Valaris: Misunderstood Deepwater Leader With 3-7x Upside Potential

The offshore drilling industry is on the cusp of a long-awaited recovery, driven by a confluence of factors: declining global supply of rigs, rising deepwater exploration budgets, and the inexorable pull of energy demand. Yet, amid this backdrop of renewed optimism, one name remains conspicuously undervalued—Valaris Limited (NYSE: VAL). For investors willing to look beyond short-term volatility and recognize the strategic advantages of a modern, high-spec fleet, Valaris offers a compelling case for 3-7x upside potential.

A Valuation That Doesn't Tell the Whole Story

Valaris's trailing twelve-month P/E ratio of 11.96 and a price-to-book ratio of 1.38 might appear modest at first glance. But these metrics fail to capture the full picture. The company's P/E is lower than peers like Tidewater (14.04) but higher than the battered Weatherford (8.28). More importantly, Valaris's P/E has surged 56% above its 10-year average of 2.10, signaling a shift in investor sentiment. The P/B ratio, while above the industry median of 1.27, reflects the company's growing equity base and disciplined asset management.

The disconnect between fundamentals and valuation is stark. Valaris's fleet—comprising 15 high-spec floaters and 34 jackups—includes seven 7th-generation drillships capable of operating in 10,000 feet of water. These rigs are not just technologically superior; they are purpose-built for the “Golden Triangle” of South America, the Gulf of Mexico, and West Africa, regions expected to account for 70% of benign environment floater demand through 2029. Yet the stock trades at a discount to its intrinsic value, as if the market still clings to the ghosts of the 2014 oil crash.

Strategic Fleet Advantages in a Tightening Market

The offshore drilling sector is in the early innings of a supply-driven upcycle. Global rig counts have fallen by 40% since 2014, creating a bottleneck for operators seeking modern, efficient assets. Valaris's 7th-generation drillships, equipped with dual derricks, high hookload capacity, and advanced thruster systems, are uniquely positioned to capitalize on this scarcity. These rigs enable simultaneous operations, reducing project timelines and costs—a critical differentiator in an era where time is money.

Recent contract awards underscore this advantage. The company secured $1.0 billion in new backlog since April 2025, including multi-year deals for its DS-15, DS-16, and DS-18 rigs. These contracts not only lock in cash flows but also validate Valaris's commercial acumen. Meanwhile, the sale of the VALARIS 247 jackup for $108 million highlights the company's focus on asset optimization. By shedding non-core assets and prioritizing high-return projects, Valaris is building a leaner, more agile business.

Analysts Are Starting to Notice

The analyst community is gradually aligning with this thesis. While the consensus remains a “Hold,” price targets have diverged widely, from a cautious $39 to an ambitious $90—a 96% upside from current levels. The most bullish case, from BTIG's Gregory Lewis, hinges on Valaris's ability to leverage its fleet's efficiency and secure premium day rates in the ultra-deepwater segment.

Notably, Valaris's operational performance has outpaced expectations. The company's 2Q25 adjusted EBITDA of $201 million exceeded guidance, driven by strong revenue efficiency (96%) and favorable arbitration outcomes. Its net leverage ratio of 1.3x and $829 million in liquidity further insulate it from cyclical risks. For value investors, the combination of improving margins, disciplined capital allocation, and a shrinking peer group is hard to ignore.

The Case for 3-7x Upside

To justify a 3-7x return, Valaris doesn't need to become the next Schlumberger—it just needs to execute its current strategy. With a $4.7 billion contract backlog and $500–560 million in full-year EBITDA guidance, the company is already on a path to profitability. But the real catalyst lies in the broader industry dynamics.

The global demand for offshore drilling is set to grow at a 5% CAGR through 2032, driven by energy transition projects and the need for long-term hydrocarbon security. Valaris's 7th-gen rigs are ideal for these projects, and its recent investments in safety (zero lost time incidents in 2025) and innovation position it as a partner of choice for E&P firms.

Moreover, the company's capital return policy—planning to distribute all future free cash flow to shareholders—adds a layer of investor confidence. At current levels, the stock offers a forward yield of ~5%, but the real appeal lies in its growth potential. If Valaris can achieve a 20x P/E (in line with its 10-year peak) and maintain its EBITDA margins, the math suggests a $70+ stock price.

Conclusion: A Deepwater Bargain

Valaris is the kind of company that thrives in the shadows—until the lights turn on. Its undervaluation is a function of the industry's cyclical nature and the market's short-term memory. But for investors with a longer horizon, the company's strategic fleet, operational discipline, and alignment with macro trends present a rare opportunity.

The 3-7x upside isn't speculative; it's a function of supply constraints, demand tailwinds, and Valaris's ability to outperform. As the offshore drilling sector emerges from its long winter, those who recognize the company's potential now may find themselves with a winner in 2025 and beyond.

Investment Advice: While the stock's volatility remains a risk, its fundamentals are compelling. Investors should consider a position in Valaris as a core holding in a cyclical energy portfolio, with a stop-loss below $40 and a target range of $60–$90. Patience is key—this is a long-term bet on the deepwater renaissance.