Energy Select Sector

Russell 2000

The Balanced Allocator

Comparable Companies - VAL

The report captures one discretionary insider purchase and one sale. Institutional ownership data shows BlackRock, Inc. as the largest holder with an 11.1% stake. Short interest data indicates a settlement date of 2025-11-28 with short interest at 13.6% of float and 9.5 days to cover.

PRESIDENT & CEO

SVP - COO

The filing amends and supplements previous Schedule 13D filings regarding the ownership of Common Shares of Valaris Limited. It reports shared voting and dispositive power over 7,501,913 shares.

Anton Dibowitz

Christopher T. Weber

Gilles Luca

Matthew Lyne

Davor Vukadin

Elizabeth D. Leykum

Dick Fagerstal

Joseph Goldschmid

Catherine J. Hughes

Kristian Johansen

Anton Dibowitz has demonstrated leadership in the offshore drilling industry, particularly in navigating complex financial challenges. His tenure as CEO of Seadrill Partners LLC was marked by a significant debt restructuring that enabled the company to emerge from Chapter 11, showcasing his ability to manage distressed assets and secure financial stability. Prior to this, at Seadrill Limited, he was instrumental in commercial strategies and fleet optimization during a period of industry volatility. While specific quantifiable performance metrics for his earlier roles are not readily available in public records, his involvement in securing key contracts and managing a large fleet indicates a focus on operational and commercial execution. His public persona reflects a leader focused on strategic resilience and financial health in a cyclical industry.

Restructuring of Seadrill Partners LLC debt

President and Chief Executive Officer

Christopher T. Weber's career demonstrates a strong background in financial leadership and accounting within the offshore drilling industry. His tenure at Ensco plc, prior to its merger with Rowan to form Valaris, involved critical responsibilities in financial reporting and accounting oversight. While specific quantifiable performance metrics for his individual contributions are not publicly detailed, his consistent progression in senior finance roles underscores his proven capability in managing complex financial operations and ensuring compliance. His expertise is particularly valuable in navigating the financial intricacies of large-scale corporate transactions, such as the merger that formed Valaris.

Senior Vice President and Chief Financial Officer

Gilles Luca brings over 25 years of deep operational experience in the offshore drilling industry to his current role. His extensive tenure at Ensco plc, where he served in various senior operational capacities, highlights his proven ability to manage and optimize large-scale drilling fleets globally. While specific quantifiable performance metrics for his individual contributions are not readily available in public records, his long-standing career in operations underscores a consistent focus on driving efficiency, maintaining high safety standards, and ensuring the effective deployment of drilling assets. His expertise is critical in overseeing the complex logistical and technical challenges inherent in offshore drilling operations.

Senior Vice President and Chief Operating Officer

Matthew Lyne's career is characterized by over two decades of experience in the commercial aspects of the offshore drilling industry. His prior roles at Ensco plc, where he led commercial and marketing efforts, demonstrate a proven track record in securing and managing significant drilling contracts across diverse international regions. While specific quantifiable metrics such as the exact value of contracts secured under his direct leadership are not individually detailed in public records, his consistent progression in senior commercial roles highlights his expertise in market strategy, client relations, and backlog development. His contributions are vital in driving revenue generation and market positioning for offshore drilling companies.

Senior Vice President and Chief Commercial Officer

Davor Vukadin possesses a strong legal background with extensive experience in corporate governance and regulatory compliance within the offshore drilling industry. His tenure at Ensco plc, where he served as General Counsel, involved critical oversight of legal matters, ensuring adherence to complex international regulations and corporate standards. While the nature of legal roles does not typically yield quantifiable performance metrics in the same way as operational or commercial positions, his consistent advancement and long-standing presence in senior legal capacities underscore his proven ability to manage legal risks, uphold corporate integrity, and provide essential legal counsel for large, publicly traded companies in a highly regulated sector.

Senior Vice President, General Counsel and Secretary

Elizabeth D. Leykum's career is marked by over two decades of experience in investment management and private equity, culminating in her role as Chair of the Valaris Board. Her background as a founder of investment firms and a Vice President at ESL Investments demonstrates a deep understanding of capital markets and strategic value creation. During her board tenure at The Ensign Group, Inc., the company experienced notable growth and strong shareholder returns, reflecting effective strategic oversight. While specific individual performance metrics for her investment roles are not publicly available, her consistent involvement in high-level financial and governance capacities underscores her proven ability to contribute to strategic direction and capital allocation decisions for public and private entities.

