Noble Corp. Continues To Weather The Storm And Deliver Solid Results

Apr.18.14 | About: Noble Corporation (NE)


Noble Corp. increased profits 70% and revenue 30%.

Newbuilds continue to drive revenue growth with attractive day rates.

The stock price has been depressed due to industry weakness, but Noble Corp is positioned to emerge with strong growth through 2015.

Noble Corp. (NYSE:NE) turned in an impressive quarter in the face of a predicted market downturn in the industry. The company blew away analyst estimates with a 70% increase in profits and a 30% increase in revenue year-over-year. The company took a massive hit in the beginning of the year when the company forecasted a tightening of rig contracts in 2014 resulting in downward pressure on prices. As a result, the industry as a whole has declined over the past several months making for an excellent entry point for investors. While Noble Corp. saw post earnings jump after their earnings release on Wednesday 4/16/14, the stock turned negative quickly on 4/17/14.

Three Months Ended 3/31/14

($ millions)



Y/Y % change


$ 1,251

$ 971


Operating Costs

$ 881

$ 741


Operating Income

$ 369

$ 229


Net Income

$ 256

$ 150


EPS (diluted)

$ 0.99

$ 0.59


Click to enlarge

So why has Noble Corp. continued to lag when it turns in impressive earnings that blow away even the aggressive EPS estimates? The market still sees uncertainty in rig demand through 2014 as the majority of offshore drillers have yet to renew the bulk of contracts expiring within the year. Noble has 17 contracts expiring in 2014 that have yet to be renewed. In the latest fleet status report, both Noble Homer Ferrington and Noble Percy Jones had contracts that expired and the rigs are now listed as available. While three ultra-deepwater drillships and two high-spec jackups were delivered to clients in 2013 and two additional high-spec jackups were delivered to clients in 2014, the uncertainty surrounding existing rigs continues to trump analyst concerns. The addition of newbuilds to Noble's fleet was the main revenue driver in 1Q2014 and added 7% in revenue growth. Continuing through 2014, the company will add two UDW rigs with 3 year contracts with a daily rate of $632,000.

In 2014, the company expects to spend $1.4 billion for newbuilds and $2.6 in total capital expenditures. This number will drop dramatically in 2015 as the new build program comes to an end. Roughly $510 million is expected to be spent on newbuilds in 2015, which will free up a great deal of the company's cash flow. On this topic, CEO and President, David Williams stated,

"Given the expected drop in our new rig reconstruction backlog, annual capital expenditures will decline substantially beginning in 2015 relative to the levels experienced over the past four years. Noble should experience strong free cash flow which will provide us with some options, we could utilize free cash to further address our dividend, currently at $1.50 per share per annum and yielding about 5% or given the reduction in share value seen over 2014 and I believe that the long-term fundamentals of the business are robust, we could repurchase shares."

Final Remarks

Noble Corp. has done a great job of locking up attractive daily rates for their newbuilds, which continue to drive growth and will continue doing so well into 2015. Management has stated that they will continue to be cautious of adding additional newbuilds to the fleet without client contracts in place. Currently the company only has 2 newbuilds without contracts, which are scheduled to be delivered in late 2014.

The weakness in the stock should be viewed as an opportunity to accumulate shares at attractive levels. The short-term weakness in the market has had very little impact on the company and it is better prepared to emerge from this downturn than most companies in the industry due to the vast majority of newbuilds being delivered with contracts in place. The company sees light at the end of the tunnel in the industry due to expanded opportunities in the Gulf of Mexico and stable oil prices.

Investors can hold this stock and wait for a turnaround in investor sentiment while enjoying a dividend yield of 5%. With a forward P/E of just 8.4 and contract backlog of $14.3 billion, the stock has very little downside and tremendous upside opportunity.

Disclosure: I am long NE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.