Valaris Ltd

The offshore drilling industry is cyclical and primarily influenced by global energy demand, oil and gas supply dynamics and customer capital allocation decisions. Periods of oil oversupply generally place downward pressure on commodity prices, while periods of undersupply can result in higher and more volatile oil prices, influencing investment decisions across the upstream sector. While the oil market is currently in a period of oversupply, industry fundamentals are generally viewed as constructive over the medium to long term. Market participants generally expect the current oil supply imbalance to shift to a structurally tighter market over the next few years, driven by past underinvestment in upstream development and slowing production growth from non-OPEC sources. Industry studies, including those published by the International Energy Agency and the U.S. Energy Information Administration, indicate that substantial upstream investment is required to offset natural field declines and maintain existing production levels. Customers continue to emphasize the need for sustained investment in oil and gas to support secure, reliable and affordable energy supply, with increasing focus on offshore developments, particularly in deepwater. Compared to other sources of supply, deepwater projects typically offer large resource potential, competitive project economics and lower carbon intensity per barrel. According to Rystad Energy estimates, approximately 70% of this expected activity is associated with projects with breakeven oil prices below $50 per barrel and over 80% is associated with projects with breakeven prices below $60 per barrel. Operating results in the offshore drilling industry are directly related to the demand for and the available supply of drilling rigs, each of which affects rig utilization and day rates. Rig attrition in the industry over the last decade, particularly for floaters, has resulted in a smaller global fleet of rigs that is available to meet customer demand.

The offshore contract drilling industry is highly competitive. Drilling contracts are, for the most part, awarded on a competitive bid basis. Price is often the primary factor in determining which contractor is awarded a contract, although quality of service, operational and safety performance, equipment suitability and availability, location of equipment, reputation and technical expertise are also factors. Valaris is a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. The fleet of offshore drilling rigs is among the largest in the world and includes one of the highest specification ultra-deepwater fleets, as well as a leading premium jackup fleet. As of February 20, 2026, Valaris owns 46 rigs, including 13 drillships, two semisubmersible rigs, 31 jackup rigs and a 50% equity interest in ARO, its 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional nine rigs. Customers include many of the leading international and government-owned oil and gas companies, in addition to many independent operators. During the year ended December 31, 2025, the five largest customers accounted for 49% of consolidated revenues. Petrobras, BP and Azule, customers who account for 10% or more of consolidated revenues, accounted for 35% of consolidated revenues.

Valaris provides drilling services on a day rate contract basis. Under day rate contracts, the company provides an integrated drilling service that includes the provision of a drilling rig and rig crews for which it receives a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. The company also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of its rigs. Customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well. The business consists of four operating segments: Floaters, which includes drillships and semisubmersible rigs; Jackups; ARO; and Other, which consists of management services on rigs owned by third parties and the activities associated with lease arrangements with ARO. Floaters, Jackups and ARO are also reportable segments.

The Floaters segment includes drillships and semisubmersible rigs. As of December 31, 2025, the company owned 15 floater rigs, including 13 drillships and two semisubmersible rigs. The 13 drillships are capable of drilling in water depths of up to 12,000 feet. The moored semisubmersible is capable of drilling in water depths of up to 8,000 feet and the dynamically positioned semisubmersible is capable of drilling in water depths of up to 10,000 feet. During the year ended December 31, 2025, Floater revenues were $1,224.1 million ¹ and Floater contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $765.6 million ². Floater operating income was $376.6 million ³. The Jackups segment includes 31 jackup rigs as of December 31, 2025. Jackups are drilling rigs that operate in shallower water depths of 400 feet or less. During the year ended December 31, 2025, Jackup revenues were $823.4 million ⁴ and Jackup contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $486.5 million ⁵. Jackup operating income was $280.5 million ⁶. The ARO segment represents the 50/50 unconsolidated joint venture with Saudi Aramco. As of December 31, 2025, ARO owned nine jackup rigs and had ordered two newbuild jackup rigs. During the year ended December 31, 2025, ARO revenues were $571.0 million ⁷ and ARO contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $360.7 million ⁸. ARO operating income was $66.6 million ⁹. The Other segment consists of management services on rigs owned by third parties and the activities associated with the bareboat charter arrangements with ARO. During the year ended December 31, 2025, Other revenues were $160.4 million ¹⁰ and Other contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $70.6 million ¹¹. Other operating income was $77.0 million ¹².

