Valaris: New Presentation Reveals Floater Strategy

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About: Valaris plc (VAL)
by: Vladimir Zernov
Summary

Valaris publishes presentation in which it details its strategy for marketing floaters.

The company also hints at how it plans to address the nearest debt maturities.

I'd expect floater scrapping in the future, but using top rigs as collateral for new debt should keep Valaris afloat until the debt wall of 2024.

At that time, everything will depend on the scale of the offshore drilling recovery.

Valaris (VAL) has just published a very interesting presentation which provides a rather detailed information on the company’s strategy. Back in early August, the company has also provided interesting information regarding its plans and its view on Valaris’ value proposition, but the recent information goes even deeper. Investors who are in Valaris for the longer term despite the risky and volatile nature of the offshore drilling industry should definitely study the new information slide by slide (and keep in mind that it’s a marketing material), while I would like to focus on two topics – the future of Valaris’ floaters and the company’s plans regarding its debt.

Floaters

Source: Valaris September 2019 presentation

Currently, Valaris has 16 drillships and 12 semi-subs. In the drillship segment, 8 rigs are drilling, 4 are warm-stacked, 2 are cold-stacked, and 2 are under construction. As per the slide above, the plan is to find additional work for the active rigs and then try to find jobs for the four warm-stacked drillships at higher dayrates. Meanwhile, delivery dates of newbuilds Valaris DS-13 and Valaris DS-14 (the “crowns” of the Atwood deal which now look more like a burden) have been pushed to 2021-2022. In this scenario, the two cold-stacked drillships, Valaris DS-3 and Valaris DS-5, are obvious scrapping candidates. Here’s why.

First, Valaris will ensure jobs for 8 drillships – this is very realistic, especially given the options on their contracts. Next, the company will have to introduce four warm-stacked rigs back to the market. After this, it will be the time to take delivery of newbuilds. By the time Valaris finally gets to cold stacked drillships (which are the rigs at the bottom of Valaris’ drillship quality), not only these drillships would be stacked for years but also Valaris will have to deal with a huge debt wall (more on this later) so investing in the reactivation of these rigs will not be on the company’s agenda.

Let’s now turn to the semi-sub segment. Four semi-subs are drilling, four are warm-stacked, and four are cold-stacked. As per the presentation, the company aims to get contracts for five rigs – Valaris 8505 (2012), Valaris 8503 (2010), Valaris DPS-1 (2012), Valaris 8504 (2011) and Valaris MS-1 (2011). The latter two rigs do not have contracts and may be warm-stacked for a longer period of time. Interestingly, three semi-subs that are currently under contract, Valaris 5004 (1982), Valaris 6002 (2001) and Valaris 5006 (1999), could be divested “unless new contract covers capital investment required to keep rigs active and provides adequate return of capital”. The term “divest” is a polite substitute for the term “scrap” – it’s hard to believe that anyone will buy these rigs at a price above scrap value in the current market in which warm-stacked and newbuild semis form a mini-armada. As per the August presentation, investors and traders should expect “no floater reactivations until day rates and contract terms can support reactivation costs”. Four cold-stacked semi-subs, while they are modern, are obviously under question now, although I’m not that sure on their fate as in the case of two cold-stacked drillships.

In short, the published plans for the floater segment imply future scrapping of floaters. Transocean (RIG) has just shown us how painful this is for the balance sheet from the accounting perspective. In my previous article on Valaris, I stated that the situation on the floater front looked alarming. Now that Valaris provided more information regarding its contracting plans, I conclude that we should not expect a flurry of news on this front for the remainder of the year.

Debt

Source: Valaris September 2019 presentation

The title of the slide above is “limited debt maturities to 2024”. Investors should also note that the remaining newbuild capex is about $300 million. In current situation, the company’s floater segment cannot pull its own weight, let alone support the whole company, so the task of getting Valaris through the next few years is on the jack-up segment. The situation when jack-ups, who operate at cheaper rates than floaters, have to service the debt which was mainly taken to purchase much more expensive floaters does not look sustainable. The following slide hints at what Valaris plans to do to get to 2024:

Source: Valaris September 2019 presentation

In my opinion, the game plan is the following. Valaris will use the highest-quality rigs to refinance nearest maturities and push the maturity dates to 2024 or beyond. Having done this, the company will wait until 2023 to see which rates the recovery brought to the market. If the rates are sufficient to service debt, it will be able to push maturities further to the right. If the recovery stalled, it will enter restructuring. While the recent price action in Valaris (and many other offshore drilling stocks) suggested that bankruptcy fears have started to emerge, Valaris will likely exist with the current capital structure for quite some time regardless of the speed of offshore drilling recovery. In this light, oversold conditions in the stock will present interesting trading opportunities. As for the longer term, the whole industry is highly speculative and volatile, so proceed with extreme caution.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VAL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks.