Offshore drilling contractor Noble Corp. (NYSE:NE) announced its first quarter 2014 results on Wednesday, April 16. These results were actually quite good, especially considering that the offshore drilling industry is in the midst of a short-term downturn. This could be quite encouraging as it shows that Noble is effectively riding out the market weakness until conditions improve. This strategy appears to be working quite well for the company, and this could make it an appealing investment at today's levels.

Highlights from the report
Let's take a minute to review the highlights from the company's earnings report before getting into the meat of this analysis. First, Noble saw its revenues increase compared to the fourth quarter. In the first quarter of 2014, Noble had revenue of $1.3 billion compared to $1.2 billion in the fourth quarter of 2013 and $971 million in the first quarter of 2013. Noble also had higher net income than in the fourth quarter of 2013. The company reported net income of $256 million in the first quarter of 2014 compared to $174 million in the fourth quarter of 2013 and $150 million in the first quarter of 2013. 

Net income gains not as large as they appear
The quarter-over-quarter net income gains that Noble reported were not really as big as they first appear, though. This is because Noble's fourth-quarter net income was reduced by an asset impairment charge. In the fourth quarter, Noble was forced to write down the value of its stake in the floating production vessel Seillean, which resulted in an impairment charge of $36 million. Excluding the impairment charge, Noble would have reported a net income of $210 million during the fourth quarter.

While this impairment charge reduced Noble's net income, it did not result in any cash leaving the business. It is also a one-time charge. Therefore, we can factor it out of the company's results when we go to compare the company's continuing operations from quarter to quarter. As you can see, its continuing operations showed improvement because Noble's net income increased from quarter to quarter even after removing the impairment charge from its results.

Improving margins
It is immediately obvious that Noble's net income increased at a much faster rate than its revenue, even if the impairment charge is excluded. The company saw its net income increase by 21.9% on a quarter-over-quarter basis, excluding the impairment charge, but Noble's revenue only increased by 8.3%. This is also evident by looking at Noble's contract drilling margin, which is the difference between an offshore drilling company's revenue and the expenses that it incurs to operate its drilling rigs. This figure increased from 50% in the fourth quarter to 54% in the first.

This is partly due to successful efforts from Noble to keep costs down. Noble saw its revenue increase due to the presence of several new rigs, but its operating costs barely budged, increasing by only $1 million. If Noble can keep this up, it could point to forward net income growth as the company's revenue growth would outpace growth in expenses. Unfortunately, that is unlikely to be the case. Noble's costs of operating its rigs actually did increase, but the company spent much less money moving its rigs around during the first quarter than it did in the fourth. The decrease in costs here was large enough to almost completely offset the increase in costs that Noble incurred in operating its rigs.

Strong near-term growth prospects
With that said, Noble does offer significant near-term growth prospects. This is because of two new rigs that just left the shipyard and joined the company's operating fleet, as well as more rigs that will be joining the company's operating fleet later in the year. The two rigs that just left the shipyard are the Noble Houston Colbert and the Noble Sam Turner, both of which are shallow-water jack-up rigs. Noble has already secured contracts for these rigs and they will begin operating shortly.

The Noble Houston Colbert is scheduled to begin operating in mid-April off of the coast of Argentina at the very high dayrate of $247,000. The Noble Sam Turner, meanwhile, will start operating later, in late-June off of the coast of Denmark. The Noble Sam Turner carries a dayrate of $215,000. Both of these rigs will increase Noble's revenues once they begin operating. Later in the year, Noble will add two ultra-deepwater drillships and another two high-specification jack-ups and this will result in strong revenue growth as these rigs begin operating.

Attractive dividend yield
Like some of its peers such as Ensco (NYSE:ESV) and Seadrill (NYSE:SDRL), Noble's stock has been sold off over the past few months due to all of the negative sentiment surrounding the offshore drilling industry. This has resulted in Noble offering a very attractive dividend yield to investors that buy the stock today. At the time of writing, Noble trades for $30.36, giving the company's stock a forward dividend yield of 4.94%.

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Daniel Gibbs has a long position in Seadrill. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no position in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends Seadrill. The Motley Fool owns shares of 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.


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