A Noble Dynasty

"Noble has grown from a midcontinent land-drilling company with a few offshore rigs to quite an international force with 62 rigs around the world, and we're not done yet."

-- Chairman and CEO David Williams

In case anyone was confused by Noble's (NYSE: NE) recent decision to issue a special dividend, the above quote should clear things up. The company's return of capital to shareholders is a sign of excess cash generation, not a sign that the company has reached its twilight years. Unlike the company's modest quarterly buybacks, this $202 million payback is enough to move the needle, but it's not large enough to take Noble out of the acquisition game.

How does a company generate excess cash, you ask? The quarterly numbers tell that story. Contract drilling revenue hit nearly $800 million, and lower-than-expected expenses produced a drilling margin far in excess of deepwater denizen Diamond Offshore (NYSE: DO). If you take the midrange of cost guidance, Noble beat that by double digits. A good bit of this came from timing, but there were also internal improvements, which is most inspiring in this inflationary environment.

At the end of the day, Noble's operations produced nearly $500 million in cash, more than double the amount directed to capital spending. That, my friends, is what we call excess cash generation. It's a condition that afflicts Diamond, ENSCO International (NYSE: ESV), and pretty much everyone else in the offshore drilling game today. Really, it's only fair, considering the cyclicality of the space.

Circling back to the matter of expansion, Noble's unwillingness to build cash on the balance sheet also doesn't indicate that the company's not focusing on increasing its newbuild program. The company is still looking at building new rigs, but it needs a contract from a quality operator. Noble's visceral opposition to spec building probably exceeds even that of Transocean (NYSE: RIG). Management compared this activity to driving into a ditch.

Noble, which is riding high on a slew of Petrobras (NYSE: PBR) renewals, has no reason to make any speculative moves today. That kind of activity is best left to DryShips (Nasdaq: DRYS), Seadrill, and other new entrants with more to prove. Noble's dynasty ensures a rich and prosperous future.

Related Foolishness:

• ENSCO has begun to shine in the spotlight.
• Here's a look at a secret drilling upstart.
• There are some puzzling pairings among onshore drillers lately.