Buying Valaris on a Rig-Rebound: High-Conviction Long as Oil Volatility Favors Contractors

Hook & thesis

I am initiating a high-conviction long trade in Valaris (VAL) at $58.69. The thesis is simple: stormy, volatile oil markets and constrained offshore supply are re-rating offshore drillers, and Valaris sits in a favorable mix of floaters and jackups with improving fundamentals and cash flow. The company combines an attractive earnings multiple, positive free cash flow and modest leverage that together provide both upside and a degree of downside protection should oil prices wobble.

This is a directional, actionable trade: enter at $58.69, stop at $50.00 and target $90.00 with a planned duration of long term (180 trading days). That horizon gives time for dayrates to firm, ARO charters to normalize and for a positive re-rating to play out through improved contract economics and potential multiple expansion.

What Valaris does and why the market should care

Valaris is an offshore contract drilling company. Its fleet is split across floaters (drillships and semisubmersibles), jackups, and arrangements under its ARO (bareboat charter) segment. The offshore drilling market is structurally tighter than it was three years ago: operators are under pressure to rein in capex, decommission older rigs and prioritize high-return projects. When oil prices spike or remain elevated, offshore dayrates — particularly for floaters — rebound sharply because new-build supply is limited and idle tonnage is scarce.

Why investors should care now: dayrate volatility tends to move offshore contractors' earnings materially. Valaris is trading at a P/E of roughly 10.23 and a market capitalization around $4.09B, while enterprise value sits near $4.51B. Those are not nosebleed multiples for a company generating free cash flow ($249.7M reported) and operating returns (ROE ~16.41%, ROA ~8.6%). If oil markets stay supportive or firm, the combination of utilization gains and modest leverage can deliver meaningful cash-flow upside and justify multiple expansion.

Supporting the argument with the numbers

• Market cap: approximately $4.09B, enterprise value roughly $4.51B.
• Earnings: reported EPS around $5.73; trailing P/E near 10.23.
• Cash generation: free cash flow about $249.7M; price-to-free-cash-flow ~16.35 and price-to-cash-flow ~6.82, indicating operating cash conversion is strong versus peers.
• Balance sheet: debt-to-equity approximately 0.45 and current ratio 1.85 - leverage is present but manageable for a cyclical services business.
• Technicals and market action: 10/20/50-day SMAs are rising (SMA-10 ~$56.97, SMA-20 ~$55.21, SMA-50 ~$54.47), RSI sits at ~64 suggesting trend strength, and MACD shows bullish momentum.

Valuation context - the company is trading well below recent analyst 12-month price-average targets (the average at one point was in the $98 range). Even if you set aside analyst optimism, the company’s P/E and EV/EBITDA (~6.55) look reasonable for a capital-intensive business that is generating free cash and has a decreasing short interest trend over recent months.

Catalysts that can push the stock higher

• Oil price resilience or rallies: elevated crude improves contractor economics, lifts dayrates and reduces downside to utilization.
• Higher fleet utilization and dayrate renegotiations as older rigs are retired and newbuild deliveries remain limited.
• Contract wins and reactivations for floaters and jackups, especially in lucrative basins that pay premium dayrates.
• Analyst upgrades and multiple expansion if quarterly results continue to show strong FCF and margin improvement.
• Operational improvements in ARO arrangements converting to stable bareboat cash flows.

Trade plan (actionable)

• Entry: buy at $58.69.
• Stop loss: $50.00. This is below the $52-$54 near-term technical support band and preserves capital if oil dips materially or a specific company event (contract suspension, major operational loss) occurs.
• Target: $90.00. This is within the range of sell-side analyst targets and represents a realistic re-rating if dayrates and utilization materially improve and valuation multiple expands toward mid-teens on earnings.
• Horizon: long term (180 trading days). Why 180 days? Offshore contract cycles and dayrate improvements typically take months to impact reported earnings and cash flow materially. The long-term horizon gives time for re-contracting, seasonal offshore activity to normalize, and for the market to digest improved results.
• Position sizing & risk: treat this as a medium-risk position. If you allocate capital, size so that a stop-hit at $50.00 limits downside to an acceptable portion of your portfolio (e.g., 1-2% of portfolio value per trade depending on your risk tolerance).

Why this trade has a margin of safety

There are three overlapping protective elements: earnings/cash flow generation (EPS ~$5.73 and free cash flow around $249.7M), a not-excessive leverage profile (debt-to-equity ~0.45, current ratio 1.85) and a valuation that already reflects some cyclicality (P/E ~10.23). In a downside scenario, these metrics reduce the chance of an equity wipeout compared with more levered or cash-burning drillers.

Catalyst timeline & monitoring plan

• Near-term (next 30-90 days): watch oil inventories and dayrate announcements; look for incremental rig reactivations and contract renegotiations that should show up in operating updates.
• Medium-term (90-180 days): quarterly earnings and cash-flow prints - monitor utilization, dayrates and any updates on ARO arrangements.
• Technical checkpoints: maintain the trade while price holds above $50 stop and preferably above the rising 50-day EMA. If momentum stalls or RSI moves above 80 without supporting fundamental news, consider trimming exposure.

Counterargument

The main counterargument is liquidity and cycle timing: if oil prices fall or remain rangebound, dayrates may not reprice sufficiently and Valaris could see longer idling of higher-cost rigs or contract suspensions in certain markets. There is also a scenario where multiple contraction offsets operational improvements - investors may not be willing to pay higher multiples for cyclical services even if earnings improve. That risk is why the stop at $50 is critical and why a 180-trading-day view is necessary: the market must show sustained demand for offshore work to validate the thesis.

Risks (detailed)

• Commodity risk: a sustained decline in crude prices depresses dayrates and utilization, directly hitting revenue and cash flow.
• Operational / contract risk: contract suspensions or cancellations (the business has previously experienced a suspension on a contracted rig) can lead to unexpected downtime and lost revenue.
• Cyclical capital intensity: offshore projects require capital; a need for higher capital expenditures or poor timing on newbuild commitments could compress free cash flow.
• Market sentiment / multiple risk: even with earnings improvement, cyclicality can keep valuations depressed if investors favor less cyclical plays.
• Regulatory & geopolitical risk: offshore operations are exposed to country-specific regulatory shifts, local content requirements, and regional geopolitics that can disrupt contracts or increase costs.
• Short-covering volatility: although short interest has declined recently, days-to-cover still sits in a single-digit band and intraday volatility could spike on short squeezes or headline risk.

What would change my mind

I will reassess and reduce conviction if any of the following occur: (a) oil prices fall and remain below levels that support offshore dayrates for more than three months, (b) Valaris reports a meaningful deterioration in utilization or a string of contract suspensions without offsetting new wins, (c) the company’s free cash flow turns negative or leverage rises materially above the current ~0.45 debt-to-equity, or (d) the stock breaks and closes below $50 on material volume, invalidating the technical setup.

Conclusion

Valaris is an asymmetric opportunity for investors who take a disciplined approach to cyclicals: it trades at reasonable multiples for a company generating free cash, with a balance sheet that is not overly stretched. Combined with improving technicals and a market environment that favors offshore dayrate recovery, the reward/risk supports a high-conviction long with defined risk controls. Enter at $58.69, protect capital at $50.00, and target $90.00 over the next 180 trading days — adjust the plan if macro and company signals deviate materially from the thesis.

Selected reference dates

• Analyst commentary summary referenced from 05/06/2024.
• Rig suspension notice (Valaris 143) reported on 04/09/2024.