Chair of the Board

Dick Fagerstal brings a wealth of experience in the maritime and energy services industries, notably as Chairman of the Board for Tidewater Inc. His leadership at Tidewater has been critical in guiding the company through a successful emergence from bankruptcy and subsequent strategic growth, including a significant acquisition that expanded its fleet and market presence. His prior role as Executive Chairman of Global Marine Group further underscores his strategic capabilities in specialized maritime services. While specific individual performance metrics for board roles are collective, his involvement in major corporate transformations and growth initiatives demonstrates a proven ability to drive strategic direction and oversee significant capital allocation events, contributing to long-term shareholder value.

Tidewater Inc. acquisition of Swire Pacific Offshore

Director

Joseph Goldschmid's professional history is deeply rooted in distressed investing and special situations, primarily through his roles at Oak Hill Advisors and Goldman Sachs. As a Managing Director at Oak Hill Advisors, he focuses on complex investment opportunities, demonstrating a keen ability to identify value in challenging financial environments. His prior experience in Goldman Sachs' Special Situations Group further solidifies his expertise in principal investing and restructuring. While specific quantifiable performance metrics for his individual investment contributions are not publicly disclosed due to the nature of private investment firms, his consistent roles in high-level distressed and special situations investing underscore a proven capability in sophisticated financial analysis, capital allocation, and strategic problem-solving for companies facing significant financial transitions.

Catherine J. Hughes brings over 30 years of executive leadership in the global oil and gas industry, with a strong focus on international operations and, more recently, sustainability governance. Her role as a non-executive director and Chair of the Sustainability Committee at Shell plc demonstrates her commitment to guiding major energy companies through the energy transition and enhancing environmental performance. Her prior executive roles at Nexen Inc., where she led international exploration and production, and her extensive career at Schlumberger, including as President of Schlumberger Canada Ltd., underscore her proven ability to manage complex global operations and drive strategic initiatives. While specific individual performance metrics are not always publicly detailed for such senior roles, her consistent progression and leadership in major industry players highlight her profound impact on operational excellence and strategic direction.

Kristian Johansen has a distinguished career in the energy and technology sectors, most notably as the Chief Executive Officer of TGS ASA since 2015. Under his leadership, TGS has demonstrated consistent revenue growth, strategic expansion into new energy data solutions, and positive share price performance, reflecting his ability to drive innovation and market diversification. His prior role as CFO of TGS further highlights his strong financial acumen and strategic planning capabilities. As a board member of International Seaways, he contributes to the strategic oversight of another significant player in the maritime industry. His proven track record in executive leadership, financial management, and strategic growth underscores his valuable contributions to the boards he serves, particularly in guiding companies through evolving market landscapes and capital allocation decisions.

Strategic investments in multi-client seismic data and new energy data solutions

Noble is a leading offshore drilling contractor providing contract drilling services with a global fleet of mobile offshore drilling units, focusing on a high-specification fleet of floating and jackup rigs.

Single reportable segment reflecting the management of the contract drilling business, which includes the operation of the company's offshore rig fleet.

Transocean is a leading international provider of offshore contract drilling services for oil and gas wells, operating a fleet of high-specification floaters and jackups.

Single reportable segment reflecting the management of the contract drilling business.

Tidewater provides offshore marine support vessels and services to the energy industry, including towing, anchor handling, supply transport, and subsea support.

Operations in the U.S. Gulf of Mexico, Brazil, and other American markets.

Operations in the North Sea, West Africa, and other European markets.

Operations in Australia, Asia, and the Middle East.

Helmerich & Payne is a performance-driven drilling solutions and technologies company, providing contract drilling and technology solutions to oil and gas exploration companies in North America and internationally.

Primarily located in Texas and other U.S. onshore basins.

Operations in major international oil and gas markets, primarily the Middle East and Latin America.

Asset-light offshore management contracts in the U.S. Gulf of Mexico, North Sea, and other international waters.

The company owns a fleet of 56 offshore drilling rigs (11 drillships, 4 dynamically positioned semisubmersible rigs, 1 moored semisubmersible rig, and 40 jackup rigs). It owns offices and facilities in the U.S. (Louisiana) and Brazil, and leases various office, warehouse, and storage facilities worldwide, including corporate offices in Houston, Texas.

