Valaris Investment Idea (NYSE: VAL)

From Bankruptcy to Goldmine: The $35B Fleet Nobody Wants

The Black History of Offshore Drilling

Over the past decade, offshore drilling has become a textbook example of how investor dreams can turn to dust. When oil traded above $100, companies ordered a wave of new platforms — rigs worth up to $1 billion each — financed with massive debt. Offshore was king, supplying nearly a third of the world’s oil.

Then came shale. U.S. production exploded — faster, cheaper, and more flexible. Oil prices collapsed. Offshore projects became uneconomical overnight. Billion‑dollar rigs sat idle in ports, crews were laid off, and day rates plunged to barely cover operating costs.

And then came COVID. Global oil demand collapsed, prices briefly went negative, and the entire industry fell apart. Nearly every major player — including Valaris, Noble, and Seadrill — went bankrupt!

Banks were crushed, left with billions in unpaid loans that no one could repay. Shipyards and rig builders went bankrupt. Offshore drilling companies were wiped out. And investors — they lost everything!!!

The pain of that period is still felt today. Investors haven’t forgotten — and they never will. Too much pain lies behind us. But all of that is in the past, and investing is all about the future.

Valaris Business Model

At its core, the offshore drilling business is simple to understand: these companies own and operate massive floating platforms (rigs) designed to drill for oil and gas in deepwater locations.

They don’t take the risk of finding oil — that’s on the oil companies (like Exxon, Chevron, or Petrobras). Instead, they rent out the rigs and the highly trained crews for a fixed daily fee, known as the day rate.

• Day rates are the lifeblood of this business. In good markets, these can reach $600,000–800,000 per day for the most advanced rigs. In downturns, they can fall to $150,000–200,000, barely covering costs.

• Contract length can range from a few months to several years. Long-term contracts provide stability; short-term contracts capture upside when rates rise.

• Costs are mostly fixed (crews, maintenance, insurance), which creates huge operating leverage: once a rig’s costs are covered, almost every extra dollar from higher day rates flows directly to profit.

These rigs are incredibly expensive assets — a new ultra‑deepwater drillship costs $800 million to $1 billion and takes 3–5 years to build. Today, no one is building new rigs, which means the existing fleet is all there is — and that creates scarcity.

In short:

1. Own the rigs.

2. Lease them to oil companies at high daily rates.

3. Cover fixed costs and keep the rest as cash flow.

When day rates are high and rigs are fully booked, these companies print money. When day rates collapse, losses pile up fast. This is why timing — and the industry cycle — matters so much.

Valaris works with oil giants like ExxonMobil, BP, Aramco, and Petrobras — companies with enormous cash reserves that depend on Valaris to keep production running. When rigs become scarce, Valaris can raise rates, and these giants will pay — because they have no choice.

Valaris is led by CEO Anton Dibowitz, an industry veteran with over 25 years of experience in offshore drilling and oilfield services. Before joining Valaris, he served as CEO of Seadrill, where he successfully guided the company through restructuring. Dibowitz is known for his disciplined capital allocation and focus on maximizing shareholder returns through debt reduction, fleet optimization, and share buybacks.

Valuation

Valaris controls the largest and most modern offshore drilling fleet in the world, consisting of 11 drillships, 5 semisubmersibles, and 44 jack‑ups. The replacement cost of this fleet exceeds $30 billion (and it would be insane to try to replace it). At the same time, since no one is approving contracts for new deepwater rigs costing $800 million to $1 billion each, there will be no new supply. In previous offshore cycles, the problem was the arrival of a new generation of rigs, which rendered older assets obsolete in about seven years. Now, with no new builds coming, today’s rigs will have a much longer useful life (30+ years).

When there’s an asset with severely limited future supply, I’m always intrigued. When that asset is starting to recover — even modestly — I’m even more intrigued. When I can buy that asset for roughly one‑tenth of its replacement cost, I get very interested. When I see the company is already generating positive free cash flow on its current contract backlog, I’m paying attention. And when I hear that management is returning 100 % of free cash flow to shareholders through buybacks — that’s when I get truly excited.

I wish I had a strong, perfectly timed investment thesis. In truth, this is probably one of the weakest “essays” I can write. I’d like to sound clever, but the reality is simple: I’m buying cheap assets during a recovery. I wish I could tell you exactly why the recovery is happening now. I can’t.

If you can buy steel at one‑tenth of its replacement cost, at a time when supply is shrinking and demand is likely to rise, with a net‑cash balance sheet and positive free cash flow, your returns will likely range from satisfactory to outstanding.

I don’t have a crystal ball for oil prices, steel prices, or future day rates. I’m an old‑fashioned value investor buying “ugly” companies just out of bankruptcy, betting that the offshore sector — which once supplied about a third of the world’s oil — will have to reinvest to maintain its share. And in the meantime, if offshore demand rebounds, human greed will overpower all the inevitable drama.

Valaris may not have the highest growth potential, but with the strongest balance sheet in the industry, it has the lowest risk if this thesis takes one to three years to play out. What I do know is that no one is building new rigs anymore — and if they start, it will take at least five years. Shale is in decline, and offshore is rising again.

What Happens in the Next Few Years

My favorite example of what disciplined capital allocation can do is NVR. Around the year 2000, they had 15 million shares outstanding. Today, that number is under 3 million. The stock price? It went from $5 at the lows to $10,000 at the highs — a staggering 2,500× return. It took nearly 30 years, but it happened.

Now look at Valaris. If no new rigs are built and demand keeps rising, we could easily see day rates of $500,000 — maybe even $800,000 per day. In that scenario, Valaris could generate $1–3 billion in pure free cash flow every year.

Today, Valaris trades at a market cap of just $3 billion. If the share price stays depressed — weighed down by ESG stigma, painful memories, and total investor apathy — management could use that cash to buy back 90 % of the company in 1–3 years.

That’s how you get insane returns.

In the worst‑case scenario, if nothing changes, the stock should still trade at its liquidation value of $30–35 billion — roughly 10× today’s price.

So either:

• Day rates surge, Valaris earns billions, and we collect massive dividends, or

• They aggressively buy back the stock, retiring nearly all shares, and we enjoy truly extraordinary returns.
  
  Sometimes, life is beautiful, isn’t it?
  
  Cheers, Sandro