What happened

Valaris PLC (NYSE:VAL) reported fourth-quarter and full-year 2019 earnings results after market close on Feb. 20, and when the market opened on Feb. 21, investors sent its shares sinking. By early afternoon, the offshore drilling contractor's stock had lost more than 25% of its value. At 2:12 p.m. EST, it were still down more than 23%.

So what

Investors were clearly displeased with Valaris' earnings. The company reported fourth-quarter revenue of $512 million, down $39 million from the prior quarter following the sale of one of its vessels.

Offshore drilling rigs at night.

Image source: Getty Images.

Valaris also reported a huge $219 million loss and $193 million in operating losses and continued a recent trend of cash burn. For the full year, the company reported $277 million in negative operating cash flow.

This cash burn is putting more pressure on the balance sheet. Valaris finished 2019 with less than $100 million in cash, while long-term debt increased $900 million to $5.9 billion.

Now what

In addition to ongoing cash burn last year, Valaris management said, "[W]e expect to report losses and have negative cash flows during 2020," even as day rates and utilization improve. This is a different situation than offshore drilling peer Noble Corp. (NYSE:NE), which reported positive cash flows, even though it also continues to report losses on a GAAP (generally accepted accounting principles) basis.

So how will they make the math work? By adding to the debt. Valaris has a $1.6 billion revolving credit facility, which will give it some breathing room to work through the next year. It also has a relatively small $125 million of long-term debt maturing this year, so there's still a path forward for the company to remain a going concern.

And that means there's still a path forward for investors to profit by owning shares of Valaris, so long as you're willing to acknowledge that there's a bit of a binary risk here: Either the company survives the next year and starts generating positive operating cash flow before it has to start refinancing its debt, or it doesn't, and bankruptcy (which would wipe out shareholders) becomes its only path forward. At least some of that result will depend on what oil markets -- which have not been kind to energy investors the past few years -- do.

Finally, there's a lot of money betting against the company. At last count, nearly 25% of its shares were held short. For this to be a profitable investment, those shorts will have to prove wrong about Valaris' ability to survive. Invest according to your ability to come out on the losing end of that and see your capital evaporate if Valaris isn't able to get to cash-positive operations.