In the second quarter of 2012, offshore-drilling contractors posted higher-than-expected earnings, as oil and gas producers scrambled to hire expensive, specialized drilling rigs, and signaled that strong demand is poised to continue. We're seeing an ongoing battle among energy companies for scarce equipment, especially deepwater and ultra-deepwater rigs, which has resulted in a super-spike in dayrates across all segments of the contract drilling market.
This boom comes just over two years after Transocean's Deepwater Horizon rig, operated by BP (BP), exploded in the Gulf of Mexico, resulting in a subsequent moratorium on deepwater drilling there, casting a pall on the industry. Two years later analysts are quick to point out that renewed activity in the U.S. Gulf is a major driver of growth for the drilling industry, as is the emergence of new areas all over the world's oceans.
One of the biggest, most successful drillers in the industry is arguably the least discussed contractor here on Seeking Alpha. A clear-cut case of "Unknown Makes Unloved." This particular drilling contractor has been in business for 91 years now and currently two rigs shy of becoming the world's second-largest contractor in terms of fleet size. No, we’re not talking about Seadrill (SDRL).
Noble Corporation (NE) is an offshore drilling contractor for the oil and gas industry. The company performs contract drilling services with its fleet of 79 mobile offshore drilling units and one floating production storage and offloading unit - FPSO - located globally. Noble's fleet size practically puts it on par with Ensco (ESV), the world's second largest contract driller with 80 rigs. Transocean (RIG), the world's largest contract driller, operates 130 rigs.
Noble's fleet consists of 14 semi-submersibles, 14 drillships, 49 jackups and two submersibles. The company's fleet includes 11 units under construction, which include five ultra-deepwater drillships, and six jackup rigs. Approximately 85% of the fleet is located outside the U.S. in areas like Mexico, Brazil, the North Sea, the Mediterranean, West Africa, the Middle East, India and the Asian Pacific.
During 2011, Noble completed construction on the Noble Bully I, a drillship, owned through a joint venture with a subsidiary of U.K.-Dutch Shell (RDS.A) (RDS.B), completed construction on the Noble Bully II, a drillship, and it completed construction of a Globetrotter-class drillship. Noble Corporation currently has 10 rigs under contract in Mexico with state oil monopoly Pemex.
During 2011, revenues from Shell and its affiliates accounted for approximately 24% of Noble's total operating revenues. During 2011, revenues from Brazil's Petrobras (PBR) accounted for approximately 19% of total operating revenues. Revenues from Pemex accounted for approximately 23%.
Semi-submersibles are floating platforms which, by means of a water ballasting system, can be submerged to a predetermined depth so that a substantial portion of the hull is below the water surface during drilling operations. As of December 31, 2011, the semi-submersible fleet consisted of 14 units, including five Noble EVA-4000 semi-submersibles; three Friede & Goldman 9500 Enhanced Pacesetter semi-submersibles; two Pentagone 85 semi-submersibles; two Bingo 9000 design unit submersibles; one Aker H-3 Twin Hull S1289 Column semi-submersible, and one Offshore Co. SCP III Mark 2 semi-submersible.
Noble's drillships are self-propelled vessels. These units maintain their position over the well through the use of either a fixed mooring system or a computer controlled dynamic positioning system. Its drillships are capable of drilling in water depths from 1,000 to 12,000 feet. The maximum drilling depth of its drillships ranges from 20,000 feet to 40,000 feet. As of December 31, 2011, the drillship fleet consisted of 14 units, including four drillships under construction with Hyundai Heavy Industries Ltd. (GM:HYHZF); three Gusto Engineering Pelican Class drillships; two Bully-class drillships to be operated by it through a 50% joint venture with a subsidiary of Shell; one dynamically positioned Globetrotter-class drillship that left the shipyard during the fourth quarter of 2011; one Globetrotter-class drillship under construction; one moored Sonat Discoverer Class drillship capable of drilling in Arctic environments; one NAM Nedlloyd-C drillship, and one moored conversion class drillship.
The company has 49 jackups in its fleet, including six jackups under construction. The rig hull includes the drilling rig, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter landing deck and other related equipment. All of its jackups are independent leg and cantilevered. Its jackups are capable of drilling to a maximum depth of 30,000 feet in water depths up to 400 feet.
Noble has two submersibles in its fleet, which are cold-stacked. Submersibles are mobile drilling platforms, which are towed to the drill site and submerged to drilling position by flooding the lower hull until it rests on the sea floor, with the upper deck above the water surface. Its submersibles are capable of drilling to a depth of 25,000 feet in water depths up to 70 feet.
On July 18, 2012, Noble presented it second-quarterly results, which included profits that tripled compared to last year. CEO David Williams credited Noble's strong performance to both the debut of new rigs in Brazil and the Gulf of Mexico and a reduction in unpaid downtime across the fleet. Average rig utilization improved to 76% in the second quarter compared to 70% a year ago.
"Despite economic uncertainty and the corresponding pressure on commodity prices during the second quarter, we remain confident in the long-term outlook for our business," Williams said. "Our backlog continues to expand and we are benefiting from growing visibility into the latter part of this decade." Noble's second-quarter net profit surged to $160 million - 63 cents per share - from $54 million - 21 cents per share - the previous year. Quarterly revenue grew 43% to $899 million.
