Valaris (VAL) Q3 2026 earnings review
Valaris operating profit jumps 59%, but shipyard bills drain cash
Valaris, an offshore oil and gas driller, lifted its operating profit as idle deepwater drillships returned to work. Revenue rose 10% from last quarter to $594 million, while earnings before interest, tax, depreciation and one-offs climbed 56% to $151 million. Chief executive Anton Dibowitz said all ten active drillships now have contracts, and the regulatory approvals are in place to close the Transocean merger around December 1.
| Total operating revenue | $593.6M +10% from last quarter, flat from a year ago |
|---|---|
| Adjusted EBITDA | $150.6M +56% from last quarter |
| Contract backlog | $4.75B +$165M since August |
| Free cash flow | -$54.4M fourth negative quarter in a row by our math |
⚖️ Verdict: 🟢 Bullish
The story got better because the drillship restarts are finished, Middle East conflict costs started to fall, and $600 million in new contracts reversed last quarter's backlog drop. Regulatory clearance also removed the main hurdle to the Transocean deal. One caution: heavy shipyard spending and an $80 million rise in unpaid customer bills kept free cash flow negative at -$54 million by our math.
The question now is whether the fully contracted drillship fleet will turn cash flow positive once the business joins Transocean. One view is that the end of reactivation projects and higher daily rates will quickly bring in cash; the other is that weak shallow-water rig pricing and Middle East insurance costs will keep weighing on returns. The first combined quarterly report after the December closing will tell.
🐂 Bull Case
Returning Drillships Lifted Deepwater Revenue and Pricing
Valaris operates ultra-deepwater drillships, which are floating vessels that drill for oil and gas in deep water. Chief executive Anton Dibowitz said that "The pipeline of deepwater opportunities remains robust, the opportunities continue to convert to contracts, and day rates are moving higher". After idle gaps earlier in the year, VALARIS DS-15 started its contract in September and VALARIS DS-18 started after the quarter ended.
- Floater revenue excluding customer reimbursements: $346.0 million, up 24% from last quarter
- Drillship average daily revenue: $469,000, up from $451,000 last quarter and $425,000 a year ago
- Active drillship utilization: 80%, up from 68% last quarter and 49% in the first quarter
The numbers back up Dibowitz's claim, because all ten active drillships now have contracts and daily rates rose for afourth straight quarter. That lifted total operating income by 59% from last quarter to $81.3 million, as total contract drilling costs fell by 6.8 percentage points of revenue. Compared with a year ago, operating margin was still down 8.2 percentage points because depreciation rose 1.7 points and merger fees added 2.6 points.
What to watch: fourth-quarter operating days for the drillship fleet. A full quarter of work from both VALARIS DS-15 and DS-18 would push active utilization toward 90% and lift deepwater earnings again.
New Contracts Reversed the Backlog Decline
Contract backlog is the total future revenue locked in under signed drilling contracts, and it had dropped by $344 million in the prior report. Since August, the offshore driller added about $600 million in new contracts, which pushed total backlog up by $165 million to $4.75 billion. Its Saudi Arabian joint venture, ARO Drilling, also grew its owned-rig backlog from $714 million to $1.16 billion.
This matters because the company won more new work than it burned through during the quarter, so its multi-year revenue cushion is growing again. What to watch: new contract awards for the drillship fleet, where backlog still dipped by $112 million since August. Fresh deepwater extensions in the next fleet report would show that drillship demand is keeping pace with shallow-water renewals.
Middle East Conflict Costs Started to Ease
Regional fighting in the Middle East had raised insurance bills and delayed shipyard work on two shallow-water jackup rigs, cutting second-quarter Adjusted EBITDA (earnings before interest, tax, depreciation and one-offs) by $30 million. In the third quarter, that hit shrank to $24 million after the company completed the "negotiation of longer-term insurance policies at lower rates" and put both VALARIS 250 and 116 back to work.
Because both rigs are now earning charter revenue again with ARO Drilling and insurance rates are locked in lower, the cost drag is shrinking as promised. What to watch: the quarterly Middle East cost figure in the annual report. A further drop below $20 million would show the remaining expense is mostly lower insurance premiums rather than lost work days.
🐻 Bear Case
Shipyard Spending Kept Free Cash Flow Negative
"All ten of our active drillships are now on contract, positioning us to generate meaningful earnings and cash flow," chief executive Anton Dibowitz said. While operating profit jumped, Valaris still burned cash in the third quarter because putting idle ships back to work required heavy shipyard spending and tied up working capital.
