VAL's Zacks Rank and Key Picks VAL currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks from the energy sector are Archrock Inc. (AROC) , Nine Energy Service (NINE) and NextDecade Corporation (NEXT) . While Archrock currently sports a Zacks Rank #1 (Strong Buy), Nine Energy Service and NextDecade carry a Zacks Rank #2 (Buy) each. You can see the complete list of today's Zacks #1 Rank stocks here. Archrock is an energy infrastructure company based in the United States with a focus on mi ...

Core Viewpoint - Valaris Limited is streamlining its drilling fleet by permanently retiring three semi-submersible rigs and selling a jack-up rig for $24 million, aiming to optimize its operations and improve cash flow [1][4][5]. Group 1: Fleet Optimization - The company will retire three semi-submersible rigs: VALARIS DPS-5, VALARIS DPS-3, and VALARIS DPS-6, with the first being inactive since Q3 2024 and the latter two cold-stacked for several years [2]. - The retired rigs may be upcycled for alternative uses or scrapped entirely, reflecting the company's strategy to focus on high-specification vessels [2][4]. - By divesting idle assets, Valaris aims to cut costs associated with maintaining cold-stacked rigs and enhance its fleet's overall performance [4][5]. Group 2: Recent Transactions - Valaris announced the sale of the Valaris 75 jack-up rig for $24 million, which has been out of service for five years, to an undisclosed operator, with future operations limited to the U.S. Gulf of Mexico [3][1]. - The sale is part of the company's broader strategy to divest rigs that do not provide adequate returns, thereby benefiting cash flow and upgrading the rig fleet [4][5].

Financial Data and Key Metrics Changes - Adjusted EBITDA for Q4 2024 was $142 million, down from $150 million in Q3 2024 [14] - Total revenues decreased to $584 million from $643 million in the prior quarter [52] - Free cash flow generated was $13 million in Q4, following $111 million in Q3 [15] Business Line Data and Key Metrics Changes - Fleet-wide revenue efficiency was 96% in Q4 and 97% for the full year, marking an improvement over the previous year [10] - The jackup segment saw a contract backlog growth of over 75% in the past two years [29] - Average day rates for key markets remained firm, with a multiyear contract for Valaris Stavanger adding $75 million to contract backlog [32] Market Data and Key Metrics Changes - Global demand for hydrocarbons is increasing, with offshore production expected to play a significant role [16] - Deepwater project approvals are anticipated to double in 2026 and 2027 compared to 2024 and 2025 [18] - The contracting environment for high specification assets is strong, with over twenty floater opportunities tracked for 2026 and beyond [25] Company Strategy and Development Direction - The company is focused on securing long-term contracts for its active fleet and is willing to idle rigs until the right jobs are available [9] - Plans to retire three semisubmersibles to reduce costs and focus on high specification assets [20] - The strategy includes minimizing costs for idle rigs while seeking attractive long-term opportunities [101] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the contracting outlook for 2026 and beyond, citing strong customer demand and CapEx plans [84] - The company is managing its fleet prudently in response to market conditions, with plans to retire rigs that do not justify their costs [19] - Management emphasized the importance of offshore oil and gas production in meeting global energy needs [64] Other Important Information - The company ended Q4 2024 with cash and cash equivalents of $381 million, providing total liquidity of approximately $750 million [54] - Capital expenditures for Q4 were $112 million, below the guidance range [53] - The company repurchased $125 million of shares during 2024, following $200 million in 2023 [54] Q&A Session Summary Question: How much of the 2025 EBITDA guidance is booked versus expected new awards? - Management indicated that approximately 94% of the revenue guidance is contracted for the year, with the remaining 6% expected to be secured later [69] Question: What is the likelihood of reactivating cold stacked drillships? - Management stated that while they are patient in reactivating rigs, they see good long-term opportunities for high specification assets currently sidelined [75] Question: What is the outlook for demand pipeline going forward? - Management expressed confidence in the demand pipeline for 2026 and 2027 based on customer discussions and CapEx plans [85] Question: Insights on Aramco's rig contracting plans? - Management noted that there are no discussions about additional rig suspensions in Saudi Arabia and that discussions for extensions are constructive [90] Question: How are operating costs managed for idle rigs? - Management explained that costs for warm stacked rigs can be reduced significantly, with a ramp-down and ramp-up period of about three months [111]