The Floaters segment includes drillships and semisubmersible rigs. As of December 31, 2025, the company owned 15 floater rigs, including 13 drillships and two semisubmersible rigs. The 13 drillships are capable of drilling in water depths of up to 12,000 feet. The moored semisubmersible is capable of drilling in water depths of up to 8,000 feet and the dynamically positioned semisubmersible is capable of drilling in water depths of up to 10,000 feet. During the year ended December 31, 2025, Floater revenues were $1,224.1 million ¹³ and Floater contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $765.6 million ¹⁴. Floater operating income was $376.6 million ¹⁵. The Jackups segment includes 31 jackup rigs as of December 31, 2025. Jackups are drilling rigs that operate in shallower water depths of 400 feet or less. During the year ended December 31, 2025, Jackup revenues were $823.4 million ¹⁶ and Jackup contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $486.5 million ¹⁷. Jackup operating income was $280.5 million ¹⁸. The ARO segment represents the 50/50 unconsolidated joint venture with Saudi Aramco. As of December 31, 2025, ARO owned nine jackup rigs and had ordered two newbuild jackup rigs. During the year ended December 31, 2025, ARO revenues were $571.0 million ¹⁹ and ARO contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $360.7 million ²⁰. ARO operating income was $66.6 million ²¹. The Other segment consists of management services on rigs owned by third parties and the activities associated with the bareboat charter arrangements with ARO. During the year ended December 31, 2025, Other revenues were $160.4 million ²² and Other contract drilling expenses (exclusive of depreciation and reimbursable expenses) were $70.6 million ²³. Other operating income was $77.0 million ²⁴.

On February 9, 2026, Valaris and Transocean entered into a business combination agreement under which Transocean will acquire all of the issued and outstanding common shares of Valaris in exchange for shares of Transocean at an exchange ratio of 15.235 Transocean shares for each Valaris share ²⁵. Following the consummation of the Business Combination, Transocean's existing shareholders and Valaris' existing shareholders will own approximately 53% and 47%, respectively, of the combined company on a fully diluted basis assuming conversion to shares of Transocean's exchangeable bonds due 2029 ²⁶. If the Business Combination Agreement is terminated under specified circumstances, Valaris will be required to pay to Transocean a termination fee of $173.0 million ²⁷. During the year ended December 31, 2025, the company sold VALARIS 247, VALARIS 75, VALARIS 102, VALARIS 145, VALARIS DPS-3, VALARIS DPS-5, VALARIS DPS-6 and an office building in Angola. The sales of VALARIS 247, VALARIS 75 and the Angola office building resulted in aggregate pre-tax gains of $115.4 million ²⁸. The sales of the Retired Semis and Retired Jackups resulted in non-cash losses on impairment of $27.3 million ²⁹. The company repurchased 2.0 million ³⁰ shares for $100.0 million ³¹ under its share repurchase program during the year. As of December 31, 2025, approximately $175.0 million ³² was available for share repurchases pursuant to the program. The board of directors has authorized a share repurchase program under which the company may purchase up to $600.0 million ³³ of its outstanding Common Shares.

Total operating revenues for the year ended December 31, 2025 were $2,369.0 million ³⁴, compared to $2,362.6 million ³⁵ in 2024. Net income attributable to Valaris was $982.8 million ³⁶ for 2025, compared to $373.4 million ³⁷ in 2024. Diluted earnings per share were $13.86 ³⁸ in 2025 versus $5.12 ³⁹ in 2024. Operating income was $477.0 million ⁴⁰ in 2025, compared to $352.3 million ⁴¹ in 2024. Net cash provided by operating activities was $546.2 million ⁴² in 2025, compared to $355.4 million ⁴³ in 2024. The company recorded an income tax benefit of $426.8 million ⁴⁴ in 2025, compared to an income tax expense of $0.4 million ⁴⁵ in 2024.

