This is a correction of a rating action commentary published on
It adds
Fitch Ratings has assigned a 'B+' first-time Long-Term Issuer Default Rating (IDR) to
Valaris' ratings reflect the expected sharp decline in leverage in 2024 as the currently strong floating drilling rig day rates feed into the company's next year's contract prices. Valaris' credit profile benefits from one of the largest fleets of offshore jackups and floaters, short-term revenue visibility due to presence of contracts with minimum prices and volumes, and healthy liquidity.
Valaris' profile is negatively affected by high volatility in day rates and rig utilization combined with asset-heavy business model and high operating leverage, which together result in considerable swings in EBITDA depending on the industry cycle. Valaris completed a debt restructuring in
Key Rating Drivers
Leader in Offshore Drilling: Valaris owns 16 floating rigs, including 11 drillships and five semisubmersible rigs, and 36 jackups. Its offshore drilling fleet is the largest globally by number of rigs. Valaris operates in all major offshore oil and gas basins, such as the
Rebound in Floater Market: As long-term forward oil prices started to increase in 2021, market day rates for floaters began growing at a fast pace and almost doubled between end-2020 and end-2022. Floater utilization has also been improving. Fitch does not assume any significant growth in market day rates in 2H23-2H24 and expects rates to decline in 2025 based on its oil price deck. The number of contracted floaters has been largely stagnant worldwide in 2017-2022, and Fitch expects this number to increase in 2023-2024.
Stacked floater rigs number peaked in early 2017 after oil prices collapsed in 2014. More than half of stacked rigs as of early 2017 exited the market by end-2022. Six of Valaris' 16 floaters are currently stacked, and this share of stacked rigs is roughly in line with total market numbers.
Jackup Fleet Improves Stability: Valaris' jackup business enhances stability of its cashflows. Jackup day rates are not as volatile as those for floating rigs and global jackup utilization fell less dramatically than floaters utilization in 2017. The higher resilience of the jackup market is underpinned by shorter payback for shallower offshore upstream projects. Valaris generated most of its EBITDA from jackup segment in 2022. Fitch expects this share will decrease in 2023-2026 as the company's floaters move away from lower legacy day rates. Valaris also benefits from stability of its other businesses, including bareboat charters to its JV with
Envisaged Decline in Leverage: Valaris' rating is based on a sharp reduction in its gross leverage that Fitch forecasts in 2024. Valaris exited chapter 11 restructuring in
Fitch projects Valaris' EBITDA to improve to approximately
Capex, Reactivations Weigh on FCF: Fitch expects Valaris will boost capex to accommodate strengthening demand for offshore drilling services. Fitch projects its annual capex including a purchase of one new build drillship to average roughly
No Dividends, Limited Buybacks: Fitch does not project any dividends to be paid by Valaris in the medium term. The company has an approved
Growing JV with Aramco: Valaris has a 50% stake in an equity method-accounted JV with
Bond Recoveries: The
Derivation Summary
Valaris's peers include
Fitch expects Precision and KCA Deutag to generate significantly lower revenue than Valaris and have comparable EBITDA margins in 2024-2025. Their leverage is projected to be higher, but they are involved in the onshore drilling segment, which is more stable than the offshore one.
Nabors has modestly larger scale than Valaris and a more diversified and less volatile cash flow profile. Gross debt and leverage are higher than Valaris and Nabors is subject to meaningful near- and medium-term refinancing risks. CGG, an offshore seismic data processing and equipment manufacturing company, is also exposed to the volatile offshore oilfield services market and also completed a debt restructuring in 2018. It has higher maintenance capex requirements than Valaris and higher expected leverage.
Key Assumptions
Brent oil prices of
Revenue growth of 15% in 2023, 30% in 2024 followed by declines thereafter;
EBITDA margins growing to 10% in 2023 and into the low 20% range in 2024-2025 while decreasing thereafter;
Capex, including newbuilds, averaging
Stock buybacks of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Sustainably stronger offshore drilling market fundamentals, including high day rates, longer contracts and growing backlog and rig utilization;
Track record of conservative financial policy that keeps gross debt in check;
Midcycle EBITDA leverage below 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deteriorating market fundamentals such as decreasing day rates and offshore rig utilization;
Significant increase in gross debt;
Weakening liquidity;
Midcycle EBITDA leverage above 3.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Sufficient Liquidity: Valaris pushed its debt maturity from 2028 to 2030 with the bond refinancing. The company's combined negative FCF, including capex and working capital cash outflows, will reach
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes Valaris would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated;
Fitch has assumed a 10% administrative claim.
Going-Concern Approach
Valaris' GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level, upon which the agency bases the enterprise valuation. The GC EBITDA assumption for commodity price sensitive issuers at a cyclical peak reflects the industry's move from top of the cycle commodity prices to mid-cycle conditions and intensifying competitive dynamics.
The GC EBITDA assumption of
The GC EBITDA assumption reflects a loss of customers and lower margins than the near-term forecast, as E&P companies cut their costs. The EBITDA assumption also incorporates weak offshore drilling market fundamentals and Valaris' charters to Aramco, as well as overall high rig supply, but improving demand.
The assumption reflects the material decrease in the company's liabilities as well as the material write down in the value of the company's PP&E following the company's debt restructuring. Valaris eliminated
An enterprise value multiple of 5.0x EBITDA is applied to GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considered the following factors:
The historical bankruptcy case study exit multiples for peer energy oilfield service companies have a wide range with a median of 6.1x. The oil field service sub-sector ranges from 2.2x to 42.5x due to the more volatile nature of EBITDA swings in a downturn.
Fitch used a multiple of 5.0x to estimate the enterprise value of Valaris due to concerns of a downturn with a longer duration, a high exposure to offshore drilling rigs that can see meaningful volatility in demand and continued capital investment to reactive rigs.
Fitch also assumed a
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realized in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
Fitch assigns standard discounts to the liquidation value of the company's ?ash, accounts receivable, and inventory. Fitch is using a 30% liquidation value to the company's book value given the high uncertainty of assets valuations during a downturn.
The
The allocation of value in the liability waterfall results in recovery corresponding to a recovery rating of 'RR3' for
Issuer Profile
Valaris provides offshore drilling services to oil and gas companies across the globe. It owns the world's largest fleet of offshore rigs, including jackups and floaters. Valaris is incorporated in
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
ESG CONSIDERATIONS
Valaris has an ESG Relevance Score of '4' for Waste & Hazardous Materials Management; Ecological Impacts due to the risk that a possible offshore oil spill may affect the drilling company. This factor has a negative impact on the credit profile, and are relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
(C) 2023 Electronic News Publishing, source