Valaris is led by a management team with exceptional, hands-on experience navigating the extreme volatility of the offshore drilling cycle. CEO Anton Dibowitz's track record in restructuring Seadrill Partners provides a high degree of confidence in his ability to manage through industry troughs. The board is appropriately staffed with industry veterans who understand the cyclical dynamics. Financially, the team has executed a disciplined capital return program funded by strong cash flow, but their buyback timing has been pro-cyclical, buying at higher prices in 2023 and early 2024. While the strategic patience to avoid low-margin 'gap-fill' work is the correct long-term decision, it has created a near-term 'white space' in the 2025 schedule, leading to a sharp projected drop in EBITDA. This creates a tension between long-term value preservation and short-term earnings visibility. Overall, the team is well-suited to manage the inherent risks of the business model, but their capital allocation execution prevents a top-tier score.

The Company is subject to various environmental laws and regulations, including those related to GHG emissions and climate change. Regulatory risks include the EPA's final rule targeting methane and other emission reductions, the EU's Corporate Sustainability Reporting Directive (applicable as early as 2026 for certain subsidiaries), and potential SEC mandatory climate change reporting rules. Physical risks include potential damage to drilling rigs from severe weather patterns and changing weather patterns. Legal risks include increased possibility of lawsuits or investigations brought by public and private entities against oil and natural gas companies in connection with their GHG emissions. In August 2024, a U.S. District Court held that a 2020 biological opinion regarding the Gulf of Mexico violated the Endangered Species Act, which could halt offshore oil and gas activities in the U.S. Gulf of Mexico on May 21, 2025, unless a solution is reached.

As of December 31, 2024, the Company had 4,130 full-time employees. Women comprised 32% of onshore employees and 1% of offshore employees. The Company does not disclose aggregate turnover rates in the provided text.

The Company provides offshore contract drilling services. The narrative focuses on the risks associated with the energy transition, including reduced demand for services due to customers transitioning to renewable energy projects and changes in consumer preferences for alternative fuels.

The Company is subject to risks related to supplier capacity constraints and price increases. The Company is also subject to potential legislative or regulatory action impacting working conditions. The Company is subject to the Economic Substance Act in Bermuda, which may require in-scope entities to be directed and managed in Bermuda, have adequate employees and expenditure in Bermuda, and maintain physical offices in Bermuda.

This narrative is built upon a strong operational foundation with 32% revenue growth in FY2024 to $2.2 billion, but is challenged by a significant 'white space' in the 2025 schedule, which is projected to cause a sharp decline in Q4 2025 EBITDA to $70-90 million.

Management's stated strategy for CapEx is focused on 'maintenance and upgrade projects, including contract-specific capital expenditures' (P14 Innovation Dossier). The Q1 2025 transcript clarifies that the CapEx increase for that year was due to 'pulled-forward shipyard days for ARO leased rigs.' There is no mention of significant R&D or new technology development; investment is purely defensive or tied to securing specific contracts.

The asset base is high-quality, consisting of 56 rigs including 11 drillships. However, the company has a history of impairments. The P14 Innovation Dossier notes a $34.5 million impairment on VALARIS DS-11 in June 2022. The P8 10-K does not list impairments for FY2024, but the auditor (KPMG) identified income tax positions as a Critical Audit Matter, which is a significant judgment-related risk that could impact asset values (deferred tax assets).

The company's reinvestment is focused on maintaining its existing fleet. The negative IncrROIC is likely a function of the 'white space' in 2025; the company has invested in reactivating rigs (e.g., DS-7, DS-8) and preparing them for contracts, but the revenue and profit from these investments have not yet fully materialized due to the timing of contract start dates, leading to a temporary but severe drop in marginal returns.

Senior Secured Revolving Credit Agreement

Price / Tangible Book Value

EV / Normalized EBITDA

EV / EBITDA

EV/EBITDA

P/Tangible Book Value

EV/EBITDA (Normalized)

Founder of Serenade Capital LLC. Former founding principal at HEG Capital LLC and Vice President at Rand Group. Over 20 years of investment management and private equity experience. Served as Vice President at ESL Investments and held positions at Oaktree Capital Management.

President and CEO of Valaris. Former interim President and CEO. Over 20 years of drilling industry experience. Previously held various positions at Seadrill, Transocean, and Ernst & Young LLP. Certified Public Accountant.

Former Executive Chairman of Global Marine Group. Former Chairman of Tidewater Inc. Senior banker at DNB ASA. Served as an officer in the Swedish Special Forces. Holds NACD Cybersecurity Certification.

Managing Director at Oak Hill Advisors, L.P. focusing on stressed, distressed, and special situations investments. Formerly at Goldman Sachs in the Special Situations Group and Restructuring Group.

