Noble Corporation (NYSE:NE), one of the largest offshore drilling contractors in the world, has a number of drilling rigs whose contracts are scheduled to conclude before the end of the year that have not obtained new contracts to start on following the end of their current contracts. This is a problem for the company in the near term, as its revenues will steadily drop as these rigs come off contract. In this article, we will look at the potential ramifications of this and will attempt to determine how worried investors should be about this.
Here are the rigs in Noble's fleet that are scheduled to come off contract in 2014 for which no replacement contract has been obtained. Please note that this list does not include those rigs that were transferred to Paragon Offshore (PGN) via the spin-off of that company.
This list includes a variety of rig types, including ultra-deepwater semisubmersibles, deepwater semisubmersibles, and shallow water high-specification jack-ups. As I discussed in a recent article, the market fundamentals for each of these different types of rigs differ. For this reason, we will look at each of these rigs separately.
The first rig that has an expiring contract is the ultra-deepwater semisubmersible Noble Danny Adkins. This rig was first built in 1999, but was then rebuilt in 2009 to bring it up-to-date with modern efficiency and safety features. The Noble Danny Adkins is capable of drilling wells up to 37,000 feet deep in up to 12,000 feet of water. While this is not as capable as the most modern ultra-deepwater rigs in existence today, it is certainly in line with most rigs built in 2009 or 2010. This is important because, as I have discussed in numerous articles in the past, oil and gas companies greatly prefer to contract modern rigs compared to older ones. Thus, Noble has a better chance of securing a replacement contract for this rig than it would have had if the rig had not been rebuilt.
Since early May 2011, the Noble Danny Adkins has been in the U.S. Gulf of Mexico, working under contract with Royal Dutch Shell (NYSE:RDS.A) at a dayrate of $498,000. This contract is scheduled to end in early September. Noble will need to secure a new contract for this rig by that time, or it will see its revenues decline by the amount of that dayrate. Fortunately, as Noble stated in its second-quarter conference call, the company is confident that it will be able to secure a replacement contract for the rig. The company did decline to be more specific than that, but it can be implied that it is currently in negotiations for the use of the rig.
In my article that is linked above, I provided the new contract dayrate for ultra-deepwater drillships like the Noble Danny Adkins. That value is unfortunately below the $498,000 that the rig is currently earning. Thus, even if Noble does manage to secure a contract for the rig, there is certainly the possibility that its revenues will still drop beginning in early September, as the new contract dayrate may be lower than the current one. Of course, earning some revenue from the rig is certainly preferable to the zero revenues that the company will get, should the rig fail to secure a replacement contract. With that said, we have seen some ultra-deepwater rigs secure dayrates well above the average lately, such as Seadrill's (NYSE:SDRL) West Saturn. Thus, there is a bifurcation in the market between modern ultra-deepwater units and older units that could result in the Noble Danny Adkins securing a dayrate that is in excess of its current dayrate. Should that occur, then Noble will see its revenues increase proportionally.
The second and third rigs that are scheduled to come off contract this year have a lot in common. These two rigs are the Noble Jim Thompson and the Noble Driller, both deepwater semisubmersible rigs. The Noble Jim Thompson was originally built in 1984, and then rebuilt in 1999. The Noble Driller is more modern, originally being built in 1976, but then being rebuilt in 2007. However, the Noble Jim Thompson is the more capable rig, as it can operate in up to 6,000 feet of water as opposed to the 5,000 feet of the Noble Driller.
Each of these rigs is working in the Gulf of Mexico, with the Noble Jim Thompson working for Royal Dutch Shell and the Noble Driller working for Marubeni Oil and Gas. The Noble Jim Thompson is earning a dayrate of $376,000, and the Noble Driller is earning a dayrate of $415,000. As with the Noble Danny Adkins, Noble will lose all of this revenue, should these rigs go off contract without securing replacement contracts. Unfortunately, in this case, Noble did not provide any assurance to investors that the company would be able to secure such contracts. The only reassurance provided was a blanket statement that the company expects to improve its contract coverage throughout 2014, meaning that it expects to get new contracts for at least some of its rigs that are coming off of their current contracts this year. Noble did, however, state that it is seeing improved demand for deepwater floating rigs such as these two, and that may inspire some confidence in Noble's ability to secure new contracts for these two rigs. From the company's second-quarter earnings conference call:
"We believe the gradual build in client demand will become evident as we progress through the next twelve months and customers proceed with a new list of project priorities. We have, in fact, already begun to see the first signs of this gradual build. After experiencing only three deepwater contract awards in the first quarter of 2014, the second quarter produced ten awards with durations on five of the contracts ranging from two to six years, totaling an aggregate of eighteen rig years. The contracts address customer rig needs in several regions, including Angola, Nigeria, the U.S. Gulf of Mexico, Brazil, the Black Sea, and Indonesia. Rigs have begun to secure work and we're beginning - we are experiencing the early stages of demand recovery, but this must demonstrate sustainability before we can return to a discussion on pricing improvement."
