VAL - Valaris Earnings Beat: Don't Get Too Excited

2023-05-02 17:07:18 ET

Summary

• VAL's earnings beat was exaggerated by one-time non-operational items, including a substantial tax adjustment.
• Still, FQ1 23 results continue a recent string of profitable quarters on improved revenues.
• I'm still on the fence with relation to VAL, but some investors may find recent results more encouraging.
• Investors who wish to accumulate VAL may want to look for a bottom around depressed sentiment, lower energy prices, and even this week's Federal Reserve Meeting.

Recent Earnings

Valaris Limited (VAL) reported FQ1 23 estimate beatings before market open on May 2nd. GAAP EPS of $0.61 beat estimates by $0.98 while revenues of $43.1M beat estimates by $15.02M. However, a closer look at VAL's press release is necessary to understand the big beat on earnings. FQ1 23 net income includes two one-time items described as follows:

Other income was $13 million compared to other expense of less than $1 million in the fourth quarter 2022. This was primarily due to foreign currency exchange gains compared to losses in the fourth quarter and an increase in interest income due to a higher interest rate on the ARO shareholder notes receivable as well as an increase in interest from short-term deposits.

Tax benefit was $28 million compared to tax expense of $10 million in the fourth quarter 2022. The first quarter tax provision included $44 million of discrete tax benefit primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years.

The currency exchange gains and tax benefit are circled in red in VAL's statement of operations below.

One-time non-operating income contributed a total $40.1M to net income $48.6M or nearly 83%. It does not seem likely that the tax man will continue to be so kind. Therefore, it makes sense to look at FQ1 EPS excluding these one-time items. Operating EPS of about $0.12 (noted in red) still beat estimated EPS of -$0.29 by $0.41.

VAL Earnings Trends

Some historical context might be helpful with relation to recent quarterly results.

VAL Quarterly Revenue and EPS: June 2020 Forward

In the context of the quarterly earnings trend, even the adjusted figure shown in red is the fourth consecutive profitable quarter. Revenues are also substantially improved over recent quarters.

VAL Yearly Revenue and EPS: 2013 Forward

However, earnings and EPS over the last 10 years are more mixed without a clear trend. It is not immediately clear if VAL is in the beginning of a recovery or will continue to flounder with historically reduced earnings and revenue.

Additional FQ1 23 Highlights

Val reported adjusted EBITDA of $24 million with revenue efficiency of 99%. Currently, backlog has increased to approximately $2.8B including $820M in new contract awards and extensions. Further, capital structure and liquidity are improved as a result of refinancing in April 2023 including the addition a $375 million revolving credit facility. Lastly, VAL Board of Directors authorized an increase in the Company's share repurchase program to $300M

Conclusions

The recent earnings beat was somewhat exaggerated by one-time non-operational items including a substantial tax adjustment. Still, FQ1 23 results continue a recent string of profitable quarters on improved revenues.

I'm still on the fence with relation to VAL. Some investors may find recent results more encouraging; those investors may want to look for a bottom around depressed sentiment, lower energy prices, and even this week's Federal Reserve Meeting . I believe bargain hunters may have the opportunity to buy VAL at a reduced price this week.

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