How Much is Valaris (VAL) Really Worth
Using Buffett’s 1950s playbook to analyze a modern drilling giant
Let’s say your broker calls you this morning with a take-it-or-leave-it offer:
“You can buy every single Valaris share for 50 dollars. You’d own 100% of the company and you’ve got the cash. Do you take the deal? Yes or no?”
Investing is not complicated. You put money out today to get more back in the future, and you simply judge the probabilities of receiving that money, when it will arrive, and what interest rates will do in the meantime.
You really need only two things: how to value a business, and how to think about markets. If people understood just the basic principles behind those two ideas, they would be far better off than if they spent years learning modern portfolio theory or options pricing. Who needs options pricing to be an investor? - Warren Buffett
The key to everything is knowing how to value a business. That’s the whole game. If you don’t know how to value a business, you don’t know how to value a stock. Focusing on stock prices is dynamite. It means you believe the market knows more than you do. Maybe it does, but then you shouldn’t be in stocks. I’m not happy when the stocks I’m buying go up. I want them to go down and down and down.
Think how much more rational people are when buying real estate. If you buy an apartment, you don’t get a monthly quote. You look at it and say, “I expect this to bring in X rent, and if it does, it meets my expectations.” But many people buy stocks and think rising prices are good and falling prices are bad. I think the opposite: when prices fall, I love it because I can buy more. When they rise, it becomes painful to add.
But you must have a reasonable sense of what the business is worth. You need to know what you’re paying for and what you’re getting back. Otherwise, you’re just speculating. When I say “know,” I don’t mean calculating value down to the last decimal — nobody can do that.
This applies to every investment. Whether you’re buying a farm, a rental apartment, Valaris stock, or Melania Coin, the rule is the same: you must understand the price you’re paying, what you expect to receive in return, and when you’ll get your money back.
When Buffett looked at Union Street Railway, he realized Mr. Market had mispriced it so badly that the shares traded at about thirty cents on the dollar. What he was doing back then was simple: he looked at how much assets the company had per share, how much debt per share, and from that he could see that the market price had nothing to do with reality. Things like that happen in the stock market. That’s the advantage of the stock market.
We will try to evaluate Valaris in a similar way, using the same framework Buffett applied in the 1950s. My detailed post is below.
Here’s what we’ll cover in this post:
Liquidation value (today)
• Balance-sheet value per share
• Fleet value per share
• Backlog value per share
Intrinsic value (2027–2032)
• Expected free-cash-flow generation over the next cycle
• Share buyback magic
Valaris: Liquidation Value
I know enough to know that I don’t know enough to make smart decisions about a huge number of companies. My circle of competence covers certain types of businesses, and there are many others I simply can’t evaluate.
One big advantage with a company like Valaris is that it owns hard, tangible assets. It’s relatively straightforward to put a reasonable value on physical equipment. It’s far harder—at least for me—to value brands, patents, or other intangibles that sit on a balance sheet.
So, how much is this broker really asking you to pay for all of Valaris? According to the latest 10-Q, the company has 69.7 million shares outstanding. At 50 dollars per share, you’re effectively paying about 3.5 billion dollars for the entire business.
If you really have 3.5 billion dollars in cash sitting in a bank, then I should be reading your posts — not you mine. 😄
For everyone else, it’s worth asking a simple question: what are you actually getting for that 3.5 billion today?
Balance Sheet
Let’s start with the simplest piece: the balance sheet. In its latest 10-Q, Valaris reports roughly the following “non-fleet” assets:
Cash: 675.5M
Accounts receivable: 513.7M
Other current assets: 154.4M
Notes receivable from ARO (fair value): 379.6M
Investment in ARO: 119.3M
Other assets: 152.1M - in a liquidation I take 50% = 75M
Deferred tax assets: 673.9M - I assume 0 in liquidation
Total “non-fleet” assets: 1.92B USD
Valaris has 69.7M shares outstanding, so: 1.92B / 69.7M = $27.5 per share. In other words, before we even talk about rigs, the non-fleet part of the business alone comes to about 27.5 dollars per share in a conservative liquidation scenario.
Fleet Value
Rig prices are ultimately set by one thing: supply and demand. When Valaris came out of bankruptcy, demand for offshore drilling was at rock-bottom and nobody wanted these assets.
Because of that, the fleet is badly misrepresented on the balance sheet. After Chapter 11, “fresh start accounting” forces every asset, including rigs, to be recorded at accounting values from that moment in time. Those marks are not based on what the rigs would cost to replace, or on what a rational buyer would pay in a tightening market. In practice this means that those book values were written down in a period when offshore rigs were hated and trading at fire-sale prices. They have very little to do with what the same rigs are worth in a world where supply is fixed and dayrates are rising.
That’s why we need to estimate the fleet value ourselves.
