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Noble Corporation (NYSE:NE)

UBS Global Energy & Gas Conference Call

May 22, 2012 09:40 am ET

Executives

David Williams - Chairman, President and CEO

Analysts

Angie Sedita - UBS

Angie Sedita - UBS

Good morning. Our next presenter is David Williams who is the Chairman, President and CEO of Noble Corporation, positions he has held since January 2008. Prior to that he was the Senior VP and COO from 2007 to 2008 of Noble and before that he served five years as Executive VP of Diamond Offshore. Dave, David has certainly led Noble through an impressive transformation of the company’s rig fleet through sizeable new build program which will result in a top-tier rig fleet upon completion. With that I will turn to David.

David Williams

Thank you, Angie. It’s a pleasure to be here, I appreciate the opportunity to come talk about Noble and appreciate the opportunity to get back to Texas. Geneva is not the hot bed of oilfield activities (inaudible) I think. So, it’s great to be back here.

Our presentation today does include some forward-looking statements. These statements are based on our current understanding of factors that affect our business, either directly or indirectly. Assumptions built in those statements could prove incorrect, leading to materially different conclusions. So please see our Form 10-K for a complete list of risks associated with the business.

Today, there are just a few things I would like to cover. I would like to give a brief overview of Noble and a little bit of history, not much, cover some details behind the strategy that Andy talked about that we’re working to design and transform the fleet to a much more premium status and finish them with comments on these sector activity, especially in deepwater also, talk a little bit about jackups, but primarily the [ore].

So, I will put this picture up. It's a great picture, shows the Bully in the front, undergoing sea trials in the Gulf of Mexico as Globetrotter was sailing, the Gulf of Mexico passed it. A lot of you will think it’s a rig picture. It’s actually not, very rarely you get to a ship, so this is [Caliber] in the same picture. But it's a great picture I like it, so I felt that it (inaudible) alright.

Noble is a 91-year old company started at 1921 by [Samuel] Lloyd Noble, he actually borrowed money from his mother to buy used land rig and started drilling land, wells on shore in around the Ardmore area. We drilled our first well offshore in the 30s and actually one of our first overseas assignments was in World War II, we drilled 100 wells offshore with Forest, kind of author (inaudible) very interesting book called [A Secret Shore] was about drilling wells in the UK during the war.

Actually the onshore business in the mid 90s and today we operate a suite of exclusively offshore rigs. By rig account we are the second largest offshore drilling contractors with 79 units that counts 14 semis, 14 ships, 49 jackups and then we also have two submersibles which are stacked on a shelf in the US Gulf of Mexico. We also have an FPSO and we operate the [Harbania] platform of Eastern Canada for Exxon Mobil, we’ve operated that since the start.

Of those 79 rigs we have 11 rigs currently in a construction. I’ll talk about those in a little bit more detail here in a minute. We operate most of the major offshore regions around the world. On the floating side, it's primarily deep water. We only have three floating rigs that operate at less than 4000 feet of water. So we are almost exclusively a deep water contractor. We operate predominately in the US Gulf of Mexico and Brazil, but we also have operations -- floating operations in the North sea, the Mediterranean and we’ll soon start in Australia.

Our jackup fleet is primarily located in, given the 49 rigs primarily located and so on the more active basis, we’ve 12 rigs in Mexico, we have 15 rigs in the Middle East and we have eight jackups in the North Sea. We are again in the process of transforming the fleet into a much more premium capability through the investment of well over $5 billion which will add 8 new ultra-deepwater drillships and 6 high specification jackups. 8 of those ships have already been delivered and there are five that remain in the yard.

Our current contract backlog stands at over $40.5 billion and extends through the end of decade extends out in to the year 2023. Our fleet expansion is driving industry-leading earnings and cash flow growth and we believe that provides real opportunities for shareholders moving forward. Our revenue backlog as measured by firm contracts represents the second largest backlog among drillers. Again it was a little over $40.5 billion at the end of first quarter of March 31st 2012. And we expect this number to build as we see continued improvement in fleet activity, just general fleet activity as we had contracts for our remaining fleet and we also expect to see the backlog expand and grow as we add contracts for our ultra-deepwater drillships that are uncommitted, the three uncommitted ships and the five uncommitted jack ups.

