Valaris: Outlook Improves As Company Is Set To Reactivate Rigs

Summary

• Valaris released Q2 earnings report and a new fleet status report, which contains major developments.
• The company received several long-term contracts and will reactivate floaters.
• This is a major step forward for Valaris. With clean balance sheet, the company is the best way to play the recovery of the offshore drilling industry.

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I have recently written about my thoughts on Valaris (NYSE:VAL), and now it’s high time to update my views as the company has just released its second-quarter results. This time, we will not focus on the company’s financials - Valaris has recently emerged from bankruptcy, and it has a clean balance sheet which was discussed before by me and fellow contributor Henrik Alex. Instead, we will focus on the major developments on the contract front.

Valaris has already announced many contracts in recent months, but the new fleet status report contained a number of new contracts, including long-term ones. We will focus on the developments in the floater segment, as it is the main moving part:

• Drillship Valaris DS-11 received an eight-well contract with TotalEnergies in U.S. Gulf of Mexico. The rig will work from July 2024 to December 2027. The project has not received a final investment decision (FID) from the customer, which is not surprising as the work starts in the middle of 2024. However, it’s important to note that the rig is stacked, and it will have to go through upgrades for an 20K PSI project. This is a clear blow for Transocean (RIG), whose 20K newbuild Deepwater Atlas stays without a contract as it awaits FID from Beacon Offshore. It should be noted that Valaris DS-11 is currently stacked in Spain, so Valaris has already secured a contract for the reactivation of its rig, which is a major move forward.
• Drillship Valaris DS-16 received a two-year contract from Occidental (OXY) in the U.S. Gulf of Mexico. The rig will work from May 2022 to April 2024. Importantly, this rig is also currently stacked in Spain.
• Semi-sub DPS-1 got a 420-day contract with Woodside. The rig will work in Australia from March 2022 to March 2024.
• Drillship DS-10 got a one-well contract with TotalEnergies. The rig will work for 92 days from July 2021 to October 2021. DS-10 also received a 6-month contract with Shell (RDS.A) (RDS.B) which will keep the rig busy from March 2022 to September 2022.
• Semi-sub Valaris MS-1 got a one-month contract from Santos. The rig will work in Australia from April 2022 to May 2022. It should be noted that MS-1 will then continue to work with Santos from May 2022 to July 2023.

This is a positive quarterly report as Valaris revealed several long-term contracts. Importantly, Valaris will reactivate two drillships. The fate of stacked rigs in the industry remains uncertain, and Valaris managed to achieve significant progress on this front. While one could argue that the work for DS-11 starts in the middle of 2024 and there is no FID, the work for DS-16 begins in the first half of 2022 which is a major breakthrough for Valaris. While I maintain my view that some of Valaris’ stacked floaters will never return to the market, the recent contracts clearly improve the outlook for the company and its remaining stacked rigs. I’d note that the company’s backlog has increased from $1.17 billion at the beginning of May to $2.22 billion (without ARO Drilling), which is a huge improvement in just three months.

In my opinion, clean balance sheet and recent success on the contract front make Valaris the best way to bet on the recovery of the offshore drilling market. There are many challenges ahead, and the speed of this recovery is uncertain, but the strength of Valaris’ balance sheet and rising backlog should provide sufficient support to the company at a time when the offshore drilling industry tries to recover from the second major crisis in less than a decade.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives 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.

I may trade any of the above-mentioned stocks.