Valaris' Contract Surge Signals Offshore Drilling's Golden Opportunity

The offshore drilling sector is in the midst of a cyclical upswing, fueled by rising oil prices, aging infrastructure, and the need for deepwater exploration. Among the companies positioned to capitalize on this trend, Valaris (VAL) stands out as a leader, with its recent $760 million contract wins for drillships DS-16 and DS-18—scheduled to begin in 2026—and a $1.9 billion expansion of its 2024 backlog. These developments highlight a strategic repositioning that could unlock significant EBITDA growth and valuation upside.

Why Valaris' Contracts Matter
The $760 million multi-year contracts for DS-16 and DS-18—though the latter's specifics remain undisclosed—are part of a broader shift toward ultra-deepwater asset demand. Valaris' Q2 2024 results revealed a backlog of $4.3 billion, up 42% year-over-year, driven by high day rates in key regions like Brazil and the Gulf of Mexico. A critical driver has been the DS-16's two-year extension with Anadarko (now part of Occidental) in the U.S. Gulf of Mexico, which transitions legacy rates in the low $200,000s to current market rates exceeding $400,000. This contract alone adds over $200 million to the backlog, reflecting Valaris' ability to renegotiate terms in a seller's market.

Operational Leverage: High-Spec Fleet Meets Rising Demand
Valaris' fleet of 30 drillships and semisubmersibles is among the youngest and most technically advanced in the industry. This gives it a critical edge in high-spec projects, such as Petrobras' Sepia and Mero fields in Brazil, where ultra-deepwater expertise is paramount. The company's Q2 results underscore this advantage:
- Average daily revenue for floaters rose to $414,000, up from $338,000 in 2023.
- DS-17's multiyear contract with Equinor in Brazil contributed nearly $500 million to the backlog.
- Reactivation of DS-7 (now contracted into 2025) and plans for DS-11/DS-13/DS-14 demonstrate disciplined capital allocation.

Petrobras and Anadarko: Catalysts for Long-Term Growth
Valaris' partnerships with Petrobras and Anadarko/Oxy are central to its growth narrative:
1. Petrobras: The Brazilian state-owned oil giant has launched tenders for up to four rigs through 2029, with Valaris well-positioned to secure contracts given its existing fleet presence and technical capabilities. The DS-17 contract is a template for future wins.
2. Anadarko/Oxy: The DS-16 extension reflects Valaris' deep ties to U.S. Gulf of Mexico operators, where day rates are rising as companies like Oxy prioritize exploration.

These relationships are underpinned by structural demand:
- Global floater demand is expected to hit 30+ opportunities by 2026, with 20 likely awarded in the next 12 months.
- Brazil's pre-salt fields and West Africa's deepwater basins are key battlegrounds for Valaris' high-spec fleet.

Valuation: A Discounted Play on Cycle Upswing
Despite its robust backlog and rising day rates, Valaris trades at a discount to peers. At a forward EV/EBITDA multiple of 4.5x, it lags Schlumberger (SLB) and Baker Hughes (BKR), which trade at 7.2x and 6.1x, respectively. This undervaluation persists despite:
- Free cash flow visibility: The $4.3 billion backlog ensures stable cash flows through 2028.
- Shareholder returns: Valaris plans to return free cash flow to investors starting in 2025, signaling confidence in its capital structure.

Risks to Consider
- Saudi Aramco's rig suspensions: Two Valaris jackups in the Red Sea were suspended in Q2, trimming $10 million from 2024 EBITDA. However, this is a minor headwind given the floater fleet's strength.
- Supply-side risks: Newbuild drillships could theoretically increase supply, but Valaris' existing contracts and high day rates mitigate this threat.

Investment Thesis: Buy the Cycle, Not the Noise
Valaris is a conviction long in the offshore drilling sector. Its backlog growth, strategic partnerships, and high-spec fleet position it to capture rising day rates in key basins. With shares trading at a valuation discount and EBITDA set to grow as contracts roll forward, the stock offers a compelling risk-reward profile.

Action Items:
1. Buy VAL on dips below $3.50, targeting a 12-month price target of $5.00.
2. Monitor Petrobras' tender outcomes and floater day rate trends in Q3 2024.
3. Watch for DS-18 contract specifics—if disclosed, they could act as an immediate catalyst.

In a world where offshore drilling is undergoing a renaissance, Valaris is the operator best poised to turn deepwater demand into shareholder value.

Final Take: Valaris is a textbook example of a cyclical stock undervalued at the bottom of the cycle. With its backlog expanding and day rates rising, this is a “buy the dip” opportunity with asymmetric upside.