So we have opportunities for the backlog to actually expand a good bit. The only jackup of the of the six that has contract. We recently announced a contract on the first at Noble Regina Allen for 18 months of $230,000 a day in the North Sea. This backlog provides great earnings visibility for us again. I said it went through into 2023, gives us a good visibility of the future which helps in planning, but it gives us a lot of diversity and a lot of flexibility in moving forward with the investment program.

Recent contract signings, not just in our fleet but in the entire industry are evidence of the entire supply demand metrics that are facing the industry particularly on the floating side. In our fleet, we've had a number of contract signings at higher rates. We've had the Noble Jim Day which is expected to start its contract with Shell at $530,000 plus a 50% bonus early next year, but in the interim we've been out filling our short-term requirements, so we have one requirement at $605,000 a day.

The Noble Amos Runner conventionally more semi, has been working in the mid 300s. It's recently been contracted for 14 months at $460,000 a day but Noble Clyde Boudreaux which is working in Brazil at $290,000 a day is expected to start a contract in Australia later this year $417,000 and the Noble Max Smith was awarded up to a three year contract in Brazil at north of $400,000, it's actually $407,000 a day plus bonus. It's currently idle in US Gulf of Mexico undergoing repairs and preparation of the contract but it's most recent contract is $380,000 a day.

So we are seeing opportunities for floaters and the rates for those rigs for deepwater and ultra-deepwater are coming up fairly smartly. Okay, well I will skip this and now we will talk a little bit about the fleet and what we are doing on the strategic front. There's too much technology here. Here we go. Noble’s executing, we talked a little bit about strategy. We are executing on a strategy designed to transform the fleet into one of the most versatile and technologically advanced fleets in the industry. This transformation is really occurring on several different fronts. First through the new build program. Right now we have the addition of new ultra-deepwater drillships and high specification jackups. The current program is eight ships and six jackups. We're talking about that three of those have been delivered. But don't forget in the last cycle from 2007-2009 we delivered four ultra-deepwater semisubmersibles and three jackups.

Another element of the strategy is we have our ongoing fleet evaluation process that we've talked some about. But it’s an ongoing, there's not a lot we could say about it. It's an ongoing evaluation process to look at the fleet to see which rigs we might want to remove from service or remove from our fleet in one of different, a number of different opportunities we might look at.

The third leg of the strategy really involves the capability of rigs that still have a good useful life, such as we are doing on Leo Segerius and Roger Eason. Those rigs were contracted for six years a piece by Petrobras, and their major rig, that's for reliability upgrades. The combination of these three elements of the strategy should yield a premium mobile ultra-drilling fleet that we are looking for. It will have an increased emphasis on ultra-deep water and high specification jackups.

Again there's not a whole lot more I can say about the divestiture process. It's an ongoing opportunity. The one thing I can say is we've not seen the transaction yet that provided enough value for shareholders that we thought we could execute that we thought was good enough. The challenge for us is really that the rates have run faster than we thought and the value of the rigs is really greater than we expected earlier, but we haven't given up on the strategies.

It's just hard to execute than we had hoped. We can't talk something about the newbuild programs. We have again, we've got a very active newbuild program. This is a picture where the timeline of the deliveries we have over the next few years. Noble is a major participant in the industry wide building effort and we are aggressively adding new state-of-the-art drilling equipment of fleet. Since 2007, we've added again four ultra-deepwater semis and three drill ships along with three high specification jackups.

Currently, we have 11 more projects in the shipyards in the Far East, five drill ships, one is in China. It will sail to Holland for [altering] topsides. The other four all in Hyundai yard in Korea and then we have all six jackups, high specification jackups.