The large increase in the number of contracts awarded from deepwater rigs such as the Noble Jim Thompson and the Noble Driller shows that demand for these rigs is growing, which Noble's management also pointed out. Thus, there is reason to believe that Noble will be able to secure replacement contracts for these rigs, or at least that the company has a better chance of securing replacement contracts for the rigs than it had a few months ago. However, there is no guarantee that the dayrates that Noble receives will be the equivalent of what it is receiving now, and should it be forced to accept a lower dayrate to secure contracts for the rigs, then the company will see its revenues decline going forward (or at least the revenues produced by these rigs). However, in the case of the Noble Jim Thompson, the rig's current assignment started in April 2011. As I discussed in my previous article, which is linked above, current dayrates remain broadly higher across the board than in early 2011. Thus, this rig may still be able to secure a higher dayrate than it currently has, although the age of the rig will serve as a potential obstacle to this scenario. This will have a positive impact on Noble's near-term results, should it occur.
Another rig that will see its contract expire later this year and does not yet have a replacement contract is the Noble Paul Romano. This rig has much in common with the other two deepwater semisubmersibles that were already discussed, the Noble Jim Thompson and Noble Driller. The Noble Paul Romano is capable of operating in up to 6,000 feet of water, and is currently operating in Morocco for Genel Energy (OTCPK:GEGYF). The rig started work on this contract in early June 2014, and it will be working until early December 2014. Under the terms of the contract, Genel Energy is paying Noble $420,000 per day to use the rig. Thus, this will be the adverse impact to Noble's revenues beginning in December, should the company fail to secure a new contract for the rig. Fortunately, the fundamentals here are the same as for the company's other two deepwater rigs, which were already discussed. Thus, there are reasons to be confident that Noble will be able to secure a new contract for this rig as well.
Another rig that will be coming off contract in the near term is the deepwater semisubmersible rig Noble Max Smith. This rig was originally built in 1980, and then rebuilt in 1999 to modernize it, but even so, it remains a somewhat old rig. However, it is capable of operating in up to 7,000 feet of water just like many of Noble's other deepwater rigs. The Noble Max Smith is currently contracted to Royal Dutch Shell in Brazil at a dayrate of $417,000, but this contract expires in late August 2014 (i.e. within the next few days). Noble has apparently not yet secured a new contract for this rig, and this is admittedly somewhat concerning, as it will prove to be a drag on near-term revenues and earnings once the contract ends. Fortunately, the fundamentals here are largely the same as for the Noble Jim Thompson in that demand for these rigs is growing but the age of the rig may place limits onto the dayrate that the rig can command, as well as make it harder for the company to secure a new contract for the rig. Ultimately, though, the growing demand for deepwater rigs does provide confidence that the company will be able to secure a contract for the Noble Max Smith.
The final rig that will be coming off contract in the near term that has not yet acquired a replacement contract is the shallow-water jack-up Noble Mick O'Brien. This rig is a 2013-built jack-up rig that has been specially outfitted to operate in harsh environments, although it is not performing such work now. The rig is currently working in the Persian Gulf at a dayrate of $197,000. For some reason, Noble does not disclose what company the rig is working for. Regardless, the contract will terminate in the middle of September 2014.
As a harsh-environment rig, the Noble Mick O'Brien has much better employment prospects than perhaps any other rig in Noble's fleet. As I discussed in my previous article that is linked above, every harsh-environment jack-up rig in the world is currently under contract, and the demand for these rigs is causing dayrates to climb. Because of this, there is certainly a strong possibility that Noble will be able to secure a new contract for this rig at a higher dayrate than what the rig is currently earning. Thus, this rig is more likely to have a positive impact on Noble's revenues and earnings going forward than an adverse impact that would result should the rig fail to secure a new contract. However, Noble will need to secure a new contract within the next week or two to avoid a near-term adverse impact on revenues (even then, the company will still see a near-term revenue decline as it moves the rig to its new location).
It is worth noting that Noble has several rigs that will be leaving the shipyard in 2015 and starting work on their first contracts. This will serve to undo or at least partially compensate for the revenue declines that the company will suffer from, should it fail to secure new contracts for those rigs discussed above. Overall, investors should keep a watchful eye on the company's contract announcements over the next few months in order to avoid any unpleasant surprises.
Disclosure: The author is long SDRL.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.