Pickering
Noble Corp. update (NE – $45.14 – A)
· Game plan: One of the most common criticisms of NE's fleet has been that it is aged - refurbishments notwithstanding, the legacy floater fleet consisted of drillships that are 33 years old and floaters that, before the recent deliveries of the Danny Adkins and Jim Day, averaged 23 years of age. The company has recognized the change in market dynamics and the preference by operators for newer equipment, and they intend to be well represented. Not finding the terms of acquisitions (other than special situation Frontier) to their liking, Noble has engaged in an aggressive newbuild program. We don't like to see massive levels of surplus equipment being constructed (the industry has announced 26 newbuild floaters over the last 6 months), but it is clear that the price of being in the game is having new equipment, and NE has a strategic imperative to build. We anticipate that older equipment is at most risk as the newbuilds are delivered over the next 3 years; currently there are 20 drillships and 117 semis that are 25 years or older (41% of total floaters), and to our thinking, at risk for dislocation as new equipment comes on. The impetus for change is not just safety, but new technologies. There should remain a market niche for moored semisubmersibles – for example in sub 1500' of water (DP systems have problems there), and we would not expect NE to upgrade the rest of its EVAs to DP as a result.
· 2013 = big year : Noble has three drillships and two high spec jackups entering the fleet in 2013, representing $1.33 in annualized earnings power under our current dayrate assumptions. Even under our 2012 forecast eps of $3.58, the stock trades at a discount to the peer group (12.7x vs. 13.4x). Post 2013, the company has an additional drillship that should add another 33c in annual eps power. While the company has plenty of cash flow to handle the current construction (cash from ops looks to be $3B+ over the next 2 years), we would expect money from divestures to be possibly applied to additional newbuilds as part of the fleet renewal mandate. Assuming trouble free construction and commissioning, the company should be able to post strong earnings growth from 2012 onwards due to the new assets (barring a rollover in the market).
· Visibility: The Frontier acquisition cemented a strong relationship with Shell that is helping the company to book backlog (currently $13.1b, or 94% of enterprise value) well into the future. Of the nine newbuilds, only 3 are speculative (the last Hyundai drillship and the 2 JU 3000N jackups). The company retains 1 more option for a drillship (exercisable before August of 2011) and 4 more options for jackups (exercisable before 2012). The impact of the change in the tax regime in the U.K. has yet to be fully digested by the industry, but NE's exposure to the U.K. basin is marginal at this point, with one semisubmersible (the Ton van Langeveld) and two jackups working U.K. waters currently. As part of a fleet review, the company is force ranking rigs for divestiture, and we would expect that a package of rigs could come out of the company as a result - including rigs with current contracts. |
