-$10.50
$35.30
bear -$10.50
base $20.20
bull $35.30
margin of safety $6.00
market price* $85.32
Business condition attached to the margin of safety
Valaris remains a stand-alone company, meaning the pending all-share combination with Transocean is terminated or abandoned (a completed deal converts the shares into Transocean shares, which this analysis does not value).
BUSINESS. Valaris is an offshore drilling contractor. It owns about 15 floaters (drillships and semisubmersibles) and 24 jackups, charters seven rigs to ARO, its 50/50 joint venture with Saudi Aramco, and earns day rates under contracts with oil companies. It emerged from bankruptcy on April 30, 2021, so the financial record that describes today's company is only about five years long; earlier results belong to a very different, far more indebted business. Valaris has agreed to be acquired by Transocean in an all-share deal (15.235 Transocean shares per Valaris share; a $173 million termination fee applies in some circumstances). The values below are for Valaris as a stand-alone business, not for the combined company. WHAT THE CASH RECORD SHOWS. After stripping out working-capital swings, stock compensation and the capital spending needed to keep and upgrade the fleet, cash left for owners (after interest) was negative in 2021 (-$1.16 per share), 2022 (-$0.63) and 2023 (-$6.96, including the $337 million purchase of the newbuild drillships DS-13 and DS-14), then positive in 2024 ($1.43) and 2025 ($1.90). Adding back the $78-90 million a year of interest, the business itself generated about $2.50 per share in 2024 and $3.18 in 2025. Net income of $983 million in 2025 is not a guide: it contained a $427 million tax benefit and $119 million of rig-sale gains, and 2025 operating cash flow included about $26 million of Australian tax refunds. We treat 2023 as non-recurring because of the DS-13/DS-14 purchase and the eight-month 2021 stub as unrepresentative, and anchor on the middle of 2022, 2024 and 2025: about $2.50 per share, or $176 million, of annual business cash flow. That level sits between a trough year (2022) and two firmer years. WHAT HAS CHANGED SINCE OUR LAST VIEW. Previous figures were built on a different basis and are not comparable. In the business itself: first-half 2026 operating cash flow fell to $88 million from $276 million a year earlier, revenue fell 19% to $1.0 billion, and the VALARIS 120 contract (about $120 million of backlog) was suspended. Management guides 2026 capital spending to $425-475 million, against $343 million in 2025, so 2026 looks like a year of little or negative free cash. Offsetting that, contract backlog rose to $4.7 billion (from $3.6 billion), including about $2.1 billion of new drillship awards, and 2027 backlog ($1.8 billion) is above 2026 ($1.7 billion). We also now recognize the $401 million of notes receivable from ARO, which we had not credited before. DEBT. $1.1 billion of 8.375% second-lien notes mature April 30, 2030; the $375 million revolver (undrawn) matures April 2028 and carries minimum-liquidity and interest-coverage tests. Cash was $541 million at June 30, 2026; we treat about $250 million as needed to run the business, so about $291 million is excess. Paying 8.375% rather than a lower rate over the remaining life adds about $80 million to what is owed. Net obligations are about $889 million, or $12.63 per share, in every case. BASE CASE: about $20 per share. The next twelve months produce only about $50 million of business cash flow because of the guided capital spending and the weak first half. From 2027 the business returns to about $176 million a year, a level it has already reached with today's fleet, and the signed 2027 backlog supports it. We credit no growth: higher day rates, reactivating the three preservation-stacked drillships (DS-12, DS-14, DS-15) and new contracts are not yet secured. We hold the level flat for fifteen years, then fade it to zero over the following ten, because rigs wear out and nothing we can name replaces them beyond what maintenance spending sustains. The ARO notes ($400.7 million, due October 2027 and 2028, with management expecting to extend them) are counted at face value because the claim is documented and accruing interest and ARO has $2.0 billion of its own backlog, though ARO has never paid a distribution. In this case the business is worth about $27 per share, the ARO notes about $5.70, and the company owes about $12.60 per share, leaving about $20. BEAR CASE: about -$10.50 per share. The offshore drilling industry has a record of deep downturns; this case uses the 2015-2020 downturn as the template. In 2018-2020 this company's pre-interest cash flow after capital spending and stock compensation was about -$291 million, -$131 million and -$177 million, on revenue of $1.4-2.1 billion, and the company then went through restructuring. Here, contracts roll off after 2027 (only $1.2 billion of backlog sits beyond 2027), business cash flow is -$50 million, then roughly zero, then about -$180 million a year for three years and -$100 million in a fourth, then recovers to only half the base level ($88 million a year). The business is then worth about $2 per share, the ARO notes are not collected (ARO has never distributed cash and enforcement needs the Saudi partner's consent), and the company owes about $12.60 per share, a shortfall of roughly $740 million. The cumulative burn of well over $1.0 billion including interest exceeds cash plus the revolver just as the 2030 notes fall due, so refinancing would likely fail and a restructuring would leave shareholders with nothing. In this case the company appears to owe more than it is worth. BULL CASE: about $35 per share. The business reaches $270 million a year, the 2025 level of $226 million plus one of the three stacked drillships returning to work, supported by the 2026 drillship awards, held for fifteen years and then faded over ten. Business value is about $42 per share, the ARO notes about $5.70 and net obligations about $12.60. We left out growth from higher day rates, a cyclical upswing and ARO distributions because none is contracted or evidenced. WHAT WOULD MAKE THIS WRONG. The valuation relies on about $340 million a year of maintenance and upgrade spending being enough; 2026 guidance is higher. If business cash flow stays near the 2022 level (roughly zero), the company owes more than it is worth even with the ARO notes collected. If ARO cannot repay its notes, about $5.70 per share disappears, leaving about $14.50 in the base case. Revenue and cash flow depend on day rates that have repeatedly collapsed. One item could not be reconciled line by line: the signs on the ARO interest-accrual and equity-income lines in the 2023-2024 cash-flow statements; we relied on the audited operating cash flow total. WHY THE MARGIN-OF-SAFETY PRICE IS LOW. We are reasonably sure of the 2024-2025 cash level but only two years record it, and the first half of 2026 went the other way. The worst plausible outcome is a repeat of 2015-2020: a $1.1 billion second-lien note due 2030 and revolver covenants would not survive three years of negative cash flow, and shareholders could be wiped out. If we are wrong on day-rate durability or on the ARO notes, the shares are worth anywhere from nothing to about $14.50. The shares pay no dividend (restricted by the debt and the merger agreement), so the only reward over the holding period is the rebuilding of cash flow as the 2027-2028 contracts run; the price assumes a three-to-four-year holding period. The margin-of-safety price is about $6 per share, the price from which that holding period, ending near our base outcome, implies at least 20% a year even if only part of the contracted recovery arrives, and from which the bear outcome implies a bounded loss. The price applies only if Valaris remains stand-alone, since a completed Transocean deal turns the shares into Transocean shares, a different and equally leveraged business.