(Idea) Buy Valaris
Editor’s Note: Ideas from HFI Research is a separate paid subscription from HFI Research. Valaris is currently not a holding in the HFI Portfolio, but we are in the process of doing a deeper dive into the offshore sector. Please stay tuned.
By: Jon Costello
Valaris Ltd. (VAL) is a Bermuda-domiciled offshore contract drilling company. I’ve followed the name for the past few years but never invested due to the industry's vulnerability to fickle day rates and its brutal cyclical downturns.
However, my interest was recently piqued when VAL shares fell into the low $30s. I began buying after realizing that macro trends within the industry favor a continuation of its upcycle and that a cash flow inflection could generate multi-bagger returns from current prices.
Based on conservative assumptions over the next few years, I believe VAL shares remain extremely undervalued. They’re one of my favorite ways to play higher oil prices and navigate range-bound or potentially sideways oil price action over the next 18 to 24 months.
Valaris Emerges from Bankruptcy
VAL is the successor to Ensco Rowan, which was formed through Ensco’s acquisition of Atwood Oceanics in 2017 for $839 million and then its acquisition of Rowan in 2018 for $2.4 billion. Ensco Rowan entered bankruptcy in August 2020.
At the time of the bankruptcy, the company listed $12.9 billion of assets and $7.3 billion of long-term debt. In bankruptcy, it reduced long-term debt by $6.5 billion. Its existing credit facility and unsecured notes were converted to equity.
The company also secured a $520 million capital injection and $550 million of new 8.25% Senior Secured Notes that mature on April 30, 2028. Interest on the Notes can be paid in kind at 12% for the life of the note. Old shareholders received warrants issued on 5.6 million new VAL shares. The warrants expire in April 2028 and have a $131.25 strike price.
Reorganization and fresh-start accounting adjustments made in the bankruptcy process—which occurred amid depressed asset values during the Covid downturn—reduced the company’s reported asset value by $9.1 billion. VAL emerged with an asset value of $2.6 billion. It exited bankruptcy in May 2021 through an IPO of 75 million shares that began trading at around $22 per share, giving it a $1.65 billion market cap.
Since the IPO, share repurchases have reduced VAL’s diluted share count to 72.9 million. With shares trading around $38, the company has a market cap of $2.8 billion. Its $700 million in net long-term debt results in an enterprise value of $3.5 billion.