Overview
Noble Corporation plc (NYSE: NE) is an offshore drilling contractor for the oil and gas industry. The company focuses on ultra-deepwater and high specification jackup drilling opportunities in both established and emerging markets across the globe. The company’s fleet consists of 28 offshore drilling units, which include 14 jackups, eight drillships, and six semisubmersibles. As of the end of the second quarter, Noble performed drilling operations in the United States, the North Sea, the Middle East, and Asia.
Noble (and its predecessor companies) have engaged in the contract drilling of oil and gas wells since 1921, and is headquartered in London, England.
Fleet
As noted above, Noble’s drilling fleet consists of drillships, semisubmersibles, and jackups:
Drillships are self-propelled vessels that maintain their position over a given well using a computer-controlled dynamic positioning system. Certain drillships can operates in water depths of up to 12,000 feet. The company’s drillship roster includes four Gusto Engineering class ships, two Bully class drillships (50 percent owned through a joint venture with a subsidiary of Royal Dutch Shell), and two Globetrotter class drillships.
Semisubmersibles are floating platforms that can be submerged during drilling operations to improve stability while drilling. These units maintain their position either by fixed moorings or computer controlled dynamic position, and can drill in many areas where jackups cannot. Semisubmersibles require depths of at least 200 feet, and can generally drill in water depths up to 12,000 feet.
Jackups are mobile, self-elevating drilling platforms equipped with legs that can be lowered to the ocean floor to form a foundation. All of Noble’s jackups are independent leg (legs can be raised or lowered individually) and cantilevered, which permits the drilling platform to be extended out from the hull, allowing it to perform drilling operations over pre-existing platforms or structures. Jackups are capable of drilling in water depths between 300 and 500 feet.
The full fleet specifications are shown below:
Source: Company Filing
Market Outlook
The company noted that the first six months of 2017 have been challenging for offshore drillers. The primary cause is excess rig supply due to reduced offshore spending triggered by low oil prices. Customers have become more cautious with capital spending after crude oil prices declined from more than $100 in mid-2014 to approximately $30 per barrel in early 2016. Although oil prices have recovered somewhat recently (to approximately $50 per barrel), the company expects that offshore drilling programs will remain curtailed until prices rise further, and volatility is reduced. Accordingly, the remainder of 2017 and 2018 is expected to remain weak and potentially deteriorate further.
October Fleet Update
Noble provides a monthly update on its fleet utilization and bookings. The October report did bring some good news – a new three-month contract for the Noble Bob Douglas (which had been idle for a significant portion of the second quarter) in the Gulf of Mexico, and a new one-year contract for the Noble Houston Colbert in Qatar. This is partly offset by the fact that the Noble Sam Hartley will complete its contract ahead of schedule. Overall, recent awards have provided intermediate-term support for the company’s floating rig capacity, and the number of jackup rigs under contracts has risen steadily since 2016. Evercore analyst James West notes that Noble’s jackup fleet coverage remains among the highest of its peers:
Second Quarter Earnings Review
Revenue for the quarter ended June 30, 2017, declined 69 percent year-over-year to $278 million. This drop was primarily attributable to declines in the average dayrate received. Overall utilization was 65 percent, flat from the same period one year ago (though operating days did fall slightly), but the average dayrate declined 68 percent to $164,475. Concurrently, operating expenses declined 28 percent year-over-year due to lower expenses from contract drilling services.
Overall, Noble’s net loss for the second was $93 million ($0.38 per share), down from net income of $323 million ($1.28 per share) in the second quarter of 2016. We note that the net loss includes a $0.08 loss per share due to the emergence of from bankruptcy of Paragon Offshore (a related entity spun-off in 2014).
At June 30, 2017, the company listed a cash balance of $603 million and long-term debt equal to $3.8 billion, yielding net debt of $3.2 billion. With shareholder’s equity of $5.4 billion, Noble’s debt-to-equity ratio is 0.7. Although the company is highly levered, the near-term debt maturities (2018-2022) are manageable.
Source: Company Presentation
Noble is expected to release Q3 financial results in the next couple weeks.
Stock Influences
- Changes in the price of crude oil;
- Changes in the supply of offshore rigs and a resulting increase in average dayrates
- Significant contract awards and changes in the company’s utilization rates; and
- M&A activity.
Risk Factors
- The company is facing legal claims related to its spin-off of Paragon Offshore;
- The company has been materially affected by the ongoing weakness in the market for crude oil;
- The significant excess supply of offshore oil rigs has increased competition and decreased average dayrates; and
- The company is substantially dependent on several clients including Shell and Statoil ASA.
Stock Performance
As of October 20, 2017, shares of Noble closed at $3.78, down more than four percent on the day, yielding a market capitalization of approximately $1 billion. The stock hit a high of $8.37 last December, but has fallen sharply since. The shares showed some signs of life in September, but have retreated in the direction of the one-year low of $3.14 attained in August. We note that the shares are currently trading well below book value.
Following are selected analyst ratings and price targets:
| Analyst | Firm | Rating | Price Target | Date |
| James West | Evercore | Outperform | $5.00 | 10/12/2017 |
| Kurt Hallead | RBC | Sector Perform | $5.00 | 9/14/2017 |
Summary
Ongoing weakness in the price of crude oil, and by extension the demand for offshore drilling services, has had a significant impact on Noble’s results. Recent status reports have been favorable, but day rates will need to recover for the company to grow significantly. In the interim, Noble is focusing on improving operations and cutting costs. Analysts do see some upside above the current stock price.
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