Non-executive director of Shell plc (since 2017), Chair of its Sustainability Committee. Former Executive Vice President, International at Nexen Inc. Over 30 years of experience in the oil and gas industry. Former President of Schlumberger Canada Ltd.

Chief Executive Officer of TGS ASA. Former Chief Operating Officer and CFO of TGS. Over 20 years of executive experience in construction, technology, and energy industries. Board member of International Seaways.

Christopher Weber

Melissa Barron

CEO: 6x base salary. Senior VPs: 2x base salary. Vice Presidents: 1x base salary. Must be met within five years of appointment.

Valaris Limited is a global offshore contract drilling company. It is a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. The company owns the world's largest offshore drilling rig fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet.

Consists of drillships and semisubmersible rigs, which can generally drill in water depths up to 12,000 feet and 8,500 feet, respectively. These rigs are generally considered more advanced, typically earn higher day rates, and require a larger crew to operate.

Consists of jackup rigs, which generally operate in water depths of 400 feet or less. Jackups have a simpler design and operate in shallow waters, typically earning lower day rates and requiring a smaller crew to operate.

Consists of the full operations of ARO, a 50/50 unconsolidated joint venture that operates jackup drilling rigs in Saudi Arabia for Saudi Aramco. The segment's operating results are not included in the company's consolidated results but are deducted under reconciling items and replaced with the company's equity in earnings of ARO.

Consists of management services on rigs owned by third parties and the activities associated with the company's arrangements with ARO under bareboat charter agreements.

Held WACC (10.4%) and Terminal Growth (2.5%) constant, and solved for the sustainable operating margin required to justify the current Enterprise Value of $3.88B.

Balance Sheet - Supplemental

Balance Sheet

Cash Flow Statement - Supplemental

Cash Flow Statement

Income Statement - Supplemental

Income Statement

Ratios

Valuation

Historical Ratios & Multiples - VAL

The offshore drilling industry is experiencing steady growth, with a projected CAGR of 5.02% through 2033, supported by deepwater exploration needs. While the industry is in a peak capital cycle phase with capex-to-depreciation at 250%, supply discipline remains high among the major players, preventing the destructive oversupply seen in previous cycles.

Valaris is highly relevant for analysis at this moment as it enters the projected Q4 2025 earnings trough, providing a potential 'maximum pessimism' entry point ahead of the 2026 contract commencements.

The announcement of long-term contract awards for the four drillships with near-term availability (DS-12, DS-15, DS-16, DS-18) for 2026 start dates.

This would directly address market concerns regarding the 2025 'white space' and validate our variant perception of a strong 2026 recovery.

A decisive turn in commodity prices or a significant increase in offshore exploration spending by major oil companies.

This would provide the macroeconomic tailwind necessary to drive day rates higher and accelerate the reactivation of cold-stacked assets.

A 'lower-for-longer' cyclical downturn where oil prices remain volatile and exploration spending fails to inflect in 2026.

This would extend the company's idle rig periods, leading to persistent margin compression and potentially requiring the company to accept low-return contracts to maintain liquidity.

Execution risk associated with the reactivation and mobilization of rigs for new 2026 contracts.

Delays or cost overruns in shipyard projects could defer revenue and erode the expected profitability of the $4.5 billion backlog.

Valaris Limited's current directly-owned offshore drilling rig fleet consists of 48 rigs. This includes 13 drillships, 2 semisubmersible rigs (one dynamically positioned and one moored), and 33 jackup rigs. This count reflects the 52 rigs reported as of February 20, 2025, in the company's 10-K filing, adjusted for subsequent disposals mentioned in the P7 Transcript Analysis. Specifically, three semisubmersibles (VALARIS DPS-3, DPS-5, DPS-6) were sold for recycling in Q1/Q2 2025, and two jackup rigs (VALARIS 75 and VALARIS 247) were sold in Q4 2024 and Q3 2025, respectively. The fleet includes high-specification 7th-generation drillships, with DS-13 and DS-14 being recent newbuild acquisitions in FY2023 Q4.

Sale of 27-year-old VALARIS 247 (jackup rig) by Valaris Limited.

Sale for recycling of three benign environment semisubmersibles (VALARIS DPS-3, DPS-5, DPS-6) by Valaris Limited.

