Growing Renewables Shift Will Erode Offshore Drilling Margins

Key Takeaways

• Intensifying renewable energy trends and evolving regulations threaten Valaris' market size, revenue growth, and profit margins in the offshore oil and gas sector.
  
• High reliance on a few large clients and rising competition increase earnings volatility and reduce future pricing power for Valaris.
  
• Strong contract wins, robust offshore demand, strategic fleet upgrades, and disciplined capital management position Valaris for sustained revenue growth, margin expansion, and shareholder returns.

Catalysts

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

• The accelerating global transition toward renewable energy and mounting decarbonization policies threaten to structurally erode long-term demand for offshore oil and gas, reducing Valaris' addressable market and compressing revenue growth potential despite the current backlog strength.
  
• Stricter environmental regulation and the growing prevalence of carbon pricing are likely to significantly increase operational costs for offshore drilling, putting sustained downward pressure on Valaris' net margins and long-term profitability.
  
• Valaris' high customer concentration, with major contract wins clustered among a small group of large oil companies, makes future earnings more vulnerable to client budget cuts or contract renegotiations, heightening revenue volatility and risking sudden declines in backlog.
  
• Persistent advances in onshore drilling and shale technologies are diverting industry capital away from offshore exploration, likely limiting future contract opportunities and exacerbating cyclical earnings risk for Valaris as offshore project lead times grow more uncertain.
  
• Although day rates for premium rigs remain elevated, growing buyer consolidation among oil majors is expected to put increasing pressure on suppliers, diminishing Valaris' pricing power and squeezing EBITDA margins over time as the competitive landscape toughens.

Valaris Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Valaris compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Valaris's revenue will decrease by 0.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.2% today to 17.1% in 3 years time.
• The bearish analysts expect earnings to reach $412.2 million (and earnings per share of $5.83) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 7.7x on those 2028 earnings, down from 12.2x 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 8.08%, as per the Simply Wall St company report.

Valaris Future Earnings Per Share Growth

Risks

• The company's contract backlog has reached $4.7 billion, the highest of the decade, and Valaris continues to secure attractive multiyear contracts at strong day rates for its high-specification fleet, indicating robust future revenue visibility and stable earnings.
  
• Persistent global demand for offshore oil and gas, especially with new deepwater project sanctioning expected through at least 2027, suggests that utilization for premium assets like seventh-generation drillships will remain high and support both revenue growth and margin expansion.
  
• Ongoing fleet modernization, strong operational performance, and disciplined cost control have enabled Valaris to generate meaningful EBITDA and free cash flow, positioning the company to deliver future shareholder returns through dividends or share repurchases, which would positively impact net income and share price.
  
• Tightening supply and limited newbuild activity in the offshore drilling market provide pricing power to established players like Valaris, fostering a favorable supply-demand balance that supports higher day rates and improved vessel utilization, directly driving revenue and margin strength.
  
• Valaris' financial flexibility, with nearly $900 million in liquidity and proceeds from non-core asset sales, allows ongoing reinvestment in fleet upgrades and opportunistic capital returns, which increase operational resilience and sustain strong free cash flow generation.

Valuation

• The assumed bearish price target for Valaris is $38.0, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $412.2 million, and it would be trading on a PE ratio of 7.7x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $47.08, the bearish analyst price target of $38.0 is 23.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.