Executive Summary / Key Takeaways

• Fleet High-Grading Creates Asymmetric Upside: Valaris has retired twelve floaters over five years—more than any competitor—while concentrating its fleet in twelve seventh-generation drillships that command premium dayrates. This transformation positions VAL to capture the next deepwater upcycle with higher-margin assets while competitors still operate aging, less efficient rigs.

• ARO Joint Venture Delivers Hidden Value with Zero Funding Risk: The 50/50 Saudi Aramco (2222.SA) partnership generates stable cash flows through nine owned rigs and seven leased rigs, with $2.16 billion in backlog and a newbuild program that management explicitly states will not require Valaris capital. This provides a non-dilutive growth engine in the world’s most stable jackup market while competitors dilute shareholders to fund expansion.

• Jackup Resilience Funds Floater Cycle Timing: With 96% utilization, 23% revenue growth, and 80% of 2026 days already contracted, Valaris’s premium jackup fleet generates predictable cash flows while the floater market troughs. This enables VAL to weather the current deepwater downturn without financial distress, unlike Transocean (RIG)’s $1.92 billion quarterly loss or Seadrill (SDRL)’s break-even margins.

• Balance Sheet Strength Enables Opportunistic Capital Returns: $662.7 million in cash, no debt maturities until 2030, and $200 million remaining on a $600 million buyback program provide downside protection and shareholder-friendly capital allocation. This gives management optionality to acquire distressed assets, retire shares at cyclical lows, or fund rig reactivations without diluting equity.

• Critical Risk: Oil Price Cyclicality Could Delay Recovery: Brent crude in the low $60s threatens to defer deepwater project sanctioning beyond management’s expected 2026 recovery timeline, potentially extending floater weakness and pressuring dayrates for VAL’s high-spec assets.

Setting the Scene: From Bankruptcy to Disciplined Capital Allocator

Valaris Limited, founded in 1975 and headquartered in Hamilton, Bermuda, emerged from bankruptcy in 2021 with a fundamentally different strategic playbook. The company that once chased fleet size and market share has become a ruthless high-grader, retiring twelve floaters over five years—more than any offshore driller—while concentrating capital in the highest-specification assets. Today, Valaris owns forty-eight rigs, including twelve seventh-generation drillships representing the highest concentration in the industry, and holds a 50% equity interest in ARO Drilling, a joint venture with Saudi Aramco that operates nine additional jackups.

The offshore drilling industry is entering a bifurcated cycle. Deepwater floater demand has softened as oil prices declined from the mid-$70s to low-$60s per barrel, pushing global drillship utilization down to 85% and forcing dayrates into the high-$300s to low-$400s range. Meanwhile, shallow-water jackup markets remain robust at 90% utilization, driven by national oil companies prioritizing energy security. Valaris’s strategic positioning—premium jackups generating cash today, seventh-generation drillships ready for the deepwater recovery—creates a barbell portfolio that competitors cannot replicate.

The industry structure reinforces this advantage. Since 2025, ten benign-environment floaters have been retired, including three Valaris semisubmersibles sold for recycling in April. The global jackup fleet contains 497 units, but 28% are over forty years old and only eleven newbuilds remain at shipyards, mostly in China. This supply discipline, combined with Valaris’s fleet high-grading, means the company enters the next upcycle with modern assets while competitors face obsolescence risk.

Technology, Products, and Strategic Differentiation: The Seventh-Generation Moat

Valaris’s competitive advantage rests on its concentration of seventh-generation drillships—twelve of its thirteen drillships represent the newest, most capable technology in offshore drilling. These rigs command premium dayrates because they deliver materially better performance on multi-well programs, with higher reliability, faster drilling speeds, and lower operational risk. Customers increasingly prefer high-specification assets for long-term developments, creating a two-tier market where seventh-generation units achieve 90% utilization while older rigs struggle to find work.

The ARO joint venture amplifies this differentiation. As a 50/50 partnership with Saudi Aramco, ARO operates in the world’s most stable jackup market with rigs contracted mostly through the end of the decade. The shareholder agreement specifies ARO will purchase twenty newbuild jackups over ten years, with Kingdom 1 and Kingdom 2 already delivered and Kingdom 3 ordered in October 2024 for $300 million. Critically, management has explicitly stated Valaris does not anticipate injecting capital to fund these newbuilds, expecting ARO to finance through operations and third-party debt backed by long-term contracts. Valaris captures 50% of the economics from a growing, self-funded fleet expansion while competitors dilute shareholders to finance new rigs.