Looking only at the projects that we've worked since 2010, we have spent or committed to spend in excess of $5 billion of capital to transform the capabilities of fleet. This effort, we think was very well timed and places the company in an enviable position with respect to the ultra-deepwater high specification jackup markets going forward in 2013 to 2014.

Right now, again, three drill ships and five jackups are uncontracted. And we have lots of opportunities. We view this uncontracted opportunities as a huge opportunity of the uncontracted piece of these rigs.

Now I’ll talk a little bit about the deepwater and the shallow water sectors, we just touch and we'll talk about deepwater first. The company’s floating rig fleet has very good contract backlog and good contract coverage through 2014, which reflects again the current state of the market. As you look in 2012, ‘13 and ‘14 at quarter to a little more than a third, up days are open over the next three years and that includes uncontracted time on the newbuilds.

So we have a combination of good contract coverage that supports the newbuild program but we still have some additional upside. Again, we view this uncommitted capacity as a huge positive. We think the market is in the right place and we’re very pleased with our current contract position.

There is a lot to talk about deepwater why it is such a good attractive sector, well, the fundamentals for deepwater are exceptional right now. There is a very strong supply and demand for ultra-deepwater units across most geographical regions and there is a very little capacity little or no capacity really in 2012 other than occasional [format].

Recent short-term signings have been in the $600,000 plus range and our evidence again of the tight, very tight supply and demand metrics that are in the market today. The tight ultra-deepwater sector is contributing to improving opportunities for the conventionally more in the deepwater sector we talk a little bit about the EVAs getting the Max Smith, Amos Runner both getting well above $400,000 a day. So the ultra-deepwater is really tight in the deepwater and so we’re seeing real opportunities for 14 drilling equip really across all brands.

Stable crude prices of levels well above the planning rates for our operators this is also contributing to the increased confidence among our client base and this translates into increased exploration and production spending.

The E&P spending for 2012 is expected to be up about 10% over 2011 according to the information we have, and it's up over 12% on average year-on-year since 1999. So, we’re seeing increased spending in space, our customers are very aggressive in deepwater.

Brand has averaged $118 a barrel through the first quarter of 2012 and over $100 a barrel since 2010. It’s down a little bit here in last few weeks I think it was $109 yesterday that's still very healthy oil price we believe.

And on top of that, excellent geologic success in geographic expansion in deepwater drilling activity are contributing to the very strong sector fundamentals.

The geologic success in deepwater remains very high and it's occurring in an expanding number of countries. The bottom of this math indicates announced discoveries in 4500 feet of water or deeper from 2009 and 2011 and it totals 96 different discoveries.

In 2011, a total of 12 countries reported deepwater discoveries compared to only five in 2008, and three of those five in 2008 were in the Golden Triangle between West Africa, Brazil and U.S. Gulf of Mexico.

And you look at what happened since then in 2009 to 2011, those 96 discoveries just about half of those were in this in Golden Triangle compared with the 2006-2008 period of time frame. There were 79 discoveries and about 80% of them were in this one little piece.

So the industry is diversifying geographically which has stimulated great demand for clients to cover a growing list of opportunities and programs in many different parts of the world. This success in geographic expansion is providing the channels for future deepwater activity we believe. Open demand is a measure of client interest in drilling rigs as indicated by either pre-tenders, ongoing tenders, ongoing discussions possible, probable needs and it always derived through ongoing dialogs with our customer bases, this is not some theoretical model it's actual demand that we see in the marketplace.

It indicates that interest is expanding around the world, you can look at just one part of it look at Africa which historically, effectively Nigeria and Angola was really the deepwater business. Africa is really spread into a top continental deepwater opportunity, on the west side you have Namibia, Congo, Togo, Benin, Ivory Coast, Liberia and several more. On the east side, you now got opportunities in Tanzania, Kenya and Mozambique. So, we have seen opportunities expand geographically and a lot of more opportunities in deepwater and we've seen it's not just one type of operator we have seen a diverse range of opportunities from diverse operator group.