Within the floater segment, utilization for the global marketed drillship fleet was approximately 88% at the end of 2025 and included 13 drillships which were not working at year-end due to gaps between contracts. Market conditions are expected to improve as these rigs commence new contracts during 2026, including four Valaris drillships that are scheduled to return to work later in the year following idle periods between contracts. Customers continue to favor technically capable and efficient assets to support complex deepwater developments. Historically, seventh-generation drillships have achieved higher utilization and stronger day rates relative to older assets, a trend that is expected to continue. The company believes it is well positioned in the market with 12 of 13 of its drillships being seventh-generation units. From a supply perspective, rig attrition over the past decade has resulted in a reduced global floater fleet to meet customer demand. The supply of benign environment floaters has decreased by more than 45% from a peak of approximately 280 rigs in 2014 to 150 rigs as of December 31, 2025 ⁴⁶. This decrease is primarily attributable to rig retirements, including 14 benign environment floaters retired in 2025. Further, given the expected high construction cost and lack of shipyard capacity, the company does not believe that market conditions are supportive of floater newbuild construction for the foreseeable future.

Global jackup utilization remains solid, with utilization at the end of 2025 of approximately 89% ⁴⁷, driven primarily by national oil companies focused on energy security and infrastructure development. Saudi Aramco recently recalled seven previously-suspended jackups to recommence operations in 2026 and there are other ongoing multi-rig tenders in the Middle East, which should further support the supply and demand balance of the global jackup fleet. From a supply perspective, as of December 31, 2025, there were 494 jackups in the global fleet ⁴⁸, with 29% of the current jackup fleet being more than 40 years of age with limited useful lives remaining. The company believes that some of the jackups that are currently idle are not competitive, either due to their age or the length of time stacked. Expenditures required to reactivate some of these rigs may prove cost prohibitive and drilling contractors may instead elect to scrap certain rigs.

Inflationary pressures impact the company's cost base, resulting in increased personnel costs as well as in the prices of goods and services required to operate its rigs or execute capital projects. Additionally, the weakening of the U.S. dollar against foreign currencies may increase costs in certain foreign jurisdictions in which the company operates. The company expects that its costs will continue to rise in the near term, particularly given the potential impact of increased tariffs on global trade, and although certain of its long-term contracts contain provisions for escalating costs, the company cannot predict with certainty its ability to successfully claim recoveries of higher costs from its customers under these contractual stipulations.

Based on current projections, the company expects capital expenditures during 2026 to approximate $425.0 million to $475.0 million ⁴⁹, primarily relating to maintenance and upgrade projects, including contract-specific capital expenditures. Depending on market conditions, contracting activity and future opportunities, the company may make additional capital expenditures to upgrade rigs for customer requirements and acquire additional rigs, subject to certain restrictions within the Business Combination Agreement.

The company expects to fund its short-term liquidity needs, including contractual obligations and anticipated capital expenditures, as well as working capital requirements, from cash and cash equivalents and cash flows from operations. Additionally, the company has liquidity available under its senior secured revolving credit agreement, which matures in 2028. The company expects to fund its long-term liquidity needs, including contractual obligations and anticipated capital expenditures, from cash and cash equivalents, cash flows from operations, as well as cash to be received from the distribution of earnings from ARO. The company may rely on the issuance of debt and/or equity securities in the future to supplement its liquidity needs, subject to certain restrictions provided within the Business Combination Agreement. Cash and cash equivalents as of December 31, 2025 were $599.4 million ⁵⁰. The company has no debt principal payments due until 2030 and had $375.0 million ⁵¹ available for borrowing, including up to $150.0 million ⁵² for the issuance of letters of credit, under the 2028 Credit Agreement as of February 13, 2026.

