Noble 2025 Earnings & Transocean x Valaris Merger
An Update on Offshore Energy Services
Introduction
It is a tall task to make a living investing in commodity and industrial businesses. Each industry within the “cyclicals” umbrella presents the investment community with a unique and nuanced set of challenges.
Some cyclicals are short cycle and move from euphoria to hopelessness every few years, some are supply/demand cycles, some are capital cycles, some are a bit of both and take a longer time to play out.
While we own businesses exposed to many cyclical forces when I think of the offshore drilling industry the trait specific to this business is the painfully slow nature of the recovery. It makes sense logically that these cycles take longer to play out as you have 2-3 pieces of $1B+ equipment, being developed hundreds of miles offshore, in tough water conditions.
In addition to that, a lot of the capex can drift to the right especially with infill activity that is in no rush to spend money at poor commodity prices. While it is easy to become frustrated with this cycle broadly, it is important to keep in mind how far the industry has come and how the industry has positioned itself for the inevitable recovery.
The most important dynamic of the current industry is the financial positions of these companies post the 2020-2021 bankruptcy cycle. All the businesses outside of Transocean ran for Chapter 11 protection and as Noble and Valaris spun out of bankruptcy, the narrative around Transocean was that the solvency of the business was in question making it largely uninvestible.
While Transocean did not seek Chapter 11 protections, we think that the companies prudent leverage reduction strategy as well as their recently announced merger with Valaris has removed the question around the business’s solvency.
In the meantime, as the industry has been consolidated mostly by Noble with now Transocean doing its part, the combined industries financial position is such that a movement to the right in the cycle while disappointing, does not threaten the operators in the way it once did.
The market seemed to be waiting for one more consolidation event but I think most were focused on who would buy Seadrill for the access to UDW tonnage - as someone who follows this market close I can say honestly it was surprising that it was Transocean x Valaris but it might just be the best thing that could have happened to the industry as we will explain below.
We continue to see the offshore energy services market as a multi-year (likely decade long) recovery story that is in the very early innings. As shale oil production continues to languish and the economic considerations between onshore and offshore production moves in favor of deep and shallow water basins, we believe the stage is set for strong risk adjusted returns.
Noble Earnings
