Valaris February 2020 Fleet Status Report Analysis

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Summary

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Valaris 5006

Valaris (VAL) has just released its new fleet status report. Traditionally, the fleet status report contains all changes from the previous fleet status report, which was issued on October 25, 2019 (I wrote about it here). However, the company has been regularly updating the market about its new contracts (check my articles here and here), so I will focus solely on contracts and developments that have not been disclosed before.

Floaters

  1. Drillship Valaris DS-15 will drill an additional well for Murphy (MUR) in the U.S. Gulf of Mexico. The job has an estimated duration of 45 days, keeping the rig busy from late March 2020 to early May 2020. This award eliminates the gap between the Murphy contract and the contract with CNOOC in Mexico. As a result, Valaris DS-15 is now on contract until October 2020.
  2. Drillship Valaris DS-12 got a one-well contract from BP (BP). The rig will drill for 120 days offshore Egypt from February 2020 to June 2020.
  3. Drillship Valaris DS-9 got a one-well contract from Premier Oil in Brazil. The rig will begin its job in July 2020 and work for 60 days. The rig is currently on contract with Total (TOT) in Brazil until May 2020. This contract has two one-well options, so Valaris DS-9 has decent chances for uninterrupted work until August 2020.
  4. Drillship Valaris DS-7 got a five-well contract from BP offshore Senegal and Mauritania. The rig will work for 320 days, starting the job in September 2020. The contract has one 1-well priced option and two 1-well unpriced options. The rig's current job with Burullus in Egypt ends in March 2020, so a gap in employment is currently expected.
  5. Semi-sub Valaris 8503 got a contract extension from Kosmos (KOS) in the U.S. Gulf of Mexico. The rig will work for approximately 80 days from early April 2020 to late June 2020. The contract with Kosmos has four 1-well options.
  6. Semi-sub Valaris MS-1 got a one-well contract with an undisclosed operator offshore Australia. The rig will work for approximately 120 days, starting the job in July 2020. Up till then, the rig has no contracts and is warm stacked in Malaysia.

This fleet status report came with a number of developments on the floater side. Valaris continues to execute its strategy of keeping the working rigs busy. Clearly, the drillship market segment is still dominated by short-term work. There are no contracts with duration of one year or longer - only DS-7 contract comes close to being considered "longer-term". The job for semi-sub MS-1 is probably the most important development since the rig was sitting idle in Malaysia.

At this point, Valaris is simply too big for the current market environment. The company has a number of modern drillships - Valaris DS-6 Valaris DS-11 and Valaris DS-17 - which are all warm stacked in Spain. Given the shorter-term nature of the jobs that active drillships get, more time will be required for warm stacked drillships to find jobs. It is highly unlikely that Valaris will reactivate warm stacked rigs for short-term jobs at a time when it has to find any follow-up work for active rigs. Investors should also keep in mind that the company has two newbuild drillships, Valaris DS-13 and Valaris DS-14, which are set to be delivered in Q3 2021 and Q2 2022 respectively. With such a pace of the recovery, the future of the cold stacked drillships Valaris DS-3 and Valaris DS-5 becomes darker day by day.

On the semi-sub front, Valaris has one available rig - Valaris 8504 - which is currently warm stacked in Malaysia. Four semi-subs (Valaris 8500, Valaris 8501, Valaris 8502 and Valaris 8506) remain cold stacked. Their long-term future is also unclear.

Jack-ups

  1. Jack-up Valaris JU-75 got a one-well contract from W&T Offshore (WTI) in the U.S. Gulf of Mexico. The rig starts the job in February 2020 and is expected to work for 30 days.

Previous fleet updates contained many jack-up contracts so it's not surprising that the company did not have much additional news on this front.

Retirements

  1. Semi-sub Valaris 6002 finished the contract with Petrobras (PBR) in Brazil (the rig worked from July 2013 to January 2020) and was immediately retired. Valaris 6002 was built in 2001, so its useful life turned out to be less than 20 years. This decision is a vivid reminder of the rate of oversupply in the benign environment semi-sub segment.
  2. Semi-sub Valaris 5006 was retired from the fleet. The rig was built in 1999 and finished the contract with INPEX in Australia in August 2019.
  3. Jack-up Valaris JU-96 was retired from the fleet. The rig was built back in 1982 and finished its latest contract with Saudi Aramco in October 2019.
  4. Jack-up Valaris JU-68 was retired from the fleet. The rig has been previously classified as held for sale.
  5. Jack-up Valaris JU-70 is now classified as held for sale. The rig was built back in 1981.

Retirements of old jack-ups are not surprising at all. The retirements of relatively "fresh" semi-subs highlight the challenging situation with supply/demand balance in the benign environment semi-sub segment. As the time goes by, the value of Ensco's four stacked modern semi-subs decreases, just like their chances to get back to work.

Conclusion

Valaris is a very big company, so it will always have plenty of developments in fleet status reports. The situation on the floater side remains challenging, and the company (as well as the industry) needs long-term contracts to improve its position. I continue to expect that drillship dayrates will gradually increase to $250,000 over the course of this year, but it is clear that it will take time as short-term jobs put pressure on dayrate upside. In my opinion, Valaris shares stay speculative and more suited for trading than for buy-and-hold investing.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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