Will the Downside Continue for Noble Corp?

A bleak outlook for the offshore drilling market could be outweighed by the cheapness of Noble Corp shares.

Apr 22, 2014 at 11:00AM

This year will be a tough one for offshore drilling companies, and Noble Corp (NYSE:NE) is no exception. The rig market remains oversupplied; Noble itself acknowledges this fact, stating that excessive supply exists in most rig categories.

Meanwhile, large oil companies have been selective in investing their capital, which led to lower rig day rates. As supply continues to outweigh demand, there's little hope for major upside in the near term. 

Older rig fleet
Noble has an older rig fleet than its more aggressive peers like Seadrill (NYSE:SDRL). However, Seadrill's intensive rig-building activity has been bad for the market and pushed day rates down. The situation is worse for older rigs, as they have to compete with a plethora of new ones.

The company decided to address this issue by spinning off several older rigs to Paragon Offshore. Noble plans to launch an initial public offering of about 20% of the company and distribute the remaining 80% of Paragon Offshore shares to Noble shareholders. This move will make Noble's rig fleet younger, but, in fact, Noble shareholders will continue to be exposed to Paragon Offshore's rigs.

Although day rates for Noble’s newest rigs are higher than average, I do believe that the industry needs even higher rates and more contracts to shrug off the pressure on drilling stocks. The Noble Houston Colbert jackup will commence operations for Total at a day rate of $247,000 per day. Noble Sam Croft, an ultra-deepwater drill ship, will start working for Freeport-McMoRan Copper & Gold's (NYSE:FCX) Gulf of Mexico operations at a rate of $610,000 per day. Freeport-McMoRan was very active during the Central Gulf of Mexico Oil and Gas Lease Sale back in March and is ready to expand its oil and gas operations that were acquired last year. This activity is yet to translate into a flood of contracts, as 14% of newest rigs are out of work, according to Rigzone.

Bound to build more rigs
During its recent earnings call, Noble stated that it was reluctant to consider ordering new premium rigs in the near term without a firm customer commitment. Building rigs without contracts for them has been a major problem for the market. Those rigs must be marketed heavily as they arrive from the shipyard. Typically, drilling companies have to make pricing for those rigs more attractive, further pushing market day rates lower.

Noble also stated that it could order rigs without a contract sometime in the future should the market environment improve. From a strategic perspective, the company has to continue renewing its fleet. The market clearly favors new rigs. Noble's latest fleet-status reports reveal that rates for several of the company's old jackups are less than $100,000 per day. Older drill ships are also experiencing significant pricing pressure with day rates closer to $300,000.

As such, companies with older fleets are bound to build more new rigs. Those rigs are entering a market that is already tough. For example, Noble stated that it was searching for work for four of its rigs.

Bottom line
Noble reported solid first-quarter results that beat analysts' expectations, but strategic challenges remain. The current market situation is not favorable for offshore drilling companies. There are too many rigs competing for a limited number of projects. In such circumstances, companies with older fleets are at a disadvantage. Noble decided to spin off its older fleet to a new entity, but this does not solve the overall problem of low day rates.

That said, it's worth mentioning that Noble has gotten cheap and trades at less than eight times its future earnings. This fact, together with a dividend that yields almost 5%, should provide support for the company's shares.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information