Devon Toogood
Australia
7m
Portfolio Update: New Position – Valaris ($VAL) Hi Copiers, We have initiated a position in Valaris, an offshore oil drilling company. The investment thesis is rooted in long-term structural tailwinds within the offshore drilling sector, compelling valuation metrics, and disciplined capital allocation. Valaris trades at approximately 10–20% of the replacement cost of its fleet, highlighting significant undervaluation. Over the past decade, there has been next to no new supply of offshore drilling rigs, as the industry suffered from severe underinvestment. This was primarily due to the high upfront capital requirements of offshore drilling, especially when compared to more flexible but higher-cost shale production. It’s important to note that offshore production accounts for around 25% of global oil supply, and this portion remains essential to meeting long-term demand. Despite this, the sector was neglected throughout the 2010s. Following the 2020–2021 oil crash, much of the industry went through bankruptcy and restructuring, including Valaris, which has now emerged with a clean balance sheet, minimal debt, and a more disciplined operating model. Current rig day rates are around $400k/day. At $800k/day—a level that would be required to justify new rig builds based on a reasonable return on investment—Valaris could generate free cash flow equivalent to its entire current market cap within a year. Importantly, Valaris is already demonstrating strong capital discipline, with active share repurchases funded by free cash flow, further enhancing shareholder value. We view this as an asymmetric opportunity with significant upside potential supported by favorable industry dynamics, a strong balance sheet, and prudent capital allocation. Cheers, Devon
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