What happened
Shares of offshore drilling contractor Noble Corp. (NEBLQ) were up more than 10% Thursday, having cooled off from morning activity that had shares up 24% in pre-market trading and up nearly 18% in the first couple of hours of trading. Today's big move is the result of two notable things the company reported Wednesday after markets closed: fourth-quarter and full-year 2019 results that came in ahead of expectations, and a plan to transition to a new CEO later this year.
So what
Noble reported fourth-quarter drilling services revenue of $441 million and a net loss of $0.13 per share, both of which beat investor expectations. Noble also reported an 18% increase in operating days -- a measure of how many days its fleet was actually being paid to drill -- and a fleet uptime of 97%.
A worker connects a pipe on a drilling rig. Image source: Getty Images.
The company also said the utilization rate of its floating rigs (which measures the percentage of its fleet under contract) was 60%, slightly down from 63% in the third quarter. Adjusting for the rigs it has cold-stacked (in long-term storage), the utilization rate was 80%. Noble's jackup fleet reported a 93% operating rate in the quarter, up from 89% sequentially, with none of those vessels idled at quarter-end.
Next, Noble announced that Julie Robertson, chairperson of the board and CEO, would resign as CEO at the close of the company's next annual meeting and be succeeded as CEO by Robert Eifler, who has been with Noble in various roles since 2005, starting in the company's management development program working offshore. Robertson will take on the newly created role of executive chairperson of the board, continuing her 40-year career with Noble, which started in 1979 with a Noble subsidiary.
Now what
Noble's shares surged today, but the company continues to have a tough path ahead of it. Oil market conditions are challenging, and even with recent increases in spending by oil and gas producers, offshore drilling remains oversupplied, with vessels and long-term contracts few and far between. Investing in the energy sector, particularly oil and gas, is a real challenge right now. Moreover, there is some risk for Noble that its substantial debt load may prove too great a load to bear. Its debt-to-equity and debt-to-assets ratios are some of the highest among its peers, and the company doesn't have the cash on its balance sheet that others do that could help it ride out the ongoing weakness offshore.
But with that said, Noble does continue to generate positive operating cash flow, a reminder that it's well run; with deep connections across the offshore space, even a small uptick in activity that puts more of its floating vessels to work would substantially improve its prospects. Moreover, Noble's debt isn't an immediate concern; the company has more than a year before facing any substantial maturities, and its ability to generate positive cash flow helps its prospects to refinance that debt.
Put it all together, and investors with a high threshold for risk may want to consider buying some Noble stock. Offshore drilling has been an ugly place to invest in for five years running, but it's still important and relevant. I think Noble's prospects are likely better than the market is giving it credit for at recent prices, with the caveat that those prospects largely depend on whether lenders will indeed prove willing to let Noble refinance its debt in coming years. If Noble can't refinance, its path forward will almost surely mean bankruptcy. If that happens, common shareholders would get almost entirely wiped out.
