Noble Corp: What Investors Are Missing

After reporting earnings on Jan. 22, investors continue to sell off shares of Noble Corp  (NYSE: NE  ) due to fears of a cyclical downturn in the previously robust offshore drilling market. The company is busy completing a newbuild program that will modernize the fleet while at the same time spinning off the older standard assets into Noble Spinco. The spinoff will help focus the company into two separate companies with different objectives to benefit shareholders, but the old assets might lose significant value in a cyclical downturn.

The stock sold off on the news of an industry pause, but people appear to be missing the extreme valuation and the limited slowdown forecasted by management of Noble. In addition, the suggested pause probably has a different impact on companies with a young fleet of premium, high-specification rigs such as SeaDrill (NYSE: SDRL  )  as opposed to companies with older fleets such as Transocean (NYSE: RIG  ) .

Solid results
The fourth quarter 2013 earnings per share jumped to $0.85 from only $0.50 in the comparable prior period. Revenue for the quarter surged to $1.17 billion compare to $1.08 billion in the third quarter of 2013 and $966 million in the fourth quarter of 2012. Incredibly, the stock recently plunged below $32, even after the substantial income production for the full year of 2013 amounted to $3.05 per share.

Even after cautionary words from Noble management, analysts still expect the company to earn $3.72 for 2014 and an incredible $4.74 in 2015. A major part of the earnings gains for the year are due to six rigs expected to be delivered from shipyards by the end of 2014. The new rigs will contribute significantly to a rig fleet of roughly 70 when the year started. The total new rigs includes the jackup Noble Houston Colbert, which was already delivered in early January. Due to all the new rigs and those delivered toward the end of 2013, analysts forecast revenues to surge over 20% for the year.

Both SeaDrill and Transocean expect large earnings gains in 2014, but the stocks trade at considerably different valuations. Investors place a higher earnings multiple on SeaDrill with the younger fleet. Noble trades similar to Transocean with a forward earnings multiple of 8. 

Pricing and utilization remains strong
Despite the concerns mentioned on the earnings call regarding the number of available rigs in the market to start 2014, the pricing and utilization levels for Noble remains strong. The floating rig fleet saw a 91% utilization rate compared to 86% in the third quarter. More importantly, the average daily rates increased 3% to $378,400 during the quarter.

The utilization for the jackup rig fleet was 86% compared to 94% in the third quarter due to several rigs expected to be sold during the first quarter of 2014. Despite the utilization decline, the rates jumped 3% to $115,700 from $112,400 during the third quarter.

The prime reason that Noble isn't too concerned about a pause in the cycle was the forecast for 7% cost inflation for 2014. After substantial growth in the last three years, the feeling is that the crews and supply markets for the offshore drilling segment could use several months of a pause in order to catch up with the long-term demand curve.

In a recent presentation, SeaDrill portrayed a strong operating environment where robust fundamentals supported newbuilds thru 2020. Any pause projected by Noble could be more related to an older fleet than that seen by the very modern fleet of SeaDrill.  

Bottom line
Investors selling off Noble are missing that the stock has been flat for the last six months despite the fact the company is still forecasting a robust long-term market. Any short-term pause in contract activity will only help to get the cost inflation back under control. Considering demand isn't likely to decline with Brent crude prices still very elevated, drillers -- including Noble -- look attractive based on long-term trends despite fleet age.

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