While the world continues to debate and tackle the challenges of climate change, there is little doubt that the oil and gas industry will remain a critical source of energy for the world. From generating electricity, heating homes, and powering vehicles, to the production and distribution of goods and services everywhere, it is still a major contributor to the global economy.
Operating the world’s largest fleet of competitive rigs, Valaris is helping to fuel the supply as a leading provider of offshore contract drilling services to the international oil and gas industry. It currently controls a drilling fleet of 56 rigs, with operations in almost every major offshore market across six continents. This fleet includes several drillships, fixed and dynamically positioned semisubmersible rigs, and dozens of jackup rigs, along with a 50/50 joint venture with Saudi Aramco, which owns an additional seven rigs. Together it forms one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet.
Emerging from Chapter 11 bankruptcy at the end of 2020, a significantly restructured Valaris has benefitted from a rebound in oil prices and demand from exploration companies, albeit with ongoing industry volatility and uncertainty. Throughout 2022 the company has continued to secure offshore drilling contracts and extensions worth hundreds of millions of dollars. The contract awards for both floating and jackup rigs across several geographies are providing a constructive outlook for the offshore drilling industry, while also adding to Valaris’s growing backlog.
Valaris was formed in 2019 through a merger between Ensco and Rowan Companies. The merger created a new company called Ensco Rowan, which later changed to Valaris. Ensco, founded in 1975, was a leading offshore drilling contractor with a fleet of rigs that operated in shallow and deepwater regions around the world. While Rowan Companies, founded in 1923, was a drilling contractor that specialized in providing drilling services to the oil and gas industry, primarily in the Gulf of Mexico, offshore North America, and internationally. The merger brought together two companies with complementary strengths, creating a larger, more diversified organisation with a larger fleet of rigs and a broader geographic reach. It also allowed the combined company to achieve cost savings and other operational efficiencies, which helped to improve its competitiveness in the offshore drilling market.
Unfortunately, Valaris soon filed for Chapter 11 bankruptcy in August 2020 as the decline in demand for oil and gas due to the covid pandemic decimated the industry. The pandemic resulted in a sharp drop in oil prices and significantly reduced demand and day rates for offshore drilling, which made it difficult for the company to service its debt and continue operations. Additionally, it was facing financial challenges related to the ongoing decline in the offshore drilling market, which had been in a slump for several years before the pandemic, as customers in most cases were already lowering their capital expenditure plans in light of declining pricing expectations. Valaris had high leverage and a large debt load, which made it more vulnerable to these challenges.
However, the bankruptcy filing allowed Valaris to restructure and in the process eliminate over $7 billion of debt to emerge as a stronger, more financially stable company.
Anton Dibowitz became the president and chief executive officer of Valaris in December 2021. Prior to joining the company, Dibowitz served as the CEO of Transocean, another of the world’s largest offshore drilling contractors. During his tenure, he led the company’s transformation, resulting in improved safety, operational and financial performance, as well as strengthening its balance sheet. Dibowitz has more than 30 years of experience in the oil and gas industry, including leadership roles in drilling and well services, operations, engineering, and business development. He has also served as a board member of several oil and gas companies and industry organizations.
Dibowitz is joined by long-serving Ensco veteran Gilles Luca, who became senior vice president and chief operating officer in December 2019. Luca joined Ensco in 1997 and has held several senior VP roles across operations, business development, and strategic planning. Before joining Ensco, he was an operations engineer for Foramer Drilling and Schlumberger.
Valaris provides a range of drilling services to oil and gas companies across the exploration, development, and production stages of the energy lifecycle. Its customers include many of the leading national and international oil companies, in addition to many independent operators. It is also among the most geographically diverse offshore drilling companies, with current operations spanning 14 countries within the Gulf of Mexico, the North Sea, the Middle East, West Africa, Australia, and Southeast Asia.
The company’s services are focused on delivering safe, efficient, and reliable drilling and well services to its customers, to help them explore, develop, and produce oil and natural gas in a cost-effective and sustainable manner. Valaris offer a wide range of drilling, well, decommissioning, project management, and environmental and safety services. Specifically, these include:
– Drilling services: offshore drilling rigs such as drillships, semi-submersibles, and jack-up rigs, are used to drill for oil and natural gas in offshore locations around the world.
– Well services: includes well completion, intervention, and maintenance.
– Decommissioning: covers the plugging and abandoning of wells, removal of platforms, and environmental remediation.
– Engineering and project management: includes various technical services to support its drilling and well services operations.
– Safety and environmental management: ensure compliance with the stringent regulations and standards of the industry.
With the world’s largest jackup rig fleet, Valaris allows customers to explore the far reaches of the world’s shallow water basins. Its semisubmersibles enable drilling operations in depths of 1,500 to 10,000 feet, while its ultra-deepwater drillships enable clients to operate in water depths of up to 12,000 feet.