We've got independence, we've got national oil companies and some major or super majors who are involved in this play. Another good feature we like about this, is about 90% of the open demand is driven by exploration which tells us that we are very early in the cycle exploration will lead to delineation development drilling. So, we are thinking this is a deepwater exploration phase, we think we are very early in this cycle. We think we have great opportunities in the future for the deepwater fleet.

As you might expect, the fundamentals for deepwater are very good and that is translating into happily higher day rates. This chart is a scattering of day rate levels across time from late 2010 through early 2012. In 2011, most day rates fell on a range between $450,000 a day to about $475,000 a day. Since the start of 2012 signings are largely over $500,000 a day and we are starting to see better terms on some of those contracts. We've actually seen some late succeeding for opportunities well above $600,000 a day.

Again many of these contracts are starting to see more and more term with them, so the fundamentals are doing very well. So far average contract signings in 2012 have averaged about three years if you exclude the 15 year contracts in Brazil. We questioned whether or not those rigs are going to get built but take those out, the average day rates have been about $537,000 a day in about three years in turn. If you look back just 90 days ago, the averages were about two years and the average rates were about $514,000 a day. If you look back a year ago, the averages were closer to about one year commitments and the rates were below five and around $465,000 a day. So, if you are where we are and you have a bunch of uncommitted newbuild capacity coming in, the trend line is definitely going in right direction.

This increase in deepwater day rates is occurring in spite of the new capacity that’s coming out of shipyards. There is a lot of talk about the new capacity but that seems to get swallowed up fairly quickly. There is effectively no capacity in 2012 right now, except for the occasional format, and operators are already looking very hard at rigs that are coming out in 2013 and 2014 for the drilling needs.

As we see today, there are 16 ultra-deepwater deliveries expected in 2013 that are uncommitted and 17 in 2014. As we go through the rest of this year, just based on the dialogs, we had and what we know is going on in the marketplace. We expect that the 2013 numbers to come down dramatically and the 2014 numbers to shrink as well. So we think that capacity will be swallowed up in the marketplace.

And given the strong fundamental fixture for deepwater, Noble is very well-positioned to play start three currently uncommitted ultra-deepwater ships in the marketplace. Dialog for these ships continues with multiple clients on multiple basis. We’ve got more dialog going on that we have ships and we think we’re in a very strong position relative to the other capacity in the market. We’ve got availability in 2013 and 2014. We think we’re very well positioned.

We look back at when we made this decision a couple of years ago, we think our timing, our marketing guys, our operations and engineering guys, I think they've nailed it. I think our timing was absolutely perfect.

We also think we’re very well timed and very, well specked on the JU-3000 in jackups. We’re building six JU-3000 in high specification jackups. These are 2.5 million ton load path, 150 million quarters, 7,500 barrels liquid by capacity. These are big rigs and they’ll be starting delivery through 2013 and ’14 and we think we’re very well timed on those rigs as well.

Now I'll talk a little about the jackup business. Noble's jackup fleet has a very strong contract coverage through 2012 with about 75% of our days committed. Not unusual for the jackup business, a little bit shorter term than the floaters. The jackup business for 2013 has about 58% of the days open and almost 80% of the days are available in 2014. Our fleet is located in excellent regions. I'll talk a little bit about the strength of the market, Mexico and the North Sea.

But we're very active in those, Mexico, North Sea and the Middle East. At present, of our 43 active jackups, we're doing 49 total, six of those are currently under construction, so we have 43 active. We only have five that are currently not working. And of those, two are probably going to work before the end of the quarter. So our jackup fleet is very well utilized and rates are moving in the right direction for us.

There is a fundamental improvement in the standard jackup sector, and that's continued throughout this year. We appear to be approaching full market capacity for the industry for the jackup business, as we see the number of surplus jackups in decline for the rigs that require only reasonable investment for them to be reactivated. So we think we're eating up the capacity. We think a lot of the rigs that are out there, that are not working right now, probably are not coming back to work anytime soon.

