I can imagine that the first number investors will look at in Noble Corporation's (NYSE:NE) most recent earnings result is the $628 million loss. That was more than double the company's revenue number for the quarter and marked a huge decline from the prior quarter. But that net income result is a bit of a red herring, as it includes a massive impairment charge in the quarter.
For investors, it's more important to focus on this other monumental change this past quarter: Noble's quarterly revenue increase. Here's why the revenue gain is more indicative of the company's future than the asset writedown, and why investors may want to pay closer attention to this stock.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$258.4 million||$235.2 million||$278.1 million|
|Operating income||($845.6 million)||($56.9 million)||($44.3 million)|
|Net income||($628.0 million)||($142.3 million)||($93.3 million)|
Noble's large asset writedown is likely going to garner lots of attention, but it shouldn't. Retiring rigs and writing down their values has been a common theme for rig companies in recent years. For one thing, rigs have an economic shelf life, and the rapid development of technology has shortened that useful life to a certain degree. Also, it doesn't make much sense to keep older, less capable rigs around if the probability of finding work for them is low, especially if the availability of these rigs reduces a rig company's pricing power when negotiating with potential customers. The fewer the rigs available, the higher the price a rig company can usually command when pricing a contract.
This past quarter, the company fully wrote down and retired one rig and partially wrote down the carrying value of two floating rigs for a total of $793 million. Absent those writedowns, Noble's adjusted loss per share was $0.49.
The more important number to focus on here is the top line, as the company announced a quarterly revenue increase that didn't involve contract terminations or other one-time gains. The uptick in revenue came mostly from new contracts for its jack-up fleet. Management noted that all 10 of its high-specification designated jack-up rigs are fully contracted through the rest of the year. Management also noted that it reactivated a previously idle drillship to start a short-term contract with ExxonMobil in Guyana after the end of the quarter. Noble expects the rig on-site in October after reactivation.
This turnaround was needed, but it also means that the company's capital spending will tick up as it reactivates and does additional upgrading and maintenance work on rigs. As a result of these rig reactivations, Noble's capital spending for the first half of the year increased slightly and ate into its cash reserves. At the end of the quarter, Noble had $411 million in cash and equivalents.
What management had to say
During the company's conference call, Chief Commercial Officer Robert Eifler said that this quarter was a pivotal moment for the company, and he thinks that additional contracts and higher day rates are on the horizon:
[T]he premium jackup market is gaining pricing momentum and the fundamentals are in place for improvement in the floating sector. History has shown that the jackup market is typically a first-mover as the offshore industry transitions into a cyclical recovery. Clearly, the premium jackup market has bottomed. And as we watch the opportunity set for floaters grow, we remain confident that we are on the cusp of visibility into a floater recovery.
Worldwide hydrocarbon demand has remained strong. Commodity pricing has been stable recently. Many of our customers' projects break even at level substantially below current oil prices, and the results of past years of underinvestment in reserve replacement are set to take effect in the coming years. If these factors hold true, we believe that improved investment offshore, including in the deepwater, is both a necessity and an eventuality.
Light at the end of the tunnel
It looks like this was the turning point that Noble investors have been waiting for. The new contract awards for the company's jack-up fleet should lead to higher revenue next quarter and will be soon followed by its newly reactivated floating rig headed for Guyana. Having more rigs in service and reactivating others will likely lead to higher operating costs in the coming quarters, but those are the things we want to see now as Noble tries to find work for the rest of its fleet.
Shares of Noble have been trading at an incredibly low price-to-tangible book valuation in recent years. But the recent writedown of its fleet suggests that perhaps the valuation multiple wasn't telling the whole story, since the market value of those rigs is less than the value carried on the books. Even if you assign a considerable discount to Noble's book value, though, this stock still looks relatively cheap. If management can maintain this momentum of bringing previously idle rigs back into service, then the company should get back to profitability sooner rather than later.