8. Valaris Ltd. (NYSE:VAL)
Forward P/E Ratio as of March 5: 5.43
Number of Hedge Fund Holders: 49
Valaris Ltd. (NYSE:VAL) is a leading offshore drilling contractor that operates a diverse fleet of drillships, semisubmersibles, and jackups. It provides crucial drilling services to oil and gas companies across global offshore locations.
Its Floater segment involves deepwater drilling operations. It’s a primary driver of revenue, particularly due to its fleet of high-specification and seventh-generation drillships. The company has 15 floaters, with 12 being advanced drillships, which indicates a focus on modern and technically capable assets. The company is pursuing long-term contracts and tracking 20+ opportunities with durations of at least one year. It’s anticipating ~30 potential contracts when Petrobras launches new tenders.
The company is managing its fleet by retiring older and less efficient rigs. Recently, it announced the retirement of 3 semisubmersibles, which included 1 active rig. Lower floater utilization is expected to impact 2025 revenues and contribute to a forecasted decline compared to 2024. However, Valaris Ltd. (NYSE:VAL) is actively lowering costs for rigs (that are expected to have idle time) to mitigate this impact. It has 4 drillships with uncontracted time in 2025, with expected idle time for 3 of those drillships after their current contracts end.
Praetorian Capital believes that the company is significantly undervalued. It is poised for substantial profit as the decade-long offshore drilling bear market reverses, given its vast and valuable fleet. It stated the following regarding Valaris Ltd. (NYSE:VAL) in its Q4 2024 investor letter:
“In 2010, at the dawning of the age of shale, offshore oil production accounted for approximately 31% of global oil supply. As shale has encroached on offshore, that number has declined to only 27% of total oil production in 2024. As you can imagine, this has led to a bear market in offshore services equipment that has lasted for more than a decade and bankrupted almost all players in the sector. This offshore equipment (Drillships, Semi-Subs, Jackups, PSVs, AHTS, and other associated pieces of highly engineered steel) is what we own through positions in Valaris Limited (NYSE:VAL), Tidewater (TDW -USA) and Noble (NE – USA), as I believe that the decade-long bear market has now ended, and that the call on this equipment will lead to excess profits for these companies for many years into the future.
Since Valaris is this Fund’s largest position, I thought it would be helpful to focus the rest of our offshore services discussion on it, though we also have substantial positions in Tidewater, the world’s largest player in Offshore Service Vessels (OSVs) and Noble, another owner of high-spec Drillships. At the close of trading on December 2024, Valaris had a market cap of $3.15 billion, and a net debt position of appx. $800 million (as of Q3 2024), for an Enterprise Value of approximately $3.9 billion. What do you get for this price?? You get 12 of the higher spec 7th Generation Drillships, and 1 of the better 6th Generation Drillships. You also get 5 Semi-Subs, 33 modern Jackups (JU) and a 50% ownership in a JU joint-venture with Saudi Aramco (ARO) that owns an additional 9modern JUs. By our math, it would cost well in excess of $1 billion to build and activate each fully equipped 7G, and in excess of $ $250 million per JU. Not that anyone would try to recreate this selection of assets today through a newbuilding program, but you’d be hard pressed to do it for under $25 billion—making our $3.9 billion EV an interesting starting point for us as value investors…” (Click here to read the full text)