- Free cash flow (operating cash flow minus capital spending): -$54.4 million by our math, the fourth negative quarter in a row
- Capital expenditures: $121.6 million (20.5% of revenue), up from $105.5 million last quarter
- Accounts receivable (unpaid customer bills): $538.1 million, up $80.0 million from June
- Proceeds from rig sales: $42.3 million from selling older rigs, including VALARIS 111 for "conversion to a mobile offshore production unit"
Selling three older rigs brought in cash and a $27.5 million accounting gain, so total cash dipped by only $16.1 million. But a company cannot fund its operations by selling off idle rigs forever. Until customers pay the new bills from the restarted drillships and upgrade spending drops, core operations are not generating excess cash.
What to watch: fourth-quarter capital expenditures and customer collections. With all ten active drillships now finished with their reactivation projects, capital spending needs to fall below operating cash flow to turn free cash flow positive.
Shallow-Water Jackup Revenue Kept Falling
Jackups are shallow-water rigs with legs that stand on the sea floor. Excluding customer reimbursements, jackup revenue fell 7% from last quarter to $171.2 million, and dropped 21% from a year ago. VALARIS 249 spent most of the quarter in a shipyard for planned maintenance, while daily revenue in harsh-water regions like the North Sea fell from $128,000 to $116,000.
Lower mobilization and insurance bills helped total jackup Adjusted EBITDA edge up from $40.6 million to $43.1 million, but earnings in harsh-water regions fell by nearly half to $17.2 million. What to watch: harsh-environment jackup average daily revenue next quarter. Another drop would show that weak North Sea pricing is still dragging down the shallow-water business.
Risks this quarter didn't answer
Two standing concerns got no new detail in the earnings release, while ARO Drilling swung to a $13.2 million net loss on higher tax and charter costs.
- ARO Drilling loan and funding terms: Valaris holds a $363.4 million long-term note from ARO and a contingent commitment for newbuild rigs, and the quarterly filing will show if maturity extensions progressed.
- Lack of management Q&A and outlook updates: Valaris again held no earnings call and gave no fourth-quarter forecast because of the pending Transocean merger, leaving investors without management's view on 2027 contract roll-offs.
👓 Other Themes
Transocean Merger Cleared Regulatory Hurdles
In February 2026, Valaris agreed to combine with rival offshore driller Transocean in an all-stock deal. Dibowitz said that "Our pending business combination with Transocean has received the required regulatory approvals and is anticipated to close on or about December 1, 2026". Valaris spent $15.5 million on merger professional fees this quarter, up from $11.4 million in the second quarter.
💲 Other KPIs
Adjusted EBITDA — earnings before interest, tax, depreciation, asset sale gains and merger fees — jumped 56% from $96.5 million last quarter after bottoming at $66.7 million in the first quarter. It remained down 7.7% from $163.2 million a year ago because of the $24 million Middle East conflict cost drag and lower shallow-water rig activity.
Net profit attributable to shareholders was $46.1 million ($0.66 per diluted share), down from $50.4 million ($0.72 per share) last quarter and $188.1 million a year ago. A $23 million one-off tax charge tied to rig sales offset $27.5 million of gains on asset sales; excluding those items, underlying tax expense fell by $8 million.
Unrestricted cash edged down 3% from $541.2 million in June and $662.7 million a year ago, as $121.6 million in capital spending outpaced $67.2 million of operating cash flow and $42.3 million from asset sales. Long-term debt stayed flat at $1,088.5 million.
❓ Key Questions
What daily rates did VALARIS DS-15 and DS-18 lock in?
Drillship average daily revenue reached $469,000 in the third quarter. Knowing the standalone day rates on the two newest drillship contracts would show whether recent pricing sits above the current fleet average.
What drove the $443 million jump in ARO owned backlog?
ARO Drilling's owned-rig contract backlog rose from $713.9 million in August to $1,157.3 million in November. Management did not say which rigs won extensions or what daily rates they secured.
When will the $80 million rise in unpaid bills reverse?
Accounts receivable climbed from $458.1 million to $538.1 million as restarted drillships ramped up. Investors need to know if this is normal billing lag or if a customer is delaying payment.
Will fourth-quarter capital spending stay within the old annual plan?
Before suspending outlook updates, Valaris planned $425 million to $475 million in 2026 capital spending. After spending $328.0 million in the first nine months, fourth-quarter spending would need to stay between $97 million and $147 million.