(Public) Valaris - Contract Win Validates The Bull Thesis
By: Jon Costello
Please read our more detailed write-up on VAL here.
The recent strength in Valaris (VAL) stock begs the question as to whether the stock price has overshot the company’s fundamentals, at least from a near-term perspective. The company's latest announcement alleviates those concerns.
Yesterday evening, Valaris announced two contract wins: one contract extension for the drillship Valaris DS-16 and one new contract for the drillship Valaris DS-18.
The DS-16 will remain in service with Occidental Petroleum (OXY). The extension pushes the end date of its service from May 2026 to December 2028. The new contract involves DS-18 moving from Chevron (CVX) to OXY in the Gulf of America beginning in the fourth quarter of 2026 to the second quarter of 2029.
Larger Backlog Provides Greater Valuation Certainty
The good news for VAL bulls is that the new contracts increase VAL’s backlog by $760 million, bringing its 2025 additions to $1.9 billion. At the company's most recent fleet status report on April 30, its backlog stood at $4.2 billion. These contract wins push the backlog close to $5 billion.
An investor in VAL shares must keep a close eye on the company’s backlog. Recall that the VAL bull thesis revolves around increasing dayrates, with higher contracted dayrates resulting in a larger backlog, all else equal. An increasing backlog provides greater visibility into VAL’s revenue, EBITDA, and cash flow. Offshore drillers tend to trade based on an EV/EBITDA multiple, so a larger backlog helps mitigate oil market and rig market volatility by locking in dayrates and increasing rig utilization for multiple years.
The contracts represent day rates of approximately $410,000. They stand to add approximately $80 million of EBITDA in 2027 and 2028. The dayrate and their EBITDA contribution in 2026 and 2027 are around what I expect for a mid-tier seventh-generation drillship. The news therefore doesn’t change my valuation.
The contracts are also positive from an offshore drilling macro perspective. The fact that day rates are holding firm in a relatively weak oil price environment is a positive sign, while the multi-year contract terms point to strong long-term demand. Furthermore, two drillships are taken off the market for future work, thereby reducing the rig capacity overhang and potentially creating positive momentum for future dayrates. If/when future supply is constrained, dayrates will take off to the upside. Each contract win brings the market closer to that point.
The negative is that the dayrates associated with these contracts are roughly in line with those for similar drillships. They don’t indicate a material uptick that is likely to send VAL’s shares or those of its peers sustainably higher. Offshore drillers will need a trend of higher dayrates to justify their bull cases, and these contracts show that the market isn’t there yet. Until it is, the bulls are engaged in a waiting game until more rigs are retired, active rig contracts are extended, re-contracted, and future capacity decreases.
Investment Implications
When I bought VAL at around $31 earlier this year, its market cap was low enough to make the stock attractive even if dayrates declined slightly. I plan to hold the stock for several years in expectation of the sector’s recovery.
With the shares now at $46, a holder should have an investment horizon of at least two years to increase the odds of generating an attractive return. Evidence of higher dayrates will probably be necessary to move the shares higher. Investors with a time horizon of less than two years might consider selling and buying back in a selloff.
My VAL investment thesis remains unchanged in light of this news. I still believe that higher dayrates are imminent and will translate into increased EBITDA and cash flow. Growing free cash flow will be distributed to shareholders through dividends and repurchases. I believe the shares still have the potential to be a multi-bagger over the next few years.
In fact, I had been looking to add to my VAL position in the $30s for the past month, but was surprised at how strong the stock has traded above $40. Perhaps in retrospect, that was a buying signal.
I like VAL over the near term because contract wins like these provide confidence that, even though oil prices may weaken, offshore drilling rig dayrates can remain firm. I want to maintain exposure to oil prices over the long term, and offshore drillers appear to be a better bet to me than E&Ps over the next few quarters. While I like E&Ps for direct oil exposure, the large oil inventory builds that the market expects to begin in the fourth quarter and persist through most of 2026 may feed through to lower oil prices and lower E&P stock prices. I don’t expect offshore driller stocks to be as negatively impacted as long as dayrates remain flat or higher.
But all offshore driller investors should be aware of the risks. Anything more than one or two floater contracts signed at weak dayrates could tank offshore driller stocks, as investors grow concerned about the possibility that those data points mark the beginning of an ominous trend of lower dayrates, lower EBITDA, and lower cash flow. By contrast, E&Ps are already reasonably priced for the current oil price environment. They’ll decline if oil prices fall, but they don’t have as much downside as offshore drillers if oil market fundamentals deteriorate significantly and take dayrates with them. They could also be quicker to respond to higher oil prices if investors remain wary of falling dayrates.
From a long-term perspective, the longer it takes for dayrates to reach the high-$500,000s level or above, the greater the cost of reactivating VAL's cold-stacked rigs, and the more likely it is that these rigs will be scrapped. A slow dayrate recovery can therefore reduce the value of VAL's cold-stacked rig fleet.
To mitigate the potential downside from holding offshore drillers over the shorter and longer terms, I’ve branched out into other energy sub-sectors with significantly more bullish fundamentals, as detailed in recent articles.
Conclusion
VAL’s contract wins are a net positive, as implied by today’s slightly higher stock price. Investors should feel confident holding VAL shares for a multi-year period, during which I expect dayrates to rise as the market becomes increasingly supply-constrained. As U.S. shale growth flattens out, major oil companies will turn to offshore for new finds. Offshore rig dayrates will be bid higher, providing a tailwind for offshore driller stocks. VAL offers the best combination of a conservative balance sheet, a fleet concentrated in floaters, floater specifications that allow for new contract wins, and stacked rigs capable of re-entering the fleet. I still believe waiting for a pullback is the right move before adding, but investors who are bullish for 2026 offshore activity should consider adding in the mid-$40s.
Analyst’s Disclosure: Jon Costello has a beneficial long position in the shares of VAL either through stock ownership, options, or other derivatives.