Company Overview - Valaris Limited owns 52 rigs, including 13 drillships and 34 jackup rigs, and has a 50% equity interest in ARO, which owns an additional nine rigs[18]. - As of December 31, 2024, Valaris had a global workforce of approximately 5,642 persons, with 4,130 excluding contractors, representing 74 nationalities across 22 locations[49]. - The company has a diverse drilling fleet, including 12 drillships capable of drilling in water depths of up to 12,000 feet, with several rigs currently under contract[185]. - The company owns a fleet of 52 rigs, including 13 drillships, 4 dynamically positioned semisubmersible rigs, 1 moored semisubmersible rig, and 34 jackup rigs as of February 20, 2025[211]. - The company has a 50% equity interest in ARO, a joint venture with Saudi Aramco, which owns an additional 9 rigs[211]. Financial Performance - The company’s five largest customers accounted for 49% of consolidated revenues in 2024, with BP plc alone contributing 17%[28]. - Revenues from non-U.S. operations represented 84% of total consolidated revenues in 2024, up from 78% in 2022[30]. - As of February 15, 2024, the company's contract backlog was approximately $3.9 billion, reflecting the remaining contractual terms multiplied by the applicable contractual day rate[79]. - The company has not paid or declared any dividends on its common shares due to limitations in its Indenture and Credit Agreement[199]. - The company has authorized a share repurchase program of up to $600 million for its outstanding common shares[202]. Market Conditions - Brent crude oil prices have been stable between $70 and $90 per barrel since late 2022, supporting investment in long-cycle offshore projects[21]. - Global demand for hydrocarbons continues to increase, with offshore production expected to play a crucial role in meeting energy needs[22]. - The five-year forward price of Brent crude oil remains above $65 per barrel, indicating profitability for nearly 90% of undeveloped offshore reserves[215]. - The outlook for the offshore drilling business remains positive despite a modest decline in demand since early 2024[22]. Operational Risks - Valaris' business is significantly affected by volatile oil and natural gas prices, impacting the level of offshore drilling activity[71]. - The company faces risks related to securing contracts on favorable terms, with potential declines in backlog revenue[67]. - A decline in oil and natural gas prices may lead customers to consider early termination of contracts, impacting future revenues[82]. - The company may face challenges in maintaining service and pricing levels due to customer consolidation and a shift towards renewable energy projects[87]. - The company may incur significant expenditures to maintain competitiveness in offshore drilling technology and compliance with regulations[96]. Sustainability and Compliance - The company is focused on sustainability, publishing an annual sustainability report aligned with TCFD and SASB standards[44]. - Increased scrutiny regarding sustainability practices may lead to additional costs or risks for the company[72]. - The company has adopted policies against corruption, bribery, and modern slavery, ensuring compliance and ethical operations[48]. - Compliance with environmental laws can be costly, and any violations could lead to significant liabilities, although no material adverse effects have been reported to date[141]. - The SEC has adopted a final rule for mandatory climate change reporting, which may increase monitoring and reporting costs[165]. Workforce and Training - Women comprised 32% of onshore employees and 1% of offshore employees as of December 31, 2024[49]. - In 2024, approximately 338 personnel attended the Building Organizational Leadership (BOLD) training program aimed at enhancing leadership skills among offshore supervisors[52]. - All employees were assigned "Workplace Harassment" training in 2024 to support a more inclusive workforce[53]. - The company emphasizes a safety-first approach, with policies designed to prevent harm during operations and effective safeguards in place[54]. Cybersecurity - The company has implemented a comprehensive cybersecurity program that includes administrative, technical, and physical safeguards to manage risks from cybersecurity threats[173]. - All employees are required to complete an annual cybersecurity training program, supplemented by additional training and simulations throughout the year[175]. - The company's cybersecurity risks are integrated into the enterprise risk management process, with a risk register reviewed quarterly by the Executive Management Committee and the board of directors[177]. - The Audit Committee oversees the IT and cybersecurity program, receiving quarterly reports on incidents, risks, and organizational readiness[178]. - No material cybersecurity incidents have been reported as of the date of the annual report, but future risks remain a concern[183]. Legal and Regulatory Matters - The company is involved in various litigation matters that could materially affect its financial position and operating results[149]. - The company may face increased climate-related litigation risks, which could adversely impact demand for its services in the oil and natural gas industry[150]. - The company is subject to increasing regulatory complexity that could adversely impact costs and reduce demand for offshore drilling services[138]. - The IRS may challenge the company's classification as a foreign corporation, which could result in significant adverse tax consequences[142]. - The OECD's Pillar Two initiative could increase the company's future tax obligations due to a proposed 15% global minimum tax[143].

