May 23, 2021 - 11:08pm EST by
2021 2022
Price: 21.00 EPS 0 0
Shares Out. (in M): 75 P/E 0 0
Market Cap (in $M): 1,575 P/FCF 0 0
Net Debt (in $M): -105 EBIT 0 0
TEV ($): 1,470 TEV/EBIT 0 0

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situations, with a focus on spin-offs. Since then, every aspiring investor has read this book and the
opportunity set has been picked over, leading to compressed returns. I’d like to posit that post-
bankruptcy securities have not yet been picked over, but have rather similar dynamics;
-Uneconomic sellers who were former creditors with no desire to own shares (particularly if there is a
negative ESG factor involved that wasn’t relevant when they were creditors a few years ago)
-Incentives to impair assets and lowball future economics in public reporting in order to cram down
subordinate claims
-Likelihood of cost savings, synergies and better economics as management is freed from prior restraints
-Management options set based on initial trading values, incentivizing them to have minimal
shareholder communication until options are struck
-Improved competitive position as newly emerged companies often have less debt than competitors
To this, I’d add investor memory and hatred by those who lost money in the last iteration of the
business. Finance guys have long memories and often ignore dynamic changes to businesses in post-
bankruptcy securities. With this little dissertation out of the way, I’m going go dumpster diving…
For the past half-decade, roughly once a year, investors have gotten excited about the prospects of
offshore drilling. This brief moment in time has repeatedly been caused by the price of oil rallying, while
management teams claimed that “tendering activity is picking up and we have great visibility on our
forward contract book,” or some nonsense like that. Then the bottom falls out and everyone loses globs
of money and swears off offshore drillers forever, until the oil price picks up again. This is because of the
incredible leverage in these shares, if you can actually catch the turn (if there is ever a turn). As a result,
it seems that losing money offshore has become something of a right of passage for value investors. I
bring all of this up because I clearly have not learned my lesson and am once again long an offshore
On May 3, Valaris (VAL - USA) exited bankruptcy with $655 million in cash and $550 million in debt for a $100
million net cash balance sheet. There are 75 million shares and the stock trades at $21 for a $1.575 billion
market cap and a $1.475 billion EV. VAL controls the world’s largest fleet of modern offshore rigs
including 11 drillships, 5 semi-submersibles and 44 jackups. The replacement cost of this fleet is in
excess of $15 billion (though you’d be insane to try and replace it). Simultaneously, as no one will ever
again green-light a $500m-$1b deep water rig newbuild contract, there won’t be any supply coming
either. Looking back on past offshore cycles, there was always the problem where a new generation rig
would show up and obsolete a lot of 30-year pieces of equipment somewhere around year 7. With this
threat out of the way, current rigs may have a longer runway.
When there’s a commodity where new supply will be restricted, I’m always intrigued. When that
commodity is recovering (anemically off the lows) I’m further intrigued. When I can buy that commodity
for about a dime on the dollar, I’m even more intrigued. When I learn that the company will be FCF
positive in 2021 based on the current backlog, I genuinely get interested. Then, when I realize there’s
effectively no backlog after 1H 2022, I sort of shrug. Then again, if an investor expects offshore rates to
recover, it’s almost better to have a fleet that’s not contracted out and ready to be utilized at rising
I wish I had a real hard-hitting timely thesis here. In fact, this is one of the worst write-ups I can imagine
submitting. I wish I could bluff you on my analytical brilliance, but I’m simply buying assets cheap during
a recovery. I wish I had a thesis as to why the recovery is now. I have none of these. Anyway here’s the
TL;DR versionif you can buy steel at a dime on the replacement cost at a time when supply will keep
shrinking, yet demand is likely increasing and you can do it with a net cash balance sheet and positive
cash flow, you’re likely to do somewhere between satisfactorily to outstanding. I wish I had a view on
the price of oil, steel or future offshore rates. I have no crystal ball. I’m an old-fashioned value guy who
likes buying sad companies that just came out of bankruptcy with a view that offshore which has
supplied roughly a third of our globe’s oil will need to reinvest to keep its market share. Meanwhile,
should offshore demand recover, human greed will overcome the inevitable drama along the way and
while the guy with the best balance sheet (VAL) will not have the most torque, it will also have the least
downside should this thesis take another year or three to play out.
My view is that you can play oil and offshore, or you can play with an Event-Driven backdrop. Of course, you
can play both. If VAL trades up to a market multiple, it is going higher. On emergence, VAL was valued at
$1.75-$3.03 billion. We’ve below the low point of that range. RIG, with all its debt is valued at an EV of
$9 billion with an inferior fleet (admittedly with  a pile of backlog)Other comps similarly say that VAL is being
penalized as no one realizes it has emerged yet. Then again, by the time there’s a clean investor deck on the
corporate website after Q2 results, we should be a lot higher…


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Q2 results with a clean corp presentation

Offshore recovery

Improved IR efforts

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