New Offshore Contracts Will Drive Future Fleet Efficiency

Key Takeaways

• Securing over a billion in new contracts strengthens Valaris's revenue prospects from 2026 onwards, driven by its high-specification fleet.
  
• Strategic partnerships and regional presence support long-term revenue growth and improved financial performance through operational efficiency and cost management.
  
• Economic uncertainty and market dynamics could pressure Valaris' margins and revenues through idle time, competition, and required capital expenditures for rig upgrades.

Catalysts

Provides offshore contract drilling services in Brazil, the United Kingdom, U.S.

• Valaris has successfully executed a commercial strategy by securing over $1 billion in new contract backlog for its high-specification fleet, which is expected to provide robust revenue growth opportunities as the contracts come into effect in 2026 and beyond.
  
• With a strong focus on delivering safe and efficient operations, Valaris continues to build on its reputation and operational efficiency, which aligns with potential improvements in net margins due to high customer satisfaction and repeat contracts.
  
• The significant presence in key offshore regions, including potential long-term opportunities in West Africa and deepwater programs in regions such as Mozambique and Nigeria, could lead to sustained revenue growth as these markets develop.
  
• The strategic partnership and contract extensions with ARO Drilling in Saudi Arabia yield a consistent flow of revenue and provide a stable operational base, which can support improved earnings and cash flow over extended periods.
  
• A focus on maintaining a high-specification and efficient fleet, along with prudently managing operating costs, especially during idle periods, helps in optimizing earnings and cash flow, improving the company’s overall financial performance.

Valaris Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Valaris's revenue will decrease by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 20.8% in 3 years time.
• Analysts expect earnings to reach $492.5 million (and earnings per share of $6.57) by about July 2028, up from $310.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $554 million in earnings, and the most bearish expecting $371 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 11.2x today. This future PE is lower than the current PE for the US Energy Services industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 2.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

Valaris Future Earnings Per Share Growth

Risks

• The macroeconomic uncertainty, including proposed tariffs on international trade and the accelerated unwind of OPEC+ production cuts, introduces risks that could impact Valaris' future contracting opportunities and revenues.
  
• The potential for increased idle time and the pressure on day rates, particularly in regions affected by market dynamics such as rigs leaving Saudi Arabia, could impact Valaris' net margins and earnings.
  
• The requirement for significant rig upgrades for new contracts could lead to increased capital expenditures if customer reimbursements do not cover these costs, potentially impacting Valaris' net margins and cash flow.
  
• Market saturation or increased competition, especially in the North Sea and other regions, could drive down day rates and limit revenue growth from new contracts.
  
• The heightened macroeconomic uncertainty could potentially slow down expected offshore production growth, impacting the long-term demand for Valaris' services and affecting future revenues and profits.

Valuation

• The analysts have a consensus price target of $50.182 for Valaris based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $492.5 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of $48.65, the analyst price target of $50.18 is 3.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.