Why Valaris Limited Rocketed Over 40% This Week

Shares of Valaris (VAL +4.97%) rallied 48.1% this week through 11:50 a.m. Friday, according to data from S&P Global Market Intelligence.

On Monday, the company announced essentially a “merger of equals” with Transocean (RIG +5.89%), a tie-up that would create the largest offshore oil rig company on the public markets.

Investors applauded the deal, looking forward to ample cost synergies that may de-risk the company going forward.

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NYSE: VAL

Valaris

Today’s Change

(4.97%) $4.42

Current Price

$93.31

Key Data Points

Market Cap

$6.2B

Day’s Range

$85.94 - $93.46

52wk Range

$27.15 - $93.46

Volume

1.2M

Avg Vol

1.4M

Gross Margin

26.69%

$200 million in synergies to look forward to

On Monday, Valaris and Transocean announced a merger agreement under which Transocean will acquire Valaris, with each Valaris shareholder to receive 15.235 Transocean shares for each Valaris share owned. The exchange ratio impled a 31.6% premium to Valaris’ price heading into the week. The resulting company will be 53% owned by Transocean shareholders and 47% owned by Valaris shareholders, as the two companies were of similar size prior. Transocean’s CEO will remain in the role, and Transocean will retain nine of 11 board seats.

Investors appear to be quite enthusiastic about the merger synergies outlined in the presentation. The two companies predict the tie-up will facilitate $200 million in cost savings. Those savings are in addition to the $250 million that Transocean had already targeted to cut from its expense base over 2025 and 2026. That should enable the company to pay down debt over the next two years, cutting its leverage ratio in half, from 3.0 times EBITDA at the time of closing to 1.5 within 24 months.

Image source: Getty Images.

Offshore rigs are consolidating

With the tie-up, Transocean and Valaris would become the largest offshore oil rig public company in terms of backlog. That should give the company the scale to be consistently profitable, even in the low oil-price environment we’ve experienced in the past year.

The past decade has been difficult for offshore rig stocks. The shift to lower-carbon vehicles, combined with hydraulic fracking technology, has dampened oil prices and lowered the rates rig operators can charge.

Still, as the industry consolidates, fewer remaining players should become more profitable, making them attractive to oil and gas investors looking for ways to play higher oil prices.