What's the Takeaway From Noble Corp's Results?

Noble Corp. (NYSE: NE  ) announced mixed fourth-quarter results last week, with both positive and negative takeaways, though some of the negatives are unlikely to significantly affect the company over the long term. 

Noble stated that contracting activity, particularly for older and less capable rigs, is down but that it does expect contracting activity to rebound in the second half of the year. The company is relatively protected from this contracting weakness, however, as it has only 22% of its total operating days available. Other offshore drilling companies such as Transocean (NYSE: RIG  )  that have a sizable percentage of their rigs coming off contract in 2014 will be affected much more.

Highlights
Here are the highlights from the company's earnings report:

  • Noble reported total contract drilling revenues of $1.12 billion, representing an increase of 8% quarter over quarter.
  • The company reported fourth quarter net income of $174 million. This works out to EPS of $0.68 per diluted share and represents a decrease of $108 million, or 53.5%, quarter over quarter.
  • Noble achieved a floating fleet utilization of 84% in the fourth quarter, an increase of 5% compared to the previous quarter.
  • Noble's jackup fleet achieved a utilization rate of 86% in the quarter,  representing a decrease of 8% compared to the previous quarter.

Revenue analysis
One encouraging sign was that the company's average dayrate increased from $194,000 to $212,000. Offshore drilling rigs, especially floating ones, have long-term contracts that typically have specified dayrates over the term of the contract, so why did the company's average dayrate rise so dramatically over just the term of a single quarter? 

The company had three new rigs begin operation during the quarter. These rigs are the ultra-deepwater drillship Noble Bob Douglas and the high-specification jack-ups Noble Regina Allen and Noble Mick O'Brien. Additionally, the Noble Globetrotter II began operations in early September. The fourth quarter would have been the first full quarter during which the rig was in operation. As these rigs carry significantly higher dayrates than the company's older ones, they serve to lift up the company's average dayrate.

This trend is likely to continue to benefit the company going forward as these rigs continue to operate and the remaining ultra-deepwater drillships and jack-ups being built under the company's fleet modernization program enter service over the next year.

Fleet utilization
Noble managed to increase the utilization of its floating rig fleet quarter over quarter, but it saw the utilization of its jackup rig fleet falter. The increased utilization of the floater fleet is the more important takeaway here because floating rigs typically carry much higher dayrates than jackup rigs. Because the oil companies that contract out these rigs only pay for times that the rigs are actually in use, the higher utilization rate for the floater fleet means that Noble collected a higher percentage of the maximum potential revenue from its floater fleet in the fourth quarter than in the third. The opposite is true for the jackup fleet. This was a net positive for the company's quarter-over-quarter revenue due to the higher dayrates of the floating rigs.

Noble's most recent fleet status report states that the only rig on which the company expects to experience downtime in the first quarter of 2014 is the Noble Globetrotter II. Noble expects 27 days of downtime for this rig. This is the same amount of downtime that the rig incurred in the fourth quarter, so the actual revenue that this rig generates should be unchanged quarter-over-quarter. If this ends up being the case then Noble may see its revenue increase somewhat in the first quarter due to improved fleet utilization.

Effects of industry weakness on Noble
Noble stated that the boom in contracting activity that it and its peer companies have been benefiting from over the past few years may now be experiencing a brief pause. Peer company Seadrill (NYSE: SDRL  ) also observed this in its third-quarter results, stating that cash flows at several exploration and production companies have become constrained. Seadrill has been forced to halt the development of some offshore projects while budgets are reexamined. This has resulted in a reduction of contracting opportunities for offshore drilling companies. 

This could negatively impact many of these companies as many have rigs leaving the shipyard over the next several months which have not already secured contracts. As shipyards typically demand payment for the balance of the rig's cost upon delivery, these companies may find themselves paying out large amounts of cash without the potential of cash inflows to counterbalance this.

Noble stated that it doesn't expect to be significantly affected by the industry slowdown because it has relatively low fleet availability in 2014. It doesn't appear that Noble will be affected by an inability to contract out its new rigs.

Final thoughts

Source: Noble Corp.

As the chart shows, Noble has already secured contracts for both of its ultra-deepwater drillships and all but two of its new jackups (which will not be completed until Q4) that will be completed in 2014. Thus, the company doesn't have to scramble to secure contracts for these rigs.  These rigs also carry some of the highest dayrates in the company's fleet and should be able to at least partially offset lost revenues elsewhere in its fleet due to this industry weakness.

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