It's Time to Buy This Oil Driller

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The collateral damage caused by the Deepwater Horizon oil spill has been indiscriminant. It has lacerated stock prices of all industry players, regardless of their individual exposure to the Gulf of Mexico. One such company whose stock slash has been disproportionate to its actual exposure is contract driller Noble (NYSE: NE  ) .

Noble owns offshore drilling rigs, which it contracts out to oil and gas producers. Most of its rigs are mobile shallow-water jackups, but Noble's also has a handful of semisubmersible rigs that constitute the company's exposure to the Gulf. Though a fraction of Noble's sixty-odd total rigs, the semisubmersibles command day-rates two to three times higher than jackups, meaning that those five Gulf semisubmersibles generated 22% of Noble's total revenue.

Noble's stock has been hammered especially hard, even among contract drillers. By June 1, Noble was down 35% since the Deepwater Horizon caught fire. That was as much or more than similarly hit competitors Ensco (NYSE: ESV  ) and Diamond Offshore Drilling (NYSE: DO  ) , which were down 29% and 34%, respectively. Fast-forward about six weeks to where we are today. Ensco's stock has recovered about 21%. Diamond, on the other hand, has sold one of its rigs to Ensco for $186 million -- a possible sign that the company is strapped for cash or concerned about its business outlook.

Noble's stock, however, remains down 24%. Noble's relatively low stock price doesn't make much sense considering the company is one of the best prepared, in a balance sheet sense, to weather a storm. Noble is one of only two major contract drillers that have net cash on their books. As of late April, Noble had about $97 million in net cash; Ensco, the other driller with net cash, had $955 million. Both companies have used their cash opportunistically to pick up assets on the cheap over the last three months: As mentioned above, Ensco bought a rig off Diamond, and Noble recently purchased the assets of privately held contractor Frontier Drilling. Ensco has already seen its stock beginning to bounce back; with Noble's similar finances, perhaps its stock will be the next to rebound.

Noble is also trading at a ridiculously cheap 1.2-times tangible book value. For Noble, tangible book value is basically the recorded value of its rigs. Normally, I would look at a company's rig sales to make sure the company is actually able to sell them for what they say the rigs are worth. One problem with Noble -- and perhaps one reason that investors have remained hesitant to put their money back into Noble stock -- is that Noble hasn't sold any major equipment since 1997, meaning we don't know for sure how accurate that tangible book value figure is. That said, Ensco has sold three rigs in the last three months, and each has fetched a price between 50% and 60% above its recorded book value. If you are willing to use Ensco's accounting methods as a proxy for Noble's -- and you have a 50%-to-60% margin of error built in -- you can assume that Noble hasn't inflated the value of its rigs on its books.

The current drilling moratorium won't last forever. And even if it does, Noble's rigs in the Gulf are mobile. They can be moved and contracted out elsewhere in the world. Put all together, and the fact that Noble's stock remains well off its pre-disaster price seems irrational, and irrationally low stock prices can be the making of a great investment opportunity.

Alex Pape does not own shares of any company mentioned. The Fool owns shares of Ensco. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1244986, ~/Articles/ArticleHandler.aspx, 10/21/2016 4:33:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:01 PM
DO $17.40 Down -0.50 -2.79%
Diamond Offshore D… CAPS Rating: **
ESV $8.90 Down -0.05 -0.56%
Ensco CAPS Rating: *****
NE $5.97 Down -0.04 -0.67%
Noble CAPS Rating: ****