The company expects to receive cash from ARO in the future both from the maturity of its Notes Receivable from ARO and from the distribution of earnings from ARO. The distribution of earnings to the joint-venture partners is at the discretion of the ARO board of managers, consisting of 50/50 membership of managers appointed by Saudi Aramco and managers appointed by the company, with approval required by both shareholders. ARO has not made a cash distribution of earnings to its partners since its formation. ARO had cash and cash equivalents of $99.3 million ⁵³ as of December 31, 2025. The Notes Receivable from ARO mature during 2027 and 2028. The company expects to agree to extend the maturity of the Notes Receivable from ARO to facilitate its capital allocation priorities, in particular its newbuild jackup rig program. In 2025, interest owed by ARO on the Notes Receivable from ARO of $24.1 million ⁵⁴ was paid in kind in December 2025 by increasing the principal balance of the Notes Receivable from ARO.

The company has a potential obligation to fund ARO for newbuild jackup rigs. The Shareholder Agreement specifies that ARO shall purchase 20 newbuild jackup rigs. The joint venture partners intend for the newbuild jackup rigs to be financed from available cash on hand and from ARO's operations and/or funds available from third-party financing. In the event ARO has insufficient cash or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion ⁵⁵ from each partner to fund the newbuild program. Following the delivery of Kingdom 2, the company's commitment to fund the newbuild program has been reduced to $1.1 billion ⁵⁶. In October 2024 and November 2025, ARO ordered the third and fourth newbuild jackups, Kingdom 3 and Kingdom 4, respectively, for a purchase price of approximately $300.0 million ⁵⁷ each.

The success of the business depends on the level of activity in offshore oil and natural gas exploration, development and production, which can be significantly affected by volatile oil and natural gas prices. The offshore contract drilling industry is highly competitive and cyclical. The current backlog of contract drilling revenue may not be fully realized and may decline significantly in the future; as of February 17, 2026, the contract backlog was approximately $4.7 billion ⁵⁸. The company's non-U.S. operations involve additional risks not typically associated with U.S. operations, and revenues from non-U.S. operations were 86% ⁵⁹ of total consolidated revenues during the year ended December 31, 2025. The pending Business Combination with Transocean may be delayed or not occur at all, and if the Business Combination Agreement is terminated under specified circumstances, Valaris will be required to pay a termination fee of $173.0 million ⁶⁰ to Transocean. The company has a potential obligation to fund ARO for newbuild jackup rigs, with a maximum aggregate contribution of $1.25 billion ⁶¹ from each partner, and following the delivery of Kingdom 2, the commitment has been reduced to $1.1 billion ⁶². The company's drilling contracts with national oil companies may expose it to greater risks than normally assumed in drilling contracts with non-governmental customers, and the company currently owns and operates 11 drilling rigs that are contracted with national oil companies ⁶³.

Management's message emphasizes that the company is a leading provider of offshore contract drilling services with a fleet among the largest in the world, including one of the highest specification ultra-deepwater fleets and a leading premium jackup fleet. The pending business combination with Transocean is a central strategic priority, with the exchange ratio set at 15.235 Transocean shares for each Valaris share ⁶⁴. Management highlights that following the consummation of the Business Combination, Transocean's existing shareholders and Valaris' existing shareholders will own approximately 53% and 47%, respectively, of the combined company on a fully diluted basis ⁶⁵. The company's strategy has been to focus on ultra-deepwater floater and premium jackup operations and de-emphasize other assets and operations that no longer meet standards for economic returns. Management notes that while taking into account certain restrictions on the sales of assets under its debt agreements and within the Business Combination Agreement, as part of its strategy, the company may act opportunistically from time to time to monetize assets to enhance shareholder value and improve its liquidity profile, in addition to reduce holding costs by selling or disposing of lower-specification or non-core rigs. The company expects capital expenditures during 2026 to approximate $425.0 million to $475.0 million ⁶⁶.