Cash & Equivalents

Accounts Receivable

Valaris Limited operates primarily as an offshore contract drilling services provider, a business model that inherently requires minimal to no physical inventory for resale. This is consistently reflected in the company's financial statements, which report zero inventory [cite: 1.5 VAL - Balance Sheet - 2024-12-31.json, 1.2 VAL - Metrics - TTM.json, 15]. Consequently, the inventory turnover is not applicable, and the health assessment is excellent due to the complete absence of inventory-related risks such as obsolescence, spoilage, or valuation complexities. In a liquidation scenario, the orderly liquidation value for inventory is therefore assessed as $0 across all cases (base, high, and low), with a 0.0% blended recovery rate, as there is no material inventory asset base to be monetized. This logic is robust and directly supported by the company's reported financial data.

Inventory

Tax Assets

Other Current Assets

**Primary Transaction Comps:**
- Valaris purchased newbuild drillships VALARIS DS-13 and DS-14 for an aggregate of approximately $337 million, equating to $168.5 million per rig. These are high-specification, 7th-generation drillships. ($168.5 million/drillship)
- Valaris agreed to sell the 27-year-old jackup VALARIS 247 to BW Energy for approximately $108 million. ($108 million/jackup)
- Valaris sold three retired semi-submersibles (VALARIS DPS-3, DPS-5, DPS-6) for recycling for a total of $10 million, implying approximately $3.33 million per rig [cite: P7_0_VAL_Transcript_Analysis_Universal.json, 12, 14, 20, 22]. ($3.33 million/semisubmersible (scrap value))
- Valaris sold the 25-year-old jackup VALARIS 75, which had been out of service for five years, for $24 million. ($24 million/jackup (distressed/older stacked rig))

**Replacement/Scrap Data:**
Market data indicates that newbuild 7th-generation drillships can cost between $600 million and $800 million, while modern used drillships might fetch $200 million to $300 million. Newbuild jackup rigs range from $180 million to $250 million, with modern used ones in the $80 million to $150 million range. Functional used semi-submersibles can range from $30 million to $75 million, depending on specifications and age.

Valaris Limited's current tangible asset base for valuation consists of its offshore drilling rig fleet. As of February 20, 2025, the company owned 52 rigs, comprising 13 drillships, 4 dynamically positioned semisubmersible rigs, 1 moored semisubmersible rig, and 34 jackup rigs [cite: 6, 10, 11 in RAG 3]. However, subsequent to this date, Valaris announced the sale of the jackup VALARIS 247 for $108 million, expected to close in the second half of 2025. Additionally, three semi-submersibles (VALARIS DPS-3, DPS-5, and DPS-6) were sold for recycling in Q1/Q2 2025 for a total of $10 million [cite: P7_0_VAL_Transcript_Analysis_Universal.json, 12, 14, 20, 22]. The Valaris website confirms the current fleet includes two semisubmersibles (one dynamically positioned and one moored). Therefore, the updated asset base for this valuation is 13 drillships, 2 semisubmersible rigs, and 33 jackup rigs, totaling 48 rigs.

Net PP&E

Long-Term Inv.

Other Non-Current

Accounts Payable

Tax Liabilities

Other Current Liabilities

Non-Current Debt

Other Non-Current Liabilities

Valaris added $190 million in backlog through new contracts, including a $140 million drillship award in Egypt.

Valaris reported Q1 2025 results with $181 million Adjusted EBITDA despite a $39 million net loss.

Unavailable

Valaris reported Q2 2024 results with net income of $151 million and secured a multi-year contract for drillship VALARIS DS-17.

Earnings Report: EPS Surprise +110.3%, Revenue Surprise -0.3%

Valaris published Fleet Status Report with new contracts and backlog updates.

Catherine J. Hughes appointed to Valaris Board of Directors.

Valaris reported new contracts and operational suspension in Fleet Status Report.

Valaris announced second quarter 2022 results highlighting strong operational performance and new contract awards.

Valaris announced new contracts and extensions for drillships and jackups, including reactivation of VALARIS DS-17 for Equinor.

Valaris held 2022 Annual General Meeting with director elections and proposal approvals.

Valaris updated Fleet Status Report with new contracts and disclosure changes.

Anton Dibowitz appointed as permanent President and CEO.

Valaris published Fleet Status Report with contract awards and rig retirements.

Valaris price target raised to $50 from $43 at Barclays

Valaris plc (VAL) PT Raised to $65 at BTIG

Valaris price target raised to $51 from $49 at Susquehanna

Valaris downgraded to Equalweight from Overweight at Capital One

Valaris downgraded to Sell from Hold at SEB Equities

Valaris is navigating a temporary earnings visibility gap in 2025 due to a strategic decision to idle rigs rather than accept low-margin work. While the market is fixated on a projected 57% sequential decline in Q4 2025 EBITDA, our analysis suggests the company's $4.5 billion backlog and high-specification fleet position it for a significant cyclical inflection in 2026. At current levels, the stock offers a balanced risk/reward, but we await a more attractive entry point or clearer signs of the 2026 demand turn to move to a full position.

