J.P. Morgan analyst Arun Jayaram reiterated the Underweight rating on Valaris Limited (NYSE:VAL) on Monday, lowering the price forecast from $40 to $38.
The analyst suggests that while the company has made significant fleet rationalization efforts, it may still need to implement further cost-cutting measures to meet the mid-point of its 2025 EBITDA guidance of $530 million.
According to Jayaram, despite an incident causing two weeks of downtime on the DS-17 drillship in the first quarter of 2025, reduced downtime could lead to a slight EBITDA beat compared to the forecasted midpoint.
Meanwhile, the analyst acknowledges challenges such as a potential slowdown in demand in the ultra-deepwater market, utilization gaps from expiring contracts, and a reduction in opportunities for certain rigs.
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There’s also a potential for more rig suspensions in Saudi Arabia, though some rigs leased to ARO continue to operate under short-term extensions while longer-term lease agreements are negotiated.
Jayaram projects 1Q25 EBITDA to be slightly above initial estimates due to reduced downtime.
The analyst has lowered their 2025 and 2026 EBITDA estimates to $522 million and $656 million, respectively, from previous projections of $539 million and $698 million.
Jayaram writes that these updated figures are 0.8% and 2.8% below Wall Street’s expectations.
The analyst now forecasts free cash flow of $28 million in 2025 and $132 million in 2026, assuming capital expenditures of $369 million (net of $75 million in reimbursements) for 2025 and $277 million for 2026.
The analyst notes that, due to the potential for ongoing white space challenges through 2025, investors may focus more on companies with a higher concentration of committed floater backlog.
Price Action: VAL stock is up 4.08% at $40.86 at last check Tuesday.
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