Valaris Limited: Undervalued Assets, Industry Upcycle, and a Post-Bankruptcy Comeback

The offshore drilling sector has long been a boom-and-bust market, but Valaris Limited (VAL) is positioning itself to capitalize on a multi-year upcycle in deepwater drilling—a trend that could make its undervalued asset base and post-bankruptcy financial restructuring a winning combination. With a modern fleet, improving industry fundamentals, and a balance sheet strengthened by recent restructuring, Valaris is a compelling investment opportunity in an underappreciated corner of energy infrastructure.

The Case for Valaris: High-Quality Assets at a Discount
Valaris' fleet stands out for its focus on 7th-generation drillships, which are the most advanced and efficient in the deepwater segment. These rigs command premium day rates and are critical for projects in high-cost, remote basins like Brazil's pre-salt fields or West Africa's ultradeep waters. As of Q1 2025, Valaris' backlog had surged past $4.2 billion, reflecting strong contracting success in recent quarters. Notably, its 2025 revenue guidance of $2.15–2.25 billion suggests a clear path to profitability, even after one-time charges like the $167 million tax expense and impairments from retiring three semisubmersibles.

But the key metric is market valuation versus asset value. Valaris' market cap of $3.09 billion as of mid-2025 is dwarfed by its $4.2 billion backlog alone. Meanwhile, its total debt of $1.16 billion (as of March 2025) is manageable, especially with $454 million in cash and a free cash flow-positive trajectory. This creates a debt-to-equity ratio that's far more sustainable than its peers', even post-bankruptcy.

Why the Offshore Drilling Upcycle Matters
The offshore drilling sector is in the early stages of a multi-year recovery driven by three factors:
1. Rising Deepwater Day Rates: Brent crude prices above $60/bbl make offshore projects economically viable again, while the global fleet of ultra-deepwater rigs has been pared down. Valaris' Q1 results hinted at day rates for its Aero Drilling joint venture jack-ups in Saudi Arabia being above historical averages, a trend likely to accelerate.
2. Declining Global Supply: The industry's fleet has shrunk by 40% since 2014, with older, less efficient rigs retired. Valaris' focus on modern assets (e.g., its drillships) means it's well-positioned to win contracts in a tighter market.
3. Long-Term Demand for Offshore Oil: Even in a transition to renewables, offshore oil will remain a critical energy source for decades. The International Energy Agency projects that offshore production will need to grow by 1.5 million barrels per day by 2030 to meet demand.

Structural Advantages Post-Bankruptcy
Valaris emerged from bankruptcy in 2020 with a leaner balance sheet and a strategy focused on fleet optimization. The sale of three semisubmersibles for recycling, while painful in the short term, reflects disciplined capital allocation. Management's Q1 comments—emphasizing 7th-gen drillships, performance incentives in contracts, and Brent's $61 price—signal a focus on high-return opportunities.

The company's free cash flow is also improving: $74 million in Q1 2025 versus $26 million a year earlier. With full-year EBITDA guidance of $500–560 million, Valaris could generate enough cash to reduce debt further or return capital to shareholders—a potential catalyst for its stock.

Risks and Challenges
The offshore market isn't without risks. Jack-up rig utilization has dipped to 90%, and North Sea projects face idle-time risks. However, Valaris' focus on drillships—a segment with only 130 units globally, versus 250 in 2014—insulates it from the worst of the jack-up oversupply. Additionally, Brent's stability above $60/bbl reduces the risk of delayed final investment decisions (FIDs) for projects.

Investment Thesis: Buy the Dip, Wait for the Upcycle
Valaris trades at a market cap-to-backlog ratio of ~73%, suggesting investors aren't yet pricing in the full potential of its contracted work or the deepwater day-rate upcycle. If day rates for ultra-deepwater rigs rise to $300,000–$40.000 per day (from current levels of ~$250,000), Valaris' earnings could surge.

The company's financial flexibility—debt below $1.2 billion, ample liquidity, and a backlog that covers most of its 2025 guidance—gives it the runway to navigate near-term headwinds. Meanwhile, its stock has underperformed peers like Transocean (RIG) and Seadrill (SDRL) over the past year, despite its stronger asset quality.

Final Take
Valaris is a contrarian play on the offshore drilling revival. With a fleet optimized for the most profitable segment, improving cash flows, and a balance sheet that's among the strongest in the sector, it's primed to deliver outsized returns as deepwater projects ramp up. Investors with a 2–3-year horizon should consider accumulating shares here, especially if the stock dips further on near-term macro concerns.

Recommendation: Buy Valaris (VAL) at current levels, with a target price of $15–$20 by end-2026 (vs. $6.50 in late June 2025). Risks include oil price volatility and project delays, but the structural tailwind for deepwater drilling is too strong to ignore.