situations, with a focus on spin-offs. Since then, every aspiring investor has read this book and the
opportunity set has been picked over, leading to compressed returns. I’d like to posit that post-
bankruptcy securities have not yet been picked over, but have rather similar dynamics;
-Uneconomic sellers who were former creditors with no desire to own shares (particularly if there is a
negative ESG factor involved that wasn’t relevant when they were creditors a few years ago)
-Incentives to impair assets and lowball future economics in public reporting in order to cram down
subordinate claims
-Likelihood of cost savings, synergies and better economics as management is freed from prior restraints
-Management options set based on initial trading values, incentivizing them to have minimal
shareholder communication until options are struck
-Improved competitive position as newly emerged companies often have less debt than competitors
To this, I’d add investor memory and hatred by those who lost money in the last iteration of the
business. Finance guys have long memories and often ignore dynamic changes to businesses in post-
bankruptcy securities. With this little dissertation out of the way, I’m going go dumpster diving…
For the past half-decade, roughly once a year, investors have gotten excited about the prospects of
offshore drilling. This brief moment in time has repeatedly been caused by the price of oil rallying, while
management teams claimed that “tendering activity is picking up and we have great visibility on our
forward contract book,” or some nonsense like that. Then the bottom falls out and everyone loses globs
of money and swears off offshore drillers forever, until the oil price picks up again. This is because of the
incredible leverage in these shares, if you can actually catch the turn (if there is ever a turn). As a result,
it seems that losing money offshore has become something of a right of passage for value investors. I
bring all of this up because I clearly have not learned my lesson and am once again long an offshore
driller.
On May 3, Valaris (VAL - USA) exited bankruptcy with $655 million in cash and $550 million in debt for a $100
million net cash balance sheet. There are 75 million shares and the stock trades at $21 for a $1.575 billion
market cap and a $1.475 billion EV. VAL controls the world’s largest fleet of modern offshore rigs
including 11 drillships, 5 semi-submersibles and 44 jackups. The replacement cost of this fleet is in
excess of $15 billion (though you’d be insane to try and replace it). Simultaneously, as no one will ever
again green-light a $500m-$1b deep water rig newbuild contract, there won’t be any supply coming
either. Looking back on past offshore cycles, there was always the problem where a new generation rig
would show up and obsolete a lot of 30-year pieces of equipment somewhere around year 7. With this
threat out of the way, current rigs may have a longer runway.
When there’s a commodity where new supply will be restricted, I’m always intrigued. When that
commodity is recovering (anemically off the lows) I’m further intrigued. When I can buy that commodity
for about a dime on the dollar, I’m even more intrigued. When I learn that the company will be FCF
positive in 2021 based on the current backlog, I genuinely get interested. Then, when I realize there’s
effectively no backlog after 1H 2022, I sort of shrug. Then again, if an investor expects offshore rates to