And again, their rates are improving across different sectors, really across all sectors where we're active. North Sea, we've seen rates north of $140,000 a day. Mexico is moving between $90,000 and $112,000 a day for different classes of rigs. We've seen the Middle East move up towards $100,000 a day. Aramco has stepped up. We didn't have any rigs in the Saudi Arabia two years ago. We've got five committed there now, and standard class rigs are $140,000 a day plus.

So we feel very good about where the standard jackup fleet is positioned and the strength of that market. The North Sea commitments are already effectively booked through 2012, and we're looking at 2013 commitments already. The available capacity in the Middle East is effectively gone as Saudi continues to ramp its level of activity. Noble will start working in the Far East. We'll have started our first opportunity, a two-year contract, in Australia here shortly.

We expect to use that as a platform to expand through Southeast Asia, and expect (inaudible) jackups to be active in Asia, Middle East, and again in the North Sea where we have our first contract. And again, that contract was with Gaz de France for 18 months at $230,000 a day. So we feel very good about the jackup business as well. So in summary, we believe our efforts transformed Noble fleet into one of most modern and versatile in the industry.

It was very well timed and places the company in a great position to address operator needs and provide shareholder opportunities. The fundamentals of the offshore industry are improving, with capacity being scarce for ultra-deepwater rigs today. This is leading to bigger opportunities for our rigs that are coming out of shipyards in the future, and are potentially more other deepwater rigs. The standard jackup business is approaching full utilization for those rigs that are actually capable of working today.

And so, those rigs with limited capacity, limited capital are either working or about to go to work. So we're reaching full capacity there. Their rates are improving across geographic sections, our sectors, and across rig types. Our revenue backlog, again, is a little over $14.5 billion at the end of the quarter, and is likely to grow as we put more rigs to work and as we contract our uncommitted new builds.

We remain intensely focused on operational issues that we think will improve our uptime, particularly in the deepwater area. And given the number of new state-of-the-art rigs that Noble will be adding to its fleet between late 2011 and '14, which will be 14 rigs in total, we're among the industry's best earnings and cash flow and growth story. So we believe the company is very well positioned, and we think we've got real value here.

So with that, I'd like to say thank you for your time and thanks for your interest in Noble. And Angie, thank you for having us.

Question-and-Answer Session

Angie Sedita - UBS

We'll run through the questions now?

David Williams

Sure.

Angie Sedita - UBS

I can start out and then I'll hand it to across the room here. On the day rate side, we've obviously seen very impressive moves on the ultra-deepwater side. Is your expectation going into the back half of 2012 and 2013 that you start to see some slowing in that rate of escalation on the ultra-deepwater and a greater rate of escalation in deepwater and midwater, and could deepwater and midwater go back to the peaks we saw in 2007/2008?

David Williams

Well, on the deepwater peaks, we're getting close to it in some cases. The maximum it was at 407 plus a 15% bonus. We're close. It was working at the peak at about 480 in Mexico. So we're not far off that now. I guess my comment about the deepwater business, it kind of depends on where you think the market is. There have been some fixtures well above 600, 640, 650. We view those kind of as more opportunistic than market makers. I'm not sure the market is at 650.

Having said that, that market has actually moved up well above the 450, 475, low-5s at where it was. And I don't actually see that it's slowing down a lot. So we have -- again, we have more discussions for rigs than we have rigs. Now, there again we're into 2013/2014 capacity and operators are starting to take a little longer view of it. So that could dampen rates a little bit. But I certainly don't see rates softening. We might see the acceleration pull back a little bit, but I don't see it going the other way.

Unidentified Analyst

David, I just have a couple. One is, can you just give an update on the (inaudible) rigs and how the uptick on those are going?

