Noble's Q3 Results Suffer Due To Downtime, Positioned For Future Growth

| About: Noble Corporation (NE)

Offshore drilling giant Noble Corp. (NYSE:NE) released its third quarter 2012 earnings results on Wednesday, October 17 after the market closed. As I discussed in my earnings preview, Noble's third quarter results suffered because of rig delays and downtime. In addition, Noble experienced increasing operating costs which put pressure on margins. Here are the company's highlights from the third quarter:

  • Earnings of $112 million or $0.45 per common share. This compares unfavorably to the $160 million, or $0.63 per share, that the company earned in the preceding quarter.
  • Contract drilling revenues totaled $833 million. This compares unfavorably to the $848 million that contract drilling services brought in during the preceding quarter.
  • Net cash from operating activities totaled $396 million in the third quarter. This is down from $435 million in the preceding quarter.
  • Total debt increased to $4.6 billion at the end of the third quarter compared to $4.4 billion at the end of the second quarter.

As I mentioned in the introduction to this article, rig delays and downtime were the major reason why the third quarter's results were so much worse than the preceding one. Noble experienced operational delays with three new rigs during the quarter: Noble Bully I, Noble Bully II, and Noble Globetrotter I. All three of these are new rigs and it is a fairly common situation for a company to need time to get its new rigs to full operational performance. That was the case here and so, as a result, these rigs were not collecting full dayrates during the time that the company was performing the needed modifications. These issues have been corrected and the rigs should all deliver improved performance going forward. This will result in these rigs generating more revenue for Noble in future quarters compared to the third quarter.

Noble also suffered from downtime on a number of other rigs. There were six rigs, excluding the ones discussed in the previous paragraph, that underwent maintenance activities or repairs during the quarter. This downtime resulted in the company being unable to collect full (or any) dayrate during the downtime period. As would be expected, this was the primary reason for the fall in revenue compared to the previous quarter.

An additional rig, the drillship Noble Leo Segerius, was also unable to earn any dayrate due to labor actions within the operational and regulatory environment in Brazil. Noble explains this situation in more detail in its third quarter conference call. The company has been disputing this lack of a dayrate with its customer, Petrobras (NYSE:PBR). Noble believes that it is entitled to at least a standby (reduced) dayrate for this rig as the rig downtime is not Noble's fault. The company will continue to discuss the matter with Petrobras and hopefully manage to collect the back dayrate.

In the first and second quarters of this year, Noble had done an admirable job of keeping downtime to a minimum and so the third quarter proved to be an exception here. Noble expects to once again be able to keep downtime to a reasonable level going forward. If the company manages to achieve this goal then the fourth quarter and later quarter results should show considerable improvement over the third quarter.

Noble has some growth opportunities going forward. On July 12, Noble announced that it had entered into a three-year contract with Anadarko Petroleum (NYSE:APC) for the use of the Noble Bob Douglas. The Noble Bob Douglas is one of Noble's newbuild ultra-deepwater drillships that is expected to be delivered in the fourth quarter of 2013. Naturally, this contract will have the effect of increasing Noble's revenues, cash flows, and profits once it begins operating. With this contract, Noble has now contracted out all but two of its newbuild drillships. The two rigs that have not yet been put under contract are not due to be delivered until 2014, so the company still has time to contract out these rigs. Given the fundamental strength in demand for these rigs, Noble seems likely to contract out both in advance of the rigs' delivery dates. Noble was also awarded 15 contracts for jack-up rigs for the period July through October. This is evidence of the strength of the market for standard jack-ups. Noble was also awarded a contract for one of its new JU3000 jack-ups to drill a high-pressure, high-temperature well in the Arabian Gulf. This contract is expected to produce $43.5 million in revenues over a period of 150 days. This is an extremely high dayrate of $290,000; this rate clearly illustrates the desire for customers to utilize this model of jack-up in the current environment.

The company's stock price was not significantly affected by the poor earnings report compared to analysts' expectations and this may be because the company discussed the downtime and the impacts that the downtime would have on the third quarter revenues well in advance of the actual earnings release. It could also be due to the very positive comments made by the managements of both Noble and Diamond Offshore (NYSE:DO) (which reported the day after Noble) regarding the fundamentals of the industry. In fact, not only did the stock shrug off the negative earnings report but it actually rose once trading reopened following the earnings release. This lends some credence to the idea that the market was impressed by the fundamentals of the industry.

NE Chart

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The stock was down as of the time of writing, with the broader market. Despite this dip, Noble stock still trades at prices well above those prior to the earnings. Potential investors may want to wait for dips before buying in.

Disclosure: I 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.