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Valaris - Credit Facility Lenders Might Pull The Plug At Any Time Now

May 04, 2020 8:38 AM ETValaris Limited (VAL)122 Comments


  • Company reports Q1/2020 results generally in line with expectations except for a massive $2.8 billion impairment charge mostly related to the decision to scrap a number of modern floaters.
  • Valaris can't afford similar charges going forward as the company would otherwise violate debt covenants.
  • Officially disclosed the engagement of restructuring advisors.
  • Credit facility agent has reserved the right to assert that a material adverse effect has occurred which could result in lenders denying additional borrowings.
  • Expect investors to be reluctant to provide new capital to the industry potentially resulting in a liquidation of the company. Investors should sell remaining positions and move on.


Valaris PLC (NYSE:NYSE:VAL) has been covered by me previously, so investors should view this as an update to my earlier articles on the company.

On Thursday, leading offshore driller Valaris released financial results for the first quarter 2020 which came in largely in line with expectations, except for a whopping $2.8 billion impairment charge, mostly related to the planned retirement of three modern drillships, four semi-submersibles and four jackup rigs and the decision to cold-stack nine additional rigs.

In fact, this is the first time an offshore driller commits to scrapping latest generation rigs.

Photo: Soon-to-be-scrapped 6th generation drillships Valaris DS-3 and Valaris DS-5 cold stacked at Santa Cruze de Tenerife, Canary Islands in October 2018 - Source: Shipspotting.com

The massive impairment charge has caused the company's debt-to-capitalization ratio to jump to 52.1% at the end of Q1 as disclosed in Friday's 10-Q filing with the SEC. While it would take another $1.7 billion in losses to exceed the 60% permitted under the terms of the company's revolving credit facility, additional impairment charges on modern rigs could easily cause Valaris to violate the covenant in the near future:

Our revolving credit facility requires compliance with covenants to maintain specified financial and guarantee coverage ratios, including a total debt to total capitalization ratio that is less than or equal to 60%. For the first quarter of 2020, we incurred impairments of $2.8 billion, and as of March 31, 2020, the total debt to total capitalization ratio was 52.1%. If activity levels of our customers remain at significantly depressed levels or further deteriorate, we could incur additional material impairments in future periods, which likely would result in our not being able to comply with such financial covenant. If we incur impairments or experience additional losses in the near future in excess of approximately $1.7 billion we would no longer be in compliance with

This article was written by

Henrik Alex profile picture

I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.

I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.

Despite not being a native speaker, I always try to deliver high quality research to followers and the entire Seeking Alpha community.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (122)

Henrik Alex profile picture
Stock approaching $2 in pre-market. Epic short opportunity ahead of bankruptcy but patience is key here. Otherwise you will get trampled down by the ongoing momentum stampede.
Equivocation profile picture
Epic short? Quite the contrary. Assuming your scenario. The total gain is only 100% on a short no matter at what point you start. But the downside from shorting a short squeeze ala Porsche style is that you could lose 1000%
You are spoiling it all! If a shortseller wants to borrow your stocks, just let them have it. :-)
Henrik Alex profile picture
Nonsense. Simply set a stop buy and limit your potential loss.

A stop loss would have worked well for you on the way down by the way :-)
Interesting. VAL is steadily grinding lower and they haven't filed for bankruptcy. WLL is stubbornly over a dollar and they have filed bankruptcy and announced how much stock they will give in return. Yet it stays above 1 buck, when the bonds price implies it is worth less than 10 cents. Maybe when VAL finally files for bankruptcy, it will jump to 5 bucks!
Henrik Alex profile picture
It won't as already evidenced by the recent Diamond Offshore bankruptcy.
We would need potent catalysts for this to work out and those are waning by the hour...
shoould they reverse split ?
PapaWhisky profile picture

The NYSE will alert them when their stock trades below a $1 average for more than six months.

But they will file Chapter 11 before then so there'll be no need for a split.
Whonoz profile picture
6 months or 30 days? I think they have 6 months to comply after receiving the notification from NYSE???
PapaWhisky profile picture

Yes, you're right. My mistake.

30 consecutivtrading days below $1 and then they have six months to rectify it.

In fact they have been notified. From their 10Q:

"On April 15, 2020, we were notified by the NYSE that the average closing price of our Class A ordinary shares was below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price required to maintain listing on NYSE. The company has until late December 2020 to regain compliance. If our shares are delisted from the NYSE and not concurrently listed on Nasdaq, the holders of our 2024 Convertible Notes would have the right to require us to repurchase the notes at a price equal to the principal amount thereof plus accrued interest to the repurchase date. Such an accelerated repurchase, if required by the holders, could be in excess of the forecasted availability under the revolving credit facility and new financing facilities could be required, which we may not be able to put in place."
Who here would honestly buy VAL shares after they emerge from restructuring (assuming they restructure and not liquidate)?

