Investors in offshore rig companies have been thinking to themselves that "the market is going to turn" for what seem like a couple of years now, but this past quarter was further evidence that the market is still deteriorating. Noble Corporation's (NEBLQ) most recent earnings release featured its lowest quarterly revenue number in more than a decade.
According to management, though, that moment where the industry turns around is now. Here's a look at Noble's most recent earnings results and why the company thinks this is the right time for the offshore rig market to rebound.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$235.2 million||$329.6 million||$362.9 million|
|Operating income||($56.9 million)||($109.6 million)||$45.5 million|
|Net income||($142.3 million)||($24.7 million)||($301.7 million)|
From a numbers' standpoint, this was a tough quarter for Noble. Revenue declined precipitously as several of its rigs either rolled off contract or were awaiting start-up of new contracts. Also, the company incurred a higher level of spending as it activated one of its previously idle rigs. Despite these less-than-stellar numbers, the company still beat Wall Streets expectations. Adjusting for a realized loss of $0.03 per share related to paying off some of its debts outstanding early, Noble's bottom line came in better than the $0.57-per-share consensus estimate.
Fleet utilization slipped from 69% this time last year to 47%, the bulk of which came from its jackup fleet. The good news is that three jackup rigs have restarted operations under new contracts since the end of the quarter. Management estimates that this past quarter was likely the low point in fleet utilization as it is fielding a lot of interest for its idle rigs and expects drilling activity to increase from here.
Another encouraging sign from this past quarter is that Noble is still generating enough cash from operations to cover its capital obligations. In fact, the company was able to use its small amount of free cash flow to retire some near-term debts and reduce its total debt load from $4.3 billion at the end of 2017 to $4.0 billion. This should give investors some confidence that the company has some financial strength to ride out the last parts of this downturn.
What management had to say
It's been a long time since offshore rig executives have actually been upbeat about the future of its business. For years, its been en vogue to talk about the resiliency of one's balance sheet or about right-sizing the fleet for the future. On Noble's most recent conference call, though, its chief commercial officer, Robert Eifler, gave one of the more optimistic market outlooks to come from an offshore executive in a while.
The mood in the industry today is decidedly more positive than even a quarter ago and this is especially true in the premium jackup segment. We have always believed in maintaining a mixed fleet and the benefits of this strategy are becoming clear as the premium jackup market transitions into full scale recovery.
Demand for the best assets is rising steadily and notably certain customers are pursuing long-term contracts while others are securing rig requirements with a year or more lead time. Contract visibility is improving and dayrates should follow. In certain regions and for niche customer requirements, dayrates have already improved from levels commonly experienced 6 months ago, especially for contract commencement dates in late 2018 or beyond.
While fixture activity in the deepwater space has developed more slowly this year than we had hoped, global liquids demand has remained strong; breakeven costs offshore are now largely below $50 per barrel; projects sanctions doubled 2017 over 2016; and we believe that we remain on the cusp of notable improvement in the segment.
Ready to rebound?
I know this sounds like somewhat of a backhanded compliment, but one of the positives about Noble's fleet size is that it won't take many new contracts to make a profound impact on the bottom line. Management was quick to leap on the opportunity to obtain contracts a couple of quarters ago when it elected to start warm stacking its drillships -- idle but ready to deploy -- instead of cold stacking them, ceasing all basic operations.
While Noble may not turn to a profit in 2018, nor will other rig companies. Also, the chances of Noble's situation getting much worse seem to be diminishing by the day. With oil prices on the rise and several oil and gas producers looking at offshore as an economically viable production source again, it looks like Noble is headed in the right direction.