Valaris: Downgrading Shares On Muted Near-Term Outlook

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Ein großes ENSCO-Bohrschiff für Offshore-Tiefseebohrungen im Atlantischen Ozean bei Teneriffa, Spanien

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Note: Valaris (NYSE:VAL) has been covered by maine previously, truthful investors should position this arsenic an update to my earlier articles connected nan company.

On Monday, starring offshore driller Valaris reported 4th fourth and full-year 2022 results mostly successful line pinch nan lowered outlook provided by guidance connected nan Q3 convention call.

The institution besides issued a caller fleet position report which was thing to constitute location astir either. While backlog accrued by 3% month-over-month to astir $2.5 billion, this was partially owed to a subsidiary of Shell (SHEL) exercising a 330-day priced action for nan drillship VALARIS DS-10 astatine a dayrate of conscionable $231,000, almost 50% beneath existent marketplace rates.

At this point, nan mostly of Valaris' drillship fleet remains either cold-stacked, nether building aliases moving nether bequest contracts astatine painfully debased aliases moreover wholly undisclosed rates:

Drillship Fleet Overview

Fleet Status Report

Even worse, nan institution has granted further priced options to a number of customers which are very apt to get exercised successful nan existent marketplace environment, frankincense resulting successful nan respective rigs moving moreover longer astatine below-market rates.

As a result, eagerly-awaited improvements successful net and rate flows are apt to return longer than galore marketplace participants mightiness like.

On nan conference call, guidance projected 2023 EBITDA to beryllium successful a scope of $240 cardinal to $280 million, astir doubling from very anemic 2022 levels but really a acold outcry from nan guidance precocious provided by much-smaller jackup axenic play Borr Drilling (BORR) and a mini fraction of floater marketplace leader Transocean (RIG).

Particularly nan first half of 2023 will beryllium anemic for Valaris pinch conscionable 20% of full-year EBITDA expected to beryllium generated successful H1.

On nan call, guidance pointed to further deterioration successful nan North Sea markets arsenic 1 of nan main reasons for nan disappointing first half guidance (emphasis added by author):

As highlighted connected our 3rd 4th call, we do not expect opportunities to materialize successful Norway until 2024. In addition, nan outlook for nan remainder of nan North Sea has softened arsenic we are now besides seeing much projects delayed successful nan UK pinch customer siding nan uncertainty created by changes to fiscal argumentation related to windfall taxes.

Our 3 Keppel FELS N-Class rigs, which are tin of operating successful Norway, are each now located successful nan UK pinch only nan Valaris Norway partially contracted for nan twelvemonth ahead. The Stavanger is presently undergoing a typical periodic survey, and we are actively trading some The Stavanger and The Norway for projects successful nan North Sea arsenic good arsenic further afield. We do not spot capable prospects complete nan adjacent 12 to 18 months to support each 3 of these rigs working. And arsenic a result, we are preservation stacking nan Viking successful Dundee to trim costs while nan rig is idle. This uncertainty is expected to person a antagonistic effect connected our business successful 2023, peculiarly successful nan first half.

While guidance expects nan institution to make affirmative rate travel this year, guidance does not relationship for further rig reactivation disbursal beyond nan remaining activity connected VALARIS DS-17 which is scheduled to commence a caller statement offshore Brazil pinch Equinor (EQNR) successful June.

But Valaris will almost surely incur substantial, further reactivation disbursal arsenic drillship VALARIS DS-8 has reportedly been awarded a semipermanent statement offshore Brazil by Petrobras (PBR). On nan convention call, guidance much aliases little confirmed nan grant and successful nan question-and-answer convention hinted to astir $75 cardinal successful reactivation disbursal for nan rig.

While there's thing incorrect pinch reactivating a cold-stacked plus for a long-term, high-margin contract, nan antagonistic effect connected 2023 EBITDA and rate travel expectations would beryllium very material.

In addition, guidance was amazingly reluctant to perpetrate to nan company's newbuild drillships VALARIS DS-13 and VALARIS DS-14.

As a reminder, nan institution has nan correct but not nan responsibility to return transportation of VALARIS DS-13 and VALARIS DS-14 for a acquisition value of $119 cardinal and $218 cardinal respectively by twelvemonth end.

Given caller acquisition prices of stranded newbuilds, 1 would person expected Valaris to happily workout its acquisition options for these high-specification drillships but connected nan call, guidance hinted to further activation and mobilization disbursal of up to $100 cardinal per rig.

As a result, nan institution has decided to prioritize nan reactivation of cold-stacked drillships complete newbuild deliveries but it's really difficult to envision Valaris giving up connected 2 of nan world's astir precocious drillships correct astatine nan opening of a imaginable multi-year upcycle.

That said, nan institution mightiness besides take to waste its acquisition options to a competitor which could consequence successful an estimated rate inflow of $150 million.

On nan convention call, guidance besides spent a awesome woody of clip discussing nan company's superior building which remains acold from perfect.

While Valaris ended nan twelvemonth pinch $724 cardinal successful unrestricted cash, nan institution would beryllium well-served to reside its costly and alternatively restrictive $550 cardinal first lien high-yield notes and work together connected position for a revolving in installments installation arsenic soon arsenic imaginable to summation further flexibility.

Otherwise, assuming reactivation of VALARIS DS-8 and taking transportation of VALARIS DS-13 and VALARIS DS-14, nan institution would person to ammunition retired much than $600 cardinal successful rate adjacent twelvemonth including first activation and mobilization costs for nan newbuilds which doesn't look for illustration a viable action astatine this constituent fixed nan truth that nan institution needs a definite magnitude of rate connected manus to behaviour business crossed aggregate regions of nan world.

Bottom Line

Quite frankly, it's difficult to get excited complete Valaris' near-term prospects.

While guidance expects 2024 to correspond an inflection constituent successful nan company's results pinch an expanding number of drillships expected to activity astatine marketplace rates and anticipated improvements successful nan North Sea, investors should beryllium wary of nan imaginable antagonistic effect of priced options and imaginable further rig reactivation expense.

Given these issues, I would expect 2025 to show a much meaningful measurement up successful profitability and rate flow.

Considering nan company's muted outlook successful conjunction pinch nan caller rally successful offshore drilling stocks, I americium downgrading VAL banal from "Buy" to "Hold".

This article was written by

Henrik Alex floor plan picture

I americium mostly a trader engaging successful some agelong and short bets intraday and occasionally complete nan short- to mean term. My humanities attraction has been mostly connected tech stocks but complete nan past mates of years I person besides started wide sum of nan offshore drilling and proviso manufacture arsenic good arsenic nan shipping manufacture successful wide (tankers, containers, drybulk). In addition, I americium having a adjacent oculus connected nan still nascent substance compartment industry.I americium located successful Germany and person worked rather immoderate clip arsenic an auditor for PricewaterhouseCoopers earlier becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver nan burst of nan dotcom bubble and nan aftermath of nan world waste and acquisition halfway attacks arsenic good arsenic nan subprime crisis.Despite not being a autochthonal speaker, I ever effort to present precocious value investigation astatine nary complaint to followers and nan full Seeking Alpha community.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

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