With the Gulf of Mexico beset by oil gushing from a blown-out well, following an explosion on a Transocean (NYSE: RIG ) rig working at a BP (NYSE: BP ) well, along with a tropical storm plowing through its western waters, drilling contractor Noble Corp. (NYSE: NE ) has brought some life to the body of water.
On Monday, the Switzerland-based company announced that it would pay $2.16 billion (including acquired debt) in cash to purchase closely held FDR Holdings, which operates as Frontier Drilling. As a second positive in this day of uncertainty among offshore drillers, Noble will pick up $4 billion worth of contracts from Royal Dutch Shell (NYSE: RDS-A ) (NYSE: RDS-B ) in the process. The pacts with Shell, which are subject to closing the Frontier purchase, involve deepwater projects.
On the basis of 2009 revenues, Noble runs neck and neck with Diamond Offshore (NYSE: DO ) for second place among contract drillers, behind Transocean. However, the Frontier acquisition will add six floating drilling rigs to the Noble fleet, moving the company's total rig count to 68, and will add about $2 billion to its current contract backlog. Noble's management estimates that the deal will be additive to cash flow when it is completed and will be accretive to earnings in 2011.
Given Noble's recent experience with Anadarko's (NYSE: APC ) reneging on a contract following the announcement by the Obama administration of a six-month moratorium on deepwater Gulf drilling (the administration is currently seeking to delay a court ruling overturning that moratorium), Shell will pay lower-than-normal dayrates for the rigs in the Gulf and will be allowed to suspend contracts, if necessary. As one Noble executive noted, the objective is to maintain rig agreements, rather than induce the abandonment of contracts in the Gulf.
Deepwater drilling isn't about to disappear. On that basis, with Noble trading at a trailing price-to-earnings ratio below 5.0, with its operating margin above 54%, and a management team that has been considered stellar since my days in the industry, I'm inclined to keep a close eye on this growing company.