In the face of a challenging deepwater environment amid the drilling moratorium (that could last into 2011) in the Gulf of Mexico [GoM], Swiss offshore driller Noble Corporation (NYSE:NE) has struck an aggressive deal by acquiring its closely held rival, FDR Holdings Limited (operating as Frontier Drilling), in an all-cash deal, valued at $2.16 billion.
The deal is expected to be funded by a combination of cash-in-hand of $848 million (at the end of first quarter), $800 million bridge loan and the draw-down of the company’s untouched $600 million revolving credit facility. The transaction is expected to be completed by the end of next month.
Frontier is an independent offshore drilling company, which manages six drilling rigs and one dynamically positioned floating production, storage, offloading [FPSO] vessel. The acquisition is expected to be accretive to cash flow immediately and will add approximately $2 billion to Noble’s existing backlog of $7.5 billion (as of March 31, 2010).
On a separate note, Noble also signed a long-term agreement with Royal Dutch Shell (NYSE:RDS.A) for two of its new build ultra-deepwater drillships. The deal also includes a contract extension of a semi-submersible currently working in the U.S. GoM and has the potential to add another $4 billion to Noble’s contract backlog.
We believe that the ongoing GoM oil spill disaster is not all about deepwater drilling, which still remains fairly unexplored. Being the world's second-largest offshore driller by revenue, we expect Noble to seize this opportunity. The Frontier acquisition and contract extensions add to the momentum, in our view.
Despite all these positives, Noble continues to trade as one of the cheapest in the offshore drilling space on a most conventional valuation method. It currently trades at 6.3x our 2011E adjusted EPS compared with the group at 11.9x. We believe some of this discount is reasonable as the company has the highest concentrated jackup exposure (43 out of total 63 rigs), which we believe will continue to face challenges in renewing / obtaining contracts on favorable terms.
Disclosure: No positions