The offshore drilling market is roaring back to life, spurred by a global thirst for hydrocarbons and fueled by $70+ Brent prices. Valaris Limited, a titan of the industry, just announced their Q1 2024 earnings, revealing an impressive backlog of over $4 billion, a testament to their relentless contract wins. But beneath the surface of these seemingly positive results lies a subtle shift, a strategic maneuvering in the face of Saudi Aramco's recent jackup suspensions, a development that could have far-reaching implications for the entire offshore sector.

Aramco's decision to delay capacity expansion plans, resulting in the suspension of 22 jackups, sent ripples across the industry. This move, ostensibly driven by the Kingdom's comfortable spare capacity, was initially perceived as a potential blow to offshore demand, particularly for jackups. However, Valaris, seemingly unfazed, painted a remarkably sanguine picture during their earnings call.

While acknowledging the inherent uncertainties surrounding Saudi's rig count, Valaris emphatically stated their belief that the Aramco suspensions will have minimal, if any, impact on their business. This assertion, far from being a hollow reassurance, appears to be backed by a calculated strategy, a deliberate positioning to capitalize on the unfolding market dynamics.

Let's delve into the numbers. Valaris, through its unconsolidated joint venture with Aramco, ARO Drilling, has eight rigs leased in Saudi Arabia, with two more slated to commence leases this year. The combined charter revenue from these leased rigs constitutes a mere 5% of Valaris' total contract backlog. This minimal exposure, a strategic decision to diversify their fleet geographically, insulates them from any significant fallout from Aramco's actions.

Further bolstering their confidence is the robust state of the global jackup market. Valaris highlighted that global marketed utilization is at a near-record 95%, with the contracted rig count reaching a nine-year peak. Even if all 22 suspended Aramco rigs were to be released, Valaris estimates that only about half would be competitive in the international market. This implies a manageable influx of 11 rigs, a number easily absorbed by the current demand, particularly with ongoing demand growth in the Middle East, Southeast Asia, and West Africa.

Valaris, recognizing this opportunity, made a bold move. They opted to terminate the lease contract for one of their ARO rigs, the VALARIS 143, rather than accept a 12-month suspension. This decisive action, resulting in a negligible $4 million backlog reduction, speaks volumes about their faith in the global jackup market and their ability to redeploy the rig promptly in a more lucrative location.

This move, seemingly a minor footnote in their earnings call, could be a shrewd strategic play. By proactively releasing a high-specification jackup, Valaris effectively reinforces the global market's tightness. They're betting on robust demand absorbing this newly released capacity at a potentially higher day rate, effectively turning a potential liability into a profitable asset.

This calculated risk-taking extends to their floater strategy as well. While Valaris remains committed to reactivating their three stacked seventh-generation drillships, the DS-11, DS-13, and DS-14, they are steadfast in their demand for meaningful returns on the $100+ million reactivation cost.

Here's where the hypothesis emerges. With global floater demand projected to outstrip supply over the next few years, and with limited viable reactivation candidates remaining on the sidelines, Valaris is perfectly positioned to drive a hard bargain.

Their recent acquisition of the DS-13 and DS-14 at bargain prices underscores their long-term vision, a calculated bet on the sustained upward trajectory of the floater market. They are prepared to exercise patience, allowing the market to tighten further before deploying these assets on long-term contracts at or near leading-edge day rates, maximizing their returns and further consolidating their market position.

The Saudi Aramco suspensions, while seemingly a disruptor, have inadvertently created a unique opportunity for Valaris. Their nimble response, combined with their unwavering focus on shareholder returns and a shrewd understanding of the evolving market dynamics, suggests a strategic vision that extends beyond short-term gains.

The question remains: is Valaris, through their calculated maneuvering in the wake of the Saudi squeeze, quietly positioning themselves to corner a significant share of the burgeoning offshore market? The coming quarters will reveal the answer, but the signs, subtle as they may be, point towards a potential power shift in the offshore drilling landscape, with Valaris at the helm.

Valaris Backlog Growth

The following chart shows the consistent growth of Valaris' backlog over the past six quarters, extracted from their earnings call transcripts.

Data Source: Valaris Limited Earnings Call Transcripts

"Fun Fact: Valaris, with its vast fleet and global reach, has drilled some of the deepest and most challenging wells in the world, contributing significantly to the discovery and production of vital energy resources."

"Infographic Idea: A map highlighting Valaris' global operations, with markers indicating key projects and rig deployments. This could visually showcase their scale and reach in the offshore market."