You have to look beyond and see how much demand will come back over 2021 and beyond. It won't simply jump back to ~100mbpd. It'll take a while to get back there.

Hence the willingness to sanction projects will be pushed out too. VAL's clients haven't deferred their contracts....some have actually cancelled future work.

I can't see the point in restructuring and re-emerging with more cash lent to them, if they're simply going to burn it away.

You won't get anything by liquidating, but, what will the creditors get in the future. The picture doesn't look convincing.

Just let the company fail, along with NE. Leave the others to survive with their assets.
There is another important twist to the matter. Right now I could even imagine the US DOD to outright buying Valaris. They could simply repaint the just repainted Valaris logo with the US Navy logo. No more oil spills! :-)
If I am not mistaken, VAL is not an American company, but a British company? Why will the FED bail out British companies?
Equivocation profile picture
- VAL has US subsidiaries that are eligible for Fed direct lending
- VAL bonds are listed in the US and are within the indexes that conform the ETFs that the Fed will buy
- The Fed is generally providing liquidity for the entire sector which opens up the door for refinancings, and senior debt issuances.

No one knows which ETFs the Fed will buy.
Equivocation profile picture

True. While the likely candidates have Valaris bonds in them, not all of them do. The uncertainty also means that there are buyers purchasing the different ETF's and underlying debt in an attempt to front-run the Fed.

The result is still liquidity support for the entire sector
Equivocation profile picture
1) Oil prices recovering strongly
2) Shale is DEAD
3) Arguing MAC clause is legally very dubious
4) Pulling the plug would force the lender to take over the assets that very moment
5) Fed is buying high yield debt (FACT). That includes VAL bonds and makes refinancing MUCH more likely
6) Fed might even buy equity ETF's, particularly small-cap and oil & gas (possible)

Seems like a good setup for a nice short squeeze.
Henrik Alex profile picture
Terrible statement. Pulling the plug would simply result in the company running out of liquidity within three months and filing for bankruptcy.

Fed is not buying Valaris debt. (FACT)

Bad case of confirmation bias - just answer ONE question, please:

At which point would you admit to having been an idiot all along the way by losing virtually everything with an investment in Ensco / Valaris TWICE?
Equivocation profile picture
FED is buying High Yield ETF's. VAL bonds are there buddy. =)


Actually I have been right on this one. The thesis was that shale would implode, which you always claimed would not happen. If it was not for COVID (which clearly was not in your investment thesis), I would be the one laughing to the bank.

But I see ample room for recovery with oil prices increasing, Fed support for HY debt, and an impending short squeeze.

Meanwhile, you and your followers are trapped in a bear trap (of course I know you are a perfect trader and your stop losses are perfect and you never lose money.....)
I have read through a good portion of your comments and I have found a lot of your ideas to be interesting and inspirational, but I urge you to be less emotional about your pre-conceived notions. @Henrik Alex has been working as auditor for PWC (see his official statement). He knows the business for sure. Don't just disregard this. You also have to argue the flipside, be the devil's advocate from time to time. VAL might turn out to be completely worthless or sharply spike up tomorrow. Please acknowledge all possibilities and be open minded. I would like to have an educated discussion with all of you.
"...Martin Shkreli orchestrated a violent short squeeze on failed biotech KaloBios that caused its share price to rise by a staggering 10,000% in just five trading days..."

Unfortunately, I have missed that one! There you have your 100-bagger in 5 days! That's a very long dark and cold nuclear winter for all the shorts involved! :-)

I really like those clueless investors!
Very limited gains long-term, unlimited losses short-term!
Shorts, they really are the smartest breed on planet earth! :-)
Henrik Alex profile picture
It's the other way round, in fact. It's clueless investors like you buying basically worthless stock like VAL or (even better) WLL and holding it until the bitter end who are paying the price.

