income in certain jurisdictions, which could impact future earnings volatility.

Conclusion

Valaris Limited is strategically positioned to leverage its high-specification fleet and operational expertise to capitalize on the anticipated strengthening of the offshore drilling market from 2026. The company's history, marked by a successful emergence from bankruptcy and a clear focus on fleet rationalization and high-grading, has resulted in a portfolio of assets well-suited for the complex, long-term development programs expected to drive future demand.

Despite facing some near-term headwinds and expected idle time for certain rigs in 2025, Valaris's strategic patience and commitment to prudent cost management through warm stacking demonstrate a disciplined approach aimed at securing the most attractive opportunities in the long run. The recent strong financial performance in Q1 2025, coupled with significant backlog additions from new contracts and the ARO JV extensions, provides a solid foundation. While macroeconomic uncertainty and operational risks persist, the company's strong liquidity position, absence of near-term debt maturities, and commitment to returning free cash flow to shareholders underscore its financial resilience and investor-friendly stance. Valaris's differentiated technology, particularly its seventh-generation drillships, provides a competitive edge in securing high-value contracts. As the robust pipeline of 2026 and 2027 opportunities materializes, Valaris appears well-equipped to translate its strategic positioning and operational capabilities into enhanced earnings and sustained value creation for shareholders.