Luminus, the largest shareholder of offshore drilling contractor Valaris, has decided to call a meeting of shareholders with an intention to nominate new directors to the board amid ‘grave concerns’ about the company’s performance.
Luminus, the investment advisor to funds and accounts that own approximately 18.7% of the equity of Valaris, on Wednesday issued a letter to Valaris shareholders expressing grave concerns regarding years of persistent strategic, operational and governance failures at the company and the immediate need to upgrade the board.
Luminus expressed its view that Valaris’ stock could be worth more than four times current trading levels if the company was appropriately governed and shareholders had renewed confidence in its future direction.
In the letter, Luminus said: “If Valaris employed the strategies we have recommended, it would increase shareholder returns by an additional 300%.
“This re-valuing of Valaris will not happen without change at the board level. After all, the responsibility for Valaris’ litany of failures lies with the directors. Shareholders cannot expect Valaris to be fixed by the very people who are responsible for its decline.”
Stock declined 85 pct over last 12 months
According to the investor, despite a superior asset base, a robust liquidity profile, and access to secured debt markets, Valaris has underperformed on both an absolute and relative basis over almost every relevant time period. Over the last twelve months, the value of Valaris’ stock has declined 85%. Over the last five years, the company has destroyed more than $11 billion of shareholder value, and over the last ten years the stock is down 97%. Over the last thirty years, even as oil prices have tripled and the global economy has boomed, the stock has declined 84%, Luminus said.
Luminus further stated: “It is unfathomable that a company with such a high-quality asset base and abundant liquidity would trade as if a restructuring or default were imminent. Nevertheless, Valaris’ near-term bonds (with maturity in June 2022) are trading with a yield above 26% and the Company’s long-dated bonds trade at levels that imply creditors expect either bankruptcy, further value destruction, or both, over the next twenty years.
“This horrific underperformance is also apparent on a relative basis. Valaris’ stock and bonds have underperformed those of its most notable peer, Transocean, over almost any time frame. Today, for example, Transocean’s 2022 bonds yield less than 8% and Transocean’s stock is down just 32% this year through November 22, compared to Valaris’ shares which have plummeted 72%.”
Luminus added: “The company’s woeful track record of value destruction – one of the worst of any company listed on the NYSE today – is a function of Valaris’ repeated self-inflicted wounds across strategy, operations, capital allocation, M&A and governance. Moreover, the trading levels of Valaris’ securities are, in our view, an indication of the market’s expectation that this pattern of poor decision making will continue.”
‘Too many mistakes’
Despite this, Luminus still believes that Valaris possesses the assets and the financial flexibility to create a significant amount of value for its stakeholders. However, in order to achieve this Luminus thinks that Valaris requires immediate changes that investors can trust.
Luminus said that this board and management team had made an astounding number of mistakes: they approved a suboptimal marketing strategy, built assets at the peak of the cycle, failed to monetize assets at the peak (or since), increased leverage to overpay for acquisitions, failed to properly negotiate a merger, mismanaged shareholder communications (on forecasts, dividends and liquidity), and completely botched a critical capital markets transaction.
“There have been too many mistakes and too many refusals to heed the advice of owners,” Luminus said.
The shareholder also added: “It is clear that shareholders deserve better representation in the boardroom, and that the capital markets will continue to lack confidence in Valaris’ board until substantial change occurs.
Luminus concluded: “There is only one way to ensure that shareholder confidence in Valaris is restored, in our view: shareholders must actively upgrade the Board with advocates who possess the skillsets and alignment required to ensure proper oversight of the Company’s operations, financial management, and governance. With a shareholder-backed and shareholder-aligned Board in place, Valaris will have the opportunity to attract new investors and achieve a fair valuation in the capital markets.”
‘Large dividend would place strain on Valaris’
Responding to Luminus’ letter Tom Burke, Valaris Chief Executive Officer, said: “I expect this development may result in increased interest in Valaris, so I wanted to reach out to provide my perspective. The company speaks regularly with shareholders about our operations, the progress we are making on merger integration and the actions we are taking to position the company for the future whilst we navigate challenging market conditions. In these conversations, we have heard from many shareholders who applaud our efforts and often provide constructive feedback on what, if anything, they would like to see us do differently.
“While we have received constructive feedback from many shareholders, Luminus’ letter publicly criticizes our performance over the past several years. We will always have scope for performance improvement, however, it is important to note that, in recent months, Luminus has publicly and privately presented various proposals for Valaris to take aggressive financial actions such as paying a large dividend to shareholders that the board has not been willing to take given the strain it would place on the company.”
Namely, Luminus in June 2019 urged Valaris, formerly EnscoRowan, to declare a special dividend of $2.5 billion, which would help the ESV share price which has been on a downward spiral for some time now and is at “1993 lows.”
Burke continued: “However, a conversation on performance would not be complete if we did not mention our recent accomplishments. Our merger integration is ahead of schedule; this is a significant achievement given the complexity of bringing two large organizations together.
“Our operating performance continues to be strong, with high levels of rig uptime along with safety results that are consistently better than the industry average. In addition, our fleet of high-quality jack-ups and floaters has been awarded 32 contracts or extensions that have added approximately $700 million of revenue backlog over the last four months alone, and Valaris has won more work than any other offshore driller during this period. This speaks to the great work being done by our marketing and operations teams, and serves a testament to the quality of the services our rig crews offer to customers each day.
“While we may see more public statements from Luminus in the coming days and weeks, we must not let it distract us. All of our shareholders, including Luminus, want you 100% focused on your day-to-day responsibilities — delivering safe, reliable and efficient operations. Our success depends on our collective efforts. We are making tremendous progress on the integration, winning new work for our rig fleet and serving our customers with distinction.”
Offshore Energy Today Staff
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