Please ensure Javascript is enabled for purposes of website accessibility

1 Company's Move Is a Telling Sign for the Rig Industry

By Tyler Crowe - Sep 27, 2013 at 7:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A sell-off of Noble's legacy fleet is an indicator of the entire industry's direction.

Whenever a company decides to break itself up, there's probably a very good reason for it. Earlier this week, Noble (NEBLQ) announced that it was going to spin off its older, lower specification rig fleet into its own company. Why would Noble do this? More importantly, why should investors other than Noble shareholders really care? Let's take a look at this move, and see if there are any telling signs for the industry from this deal.

 

Source: Seadrill Media Relations

Different strategy for different assets
Noble, like several of its peers, have seen demand for offshore drilling equipment run rampant in the past couple of years. While it should be exciting for many of these companies, the technology required to access these new offshore plays is requiring new technology. This also means that a large percentage of these older rigs are starting to see their final days. Of course, not every company is in this position, but Noble is one of them. The average age of a company's fleet of floating rigs is approaching 20 years, and its jack-up fleet is creeping up on 30. 

What this translates to is more time at the dockyard for maintenance, and less time making money for the company. This can be seen in the company's utilization rate. Adjusted for rigs under construction, Noble has a fleet utilization rate of 83%. Compare that to both Seadrill's (SDRL) and Ensco's (VAL) adjusted utilization rates of 94% and 91%, respectively. Both of these companies are able to keep a higher utilization rate in part because their ultra-deepwater capable fleets -- the segment of the industry that commands the highest dayrates- -- are less than three years old.

So, by splitting the company's fleet into its legacy fleet -- a fancy way of saying old -- into its own separate entity, it can focus on its newer, higher-specification rigs, and drive growth for the company. Since Noble could not sell off this part of the business like Transocean did last year, it opted to spin them off into its own fleet. This would shed the company of its lower-performing assets, and allow it to focus more on its higher-margin, higher-growth sectors like ultra-deepwater capable floaters, and high specification jack-up rigs. 

As an investor, why the heck would you want to buy an old fleet that doesn't have as-high margins, and spends more time in the shop? Well, an old fleet company that doesn't have a lot of capital tied up in newbuilds could generate a lot of cash. This is speculative, but it is very possible that a spin-off of legacy assets into its own company would be one that focuses on returning value to shareholders though a high dividend and share buybacks, rather than growing with new rigs. 

A new era for the rig industry
The moves by Noble and Transocean to unload some of the older parts of their fleets are pretty telling signs that the rig business is changing fast. It would not be surprising if Diamond Offshore, another company with a larger legacy fleet, does some sort of move to unload its legacy assets, as well. With the Brazilian pre-salt auction happening within the next couple of months, and big-exploration projects in line for the coast of Africa, the Gulf of Mexico, and the Arctic, rig companies are going to have to deliver a large amount of floating rigs and high specification jack-ups to meet this demand. For the older feet owners, replacing lost revenue from these older fleets will require large investment programs on top of any investments to grow revenues, as well.

What a Fool believes
This move by Noble may seem like a less-than-ideal one for shareholders at first glance, but it should set the company up to be more successful in the long run, as it can apply two separate business strategies for its different fleets. Noble doesn't expect the IPO for this spinoff to occur until late next year, so it should give investors plenty of time to figure out how to play this move. The theory for these two different companies is sound, but we'll have to see how the deal is structured before taking any action.

Fool contributor Tyler Crowe has no position in any stocks mentioned.  You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool.

The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SeaDrill Limited Stock Quote
SeaDrill Limited
SDRL
Noble Corporation plc Stock Quote
Noble Corporation plc
NEBLQ
Valaris plc Stock Quote
Valaris plc
VAL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.