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Offshore drilling is the new wave. In contrast with land based drillers, demand is outpacing capacity driving up daily rates. Hercules' (NASDAQ:HERO) recent play for TODCO (THE), which happens to be a shallow water driller, exemplifies the discrepancy between supply and demand. Mexico [PEMEX] is going to have to increase offshore drilling to replenish its dwindling production within a year to eighteen months. Noble already has 10 rigs under contract with PEMEX.

In Q1 2007, a quick check of day rates revealed that the average going rate in the Gulf was 9% above estimates. In West Africa, day rates were 40% above estimates, however, this now brings rates in line with other locations. In the North Sea, rates were running 15% above both analyst and previously released company estimates. This all adds up to one thing - margins & profits. Expenses have risen as well; we doubt the industry average has exceeded the 5% mark.

Though Noble (NYSE:NE) is the third largest offshore driller, we liken NE to ExxonMobil (NYSE:XOM) as the most consistently profitable company amongst its peers. For the past decade, NE has outperformed all of its competitors in net margins. ROE average is 12.5%! ROE is a full 33% above the industry average, again, for a decade. It takes a well oiled company to produce these figures.

Taking into account additional capacity (new & refurbished rigs) in Q3 2007, we estimate 2007 EPS coming in at $9.25. We anticipate 2008 earnings to increase by 25% to $11.57. Before you get all excited about the new forward looking EOL, posted at $115.60, let us point out that this is very conservative. A P/E of 12.5 is at the low end. NE increased 2006 earnings ($5.33) over 2005 earnings ($2.16) by 146%. 2007 earnings are calculated to increase by ONLY 73%. Taken into account are; moderately higher fixed costs, 43% higher income and 90% utilization, which is already guaranteed for 2007. Every drill bit is money in the bank.

NE 1-yr chart

NE

Disclosure: No conflicts

Source: Noble Corporation: Every Drill Bit is Money in the Bank