Rising Global Demand And Deepwater Trends Will Drive Offshore Opportunities

Key Takeaways

• Strong demand for offshore drilling and long-term contracts is driving higher utilization and greater revenue visibility for Valaris’ advanced rig fleet.
  
• Operational discipline, strategic contract wins, and premium fleet upgrades are boosting profitability and supporting sustained margin growth.
  
• The ongoing energy transition, regulatory risks, fleet oversupply, high maintenance spending, and shifting investor sentiment threaten Valaris’ long-term demand, profitability, and access to capital.

Catalysts

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

• Sustained and growing demand for offshore oil and gas exploration, especially in emerging markets across Asia, Africa, and South America, is driving a multi-year pipeline of new tenders and long-term contracts, directly supporting higher utilization rates, increased backlog, and robust forward revenue visibility.
  
• Heightened energy security concerns and the need for supply diversification by governments and national oil companies are fueling persistent investments in offshore production, which underpin longer contract durations and bolster premium dayrates for Valaris’ high-spec rig fleet, providing structural support for long-term revenue and margin growth.
  
• Valaris’ ability to secure premium, multi-year contracts for its advanced 7th-generation drillships and jackups—particularly in technologically demanding deepwater and ultra-deepwater programs—positions the company to consistently command higher dayrates, directly increasing both top-line growth and net margins.
  
• Recent contract wins and extensions, including the sizable Saudi jackup renewals and multi-year awards in West Africa and the North Sea, have driven a steep rise in backlog, providing significant visibility for future earnings and supporting bullish projections for free cash flow generation.
  
• Continued disciplined fleet management, with timely rig retirements and cost control during idle periods, alongside ongoing rig upgrades often funded by customers, is expected to drive higher operational efficiency and support improvements in net profitability and earnings per share over the medium and long term.

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 2.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.6% today to 23.3% in 3 years time.
• The bullish analysts expect earnings to reach $618.3 million (and earnings per share of $9.44) by about July 2028, up from $310.0 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 8.2x 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 accelerating global transition to renewable energy and long-term shift in capital allocation away from offshore oil drilling could result in a structural decline in demand for Valaris’ core services, leading to lower rig utilization and sustained pressure on revenues.
  
• Increasing regulatory pressures and the possibility of stricter environmental restrictions create risks that new offshore projects may be delayed, cancelled, or never sanctioned, directly impacting Valaris’ future revenue visibility and leading to longer idle periods for rigs.
  
• The persistent oversupply of offshore rigs, coupled with limited retirements and continual technological upgrades, may suppress day rates and utilization for Valaris’ fleet, driving down operating margins over time.
  
• High capital expenditure requirements for upgrading and maintaining Valaris’ fleet, as reflected in rising guidance for CapEx and asset retirement, threaten to compress free cash flow and net margins, especially during intervals of lower contract coverage or weaker market conditions.
  
• Evolving investor and societal preferences for ESG-compliant portfolios could reduce access to capital, increase borrowing costs, and apply downward pressure on Valaris’ stock price and net earnings as major investors continue to divest from fossil fuel-related services.

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 $2.7 billion, earnings will come to $618.3 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 7.6%.
• Given the current share price of $48.65, the bullish analyst price target of $62.0 is 21.5% 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.