Like all of its peers, offshore rig owner Noble Corporation's (NE +0.00%) current strategy is to just get through this challenging market. We're starting to see signs of life in this industry as some producers are taking tender offers for new offshore exploration and development projects. Those tenders have yet to translate to Noble's bottom line results, though.
Noble isn't just waiting around for the market to turn. The company has made some deals lately that should help bolster the bottom line now and potentially lead to substantially better results when the market does turn. Here's a quick rundown of Noble's most recent results, what the company has been up to lately, and what that could mean for investors further down the road.
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By the numbers
| Metric | Q1 2017 | Q4 2016 | Q1 2016 |
|---|---|---|---|
| Revenue | $362.9 million | $410.1 million | $611.9 million |
| Operating income | $45.8 million | ($1,795 million) | $175.4 million |
| Net income | ($301.7 million) | ($1,302.8 million) | $105.4 million |
| Earnings per share | ($1.24) | ($5.36) | $0.42 |
Source: Noble Corporation earnings release.
As has been the case with Noble and so many other offshore rig companies in recent quarters, reported numbers aren't necessarily a reflection of the situation on the ground. This latest quarter didn't have any asset writedowns or goodwill impairments like the fourth quarter, but Noble did realize a one-time, non-cash tax expense of $260 million. Without that charge, Noble's net loss per share would have been ($0.17). Not great, but certainly much better than the reported numbers.
Operations wise, it was a mixed bag quarter. The good news is that the company's jack up fleet is running at almost full capacity with a utilization rate of 93%. The average day rate for those rigs is down a bit to $123,000 per day, but that is a decent rate for jack ups. Also, Noble lowered operating expenses despite higher total operating days for the entire fleet. Several floating assets rolling off contract offset those gains, though. Noble's utilization rate for semisubmersibles declined from 48% in the fourth quarter to 17%. Also, its drillship utilization rate over the same period decreased from 79% to 69%.
Investors shouldn't be too discouraged by the decline in semisubmersible use, though, because those are the oldest assets in Noble's fleet. Of the six semis that are still part of the fleet, four of them are more than 30 years old and the remaining two are approaching their 20th anniversary. These rigs are likely candidates to send to the scrapyard soon.
Even though earnings were negative, Noble still generated free cash flow in the quarter to the tune of $103 million. Management used that and some cash on the balance sheet to pay down $300 million in secured notes to bring the company's total debt load down to $3.79 billion. At the end of the quarter, net debt stood at $3.25 billion, and Noble's debt-to-capital ratio was a respectable 38%.
It was a pretty quiet quarter overall, but one news item of note was that Noble signed a partnership with General Electric (GE 3.38%) for what they are calling The Digital Rig program. The idea here is to use GE's data analytics and asset performance systems on four of Noble's rigs to gather information on operations and find ways to improve operational uptime and reduce unplanned maintenance. GE estimates it can lower a rig's repair and maintenance costs by 20% with this Digital Rig program.
What management had to say
CEO David Williams shared some of the things he has seen in recent months that should give some hope to offshore investors that we might be through the worst of this market downturn.
We believe improving conditions in the offshore drilling industry are becoming clearer. Client tenders for both jack ups and floating rigs are on the rise and include emerging regions, as well as previously active areas that have largely been dormant over the past two years. Also, contract awards, especially in the jack up sector, are occurring with greater frequency, and field development activity is up, relative to the recent past, as project cost rationalization efforts lead to better program economics. Finally, we believe long-term oil market fundamentals are supportive of stable to higher crude oil prices, which with time will support an increase in rig demand.
What a Fool believes
Noble is still in survival mode as the market for rigs has yet to pick back up. That's pretty much the case across the entire offshore rig industry today. While Williams' comments on the market do offer some level of encouragement, it is likely going to take a while before we see any drastic changes in Noble's earnings releases.
In the short term, the thing to watch is whether Noble can lower its operational costs significantly using GE's Digital Rig platform. Those cost savings could help Noble get through this last stretch of challenging times. Longer-term, it could make Noble's fleet more attractive because it can market less downtime and better operational efficiency. Noble isn't the only company to partner with GE, though, so perhaps this competitive advantage will diminish over time as others get on board.