Financial Performance - Net income increased to $131 million in Q4 2024, up from $63 million in Q3 2024, including a tax benefit of $7 million[6] - Net income attributable to Valaris for Q4 2024 was $133.7 million, compared to $64.6 million in Q3 2024, representing a 106.5% increase[23] - Operating income for Q4 2024 was $119.2 million, up from $94.9 million in Q3 2024, indicating a 25.5% increase[23] - Net income for the year ended December 31, 2024, was $369.8 million, a decrease of 57.3% compared to $866.8 million in 2023[27] - Net income for the same period was $15.1 million, a significant recovery from a net loss of $54.0 million in the previous quarter[71] - Valaris reported a net income of $130.6 million for the three months ended December 31, 2024, compared to $62.9 million for the previous quarter[85] Revenue and Utilization - Total operating revenues for Q4 2024 were $584.4 million, a decrease of 9.1% from $643.1 million in Q3 2024[23] - Revenues exclusive of reimbursable items decreased to $548 million in Q4 2024 from $600 million in Q3 2024, primarily due to lower utilization for the floater fleet[7] - Average daily revenue for drillships increased to $405,000 in Q4 2024, up from $307,000 in Q4 2023, representing a 32% increase year-over-year[47] - Total fleet utilization decreased to 58% in Q4 2024 from 60% in Q4 2023, while jackup utilization remained stable at 60%[50] - Total active fleet remains stable at 31 rigs as of December 31, 2024, compared to 33 rigs a year earlier, indicating a decrease of 6.1% year-over-year[68] Cash Flow and Expenditures - Generated $125 million of cash from operating activities and $13 million of Free Cash Flow in Q4 2024[8] - Cash and cash equivalents decreased to $381 million as of December 31, 2024, from $392 million as of September 30, 2024[11] - Capital expenditures increased to $112 million in Q4 2024 from $82 million in Q3 2024, primarily due to higher rig upgrade expenditures[11] - Net cash provided by operating activities increased to $355.4 million in 2024 from $267.5 million in 2023, representing a growth of 32.8%[27] - Free cash flow for the three months ended December 31, 2024, was $12.9 million, a decrease from $111.1 million in the previous quarter[93] Backlog and Contracts - Secured approximately $120 million of contract backlog, including a multi-year contract for jackup VALARIS Stavanger in the North Sea[8] - The total contract backlog as of February 18, 2025, was $3.6085 billion, a decrease from $4.1048 billion reported on October 30, 2024, representing a decline of 12.1%[44] - Contract backlog for owned rigs was $1,124.9 million as of February 18, 2025, down from $1,475.4 million a year earlier, representing a decline of 23.7%[73] Adjusted EBITDA and Performance Metrics - Adjusted EBITDA decreased to $142 million in Q4 2024 from $150 million in Q3 2024, primarily due to lower utilization for the floater fleet[6] - Adjusted EBITDA for the total fleet was $207.2 million for the three months ended December 31, 2024, compared to $216.6 million for the previous quarter, reflecting a decrease of 6.4%[35] - Adjusted EBITDA for HD Harsh Environment Jackups reached $50.0 million, a significant increase from $31.4 million in the prior quarter, reflecting a 59.4% growth[92] - Adjusted EBITDA for HD & SD Modern Jackups was $19.5 million, down from $20.0 million in the previous quarter, indicating a decrease of 2.5%[92] Assets and Liabilities - Total current assets decreased to $1,078.7 million as of December 31, 2024, from $1,111.5 million as of September 30, 2024[25] - Long-term debt remained stable at $1,082.7 million as of December 31, 2024, compared to $1,081.8 million as of September 30, 2024[25] - Total liabilities decreased to $2,175.5 million as of December 31, 2024, from $2,209.6 million as of September 30, 2024[25] - The company reported equity of $2,244.3 million as of December 31, 2024, an increase from $2,123.8 million as of September 30, 2024[25] Market Outlook and Challenges - The company anticipates continued volatility in the offshore drilling market, influenced by commodity price fluctuations and customer demand[20] - The contracting outlook for 2026 and beyond remains strong for high-specification assets, with a focus on securing long-term programs for active rigs[4] Segment Performance - The JACKUPS segment reported an Adjusted EBITDA of $75.5 million for Q4 2024, compared to $57.0 million in the previous quarter[87] - The total revenue from jackups was $75.5 million for the three months ended December 31, 2024, compared to $57.0 million in the previous quarter, an increase of 32.5%[41] - The total revenue from drillships was $108.4 million for the three months ended December 31, 2024, compared to $130.9 million in the previous quarter, a decrease of 17.2%[35]

