On Monday, Citi downgraded shares of Valaris plc (NYSE: VAL) from Buy to Neutral, adjusting the price target to $47.00 from the previous $58.00. The decision comes amid lowered expectations for the company's future earnings before interest, taxes, depreciation, and amortization (EBITDA).
The new price target is based on a valuation multiple of approximately 6x the company's core 2025 EBITDA, a figure slightly below the historical industry average during the last healthy EBITDA period from 2010 to 2014.
The downgrade reflects concerns over recent contract suspensions in Saudi Arabia, which have impacted the valuation of Valaris's ARO joint venture. Citi has applied roughly a 9x multiple to the 2025 EBITDA from the ARO JV, resulting in an estimated value of approximately $150 million net to Valaris. However, this is a decline from previous valuations due to the aforementioned contract issues.
Valaris's forecasted free cash flow (FCF) yield for 2025 is just 7%, which is the lowest among its peers, with the exception of Seadrill (OL:SDRL). The analyst at Citi pointed out that this could improve to around 12% in 2026 if there is a modest improvement in offshore rig demand.
Nonetheless, the near-term outlook for the industry is heavily influenced by crude oil prices, which are expected to determine the fundamental conditions for the industry in 2026.
Citi's Commodities team anticipates potential downside risks to crude prices in the upcoming 6 to 12 months. This uncertain outlook for crude prices has led the firm to adopt a more cautious stance on Valaris, opting to move to the sidelines for the time being. The analyst's comments highlight the impact of market conditions on Valaris's operations and its position within the industry relative to its peers.
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