David Williams

They're doing great. Both Bully's are on contract and doing very well. There's no -- any new build has things that go on, and we've had some of those with the Bully rigs, but actually they're doing very well. Globetrotter is on payroll, we announced recently, and it's on the payroll finishing its subsea acceptance and it's on location now going through its spaces. So no (inaudible) issues at all.

Unidentified Analyst

Great. The other question I had, Angie --

David Williams

Hang on, obviously, none at all. None material and no showstoppers, it's actually going real well.

Unidentified Analyst

So nothing materially different than your other ultra-deepwater rigs that would normally come off?

David Williams

No.

Unidentified Analyst

Okay. The other question I had was on the fourth gen market, and Angie alluded to a commentary your questioning on pricing. My question is more, you talked about the ultra-deepwater market, and a year ago the average term was one year. Three months ago it was two years, and now it's three years. How do you think that translates not in the deepwater market from a terms standpoint?

David Williams

That's a great question. What we're seeing so far is rate drivers and some term drivers, but you just don't have the term largely in that market that you have in the ultra-deepwater market. Particularly like we've got the Romano, the Gulf of Mexico, and we've just extended a 14-month contract on it. It's hard to get -- the Gulf of Mexico is a very prolific, hydrocarbon-bearing basin. Operators like it. There's a lot of investment here.

But there are a lot of operators here who are not majors, or super majors, who just don't have the capacity to go out two and three and four years. So I think you'll see the term expand because we'll require it as contractors. We can only push so hard, so long. But in today's market, we're seeing three to five years on the ultra-deepwater. I think probably one to two years is about the best you're going to see on the deepwater market right now. You will see the rate response, you just don't see the term -- see better term but not as good.

Angie Sedita - UBS

And then quickly one more or two more. On the jackup market, obviously, very hi-tech jackups that you're building. But we're delivering a lot of jackups in 2013. Are you concerned with 30 plus jackups to be delivered in 2013? Obviously, your jackups are both tier, the rest of the pack. But are you concerned about the rest of the delivery, as far as the flattening day rate environment giving pressure on rate? And then one more is, obviously, you've had a great new build program on the ultra-deepwater side. What's your ability and interest in adding to that new construction program on the ultra-deepwater?

David Williams

Okay. On the jackups, and my concern would be, if any, is not to be aware and concerned. We spec these rigs really at the top of the pile. And one of the great things about the way our engineering and operations guys conceived and lay these rigs out is the capacity we've built in is creating demand. So we didn't actually spec the rigs in the North Sea, but we've actually got a lot of demand out of the North Sea just because of what we're building.

There are, in my opinion, a number of rigs under construction of the jackups that are effectively commodity rigs. Really, they're not particularly high-spec. They're just newer. And there is an operator preference for newer equipment. That's not the segment of the market that we're after. I don't know that I expect -- I don't expect all of our rigs to go to work in the $230,000 a day. But I do expect that they'll go to work at a level on average above what the rest of the bulk of the new build fleets will, and I think they'll go to work.

So I think, yes, I think we're now adding capacity out of the stock ranks, contractors that have stock capacity are putting them back to work. So I think the jackup market is robust enough that it will swallow those rigs up. I think some of the more commoditized rigs may work at lower levels than some of the higher spec, which is natural to assume. But I think they'll work. I think the market is strong enough to absorb them.

On the new build front, we still have three of the four Hyundai ships uncommitted. I would not bet against us being back in the yard before the end of the year. And if we can get jobs for these, we like the jobs we -- this is clearly a Board issue that we'll take up with the Board, and the Board wants to see that we can deliver on our promise on -- our Board has been told for years that dividends are bad, building spec is bad and debt is bad, and we're doing all of it.

And so, with the support that we've got at the Board, they want to make sure that we're delivering on promise to shareholders, to put those to work and deliver returns. So I don't -- but I don't see any reason to believe that we'll lose that support if we get jobs for what we have paying now. I think that we'll be building more.

Angie Sedita - UBS

Well, we want to thank David Williams and (inaudible) for joining us thing morning. Thanks Noble.

David Williams

Thank you.

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