Valaris (

Source: Valaris 2Q 2020 report

Valaris’ plan is to equitize its debt and wipe out the common equity, while relying on the $500 million of DIP financing during the transition period. It also looks like the rights offering will be used to pay for the DIP financing.

So, the company will operate with liquidity consisting of $175 million of cash (as indicated by the press release) and $500 million of DIP financing. In addition, Valaris’ fleet will shrink significantly, so the company will have to support less rigs:

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Source: Restructuring support agreement

In the presentation published at the very end of the restructuring support agreement linked above, Valaris stated that significant re-contracting activity was not expected until mid-2021, similar to the view presented by Pacific Drilling (PACD). The company also expects that floater dayrates will decline in 2021 and remain flat in 2022 before rebounding in 2023-2025, leading to rig reactivations in 2025 (a truly nightmarish scenario for Transocean (RIG), which will file for bankruptcy if this scenario is realized in practice).

Source: Restructuring support agreement

In addition to scrapping rigs, Valaris will also aggressively cold-stack rigs which do not have contracts, as highlighted by the slide above. This is understandable given the fact that the company’s new forecast envisions that dayrates for dual-activity drillships will reach $250,000 only in 2025 (!). This is a very pessimistic forecast, but it is certainly better to craft a bankruptcy plan based on a very conservative forecast rather than plan the business based on rosy forecasts as many drillers did during the previous restructuring season.

In case Valaris is able to implement the restructuring support agreement, it will remain a viable enterprise, at least in the near term. The company has burned almost $400 million in operating cash flow this year, so its best chance is to eliminate all costs that can be eliminated, stack the excessive rigs and hope for the best.

That said, the restructuring support agreement is based on a conservative forecast and provides Valaris with a realistic chance to survive as a business, unless the whole industry goes completely bust for whatever reason.

In my opinion, investors and traders in the companies which have not announced their plans to restructure (like Transocean) should thoroughly study Valaris’ dayrate assumptions. These are modelling assumptions, and the situation in the offshore drilling market may improve more quickly, but those who bet on the first signs of floater dayrate rebound in 2021 will be proven wrong, in my view.

For current equityholders, there is nothing more to lose. The stock will start trading on the OTC and will trade close to zero, more like Noble Corp. (OTCPK:NEBLQ) than Diamond Offshore (OTCPK:DOFSQ).

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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.

Additional disclosure: I may trade any of the above-mentioned stocks.