Core Insights - ExxonMobil Egypt has made a significant gas discovery in the western Mediterranean Sea, specifically through the Nefertari-1 well in the North Marakia Block [1][2] - The well was drilled at a water depth of 1,720 meters and reached a final depth of 2,700 meters, indicating a relatively shallow depth that facilitates rapid production [2] - The discovery is expected to enhance Egypt's energy sector and attract further investments in the region [5] Exploration and Technology - The exploration was conducted in partnership with QatarEnergy, utilizing advanced seismic data processing and modern drilling technologies [3] - The Valaris DS-9 drillship, capable of operating in water depths up to 12,000 feet, was instrumental in the discovery and has also been used for recent oil discoveries in Angola [3] Egypt's Energy Strategy - Egypt is actively expanding its hydrocarbon exploration activities, with plans to sign 15 new exploration agreements by the end of 2025 and commitments to drill at least 46 wells [4] - ExxonMobil has secured a six-month extension for the Valaris DS-9 drillship starting January 2025, indicating a long-term commitment to Mediterranean exploration [4]

Industry Overview - The Zacks Oil and Gas - Drilling industry includes companies that provide rigs and services for oil and gas exploration and development, with operations both onshore and offshore [2] - Drilling for hydrocarbons is capital-intensive and technically challenging, with future performance largely dependent on contracting activity rather than oil or gas prices [2] - Offshore drilling companies exhibit higher volatility compared to onshore firms, with their share prices more closely correlated to oil prices [2] Current Challenges - The U.S. rig count has decreased by approximately 18% over the past year, reversing post-pandemic recovery gains and raising concerns about future contracts and operational performance [3][4] - Excess capacity and intense pricing competition are squeezing profit margins, limiting revenue growth and challenging companies' profitability [4] - The industry's earnings estimates for 2025 have declined by 57.1% over the past year, indicating a negative outlook for earnings growth [9] Global Opportunities - International demand for drilling services is experiencing a significant increase, with the highest levels of activity in over a decade, driven by rising tendering and rig awards [5] - This growth in international operations is expected to enhance revenues and contribute to long-term sector stability [5] Regional Dynamics - Saudi Arabia's decision to freeze its Maximum Sustainable Capacity at 12 million barrels per day and halt expansion plans has raised concerns about future revenue opportunities from Middle Eastern projects [6] Industry Performance - The Zacks Oil and Gas - Drilling industry has underperformed compared to the broader Zacks Oil - Energy sector and the S&P 500, with a decline of 29% over the past year [11] - The industry's current Zacks Industry Rank is 225, placing it in the bottom 9% of 248 Zacks industries, indicating challenging near-term prospects [7][8] Valuation Metrics - The industry is currently trading at an EV/EBITDA ratio of 7.52X, significantly lower than the S&P 500's 18.36X but above the sector's 3.47X [14] - Over the past five years, the industry's EV/EBITDA has ranged from a low of 7.16X to a high of 24.81X, with a median of 14.66X [14] Notable Companies - **Valaris Limited**: Holds a diverse fleet of rigs and has a market capitalization of $3.2 billion, with a projected earnings growth of 16.7% for 2025 [17] - **Transocean**: Known for its modern fleet and focus on ultra-deepwater drilling, with a market capitalization of $3.3 billion [20] - **Patterson-UTI Energy**: Benefits from advanced rig technology and strategic acquisitions, with a market capitalization of $3.2 billion [23]

Company Overview - Valaris Limited (NYSE: VAL) is the largest offshore drilling company, originating from the former Ensco, which merged with Rowan Companies in 2019 and rebranded as Valaris [1] Leadership and Expertise - Oriol Madaula is highlighted as an experienced actuary with a strong interest in value investing, particularly in the shipping sector, and has a practical approach to the financial world [1] Investment Strategy - The company employs a value investing approach, focusing on both long and short positions, and utilizes options for hedging purposes to optimize investment returns [1]

