Whenever a company decides to break itself up, there's probably a very good reason for it. Earlier this week, Noble (NYSE:NE) announced that it was going to spin off its older, lower specification rig fleet into its own company. Why would Noble do this? More importantly, why should investors other than Noble shareholders really care? Let's take a look at this move, and see if there are any telling signs for the industry from this deal.
Different strategy for different assets
Noble, like several of its peers, have seen demand for offshore drilling equipment run rampant in the past couple of years. While it should be exciting for many of these companies, the technology required to access these new offshore plays is requiring new technology. This also means that a large percentage of these older rigs are starting to see their final days. Of course, not every company is in this position, but Noble is one of them. The average age of a company's fleet of floating rigs is approaching 20 years, and its jack-up fleet is creeping up on 30.
What this translates to is more time at the dockyard for maintenance, and less time making money for the company. This can be seen in the company's utilization rate. Adjusted for rigs under construction, Noble has a fleet utilization rate of 83%. Compare that to both Seadrill's (NYSE:SDRL) and Ensco's (NYSE:ESV) adjusted utilization rates of 94% and 91%, respectively. Both of these companies are able to keep a higher utilization rate in part because their ultra-deepwater capable fleets -- the segment of the industry that commands the highest dayrates- -- are less than three years old.
So, by splitting the company's fleet into its legacy fleet -- a fancy way of saying old -- into its own separate entity, it can focus on its newer, higher-specification rigs, and drive growth for the company. Since Noble could not sell off this part of the business like Transocean did last year, it opted to spin them off into its own fleet. This would shed the company of its lower-performing assets, and allow it to focus more on its higher-margin, higher-growth sectors like ultra-deepwater capable floaters, and high specification jack-up rigs.
As an investor, why the heck would you want to buy an old fleet that doesn't have as-high margins, and spends more time in the shop? Well, an old fleet company that doesn't have a lot of capital tied up in newbuilds could generate a lot of cash. This is speculative, but it is very possible that a spin-off of legacy assets into its own company would be one that focuses on returning value to shareholders though a high dividend and share buybacks, rather than growing with new rigs.
A new era for the rig industry
The moves by Noble and Transocean to unload some of the older parts of their fleets are pretty telling signs that the rig business is changing fast. It would not be surprising if Diamond Offshore, another company with a larger legacy fleet, does some sort of move to unload its legacy assets, as well. With the Brazilian pre-salt auction happening within the next couple of months, and big-exploration projects in line for the coast of Africa, the Gulf of Mexico, and the Arctic, rig companies are going to have to deliver a large amount of floating rigs and high specification jack-ups to meet this demand. For the older feet owners, replacing lost revenue from these older fleets will require large investment programs on top of any investments to grow revenues, as well.
What a Fool believes
This move by Noble may seem like a less-than-ideal one for shareholders at first glance, but it should set the company up to be more successful in the long run, as it can apply two separate business strategies for its different fleets. Noble doesn't expect the IPO for this spinoff to occur until late next year, so it should give investors plenty of time to figure out how to play this move. The theory for these two different companies is sound, but we'll have to see how the deal is structured before taking any action.
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