Executive Summary

Valaris is leveraging its high-specification fleet to secure a robust 2026 pipeline while maintaining financial discipline through the 2025 schedule gap. This strategy protects long-term pricing power and is supported by a conservative capital structure that allows for opportunistic share repurchases near cyclical troughs.<ul><li>Driver: The primary value driver is the anticipated 2026/2027 demand inflection for seventh-generation drillships, which currently command day rates in the mid-to-high $400,000 range.</li><li>Catalyst: The specific event that unlocks value is the conversion of the $4.5 billion contract backlog and the awarding of long-term contracts for the four drillships with near-term availability, such as VALARIS DS-15 and DS-18.</li><li>Protection: Downside protection is provided by a robust balance sheet with net leverage of 0.6x and a modern fleet trading at a 0.7x multiple to tangible book value, which is significantly below the historical 3-year average of 2.6x.</li></ul>Our variant perception is that the market is incorrectly extrapolating the 2025 'white space' and the associated near-term EBITDA drop into perpetuity, pricing the stock as a broken business. In contrast, our analysis of the $4.5 billion backlog and increasing exploration discussions suggests a cyclical inflection is imminent, creating a classic mean-reversion opportunity for patient investors who can look past the 2025 earnings cliff.This is a mid-term, cyclical trade designed to capture the upside from a trough valuation to a mid-cycle normalization, not a long-term compounder investment. The bet relies on the successful transition from the current idle period to a high-utilization environment in 2026.

Core Investment Rationale

Valaris operates as a global offshore contract driller, generating revenue primarily through day-rate contracts for its fleet of 56 rigs. The strategy is centered on maintaining a high-specification fleet, particularly seventh-generation drillships, to serve international, government-owned, and independent oil companies. Management prioritizes operational excellence, evidenced by a 95-99% fleet-wide revenue efficiency, and a disciplined approach to contract selection that avoids low-margin gap-fill work to preserve pricing power.The company's core assets are its 11 drillships and 40 jackup rigs, which provide significant operational leverage through a cycle. The fleet is high-graded, with 12 seventh-generation drillships out of 15 total floaters. These assets are critical for deepwater projects, which remain economically viable with breakeven prices below $50 per barrel, particularly in active regions like Africa and Brazil.The offshore drilling market is a rational oligopoly dominated by Valaris, Noble Corporation, and Transocean. While competition is intense, the industry has shown capacity discipline, with peers focusing on maintenance rather than speculative newbuilds. Valaris maintains a structural cost advantage, with an operating margin of 22.5% that is significantly higher than the Tier 1 peer median of 7.9%.The most important historical story is Valaris's navigation of the last full business cycle, including its 2021 emergence from Chapter 11 with a cleaned-up balance sheet. Since then, the company has focused on a fleet reactivation phase, bringing assets like VALARIS DS-7 and DS-8 online, which drove a 32% revenue increase in FY2024 to $2.2 billion. Management has transitioned from aggressive reactivation to a patient, opportunistic stance, prioritizing shareholder returns through $335.6 million in buybacks while managing the current cyclical trough.