Financial Data and Key Metrics Changes - Revenue for Q3 2024 was $643 million, an increase from $610 million in the previous quarter [49] - Adjusted EBITDA rose to $150 million from $139 million in the prior quarter, driven by strong operational performance [49][50] - Free cash flow improved to $111 million, with $100 million of shares repurchased during the quarter [10][52] Business Line Data and Key Metrics Changes - Fleet-wide revenue efficiency was 98%, marking the third consecutive quarter of at least 97% efficiency [11] - The jack-up market remains healthy with contracted rig counts and utilization stable, with marketed utilization for the global jack-up fleet at 93% [25][29] Market Data and Key Metrics Changes - Global demand for hydrocarbons continues to rise, with deepwater production expected to play a significant role [17] - Average day rates for seventh-generation drillships increased to approximately $500,000 in Q3 2024 [22] - Marketed utilization for the global jack-up fleet is currently 93%, with day rates in the North Sea in the mid-100,000s [25][29] Company Strategy and Development Direction - The company is focused on securing attractive long-term contracts and managing its fleet prudently to support earnings and cash flow growth [9][60] - There is a robust pipeline of future opportunities in 2026 and beyond, despite some customer demand being deferred [9][60] - The company is committed to returning all future free cash flow to shareholders unless better opportunities arise [10][61] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strength and duration of the current upcycle, despite some customer demand being deferred [9][60] - The company noted that while there are headwinds due to equipment availability and regulatory delays, projects are being delayed rather than canceled [20] - Management highlighted the importance of deepwater production in meeting global energy needs and the compelling economics of offshore projects [17][93] Other Important Information - The company received the Safety Leadership Award for its restricted zone analysis tool, enhancing safety in offshore operations [14] - The company has repurchased a total of $300 million in shares since the program began, with $300 million remaining under the authorization [52] Q&A Session Summary Question: Expectations on day rates trajectory - Management indicated that day rates may see some variety, with customers willing to pay solid rates for high-specification assets [64][65] Question: Customer demand deferral details - Management clarified that deferrals are primarily in deepwater projects, with delays in FPSO availability impacting timelines [66][67] Question: Cost reduction during warm stacking - Management explained that costs can be reduced to around $60,000 per day during warm stacking, with a ramp-up period of about 90 days to return to work [71][72] Question: M&A opportunities and consolidation - Management believes there is room for consolidation in the offshore drilling market but emphasized that Valaris is not compelled to pursue M&A for scale [79][80] Question: Timeline for activating sidelined assets - Management stated that the activation of sidelined assets will depend on market opportunities, with a focus on keeping the active fleet utilized [82][84]

Financial Performance - Net income for the three months ended September 30, 2024, was $62.9 million, compared to $17.0 million for the same period in 2023, representing a 269% increase[13] - For the nine months ended September 30, 2024, net income was $239.2 million, significantly up from $38.3 million in 2023, marking a 524% increase[13] - Comprehensive income attributable to Valaris for the three months ended September 30, 2024, was $64.7 million, compared to $12.9 million in 2023, an increase of 400%[13] - The company reported net cash provided by operating activities of $230.8 million for the nine months ended September 30, 2024, compared to $170.8 million for the same period in 2023, an increase of 35%[19] - The Company reported basic earnings per share of $64.6 million for the three months ended September 30, 2024, compared to $12.9 million for the same period in 2023[67] - Operating income for Q3 2024 was $94.9 million, compared to $16.6 million for Q3 2023, reflecting improved performance across segments[100] - Operating income for the nine months ended September 30, 2024, was $233.1 million, compared to $15.2 million in the same period of 2023, reflecting a significant improvement[102][103] Assets and Liabilities - Total current liabilities decreased to $692.3 million