When Others Exit, Transocean Acquires: The Logic Behind the Valaris Deal
Written by Kfir Kedem
Offshore drilling is one of the most capital-intensive and cyclical industries in the world, where companies extract oil and gas from beneath the ocean floor using massive floating rigs positioned miles from shore. The companies that own and operate these rigs do not produce oil themselves, but instead lease their equipment and crews to energy producers on a day-rate basis, making their fortunes closely tied to the broader oil market. Transocean has spent the better part of five decades turning that volatility to its advantage, using every downturn as an opportunity to consolidate the industry around itself.
Transocean announced its acquisition of Valaris. Transocean is an offshore drilling giant who provides rig-based well construction services to customers. Over the last ~70 years, they have been innovating endlessly in the offshore drilling space. Earning through day rates, Transocean specializes in ultra-deepwater drillships and harsh-environment semisubmersibles. During COVID, there was an oil collapse which was then followed by the Ukraine-Russia war which further increased volatility on oil prices. During that time, I was tasked with acquiring millions of liters of automotive oils and the day-to-day volatility was more than clear. As such, Transocean focused their strategy on liquidity preservation, backlog growth, fleet high-grading, and industry consolidation. Backlog refers to signed contracts which have yet to be fulfilled due to fleets that are in use needing to be freed up and it can be seen as a kind of long-term accounts receivables. As for industry consolidation, this seems to have been Transocean's growth strategy for the past 50 years in which the company took every opportunity to expand their portfolio in accordance with market trends:
Oil cycle phase | Oil price trend | Transocean M&A behavior | Acquired / Merged company | Activities of acquired company |
Downturn (late 1990s) | Very low | Consolidation mergers | Reading & Bates Corporation | Offshore drilling contractor, jackups, semisubmersibles, international operations |
R&B Falcon Corporation | Offshore drilling fleet, floaters, jackups, global footprint | |||
Boom (2005–2008) | Rising fast | Transformational merger | GlobalSantaFe Corporation | Deepwater drilling, jackups, harsh-environment rigs, North Sea presence |
Peak (2011–2012) | ~$110 | Premium-asset expansion | Aker Drilling | Harsh-environment semisubmersibles, North Sea drilling, modern fleet |
Crash (2014–2016) | Collapse | Distressed acquisitions | Songa Offshore | Harsh-environment semisubmersibles, long-term contracts, North Sea exposure |
Ocean Rig UDW Inc. | Ultra-deepwater drillships, Brazil operations, West Africa, Mediterranean |
This brings us to Valaris, the offshore drilling contractor. Valaris owns and operates drilling rigs such as floaters, semisubmersibles, and jackups however they do not produce the oil. By geographical footprint and fleet size, they are one of the largest offshore drilling contractors. This being the case though, Valaris still had to file for Chapter 11 bankruptcy in August of 2020 during the oil crash. The bankruptcy eliminated $7.1B in debt and Valaris emerged in May of 2021 leaner and re-strategized. Furthermore, the company has $4.5B in backlog, showing future cash flows.
It seems to be that Valaris is complementary to Transocean rather than merely overlapping, bringing jackup expertise that makes the combined company capable of operating at any water depth, while also creating synergies that Transocean estimates will reduce costs by $200M**. The combined backlog of the merged entity is expected to reach approximately $10B.** The acquisition was done for $5.8B in an all stock transaction. As such, I simulated the valuation of Valaris based on future cash flows.
I started by projecting total revenue from 2025 through 2029 using a realistic growth trajectory that reflects both backlog and the industry cycle. Contract drilling expense and reimbursable expense were modeled as a percentage of revenue based on historical trends to capture operating leverage and cost behavior. Depreciation was projected using an asset-based methodology, applying a depreciation rate derived from historical gross PP&E and annual depreciation charges to a growing asset base that reflects each year's CapEx additions. G&A was projected using a combination of historical averages and gradual changes to reflect scale effects, while equity in ARO was included as a line item following the historical pattern.
From these inputs I calculated operating income, which then flowed into free cash flow. For FCF, I added back depreciation and amortization, subtracted CapEx, and accounted for changes in net working capital. CapEx started at $455M in 2025, matching the prior year's level as the reactivation cycle continued its final year, before declining at a constant 25 percent rate annually to reflect the reactivation cycle gradually normalizing toward maintenance levels. Working capital was scaled to revenue using the 2024 ratio of 5.4%, excluding the 2023 outlier year which was distorted by debt restructuring activity, to capture the operational cash absorbed as the company expands.
Once the annual free cash flows were determined I discounted them using a WACC of 9.45% to get the present value. For the terminal value, I applied a long-term growth rate of 2.5% to the 2029 FCF and discounted it back to present value, giving a present terminal value. Furthermore, the expected $200M in synergies were added to the model.
This approach allows the model to capture both the cyclicality of the offshore drilling business and the expected normalization of capital spending while remaining anchored to historical financial behavior. It also ensures that the DCF reflects realistic free cash flow generation rather than mechanically scaling costs or capex with revenue.
| 2025 | 2026 | 2027 | 2028 | 2029 | Long-term |
Total Revenue | 2,543.69 | 2,848.93 | 4,700.49 | 6,737.20 | 8,977.59 | |
Contract Drilling Expense | 1,944.58 | 1,977.93 | 3,393.40 | 4,950.41 | 6,663.13 | |
Reimbursable expense | 152.79 | 171.13 | 282.35 | 404.69 | 539.27 | |
Depreciation | 124.81 | 124.48 | 124.15 | 123.83 | 123.51 | |
G&A | 131.73 | 147.54 | 243.43 | 348.91 | 464.93 | |
Equity of ARO | 15.34 | 17.18 | 28.34 | 40.62 | 54.13 | |
EBIT | 406.99 | 484.32 | 846.09 | 1,212.70 | 1,526.19 | |
Operating Income | 205.11 | 445.03 | 685.50 | 949.98 | 1,240.88 | |
Depreciation & Amortization | 128.56 | 135.35 | 142.51 | 150.04 | 157.98 | |
CapEx | (455.10) | (273.06) | (163.84) | (98.30) | (58.98) | |
Δ Net Working Capital | (136.73) | (153.14) | (252.67) | (362.15) | (482.58) | |
Free Cash Flow | 128.46 | 57.16 | 262.06 | 432.47 | 586.78 | |
Present Value | 128.46 | 52.22 | 218.76 | 329.85 | 408.90 | |
Terminal Value | 6,030.50 | |||||
Present Terminal Value | 330.22 | 3,839.50 | ||||
Enterprise Value | 4,977.68 |
The calculated valuation comes to $4.98B which is quite close to the deal figure. This does not account for the projected growth that Transocean is expecting from Valaris' operations due to the merger as well as long-term forecasts. Additionally, this deal puts Valaris' pro forma valuation at $12.3B and increases Transocean's to $17B which will allow them to accelerate debt reduction. Furthermore, Transocean has their own cost reductions planned at a value of $250M which further optimizes their income. Given the insider knowledge that Transocean uses to estimate future growth, further cost optimizations, and most importantly, the increase in pro forma valuation, Transocean is spending $5.8B in order to increase their own valuation significantly while expanding their capabilities.
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