Fleet management discipline further distinguishes Valaris. The company sold VALARIS 247, a 27-year-old jackup, for $108 million in Q3 2025, generating an $88.4 million pre-tax gain. It retired three semisubmersibles for $10 million in scrap value, eliminating operating costs for assets that no longer met economic return thresholds. This contrasts sharply with Transocean, which reported a $1.92 billion quarterly loss partly due to impairments on aging assets. Valaris’s willingness to shrink its fleet to improve quality demonstrates capital discipline that directly supports higher returns on invested capital.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

Valaris’s financial results validate its strategic transformation. For the nine months ended September 30, 2025, total operating revenues rose 3% to $1.83 billion while operating income surged 88% to $437.6 million. This margin expansion—operating margins reaching 21.14% on a trailing twelve-month basis—flows directly from fleet high-grading and cost discipline. Contract drilling expense decreased $151.5 million year-over-year, driven by lower costs for warm-stacked or retired rigs and reduced reactivation expenses.

Segment performance reveals the barbell strategy in action. The Jackup segment delivered 23.2% revenue growth to $614.6 million, with 96% utilization and average daily revenue of $141,000. Nearly 80% of available days are contracted for 2026 and over 60% for 2027, providing revenue visibility that competitors cannot match. The jackup fleet has become a stable annuity-like asset, funding corporate overhead while floaters cycle.

The Floater segment, by contrast, shows the trough dynamics. Revenue declined 8.2% to $968.7 million as rigs completed contracts and moved to warm-stack status, with utilization falling to 68%. However, average daily revenue increased to $381,000 from $338,000, demonstrating pricing power for active high-spec rigs. Management expects global drillship utilization to trough in late 2025 or early 2026 before recovering, with seventh-generation drillships exiting 2026 at 90% utilization. Valaris has already secured contracts for all four of its active drillships with near-term availability, effectively “bookending” the white space and positioning for the recovery without burning cash on idle rigs.

ARO provides the hidden value. The joint venture contributed $5.9 million in equity earnings for the nine-month period, but the real story lies in the $2.16 billion backlog and $431.4 million in revenue (+14.7% year-over-year). Valaris holds $376.6 million in Notes Receivable from ARO maturing in 2027 and 2028, creating a near-term cash infusion that competitors lack. The fact that ARO ordered Kingdom 3 with cash on hand and financed the delivery payment proves the JV’s self-sufficiency, making Valaris’s 50% stake a non-dilutive growth engine.

Balance sheet strength underpins everything. Cash increased from $368.2 million at year-end 2024 to $662.7 million at September 30, 2025.

The company has no debt principal payments until 2030, when $1.25 billion in 8.38% second-lien notes mature. With a $375 million revolving credit facility available and minimum cash needs of only $200 million, Valaris has over $460 million in excess liquidity for opportunistic capital returns or distressed asset acquisitions.

Outlook, Management Guidance, and Execution Risk

Management’s guidance reveals confidence tempered by cyclical realism. Fourth-quarter 2025 revenue is projected at $495-515 million with adjusted EBITDA of $70-90 million, implying margins compressed by warm-stacking costs for VALARIS DS-18 and DS-15. Full-year adjusted EBITDA guidance was raised to approximately $625 million, driven by jackup outperformance and longer-than-expected contracts. Management can raise guidance despite floater headwinds, proving the jackup portfolio’s resilience.

The floater outlook hinges on a 2026 recovery. Anton Dibowitz anticipates seventh-generation drillships will exit 2026 at 90% utilization, supported by more than thirty long-term opportunities starting in 2026-2027. Offshore Africa represents roughly half the pipeline, with requirements for seven drillships in India, Southeast Asia, and Australia representing over ten years of firm demand. The recovery is not speculative but based on visible project sanctioning, with Valaris’s high-spec fleet positioned to capture premium pricing.

Execution risk centers on cycle timing. If oil prices remain in the low-$60s, customers could defer deepwater projects beyond 2026, extending the trough and pressuring dayrates. Management acknowledges this risk, noting that 70% of deepwater spending over the next three years has breakeven prices below $50 per barrel, providing a buffer. However, if the recovery delays into 2027, Valaris may need to warm-stack additional drillships, increasing costs and reducing cash flow.

Jackup market dynamics provide stability. Saudi Aramco’s recall of suspended rigs supports utilization, while Valaris’s 80% contract coverage for 2026 insulates it from spot market volatility. The North Sea market shows increased competition as operators prioritize other basins, but Valaris’s contract extensions for VALARIS Norway, 121, and 122 demonstrate customer loyalty. The jackup segment can fund the company through the floater trough, a strategic advantage over pure-play deepwater drillers.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is oil price cyclicality. Management explicitly states that if oil prices continue declining, demand and pricing for services could be materially adversely affected. With Brent in the low-$60s and supply projected to outpace demand in 2025-2026, customers may defer deepwater projects, delaying the expected 2026 recovery. Valaris’s floater segment still represents 53% of revenue, and extended weakness could force additional warm-stacking or retirements, compressing margins.

Customer concentration amplifies this risk. Saudi Aramco’s suspension of 37 jackup contracts in 2024, including three Valaris rigs, shows how quickly demand can shift. While the company has since recalled several rigs, this demonstrates vulnerability to single-customer decisions. ARO’s five-year extensions for five leased rigs provide stability, but the JV’s dependence on Saudi Aramco’s drilling program remains a structural risk.