Just look here to get an impression of how many retail idiots have accumulated Valaris's shares in recent weeks:

@Henrik Alex
Most shorts don't really know what risk they are actually taking on by selling short. They often loose all their accounts and even risk having their homes foreclosed afterwards. I have never shortsold anything and I will never shortsell anything.
Henrik Alex profile picture
Who cares what you do or don't do? Just like investing, shortselling simply requires adequate risk management to avoid potentially outsized losses.
The stock rose 20% today morning. Judging by WLL, if they declare bankruptcy, it might rise 500% !!
Henrik Alex profile picture
Judging by the move in Diamond Offshore Drilling after the company filed for bankruptcy, this is unlikely to be the case :-)
Well... just went up 120% in a day. Interesting worthless stock! Fundamentally could be whatever you want it to be BUT what it's important to every investor/trader that I know is money on your BANK account and that's what I got by buying at the right time and sell on every spike 40%+. Not too difficult to find their bottoms
Henrik Alex profile picture
These stocks always have some violent spikes due to momentum traders chasing them from time to time. Expect another leg up this morning but Valaris to close the week materially below last Friday's closing price.
How much money are they supposed to get on their insurance when a client cancels on them. If I recall their value if a few hundred million but at this point does it even matter?
Liquidation inevitable. Get out now. Disdainful that company management would not accept questions from analysts. Goodnight Vienna.
rodolfoavalos1 profile picture
Even if VAL hadn’t acquired ATW and merged with ESV, they would probably have ended up on the same path and outcome after COVID. There’s simply no market for OFS drillers in the near to mid future, it’d just have taken a bit longer for them to restructure or liquidate ..
Henry Miles profile picture
I agree. Like airlines, rental cars, Airbnb, and others, this industry is unlikely to recover against a practical investment horizon.
Fresh idea: Anyone want to float this thing with me and start our own country? Venezuela would recognize us for $1. Sinworld would be my name for it.
I know people who will buy the rigs at cents/$ if available and break them into spare parts . They did it in the last oil bust decades ago.

I love Henrik's analyses because he always finds crappy companies that are becoming crappier , then craps on them!!
Seriously that's my kind of guy
crazy mook profile picture
I believe liquidation is coming. There's just no justifiable workings to the economics of the OSD business right now. Who is going to insert new capital into this business. Its a zombie company now.
Amit Chokshi, CFA profile picture
VAL is the worst mgmt and board in the rig space. If it goes Chapter 7, then the rigs will be scrapped. There's no recovery at that point. VAL has a pretty good fleet but with the current outlook, even getting a 7th gen semi that's cold stacked will need $50MM+ just to reactivate it plus carrying costs. They were so bad at managing the co the bulk of their fleet has been commissioned with really low step up options that are going to easily get turned down and if they get called with VAL's track record it barely covers rig cash costs.

The current enterprise value is like $8MM per rig, its a back of napkin estimate with 10% of $6.5B / 75 rigs. plenty of rigs are garbage, some are good but the point is it shows that this could be scrapped.

The crazy thing is if it goes Chapter 7 - it's going to the scrap heap and metal buyers will buy these for $5-8MM to break up and resell and nobody will care. You may get a few buyers of a rig here/there but basically these rigs will be incinerated.

That would actually be insanely positive for the industry as VAL is about 10%+ of the global rig fleet. RIG would benefit most given a lot of high cost, relatively decent spec floaters would be taken out.
parisbiker profile picture
PE could buy the good rigs at auction.The rest scrapped. Sure looks like rig supply will diminish over the next yr or 2? Don't see the rush to invest in sector when the outlook for a pick up in economic growth/oil consumption is so muddled?
Why would a PE shop buy the rigs when there 24 floaters and 42 jackups in the shipyard that need a home?
I suggest to pile all Valaris rigs in the North Sea to make a statue for Jeremy Thigpen. Just because he is so damn positive! Thx for article :)
I wonder if they will go into Chapter 7 instead of 11?
PapaWhisky profile picture

This is exactly what the article is saying.

Chapter 7 is liquidation, Chapter 11 is restructuring.

The author predicts Chapter 7
I traded this stock a bit. took my losses at 7 bucks . I was looking at the yahoo charts-in 1980 this stock was 200 $, In 2008, it was over $300. Now it is 40 cents! I am wondering if this will be a fate of a few oil majors too, if oil stays at depressed for a long time?
Whonoz profile picture
300.00 to .40...that's peanuts. Look up AIG's charts back to 2000

Would be interesting to see how many investment wizards on here would have been warning everyone to run from that stock at the time...

It's all a crap shoot boys, regardless of what any of these "experts" tell you. Long shots have and do work out...sometimes. FTR, I do NOT expect this to be the case with VAL.
HariSeldon522 profile picture
Thx for your article!!!
Invader from Earth profile picture
I would take the gloves off and admit that the price of oil could double and offshore oil operations will still be deep in red ink.

I am curious how the depreciation expenses jumped even after the $3B impairment charge.

While Cramer seems to be off buying S&P Index funds, I would avoid energy stocks for the time being.

Personally, I went to cash last Thursday afternoon.
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