Noble updated its third-quarter guidance this week after encountering a number of minor rig delays. Quarterly revenue is expected to be reduced by approximately $50 million compared to previous guidance, $905 million versus $955 million previously.
Noble's ultra-deepwater drillship Noble Globetrotter I, located in the Gulf of Mexico, has experienced a longer-than-expected downtime. The rig will remain at a reduced day rate until the end of this quarter, when all testing and commissioning of a subsea blowout prevention and control system - BOP - is expected to be completed.
An ultra-deepwater rig and two drillships in Brazil are yet to return to work as it was awaiting regulatory approvals in the country, expected at the end of the third quarter. The deepwater rig Noble Max Smith, undergoing a planned shipyard program in Mississippi, may experience 30 to 40 days of unpaid downtime due to a delay in mobilization to Brazil.
These rig delays are expected to reduce third-quarter EPS of 74 cents by 8-12 cents per share. With EPS now expected to come in around 64 cents per share, the company will still be recording a 30% earnings increase compared to quarterly earnings of 49 cents one year ago.
The company just announced a new contract commitment for its jackup rig Noble Hans Deul, operating in the UK sector of the North Sea. The rig has been awarded a minimum 18 month contract extension by a subsidiary of Shell, with the extension period expected to commence in February 2013, in direct continuation of the rig's current contract. Revenues expected to be generated over the 18 month extension are estimated at $132 million, an equivalent dayrate of $242,500 compared to the current day rate of $175,000. Shell has the right to further extend the rig's contract, pursuant to which the dayrate corresponding to a longer duration contract will be reduced.
Analysts currently expect new rig deliveries alongside rising dayrates to more than quadruple Noble's 2011 earnings of $1.46 to $7 per share by 2015. The company's 2012 earnings are currently expected to come in around $2.40-$2.50 per share.
A clear benefit of the various deals and contracts that Noble has signed during the last few years has been that a large percentage of the company's backlog now rests with three key customers: Shell, Pemex and Petrobras. The close relationships with these key deepwater customers put Noble in a solid position for future work at competitive dayrates.
When it comes to ultra-deepwater supply in the contract drilling industry it's becoming evident that not only is all 2012 supply being contracted, but most of 2013 ultra-deepwater supply is effectively booked as well. The ultra-deepwater sector has approximately 36 rigs with 168 rig months of availability in 2013. This includes new capacity and existing rigs with contract rollovers. Of the 36 rigs, 11 units had options varying in lengths of time. Based on the preference of customers today to secure the capabilities of such rigs, most, if not all of these 11 rigs, are unavailable as the current customer will exercise the option and keep the rig.
That effectively left 25 ultra-deepwater rigs with around 123 rig months of clear availability in 2013. A review by Noble of their own database and customer specific programs and timing preferences and matching rig availability with those programs, concludes that as many as 22 of these 25 rigs are already spoken for, with much of the units expected to be deployed in the Gulf of Mexico and West Africa. One of these rigs is the Bob Douglas, which is to be delivered in 2013, and was recently contracted for 3 years. Most rigs exiting the yard before Bob Douglas are in fact unavailable and therefore customers are increasingly turning their attention to those units available in 2014. It is clear that tight supply is sustaining the rise in dayrates across all contract drilling segments.
Noble and Ensco are virtually identical in terms of both size and valuation, fighting for the place of world's second largest offshore driller. There are slight differences in dividend yield and debt-to-equity, with Ensco coming out on top in both. Both companies however seem to tick all the boxes with strong financial positions, prudent debt management, impressive growth, and sustainable dividends.
Transocean provides some very interesting metrics as well, but the lack of even a small dividend until the company has more clarity on a Macondo settlement with U.S. government will results in many investors looking elsewhere in the meantime. Seadrill is clearly the odd one out, with its high leverage and inflated valuation compared to the top 3 drillers. On the other hand, Seadrill's dividend makes it very appealing amongst income investors and the company still has 18 rigs under construction, meaning earnings are expected to increase substantially in the coming years, just like Noble's.
Noble Corporation celebrates its 91st year in 2012. Very few companies, and even fewer drilling contractors, can claim this milestone. The company's proactive style of management has guided it from a one rig operation in 1921 to one of the largest offshore drilling contractors in the world today. Noble Corp's growth since the time of its spin-off from Noble Affiliates in 1985 has come about through a series of strategic acquisitions of offshore drilling assets and has put the company on the verge of becoming the world's second largest offshore driller.
Noble has been successful by maintaining a conservative financial policy throughout the years and through adaptation of an employee-oriented attitude, as laid out by Lloyd Noble in "A Legacy for Management" when he said, "It has been my further belief that it was the duty of the management, and to that end my mind has been constantly surcharged, to so build the organization that when men evidenced capabilities to give them a part of my work and find other tasks to do which might result in increased benefits to the organization, or step aside; and, on the other hand, should death intervene, to have matters so arranged that I would be missed personally, while the machinery continued to function smoothly." - from the will of Lloyd Noble.
You know your investment is in safe hands when a company is wise enough to perpetuate this heritage.