Business & Situation

<ul><li>Bull Case: The bull case is driven by a structural undersupply of high-spec offshore rigs and a $4.5 billion backlog that provides high revenue visibility for 2026. Additionally, the company's low net leverage of 0.6x and its ability to generate $237 million in adjusted free cash flow in a single quarter (Q3 2025) provide significant firepower for continued share repurchases at attractive valuations.</li><li>Bear Case: The bear case centers on the extreme volatility of oil prices and the risk that the 2026 demand inflection is delayed, extending the current 'white space' and forcing further margin compression. Furthermore, the auditor's identification of income tax positions as a Critical Audit Matter and the recent $167 million tax-driven loss raise concerns about the reliability of reported net income and book value.</li></ul>The consensus view is that 2025 will be a 'lost year' for Valaris, as the company navigates a significant schedule gap that will depress earnings and cash flow. This narrative is reinforced by management's guidance for a sharp decline in Q4 2025 EBITDA to $70-90 million, down from $163 million in Q3, due to idle rigs and fewer operating days.This pessimism has kept the stock trading at a significant discount to its historical multiples, as investors wait for tangible evidence of the 2026 recovery.The offshore drilling industry is experiencing steady growth, with a projected CAGR of 5.02% through 2033, supported by deepwater exploration needs. While the industry is in a peak capital cycle phase with capex-to-depreciation at 250%, supply discipline remains high among the major players, preventing the destructive oversupply seen in previous cycles.Our differentiated view is that the market is extrapolating trough conditions indefinitely, while we see clear signs of a cyclical inflection. While the 2025 'white space' is a real near-term headwind, it is a strategic choice by management to protect day rates that have already troughed in the high $300,000 to low $400,000 range. Our analysis of the $4.5 billion backlog and the 30+ floater opportunities tracked for 2026/2027 suggests that the coming upcycle will be stronger and longer than the market currently prices into trough multiples of 0.7x tangible book.The debate between near-term earnings visibility and long-term asset value is currently tilted toward skepticism. However, the company's operational excellence and disciplined capital structure suggest that the 2026 inflection will provide a powerful catalyst for re-rating. We conclude that the current valuation offers a significant margin of safety for those willing to look through the 2025 volatility.Our analytical edge is a more granular analysis of industry supply-side discipline and the specific timing of Valaris's contract roll-overs, which suggests the 2026 recovery is more certain and potentially more lucrative than consensus estimates imply.

Core Thesis

CEO Anton Dibowitz has an exceptional track record in the offshore drilling industry, most notably leading Seadrill Partners through a restructuring that reduced debt by $2.8 billion. This experience in managing distressed cyclical assets is a critical asset for Valaris as it navigates the current market trough.Management has demonstrated adequate capital allocation skill, returning $335.6 million to shareholders via buybacks since 2021. However, execution has been somewhat pro-cyclical, with significant repurchases made at prices as high as $73.45, which currently show a negative trade ROI. Conversely, the recent $75 million in buybacks at $48.85 in Q3 2025 shows improved valuation sensitivity.Management maintains high credibility, providing candid assessments of the 2025 'white space' and consistently delivering 95-99% revenue efficiency, which has led to multiple EBITDA beats over the past eight quarters.<ul><li>Board Independence: 83% (5 of 6 directors)</li><li>Chairman/CEO Roles: Separate</li><li>Chairman Tenure: 4 Years</li><li>Insider Ownership: 0.82%</li><li>Shareholder Rights: Declassified Board, Majority Voting Standard</li></ul>The leadership and governance at Valaris are a net positive. The board is composed of industry veterans with deep expertise in cyclical turnarounds, and the management team has proven its ability to execute operationally and financially through the most challenging parts of the energy cycle.

Leadership & Governance

The valuation floor is derived from the historical trough Price-to-Tangible-Book multiple of 0.7x applied to the current tangible book value per share of $34.48.The base case assumes Valaris successfully navigates the 2025 schedule gap with disciplined cost management, followed by a 2026 demand inflection where newly contracted drillships commence operations at day rates near $450,000. This results in a fair value of $40.17.In a blue-sky scenario, the 2026 inflection occurs earlier and stronger, with day rates exceeding $500,000 and the company accelerating the reactivation of cold-stacked rigs. This scenario yields a potential value of $66.87.The bear case fair value of $23.47 is determined by a severe operational decline scenario where the 2026 recovery is delayed by 18 months, forcing the company to accept lower-margin work and accept a fire-sale valuation for its assets, consistent with the lower of the severe DCF or the fire-sale Net Liquidation Value.

Valuation Context

<ul><li>The announcement of long-term contract awards for the four drillships with near-term availability (DS-12, DS-15, DS-16, DS-18) for 2026 start dates.

This would directly address market concerns regarding the 2025 'white space' and validate our variant perception of a strong 2026 recovery.</li><li>A decisive turn in commodity prices or a significant increase in offshore exploration spending by major oil companies.

This would provide the macroeconomic tailwind necessary to drive day rates higher and accelerate the reactivation of cold-stacked assets.</li></ul>Valaris is highly relevant for analysis at this moment as it enters the projected Q4 2025 earnings trough, providing a potential 'maximum pessimism' entry point ahead of the 2026 contract commencements.

Catalyst Path & Context

<ul><li>A 'lower-for-longer' cyclical downturn where oil prices remain volatile and exploration spending fails to inflect in 2026.