as of September 30, 2024, down from $744.3 million at the end of 2023, a reduction of approximately 7.4%[15] - Cash and cash equivalents decreased to $379.3 million as of September 30, 2024, from $620.5 million at the end of 2023, a decline of 39%[16] - Total liabilities decreased to $2,209.6 million as of September 30, 2024, compared to $2,325.2 million at the end of 2023, a decrease of approximately 5%[15] - Retained earnings increased to $1,265.2 million as of September 30, 2024, from $1,025.5 million at the end of 2023, an increase of 23.4%[17] - Total Valaris shareholders' equity rose to $2,114.9 million as of September 30, 2024, compared to $1,987.6 million at the end of 2023, an increase of 6.4%[17] - Other liabilities decreased to $404.4 million as of September 30, 2024, from $471.7 million at December 31, 2023[108] Revenue and Expenses - For Q3 2024, consolidated total revenues were $643.1 million, with segment revenues of $389.0 million from Floaters, $213.7 million from Jackups, and $113.7 million from ARO[99] - Revenues for the nine months ended September 30, 2024, totaled $1,778.2 million, a 37% increase from $1,300.4 million in the same period of 2023[102][103] - Contract drilling expenses (exclusive of depreciation) increased to $1,345.6 million in 2024 from $1,141.6 million in 2023, indicating a rise of approximately 18%[102][103] - The company reported a loss on impairment of $28.4 million for the nine months ended September 30, 2024[102] ARO Performance - ARO's revenues for the three months ended September 30, 2024, were $113.7 million, compared to $121.5 million for the same period in 2023[46] - ARO reported a net loss of $54.0 million for the three months ended September 30, 2024, compared to a net loss of $1.3 million for the same period in 2023[46] - The equity in losses of ARO for the three months ended September 30, 2024, was $(23.8) million, compared to $2.4 million for the same period in 2023[50] - ARO is expected to purchase 20 newbuild jackup rigs over an approximate 10-year period, with the first two already delivered and operational[43] Shareholder Activities - During Q3 2024, the company repurchased 1.8 million shares at an aggregate cost of approximately $100.0 million, averaging $57.02 per share[82] - The company had approximately $300.0 million available for share repurchases under the authorized Share Repurchase Program[81] - For the nine months ended September 30, 2023, the company repurchased 2.3 million shares at an aggregate cost of approximately $150.0 million, averaging $66.24 per share[82] Tax and Regulatory Matters - The company utilized a discrete effective tax rate method for calculating income taxes for the three and nine months ended September 30, 2024[83] - Discrete income tax expense for Q3 2024 was $0.5 million, with a tax benefit of $70.0 million for the nine months ended September 30, 2024, primarily due to changes in unrecognized tax benefits and prior period tax matters[84] - Luxembourg tax assessments resulted in a revised aggregate tax assessment of approximately €60.0 million (about $65.0 million), with a tax benefit of approximately $65.0 million recognized in Q2 2024 after a favorable decision from tax authorities[87] - The Organization for Economic Co-operation and Development introduced a new global minimum tax of 15% effective January 1, 2024, with no significant impact on financial statements for the three and nine months ended September 30, 2024[88] Geographic Revenue Distribution - Consolidated revenues for Brazil reached $380.5 million for the nine months ended September 30, 2024, compared to $117.4 million for the same period in 2023[116] - The U.S. Gulf of Mexico generated $273.7 million in revenues for the nine months ended September 30, 2024, an increase from $253.3 million in the prior year[116] - The United Kingdom contributed $273.1 million in revenues for the nine months ended September 30, 2024, compared to $192.6 million in the same period of 2023[116] - Australia reported revenues of $195.8 million for the nine months ended September 30, 2024, up from $148.3 million in the previous year[116] - Angola's revenues were $141.3 million for the nine months ended September 30, 2024, compared to $160.1 million in the same period of 2023[116] - Other countries collectively generated $513.8 million in revenues for the nine months ended September 30, 2024, compared to $428.7 million in the prior year[116] - The geographic concentration indicates that Brazil, U.S. Gulf of Mexico, and the United Kingdom are significant contributors to the overall revenue, each exceeding 10% of total revenues[116]