Back in February, I pondered whether deepwater drillers were just dandy, or faced a downturn ahead. Little did I know that there would be a tragedy aboard the Transocean (NYSE: RIG) Deepwater Horizon just a few months later. The Macondo disaster has turned the industry on its head for the moment. Fortunately, drilling contractor Noble (NYSE: NE) has done more than keep its head above water.
Like Seadrill (NYSE: SDRL), which snapped up Scorpion Offshore in the wake of the great oil spill sell-off (and outbid Ensco (NYSE: ESV) in the process), Noble has made a splash with an opportunistic acquisition of its own. In late June, the company agreed to acquire Frontier Drilling for $2.16 billion. The purchase adds six floating drilling units, including two Arctic-class premium drillships that are under construction and jointly owned by Royal Dutch Shell (NYSE: RDS-A), to Noble's large stable of offshore rigs.
The Shell connection extends well beyond the pair of joint-venture-owned rigs, which have five- and 10-year contracts with the super major, respectively. Most of the rest of Frontier's fleet is also contracted to Shell, and the operator has agreed to pay suspension rates and cover the rigs' operating costs under the current Gulf of Mexico moratorium. Such an accommodative stance contrasts sharply to the contract with Anadarko Petroleum (NYSE: APC) on the Noble Amos Runner, which is tied up in litigation now that Anadarko has claimed force majeure and terminated the contract.
In this time of massive uncertainty for everyone working or investing in the Gulf, having a supportive, long-term customer like Shell is a major plus. So is doubling your contract backlog overnight, which is exactly what the Frontier acquisition will achieve.
Noble's second-quarter results were nothing to write home about, and subsequent quarters will almost certainly be dim as well, but the long-term outlook remains exceptionally strong for this top-flight rig operator. If Noble had gone into this moratorium with a big pile of debt, the story would be different, so thank goodness for dry powder.
