Valaris Limited (VAL): A Bull Case Theory

We came across a bullish thesis on Valaris Limited (VAL) on Substack by Alpha Ark. In this article, we will summarize the bulls’ thesis on VAL. Valaris Limited (VAL)’s share was trading at $46.09 as of Feb 12th. VAL’s trailing and forward P/E were 3.21 and 8.44 respectively according to Yahoo Finance.

Valaris, the world’s largest offshore drilling contractor by fleet size, stands out for its expansive portfolio of 53 vessels, including 18 floaters (deep-water units) and 35 jackups (shallow-water units). Serving major energy companies like Chevron, BP, Shell, and Exxon, Valaris has established a dominant presence in offshore exploration and production. The company’s assets, which include drillships and semi-submersibles, are crucial for global energy giants, with Valaris being especially strong in regions such as the Gulf of Mexico, North Sea, and Gulf of Guinea. Valaris’ fleet is primarily comprised of modern equipment, with its floaters being the most profitable, contributing 66% of mid-cycle EBITDA, compared to 34% from jackups.

The offshore drilling industry has faced a prolonged downturn, resulting in many operators, including Valaris, filing for bankruptcy. This was primarily due to competition from shale and the aftermath of the Deepwater Horizon disaster. However, the company has emerged from this cycle stronger, with debt eliminated, improved management, and aggressive share buybacks. These factors, along with increasing demand for offshore drilling, have positioned Valaris as a competitive player with substantial upside. Notably, Valaris has benefited from technological improvements that have enhanced the drilling capacity of each ship, allowing the company to navigate reduced fleet sizes. In the last decade, the global offshore fleet has shrunk from 300 to about 150 vessels, which, combined with a 50-60% reduction in fleet size, has resulted in a restricted supply of offshore rigs.

As a result, offshore projects have become more attractive due to their superior internal rates of return (IRRs). Offshore breakevens have fallen to around $40 per barrel, offering a significant cost advantage over shale, which has a breakeven of around $60 per barrel in the U.S. In response to these conditions, day rates for Valaris’ drillships and jackups have surged, doubling in some cases. This upward pressure on pricing has positioned Valaris to capture higher margins from its fleet, with day rates expected to continue rising in the current cycle, potentially reaching $900k for floaters and $275k for jackups.

Valaris’ fleet replacement costs are significant, with new vessels requiring 2-4 years to build, highlighting the inherent value of existing assets. Valaris’ current market valuation is a fraction of the replacement value of its fleet, trading at only 16 cents on the dollar based on enterprise value (EV). This gap between market value and asset replacement value, combined with low oil price dependency for offshore operations, presents a compelling upside for investors. The company is trading at attractive multiples, including a price-to-free cash flow (P/FCFF) ratio of 10x for 2025E and 4x for 2026E. Furthermore, Valaris’ ability to generate free cash flow and its buyback program, coupled with investor interest from figures like John Fredriksen, add to its appeal.

Given the cyclicality of offshore drilling, Valaris’ valuation is best assessed using net asset value (NAV) to EV. By applying peak cycle multiples, the company’s target EV is estimated at $27 billion, representing a potential upside of approximately 7x. In downside and upside cases, Valaris could experience a range of 5x to 9x potential returns, further highlighting its substantial upside potential. With a robust fleet, improved financials, and favorable market conditions, Valaris presents a unique investment opportunity in the offshore drilling sector, poised for significant growth as the market continues to recover.

Valaris Limited (VAL) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 42 hedge fund portfolios held VAL at the end of the third quarter which was 39 in the previous quarter. While we acknowledge the risk and potential of VAL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VAL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.