This would extend the company's idle rig periods, leading to persistent margin compression and potentially requiring the company to accept low-return contracts to maintain liquidity. The company's Q4 2025 EBITDA guidance already reflects a 57% sequential decline, highlighting the high operational leverage and sensitivity to utilization.</li><li>Execution risk associated with the reactivation and mobilization of rigs for new 2026 contracts.

Delays or cost overruns in shipyard projects could defer revenue and erode the expected profitability of the $4.5 billion backlog. Management has a history of raising capex guidance, with 2024 capex increasing to $450-480 million from initial estimates due to shipyard timing.</li></ul>

Primary Risks

<ul><li>Entry Target: Calculated threshold price required to restore a 30% expected return based on internal valuation of $56.42.</li><li>Stop Loss: Set below the lower Bollinger Band and key technical support levels. A break below $38.00 would suggest the current downturn is structurally worse than anticipated, invalidating the mean-reversion thesis.</li><li>Position Size: Sizing reflects a 'Starter' posture while awaiting a more attractive valuation-based entry point. While the business quality and management are high, the final size is constrained by the high timing risk and near-term earnings volatility inherent to the Cyclical Operator model.</li><li>Time Horizon: A 12-24 month horizon is required to capture the turn from the 2025 trough to the 2026 mid-cycle normalization as the backlog converts to earnings.</li></ul><ul><li>Quarterly Adjusted EBITDA and revenue efficiency</li><li>New contract awards and day rate trends for 7th-gen drillships</li><li>Progress on shipyard projects for rigs scheduled for 2026 starts</li></ul>The thesis killer would be evidence that the 2026 demand inflection is not materializing as expected, or that the downturn will be structurally deeper and longer than prior cycles, leading to a breach of the $200 million minimum cash requirement.

Actionable Parameters & Monitoring

Valaris is a high-quality cyclical operator trading at a significant discount to its intrinsic value due to temporary near-term earnings headwinds. The company's modern fleet, robust backlog, and exceptional management team provide a compelling risk/reward profile as it approaches a cyclical inflection point. We recommend a Hold with a valuation target of $56.42, representing a 13.1% upside from current levels, and look to increase exposure on any valuation-driven weakness toward our $43.40 entry target.

Final Conclusion

The primary value driver is the anticipated 2026/2027 demand inflection for seventh-generation drillships, which currently command day rates in the mid-to-high $400,000 range.

Driver

The specific event that unlocks value is the conversion of the $4.5 billion contract backlog and the awarding of long-term contracts for the four drillships with near-term availability, such as VALARIS DS-15 and DS-18.

Catalyst

Downside protection is provided by a robust balance sheet with net leverage of 0.6x and a modern fleet trading at a 0.7x multiple to tangible book value, which is significantly below the historical 3-year average of 2.6x.

Protection

The bull case is driven by a structural undersupply of high-spec offshore rigs and a $4.5 billion backlog that provides high revenue visibility for 2026. Additionally, the company's low net leverage of 0.6x and its ability to generate $237 million in adjusted free cash flow in a single quarter (Q3 2025) provide significant firepower for continued share repurchases at attractive valuations.

Bull Case

The bear case centers on the extreme volatility of oil prices and the risk that the 2026 demand inflection is delayed, extending the current 'white space' and forcing further margin compression. Furthermore, the auditor's identification of income tax positions as a Critical Audit Matter and the recent $167 million tax-driven loss raise concerns about the reliability of reported net income and book value.

Bear Case

Valaris is navigating a temporary earnings visibility gap in 2025 due to a strategic decision to idle rigs rather than accept low-margin work. While the market is fixated on a projected 57% sequential decline in Q4 2025 EBITDA, our analysis suggests the company's $4.5 billion backlog and high-specification fleet position it for a significant cyclical inflection in 2026. At current levels, the stock offers a balanced risk/reward, but we await a more attractive entry point or clearer signs of the 2026 demand turn to move to a full position.

The strategy has evolved from a focus on reactivating sidelined assets and managing near-term demand deferrals (FY23-Q4 to FY24-Q2) to a disciplined execution phase centered on high-grading the fleet and securing long-term contracts for 2026+ (FY24-Q3 to FY25-Q3). The narrative shifted from 'patience in reactivation' to 'full utilization of active fleet' and finally to 'capital return optimization' as the backlog for 2026 solidified.

Method	Implied Value	Weight	Weighted Value
DCF	$42.68	45%	$19.21
Comps	$60.30	35%	$21.10
Historicals	$33.19	5%	$1.66
NLV	$45.30	15%	$6.79
Total Weighted			$48.77

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