Tuesday, Susquehanna initiated coverage on Valaris plc (NYSE: VAL) shares, an offshore drilling company, with a Neutral rating and a price target of $62.00. Valaris boasts the largest offshore drilling fleet by rig count and operates in both deepwater and shallow water across six continents.
The firm forecasts significant EBITDA growth for Valaris in the coming years, anticipating a compound annual growth rate (CAGR) of approximately 45% from 2024 to 2026. This growth projection is based on the expectation that Valaris' floating rigs will transition from lower-rate, legacy contracts to agreements closer to the current market rates.
Despite the positive EBITDA outlook, Susquehanna notes some potential challenges for Valaris. The firm points out the risk of increased floater downtime in 2025 due to the difficulty in aligning new contracts with those expiring. This risk factor contributes to the Neutral stance, despite the anticipated growth.
The firm also expects Valaris to see an upswing in free cash flow (FCF), projecting an increase from a negative $64 million in 2024 to a positive $526 million by 2026. The substantial growth in FCF underscores the company's potential for increased financial flexibility and strength.
While acknowledging Valaris' impressive growth trajectory, Susquehanna's forecast remains more conservative than the consensus, citing uncertainties regarding the contract status of certain floating rigs as a reason for their caution. This conservative stance reflects the analyst's view on the potential risks that may impact the company's growth in the near term.
In other recent news, offshore drilling contractor Valaris reported strong second-quarter results for 2024. The company announced an adjusted EBITDA of $139 million, surpassing previous guidance, and a revenue efficiency of 99%. Valaris also highlighted the successful reactivation of the Valaris DS-7 drillship and the securing of new contracts and extensions, including a notable multiyear contract for the Valaris DS-17 drillship.
Valaris reported a backlog of over $4.3 billion, reflecting strong customer demand for 2025 and 2026 projects. The company forecasts total revenues between $610 million and $630 million for Q3 2024 and adjusted its full-year EBITDA guidance to a range of $480 million to $540 million. However, Valaris reported a decline of $99 million in cash due to capital expenditures and other factors.
Valaris is open to mergers and acquisitions that are value-creating and accretive to shareholders. CEO Anton Dibowitz discussed technology investments and automation in the North Sea, highlighting a strong pipeline of opportunities. These recent developments position Valaris for sustained free cash flow generation in 2025, with plans to return value to shareholders.
InvestingPro Insights
Recent data from InvestingPro shows that Valaris plc (NYSE: VAL) maintains a robust market capitalization of $4.03 billion, underpinned by an enticing P/E ratio of 3.97 and an adjusted P/E ratio of 3.94 for the last twelve months as of Q2 2024. These metrics suggest that the company is currently valued by the market at a price that is low relative to its earnings, potentially offering an attractive entry point for investors.
The company's revenue growth is particularly striking, with a 20.86% increase over the last twelve months as of Q2 2024, and an even more impressive quarterly revenue growth of 46.94% for Q2 2024. This aligns with Susquehanna's positive EBITDA growth forecast for Valaris, emphasizing the firm's potential for significant financial gains. Moreover, Valaris' return on assets stands at a healthy 27.23%, reflecting efficient use of its assets to generate profits.
InvestingPro Tips highlight that Valaris' revenue and EBITDA growth rates are critical factors to watch, as they can provide insights into the company's operational efficiency and profitability. Moreover, with the next earnings date set for October 29, 2024, investors should keep an eye on the company's performance updates to gauge whether the anticipated growth is on track. For those interested in a deeper analysis, InvestingPro offers 17 additional tips on Valaris, providing a more comprehensive understanding of the company's financial health and market potential.
Overall, the InvestingPro data and tips complement Susquehanna's analysis, offering valuable insights into Valaris' financial metrics and growth prospects that could inform investment decisions.
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