Valaris & Transocean: A Merger of Sorts

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Shares of Valaris (VAL +5.69%) experienced a rather enthusiastic upward trajectory this week, leaping a considerable distance (48.1%, to be precise) as observed by those diligent number-counters at S&P Global Market Intelligence. It’s always good to see numbers leaping, isn’t it? Provided they leap in the direction you’d prefer, naturally. (One does occasionally encounter numbers that leap in the opposite direction. These are generally considered less desirable.)

On Monday, the company announced what can only be described as a “merger of equals” with Transocean (RIG +5.89%). Now, the phrase “merger of equals” is a curious one. It implies a sort of symmetrical union, a harmonious blending of forces. In reality, it often means one company is slightly larger and therefore gets to decide what color the new stationery will be. This particular union, however, appears to be of a scale that would likely require a whole new planet to house the stationery.

Investors, in a display of optimism that bordered on the reckless, applauded the deal. They are anticipating, with a hopeful glint in their eyes, a substantial amount of “cost synergies.” (Synergies, in this context, are a bit like unicorns: everyone talks about them, but few have actually seen one. They are, however, excellent for boosting shareholder presentations.) These synergies, it is hoped, will somehow de-risk the company going forward. (Risk, of course, is an inherent part of existence. Attempting to “de-risk” anything is akin to attempting to de-wet water. One can manage the risk, certainly, but eliminating it entirely is a task best left to philosophers and theoretical physicists.)

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$200 Million in Synergies to Look Forward To

On Monday, the aforementioned Valaris and Transocean formally announced their impending union. Transocean will be acquiring Valaris, and each Valaris shareholder will receive 15.235 Transocean shares for each share they currently own. This exchange ratio represents a 31.6% premium – a rather significant number, when you consider that most premiums are, at best, moderately enthusiastic. The resulting entity will be 53% owned by Transocean shareholders and 47% by Valaris shareholders. A remarkably even split, considering the sheer logistical complexity of dividing ownership of a giant offshore drilling company. Transocean’s CEO will retain the top spot, and Transocean will also control nine of the eleven board seats. (One wonders what the other two board members will be doing. Perhaps practicing interpretive dance? It’s important to have a diverse skill set, after all.)

Investors seem particularly enthused about the predicted cost savings: a tidy $200 million. This is in addition to the $250 million Transocean was already planning to trim from its expenses over the next couple of years. (One suspects that somewhere, a spreadsheet is being vigorously massaged to justify these numbers. Spreadsheets are powerful things, capable of bending reality to their will.) The combined savings should allow the company to pay down debt and halve its leverage ratio within 24 months, from 3.0 times EBITDA to a more manageable 1.5. (EBITDA, for those unfamiliar, stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It’s a bit like describing a cake without mentioning the flour, sugar, or frosting. Technically accurate, but somewhat lacking in detail.)

Offshore Rigs are Consolidating

With this merger, Transocean and Valaris will become the largest public offshore oil rig company, measured by backlog. This scale, it is hoped, will provide consistent profitability, even when oil prices are behaving in a particularly uncooperative manner. (Oil prices are notoriously fickle. They have a tendency to fluctuate wildly, often for reasons that defy all logical explanation.)

The past decade has been… challenging for offshore rig stocks. The rise of lower-carbon vehicles and the advent of hydraulic fracking have dampened oil prices and reduced the rates rig operators can charge. (It’s a complex situation, involving a multitude of factors, including geopolitical instability, technological advancements, and the inherent unpredictability of human behavior.)

However, as the industry consolidates, fewer remaining players should become more profitable, making them attractive to investors seeking a way to capitalize on potentially higher oil prices. (The universe, after all, has a peculiar fondness for reducing complexity. It’s a bit like a cosmic Marie Kondo, tidying up the chaos one merger at a time.)

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2026-02-13 20:04