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Noble Corporation (NYSE:NE) Chairman and CEO David Williams believes that uncertainty in the Gulf of Mexico will continue to impact the offshore drilling industry for some time to come. Mr. Williams, speaking at the Barclays Capital Energy and Power Conference in New York, updated investors regarding the company’s operations and future prospects in light of continued regulatory uncertainty in the Gulf of Mexico in the aftermath of the Deepwater Horizon disaster involving the blow out of the Macondo well.

We have provided coverage of Noble Corporation over the past few months and believe that the company is well positioned despite Gulf of Mexico uncertainty. The company has proven adept at seizing opportunities when they arise, as illustrated by the acquisition of Frontier Drilling earlier this summer. The acquisition added six floating drilling rigs along with $2.0 billion of contract backlog (net to Noble) and was financed with debt obtained at an attractive interest rate made possible by the company’s relatively unleveraged balance sheet. The company has a modern fleet of rigs and has indicated in the past that the costs of retrofitting rigs for new regulations should be manageable. Since our initial write up, Noble shares have rallied with increased exposure in publications like Barron’s, but shares are still trading at prices far lower than before the Deepwater Horizon incident.

Post-Macondo Scenarios

One of the more interesting aspects of the presentation involved an assessment of a “new normal” for the Gulf of Mexico in a post-Macondo world. The slide below considers three scenarios that could develop in the coming months and the consequences for the industry based on each scenario (click on the image for a larger view):

While Mr. Williams did not make a specific prediction regarding which scenario is most likely to play out, he did indicate that an end of the official moratorium is likely to come before the elections but a de-facto moratorium could continue if the federal government refuses to issue permits. This would most closely align with the middle scenario entitled “regulatory inaction” which could lead to more uncertainty, an exodus of rigs from the Gulf of Mexico, and downward pressure on dayrates. In the highly charged political environment in Washington today, one cannot discount the possibility of the “impossible regulations” scenario which would effectively destroy the economics of oil and gas exploration in the Gulf of Mexico and devastate the regional economy.

Mr. Williams noted that a growing percentage of oil and gas discoveries in the Gulf of Mexico have been in deep waters in recent years and stressed the fact that decline rates are higher in the Gulf than in other parts of the world. In other words, an extended moratorium will have a major impact on production, particularly for deepwater, where the typical decline rate is between 20 and 25 percent.

Rig Updates

Mr. Williams provided updates on the following rigs which we have combined with an analysis of the company’s latest fleet status report from July.

  • Noble Danny Adkins. This rig is currently in the Gulf of Mexico and has resumed work. The rig was previously on a suspension dayrate of $68,000 to $70,000. While the new dayrate for Danny Adkins was not disclosed, the presentation slide indicated that Noble’s total dayrate for all rigs operating in the Gulf of Mexico is now $685,000 which is down from $3.025 million prior to the Macondo blowout.
  • Noble Johnnie Hoffman. This rig operating in Mexico the has secured a three month extension at a $75,000 dayrate starting in July. This is down from the previous dayrate of $84,000 to $86,000.
  • Noble Earl Frederickson has secured a four month extension at a $64,000 dayrate starting in August. The rig is operating in Mexico and was previously at a $67,000 to $69,000 dayrate.
  • Noble Julie Robertson secured a three month extension at a dayrate of $87,000 starting this month. The rig is in the North Sea and was previously earning a $211,000 to $213,000 dayrate. The reason for the sharp decline in the dayrate was not discussed.
  • Noble Ronald Hoope, operating in the North Sea, secured a five month extension starting in November at a dayrate of $87,000. The rig was previously contracted at a similar dayrate.
  • Noble Ton van Langeveld, operating in the North sea, has a new nine month contract at a $247,000 dayrate starting in December. The rig was previously contracted at the same dayrate.
  • Noble Roger Lewis will begin a three year contract at a $132,000 dayrate in Saudi Arabia starting in January 2011. This is an improvement over the $105,000 dayrate the rig earned earlier this year prior to renovations that included installation of leg extensions and upgraded steel.
  • Noble Scott Marks is being moved from the North Sea to Saudi Arabia to begin a three year contract at a $237,000 dayrate starting in June 2011. Scott Marks is currently earning a $212,000 to $214,000 dayrate in the North Sea.

Future Plans

Mr. Williams estimated realization of $7.1 billion of net cash (undiscounted) from the current $13.2 billion backlog based on a 53.5 percent operating margin. Noble’s margins continue to exceed comparable margins of competing offshore contract drillers but Mr. Williams noted that increased regulatory burdens could impact margins for all companies in the industry.

In response to a question, Mr. Williams reiterated Noble’s focus on growth but also kept open the possibility of increasing dividends in the future.

Resources:

Latest Fleet Status Report – July 8, 2010 (pdf)
Barclays Capital Presentation Slides – September 15, 2010 (pdf)
Replay of Barclays Conference Webcast – September 15, 2010

Disclosure: The author of this article owns shares of Noble Corporation.

Source: Noble Corp.: Continued Gulf of Mexico Uncertainty Ahead