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Deepwater Projects Expected From 2026 Will Drive Demand For High-Spec Rigs

AN
Consensus Narrative from 11 Analysts
Published
30 Aug 24
Updated
17 Apr 25
Share
AnalystConsensusTarget's Fair Value
US$49.73
35.9% undervalued intrinsic discount
17 Apr
US$31.89
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1Y
-52.4%
7D
6.2%

Author's Valuation

US$49.7

35.9% undervalued intrinsic discount

AnalystConsensusTarget Fair Value

Key Takeaways

  • Focus on high-spec drillships positions Valaris for premium rates and long-term contracts, improving margins.
  • Fleet modernization and cost strategies enhance earnings and financial stability amid deepwater project growth.
  • Slowed offshore CapEx growth and potential idle rigs might increase costs and competition, impacting Valaris's revenue and earnings projections.

Catalysts

About Valaris
    Provides offshore contract drilling services in Brazil, the United Kingdom, U.S.
What are the underlying business or industry changes driving this perspective?
  • Valaris is poised to benefit from strong long-term contracting opportunities for high-specification assets, particularly for deepwater projects expected to be sanctioned from 2026 onwards. This is likely to drive revenue growth in the future.
  • The company's focus on high-specification seventh-generation drillships, which are favored by customers over other assets, positions it well to achieve premium day rates and long-term contracts, potentially improving net margins.
  • The strategic decision to retire less competitive assets and high-grade its fleet with more modern rigs may lead to cost savings and increased cash flows, enhancing overall earnings.
  • Expected growth in offshore project approvals, especially in deepwater locations like Brazil, Africa, and the U.S. Gulf, can create additional demand for Valaris's fleet, supporting revenue growth.
  • Valaris's proactive approach to minimizing costs and idling rigs until optimal contracts are secured could maintain financial stability and improve net margins despite fluctuating market conditions.

Valaris Earnings and Revenue Growth

Valaris Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Valaris's revenue will grow by 4.3% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 15.8% today to 20.6% in 3 years time.
  • Analysts expect earnings to reach $552.5 million (and earnings per share of $7.76) by about April 2028, up from $373.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $671.3 million in earnings, and the most bearish expecting $434.8 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, up from 5.7x today. This future PE is lower than the current PE for the US Energy Services industry at 10.3x.
  • Analysts expect the number of shares outstanding to decline by 1.9% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 8.2%, as per the Simply Wall St company report.

Valaris Future Earnings Per Share Growth

Valaris Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Slowed pace of offshore CapEx growth in 2024 and expected continuation in 2025 could lead to a slowdown in rig contracting, impacting future revenue growth.
  • Several high-specification floaters are expected to have idle time after current contracts, potentially leading to increased operating costs and reduced net margins if these rigs remain uncontracted for extended periods.
  • Continued pressure on sixth-generation rigs and heavy focus on high-specification assets could lead to increased competition in securing contracts, affecting earnings if Valaris is unable to effectively place its rigs.
  • Potential for supply chain challenges or delays in project timelines could affect the pace at which Valaris secures new contracts, impacting both revenue and net earnings projections.
  • Dependency on capital expenditure plans and project sanctioning by large E&P companies means any setbacks or shifts in these plans would pose significant risks to future revenues and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $49.727 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 $34.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $552.5 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 8.2%.
  • Given the current share price of $30.1, the analyst price target of $49.73 is 39.5% 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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