What happened

Shares of Noble Corporation (NYSE:NE) spiked 24% by 10:45 a.m. EST on Wednesday. Fueling the surge in the offshore drilling stock was the signing of a new drilling services agreement with ExxonMobil (NYSE:XOM) in the Guyana-Suriname Basin. 

So what

As part of the deal, Exxon will add three and a half years to the current contract terms of the three rigs Noble leases to the oil giant. Furthermore, instead of locking in a firm dayrate for the contract extensions, the companies will update the rates at least twice each year to the prevailing market rate, which they'll subject to a scale-based discount and performance bonus.

This agreement will align the interests of both companies. It also provides for the potential of adding six years to the term and bringing other rigs into the framework agreement, depending on development decisions and government approvals. 

A drilling rig in the water with the sun setting in the background.

Image source: Getty Images.

Noble CEO Julie Robertson said: "The commercial enabling agreement with ExxonMobil takes our regional position a step further, as we benefit from multiyear contract visibility and utilization allocated across three of our premium drillships. This attractive commercial model secures current market pricing dynamics on six-month intervals and important operational economies of scale, and, importantly, the agreement can cover additional Noble drilling rigs."

Noble stands to benefit from both a potential rebound in offshore drilling dayrates as well as the success of Exxon's development and exploration program in the region. 

Now what

With this agreement, Noble Energy will keep at least three of its rigs working for an additional three and a half years at prevailing market rates. While that exposes the company to the downside if they decline, it also provides it with more upside if dayrates improve. That could enable it to earn higher profits than its rivals, which could give this energy stock the fuel to outperform if market conditions strengthen.