Inflationary pressures threaten cost control. Personnel costs and service prices continue rising, while the weakening U.S. dollar increases expenses in foreign jurisdictions. Management notes tariff exposure is indirect but could impact suppliers. Margin expansion depends on cost discipline; if inflation outpaces dayrate growth, the operating leverage thesis reverses.

The upside asymmetry lies in accelerated deepwater sanctioning. If oil prices recover to $70+ per barrel, the thirty-plus long-term floater opportunities could convert faster than expected, driving dayrates above the current $400,000 range. Valaris’s four available drillships are already contracted for 2026 work, but earlier-than-expected starts could pull revenue forward and boost cash flow. Additionally, competitor distress—Transocean’s $1.92 billion quarterly loss, Seadrill’s near-break-even margins—could create acquisition opportunities for Valaris’s strong balance sheet, consolidating market share at cyclical lows.

Competitive Context and Positioning

Valaris’s competitive positioning shines through peer comparisons. Against Transocean, Valaris delivers superior profitability with $187 million quarterly net income versus Transocean’s $1.92 billion loss, despite lower revenue scale. Transocean’s $7-8 billion debt burden and recent impairments highlight the cost of operating aging assets, while Valaris’s fleet high-grading and $662.7 million cash position provide flexibility. Valaris’s capital discipline creates financial resilience that Transocean’s scale cannot match.

Noble Corporation (NE) presents a closer jackup peer, with 30-35 rigs and solid Q3 2025 free cash flow of $139 million. However, Valaris’s 40 jackups and 50% ARO stake provide greater scale and geographic diversification. Noble’s U.S. Gulf focus creates volatility, while Valaris’s positions in Saudi Arabia, North Sea, Australia, and Trinidad insulate it from regional downturns. Valaris’s operating margin of 21.14% exceeds Noble’s 14.13%, demonstrating superior cost control.

Seadrill and Borr Drilling (BORR) represent niche players. Seadrill’s 15-20 high-spec rigs compete directly with Valaris’s floaters but lack the jackup cash flow buffer, resulting in variable profitability. Borr’s pure jackup focus (24 units) delivers high utilization but no deepwater upside. Valaris’s barbell strategy captures both stable shallow-water cash flows and deepwater optionality, a structural advantage neither pure-play can replicate.

Valuation Context

Trading at $60.42 per share, Valaris trades at 10.81 times trailing earnings, 6.99 times EV/EBITDA, and 1.72 times book value. These multiples compare favorably to offshore drilling peers: Transocean trades at a negative P/E due to losses, Noble at 24.19 times earnings, Seadrill at 69.72 times earnings, and Borr at 13.54 times earnings. Valaris’s profitability and balance sheet strength are not fully reflected in its valuation, suggesting the market still prices it as a cyclical commodity player rather than a transformed capital allocator.

The price-to-free-cash-flow ratio of 17.23 appears elevated against TTM negative free cash flow of -$99.7 million, but quarterly free cash flow turned positive at $128.3 million in Q3 2025. With $474 million in operating cash flow year-to-date and no debt service requirements until 2030, Valaris’s cash generation is accelerating. The enterprise value of $4.80 billion represents 1.99 times revenue, in line with Noble’s 1.98 times but below Transocean’s 2.66 times, despite superior margins.

Balance sheet strength provides a floor. Net debt is negative (net cash position), with debt-to-equity of 0.47 versus Transocean’s 0.77 and Borr’s 1.80. The $200 million minimum cash balance leaves $462.7 million in excess liquidity for opportunistic buybacks or acquisitions. This frames Valaris as a defensive play with upside optionality, trading at cyclical multiples despite structural improvements.

Conclusion: A Transformed Driller Priced for the Old Cycle

Valaris has evolved from a fleet-maximizing, capital-intensive offshore driller into a disciplined allocator of high-specification assets with a self-funding growth engine in ARO and a balance sheet that provides downside protection. The central thesis rests on three pillars: fleet high-grading that captures premium pricing, ARO’s non-dilutive cash generation, and jackup stability that funds the floater cycle timing.

The investment case is attractive because Valaris enters the expected 2026 deepwater recovery with the industry’s highest concentration of seventh-generation drillships, no near-term debt maturities, and a competitor set weakened by balance sheet distress. The primary risk is oil price cyclicality deferring the recovery, but the jackup portfolio’s 80% contract coverage for 2026 provides a cash flow buffer that pure-play floaters lack.

What will decide the thesis is execution on the floater recovery timeline. If management’s forecast of 90% utilization for seventh-generation drillships by end-2026 materializes, dayrates should inflect above $400,000, driving margin expansion and cash generation that the current 10.8 P/E multiple does not capture. If the recovery delays, Valaris’s balance sheet and ARO distributions provide a soft landing that competitors cannot replicate. For investors, Valaris offers a rare combination: cyclical upside with defensive characteristics, priced as if the transformation never happened.