Deepwater Demand And Tech Advancements Will Power Offshore Growth

Key Takeaways

• Valaris is set to accelerate revenue and margin growth as higher day rates and industry demand intersect with superior asset utilization and technical expertise.
  
• Advanced automation and a strengthened balance sheet enable Valaris to pursue long-cycle projects and capital returns, supporting outperformance versus peers.
  
• Structural market challenges, ongoing high costs, regulatory pressures, persistent overcapacity, and financial volatility undermine Valaris's growth, profitability, and long-term financial stability.

Catalysts

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

• While analyst consensus views Valaris's $4.7 billion contract backlog as a source of stable future revenue, they may underestimate how new awards at higher day rates-particularly for seventh-generation drillships-can rapidly accelerate top-line growth and push long-term revenue well above current forecasts, especially as utilization for these assets is projected to exceed 90% post-2026.
  
• Consensus expects margin improvement through cost discipline and operational efficiency, but this outlook is conservative given Valaris's demonstrated ability to win technically demanding projects funded with upfront customer payments, which reduces operating risk and CapEx outlays, supporting a dramatic step change in sustained EBITDA and free cash flow expansion.
  
• The industry is on the cusp of a multi-year supply-demand inflection due to persistent underinvestment in oil supply and a global shortage of high-specification offshore rigs; Valaris is uniquely positioned to benefit from a disproportionate increase in day rates and contract duration, unlocking margin and earnings upside well ahead of peers.
  
• Technological advancements, including advanced AI-driven maintenance and automation, are set to make ultra-deepwater drilling significantly more economic, enabling Valaris to tap new long-cycle projects in emerging basins and drive superior rig utilization and cost efficiency, leading to structural outperformance in both revenue and net margins.
  
• With a restructured balance sheet and near $900 million in liquidity, Valaris is positioned to redeploy substantial capital into shareholder returns or strategic growth investments just as industry-wide activity accelerates, potentially driving above-peer earnings per share growth and catalyzing a fundamental re-rating of the stock.

Valaris Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Valaris compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Valaris's revenue will grow by 2.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.2% today to 24.3% in 3 years time.
• The bullish analysts expect earnings to reach $640.8 million (and earnings per share of $9.84) by about August 2028, up from $275.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, down from 12.1x today. This future PE is lower than the current PE for the US Energy Services industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

Valaris Future Earnings Per Share Growth

Risks

• The global energy transition and increased institutional divestment from fossil fuels may reduce long-term demand for offshore oil and gas drilling, which could structurally suppress day rates and contract volumes for Valaris, ultimately pressuring revenue growth and long-term earnings potential.
  
• Ongoing fleet maintenance and modernization requirements, combined with regular rig retirements and CapEx for upgrades, are likely to result in sustained capital spending that could consistently suppress free cash flow and limit improvements in Valaris's net margins.
  
• Intensifying regulatory and environmental scrutiny around offshore drilling could increase compliance costs and litigation risk for Valaris, amplifying pressure on operating expenses and potentially reducing future net income.
  
• Despite recent operational improvements, Valaris remains exposed to cyclical cash flow volatility and high leverage after its Chapter 11 restructuring, which could heighten liquidity and solvency risks and cause significant swings in quarterly earnings during downturns or periods of fleet idleness.
  
• Persistent industry overcapacity and increased global competition, especially as day rates for drillships recently declined from mid-high 400s to low 400s, may restrict Valaris's pricing power and margin expansion, especially if utilization does not recover as expected, directly impacting revenues and underlying profitability.

Valuation

• The assumed bullish price target for Valaris is $62.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Valaris's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $640.8 million, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $47.0, the bullish analyst price target of $62.0 is 24.2% higher.
  
• 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.