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Will the Downside Continue for Noble Corp?

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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.

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  • Report this Comment On April 22, 2014, at 1:40 PM, 67Bulldog67 wrote:


    While the gist of your article is correct, there are a couple of major concerns I have with it.

    "So far, day rates for the newest rigs are not particularly impressive." You then go on to mention the Noble Houston Colbert jackup with a day rate of $247K, and the Noble Sam Croft, an UDW drill ship that will go to work in the US GOM at $610K per day.

    The rate of $247K for a jackup rig is outstanding in today's market. Depending on location, most JU's average in the $150 -$160K per day, so the Colbert will go to work at an OUTSTANDING rate. While you didn't mention it, NE has another NB JU, the Sam Turner, that should start work in July on a two year contract at $215K per day, also a very good rate, especially when considering the length of the contract (longer contracts are usually at lower day rates).

    As to the Sam Croft, both it and a sister UDW drill ship, the Tom Madden (which should start work in the US GOM for FCX in February 2015), each have three year contracts at $610K per day. When you add mobilization fees that are paid at time of MOB, but accounting wise have to amortized over the life of the contract, each ship will generate about $632K per day in revenue. Those are again GREAT rates for three year contracts that are in the GOM, which is a lower cost operating environment.

    While you mentioned that NE beat analysts' estimates in the 1st quarter, they blew the street away at $0.99 vs a $0.71 mean estimate. Their operating efficiency was an outstanding 95.5%, and their cost controls were excellent with almost flat operating costs from a year ago.

    With all the negative comments in the press about declining day rates, I think you do a great disservice to TMF readers when you indicate that excellent day rates are somehow unimpressive!

    As to your comments about the spin of "standard equipment" to the new Paragon Offshore company not solving the problem of lower day rates, it will lead to the "new" Noble having a very modern, much younger, and high tech fleet. That in turn should lead to a higher PE multiple on NE going forward. My expectation is that a number of current NE shareholders may decide to sell the PO stock when it is received.

  • Report this Comment On April 22, 2014, at 4:06 PM, bikerron1 wrote:

    One way to get newer UDW rigs is to buy up VTG, and other company's with stock. Lot of small drillers with newer UDW rigs can be bought for bargain price. And It can be done for stock.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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