Today's Buy Opportunity: Noble

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Now, I know what you're thinking: "You're pitching me a drilling contractor? Are you crazy?! Do you even watch the news?" Before I get into why Noble (NYSE: NE) is today's "11 O'Clock Stock" and a great investment, let's address your concerns.

The fiasco in the Gulf of Mexico, now our nation's largest natural disaster, appears to have been preventable. Rex Tillerson, ExxonMobil's (NYSE: XOM) CEO, said as much in front of Congress last month. However, Big Oil is only as good as its worst operator, and BP may well have been the worst. The British giant had a whopping 760 safety and environmental violations since 2005. To put that in perspective, Exxon only had one.

In the wake of BP's bad behavior, we're left with a drilling moratorium in the Gulf and a lot of uncertainty surrounding the sector. Shares of oil services companies have been beaten down far in excess of the market. And like another great investor who proclaimed that we need to "be greedy when others are fearful" (hint: Warren Buffett), it's time to get greedy on offshore drilling. Noble offers the best way to do so.

Fast facts on Noble:

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Getting better acquainted
Founded in 1921, Noble relocated to Switzerland for tax reasons last year. The company makes its money by drilling wells, via its 62 mobile offshore rigs, for oil companies across the globe. Currently, its most exciting destination is Brazil, where a bonanza of recently discovered oil has made Petrobras (NYSE: PBR), the Brazilian state oil company, Noble's biggest client.

Noble contracts its units out from periods of several months to more than five years, but for easy comparisons, the industry breaks the contracts down to a figure called the dayrate -- the price per day to operate the rig. To give you an example of the premium that deepwater-capable units command over shallower-water jack-up rigs, Exxon has four of Noble's jack-ups in use in Nigeria at roughly $85,000 a day. At the same time, a semisubmersible hired by the oil giant in Libya is contracted at a price in excess of $500,000 a day.

Show us what you're made of
Let's take a look at how some of the industry's top competitors stack up. The table shows key financial metrics, while the chart shows the breakdown of each company's fleet by number of rigs, both financially and on a fleet basis. Keep in mind that Noble's data predates the completion of the Frontier Drilling purchase; I'll touch on that a little later.

Data from Capital IQ and Yahoo! Finance as of 07/25/10.

Data from company rig reports. Water depth is deepwater = > 4,500 ft, midwater = 401-4,499 ft, shallow water = < 400 ft.

As you can see, Transocean is clearly the largest player, both in terms of market cap and sheer fleet size. Its 135 rigs nearly equal the fleets of other three companies combined. However, it has also rung up a massive debt load in the process, and its operating margin is lagging. Additionally, the financial and reputational fallout stemming from its involvement in the Deepwater Horizon disaster will take some time to get sorted out.

Diamond just edges out Noble as the second-most-valuable company in the industry, and its balanced fleet is certainly an asset. Even though a quarter smaller, it manages to bring in revenue comparable to Noble thanks to its favorable mid- and deepwater mix. However, not only is its balance sheet is disconcerting, but Diamond is also trading at 2.4 times its book value, while its competitors are hovering right around 1 times book value, ruling it out as the group's value play.

I like Ensco, especially for its stellar balance sheet, where its net cash balance of nearly $1 billion manages to trump Noble. However, Ensco's growth prospects are not considered as strong as the rest of the group: It is trading at a higher earnings premium, and its heavy dependence on jack-up rigs with the lower day rates is a turn-off.

The winner!
I favor Noble because it has the top operating margin, attractive financial ratios, and good exposure to the deepwater, which will only get better when it completes its purchase of Frontier Drilling.

Click here to see a video of a Fool.com analyst discussing why Noble's a great buy.

The $2.16 billion deal, which closed yesterday, increased Noble's fleet count to 69. Not only are these great vessels, but two of them are jointly owned with Shell, while two more carry valuable long-term contracts with the oil major. Noble wisely used its fiscal prudence to be aggressive at the bottom part of the cycle. A $1.25 billion debt offering will mostly wipe out its strong net cash position. However, that the deal instantly doubled Noble's backlog, should be immediately accretive to cash flow, and will add $0.35 to Noble's per-share bottom line by 2011.

Noble may not be the highest flier, but I believe there is a fairly safe 15%-20% upside based on a conservative multiple, with greater potential down the road as the Frontier purchase kicks in, coupled with what I expect to be rising oil prices.

What could possibly go wrong?
When you're in a commodity-based business, the underlying price of that commodity is your biggest risk. If oil prices tumbled significantly, Noble wouldn't be able to charge its current high dayrates, which would have a material impact on its financial performance. However, if you believe that once the global economy fully recovers, oil will break out of its $70-ish-a-barrel trading range and resume its march higher, then Noble will benefit.

The Gulf moratorium is also a concern. Anadarko Petroleum (NYSE: APC) has declared force majeure on Noble, and it is likely that the company will feel the moratorium's financial impact for a couple of quarters.

However, we are still seeing activity. Ensco managed to talk regulators into giving two of its deepwater rigs the thumbs-up for use on certain types of projects. Diamond Offshore has moved rigs from the Gulf of Mexico to Africa and the Middle East.

But that's the important point: Even if rigs are fleeing the Gulf, they're going somewhere. Noble can move its affected semisubs to other regions if it receives a different finger from the government than Ensco did.

Foolish takeaway
The world's insatiable appetite for oil is only growing. China just passed the United States as the largest global energy consumer, but they still trail dramatically on a per-capita basis. Even though the Gulf of Mexico blowout highlighted the risks, and potentially how unprepared the industry was for a catastrophic disaster, offshore drilling and deepwater drilling are here to stay. We aren't going to wean ourselves off oil overnight, and as E&P's are forced into deeper waters to satisfy our needs, Noble will be there, charging a premium for use of its rigs.

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