I recently wrote an article discussing the merits of investing in Noble Corporation's (NYSE:NE) 2017 bonds as they were trading around 88. The thesis centered on sufficient liquidity that the company had to cover 2016 and 2017 debt maturities. NE reported its Q4 2015 earnings last night, and from a liquidity standpoint, it had a tremendous improvement.
The company added $350 million to its cash balance while I was forecasting only $150 million uplift. There were two things, which benefited NE during this quarter and were unaccounted in my previous analysis:
1) Lump-sum payment of $140 million for the cancelled contract on Noble Discoverer.
2) $60 million of lower capex compared to the company's guidance.
I have no idea how market participants will spin the company's earnings "miss", but in my view, NE solidified its liquidity position, which is the only thing that matters at this time. Moreover, NE decided to scrap two older rigs, which would lower both daily opex and potential maintenance capex going forward.
After listening to the remarks on the conference call, I believe NE is hopelessly hopeful. The company decided to warm stack two semis that are ending their respective contracts in the Gulf of Mexico. In addition, two other semis are out of work with Clyde Boudreaux going through its five-year regulatory survey without any work lined up. I find this particular decision illogical in lieu of current conditions, however, NE's management believes that cycle upturn could be as sharp as the downturn and is not cold stacking equipment in hopes of getting contractual assignments.
Since we don't own equity and our bonds are maturing in 2017, management's actions do not have serious repercussions, but one really has to question such positive approach in the face of hard facts. NE's management thinks it has more than sufficient liquidity to weather the downturn however long it lasts, thus all uncontracted semis are not cold stacked as the logic of liquidity preservation would imply.
It is true that 2016 appears to be a very positive year operationally, and NE is certain to generate operating cash flows of nearly $1 billion, easily covering the remaining capex and leaving sufficient cash to pay for the 2017 notes. Nonetheless, management seems overly optimistic given the grave situation with scarce contracting opportunities (especially for the floater segment) expected over the next 12 months, and the decision to keep idle semis in warm mode will result in additional opex that could have been alleviated with cold stacking or outright scrapping. Once again, nobody is willing to fold unless forced to, and NE's management is certainly no different.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.