Noble and Valaris – restructured and deleveraged rig companies are back in the market at a discount to unrestructured peers

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I have bought into two new transactions in the last two days: Noble and Valaris. These are rig owners that went through bankruptcy, got deleveraged and relisted. The companies are trading at significant discount to its peers, that have not deleveraged. Very interesting opportunity. I enclose summaries from research reports published yesterday on both. It is wrong not to look into those.

DNB note published this morning on Noble:

Ahead of the relisting
Noble is set to begin trading on the NYSE tomorrow (9 June), following its current listing on the OTC market. We believe transitioning to a main exchange will help it reach a larger investor audience and raise investor awareness as well as improve trading volumes. In sum, we believe this may help it trade on a par with peers, or even at a premium, compared to its current discount valuation. To close the gap to its most relevant peer, Maersk Drilling, we see 33% potential upside on asset values, while on 2023e EV/EBITDA (8.6x), we calculate 54% potential upside in Noble’s shares. We maintain our BUY and USD32 target price, and keep it among our preferred investment ideas in the offshore drilling sector.   An industry leader and consolidator. Since emerging from Chapter 11 in February, Noble has executed a merger with Pacific Drilling and we expect the company to drive industry consolidation. Of its 12 floaters and 12 jackups, only three rigs are uncontracted, supporting its contracting and operational success. From discount to possible premium valuation. Given its current listing in the OTC market, we believe the transition to a main stock exchange could help the stock be valued on a par with peers, or even at a premium. We see elements within the Noble equity story that differentiate it from peers: 1) a high portion of the fleet is contracted and has solid backlog coverage; 2) we expect positive near-term cash-flow generation; and 3) we see potential for the company to drive industry consolidation. BUY and USD32 target price reiterated – attractive stand-alone and relative valuation. Based on a stand-alone valuation, we have a fully diluted NAV of USD29/share, 21% above the recent OTC market price of cUSD24/share. Based on relative valuation, we consider Maersk Drilling as its closes peer, and see 33% (USD32/share) and 54% (USD37/share) potential upside for Noble on asset values and 2023e EV/EBITDA, respectively.      

DNB´s Comment on Valaris published today:

 News Comment – Building some UDW backlog
 Having little backlog and visibility for its UDW floaters, the 3-year extension announced with Chevron for its high-spec 7G drillship Valaris DS-18 (Relentless) is likely to be welcomed by investors. While no economics were announced, we believe the average rate could be cUSD250k–260k for the 3-year period starting early 2022. It is unclear if MPD services are included, but we note that the rig is MPD capable, and we understand this service has been available under its current contract with Chevron. Compared to our estimates, we are modelling such rigs (conservatively) at USD210k–225k for 2022/23. Hence, it should be supportive for our estimates. Looking ahead, we believe Valaris could be well placed to add more UDW backlog in Australia, the US GoM and Angola. Contract announced. After the US market close yesterday, Valaris announced that it has secured a 3-year extension for the Valaris DS-18 (ex Relentless) (7G drillship from 2014) starting in Q2 2022, in direct continuation with its existing contract with Chevron. The rig is among the highest specification drillships in the global fleet, having features like MPD, two 7-RAM BOPs and high hook load capacity. No contract economics were disclosed. Benefiting from incumbent position. Valaris’ DS-18 got contracted by Chevron in H2 2019 for work starting in mid-2020, and to our understanding Chevron has been working to extend both this rig and the Deepwater Conqueror of Transocean (due to complete its current contract late-2021). Hence, we believe the announced contract is a result of a direct negotiation as opposed to a full tender process. Day-rate seen around the mid-USD200k level. Based on the current market and industry updates, we believe the day-rate level may include annual escalations and that it could average USD250k–260k. As the rig is MPD-capable, this service may be included in the contract and we believe this service has been available under its existing contract with Chevron. Thus, we estimate an annual EBITDA contribution of USD35m–40m. Potentially above our modelled day-rate. In our generic (conservative) modelling of 7G drillships, we have assumed USD210k–225k for 2022/23, with annual EBITDA contribution of USD22m in 2023e. Hence, we would consider a potential rate level around the mid-USD200k level as supportive for our estimates and valuation, even if MPD is included (this service is typically priced at USD20k/day). At the same time, as the contract is extending into early 2025, it may be slightly on the downside for the out-years compared some consensus participants. Helping backlog and visibility. As Valaris has a large floater fleet (16 UDW rigs) with most rigs sitting idle (10 rigs) and the contracted rigs mostly having short-term contracts, we believe building backlog has been a priority from a portfolio perspective. We also believe investors will appreciate backlog build in the current situation as it will help the cash-flow profile. More could come Valaris’ way. While most jobs in the UDW market still are of short-term nature (except Petrobras tenders), there is small selection of long-term opportunities, including a development programme in Angola, a PnA programme in Australia (for a semi) and a 20k job in the US GoM. We believe Valaris is among the contenders on these jobs and that rig selection on all these jobs should be in the next few months.       Last published research note:
Recommendation: Buy

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