The company offers its drilling services on a day-rate contract basis. Under these day rate contracts, it provides an integrated service that includes the provision of a drilling rig and crews that may vary between a full rate and a zero rate throughout the contractual term. The company also receives lump-sum fees or similar compensation for the mobilization, demobilization, and capital upgrades of its rigs. Ultimately, Valaris customers bear substantially all of the costs of constructing a well and supporting drilling operations, as well as the economic risk relative to the success of the well.
Valaris has a strong customer base that includes major international, government-owned, and independent exploration and production companies. In recent years, the company’s five largest customers accounted for more than 40% of revenues, with BP being the only customer to account for more than 10%.
Valaris’s diverse rig fleet of ultra-deepwater drillships, versatile semisubmersibles, and modern shallow-water jackups are capable of meeting a wide spectrum of customers’ well program requirements, as well as serve them in different regions and water depths. It is also among the most technologically advanced in the industry, as its highly-trained crews perform at the highest levels in the most challenging offshore environments. Furthermore, its expertise in decommissioning services and environmental remediation provides a high-demand service in the industry which not all drilling companies offer.
Valaris has been able to maintain a strong financial performance despite the challenges of the offshore drilling market. After cratering to almost $20 per barrel in 2020, Brent crude oil prices have gradually recovered throughout the last two years and currently have a 200-day moving average above $80 per barrel. These increased oil prices are largely due to a measured approach to production increases by OPEC+ members, rebounding demand for hydrocarbons, and a focus on cash flow and returns by major exploration and production companies. Global oil companies are now injecting a lot of money into offshore drilling as confidence is buoyed by the more favorable pricing environment.
The confidence of Valaris management has also improved as it sees the fundamental outlook for the industry as “highly constructive”. A lack of investment in new sources of production over the past several years has contributed to a tight supply picture that has been exacerbated by geopolitical instability and an increased focus on energy security. A significant increase in investment will be required to rebuild global supplies, irrespective of near-term demand volatility. Consequently, offshore production is expected to continue to play an important role in meeting the world’s need for secure and affordable energy. Valaris also believe that these factors and the significant reduction in the global rig fleet over the past several years lay the foundation for a sustained industry upcycle.
These economic factors have resulted in a marked increase in activity for Valaris, evidenced by a strong pipeline of several multi-year contracts awarded and a meaningful improvement in day rates across the fleet. Major contracts throughout 2022 have included a $327 million drillship deal with Equinor in Brazil, a $159 million agreement with Brunei Shell Petroleum for heavy-duty modern jackup, along with many more new and extension deals. As a result, the near-term outlook for the offshore drilling industry has drastically improved. And while there is still uncertainty around the sustainability of the improvement in oil prices and the recovery in demand, the company’s backlog continues to improve and now stands at $2.7 billion. Furthermore, ARO Drilling, Valaris’s 50/50 joint venture with Saudi Aramco provides a strong presence in the largest market for jackups in the world.
While Valaris has not yet returned to its pre-bankruptcy highs, the company is making traction with its recovery. In the last quarter, total revenues increased to $437.2 million, up from $326.7 million in the third quarter of 2021. The increase was primarily due to higher utilization for floaters and higher average day rates for both floater and jackup fleets. The result puts the company on track to close out the 2022 year with total revenue of $1.6 billion, in line with consensus estimates, and representing year-over-year growth of over 28%.
Looking ahead, consensus estimates have Valaris continuing its growth into 2023 and 2024 with expected sales of $1.86 billion and $2.37 billion respectively, continuing year-over-year growth at 18% and 27% respectively. While full-year earnings per share are also forecasted to continue a strong positive trend, growing over 214% to $3.66 in 2023, up from an expected $0.53 in 2022, then again jumping 144% to $8.92 in 2024.
The offshore drilling industry is highly competitive with drilling contracts, for the most part, awarded on a competitive bid basis. Valaris competes with several major drilling providers including Noble, Maersk, and Transocean, among others, many of which have significant resources in the offshore contract drilling industry. While price is often the primary factor in determining which company is awarded a contract, quality of service, operational and safety performance, equipment suitability and availability, reputation and technical expertise are also key factors, giving Valaris a strong competitive edge.
The key risk for Valaris remains that the ongoing impacts of the covid pandemic coupled with the volatility of oil prices and a wide range of economic factors may have significant impacts on the company’s demand, operations, and financials.
In less than two years from emerging from bankruptcy Valaris has proven its ability to win contracts and reactivate its assets. The company’s best-in-class fleet, industry-leading operational platform, and strong financial position have made it an attractive partner of choice for many exploration and production companies.