Noble Corp. (NYSE:NE) finished 10% higher in today's trade following its smaller than expected Q4 loss, leaving Jefferies analysts, who rate the stock a Buy and believe it is the best way to play for a long-term recovery in the offshore drilling group, feeling vindicated.
"Noble is in the sweet spot with respect to having good backlog coverage yet still the right combination of assets and leverage to a market recovery," the firm says.
While NE is subject to the same generally catalyst-light environment as peers, the firm notes "some potential contracting positives that, while unlikely to help earnings materially, could at least better position rigs for the upturn."
Elsewhere among the group today: RIG +1.2%, ATW +3.1%, RDC +2.8%, ESV +5.9%, DO +4.2%, SDRL +9.7%, PACD +1.5%.
Noble Corp. (NE +12.7%) surges after reporting a narrower than expected Q4 loss and stronger than expected revenues of $410M, even though sales came in 52% below year-ago levels and analysts remain generally neutral on the stock.
NE says its $1B-plus revenue base, along with further reductions in contract drilling costs and capital spending, should result in another year of positive free cash flow.
Stephens reiterates an Equal Weight rating and $7 price target on the stock, saying NE has proven its ability to successfully manage its cost structure, execute operationally and generate cash flow (~$105M in Q4) despite difficult market conditions.
Raymond James reiterates its Market Perform rating, as NE’s commitment to cost rationalization largely drove the better than expected Q4 results, with contract drilling expenses of $177M coming in below the middle of NE’s $190M-$205M guidance range.
Offshore drillers are broadly higher: RIG +2.1%, ATW +3%, RDC +3.1%, ESV +6.9%, DO +4.6%, SDRL +13.1%, PACD +5.2%.
Offshore drillers plunged today even after Diamond Offshore Drilling (NYSE:DO) reported a strong Q4 earnings beat, which was padded by a $0.26/share benefit attributable to a contract dispute settlement with a client in the North Sea.
DO painted a continuing troubled outlook for offshore drillers druing today's earnings conference call, saying it has "yet to see a floor in the declining demand of deepwater assets" - DO does not anticipate a recovery until 2019 or 2020, it expects pricing pressure will continue to "remain out there for a period of time," and likely will continue to see fixtures awarded at what is "essentially close to break even."
Noble Corp. (NE -7.2%) is upgraded to Buy from Hold with a $9.50 price target while offshore drilling peer Rowan (RDC -8.1%) is downgraded to Hold from Buy with a $20 target at Jefferies.
While the firm still does not view the group favorably, it sees relative value in NE and considers the stock as the safest way to play offshore drilling exposure for now, as the stock should enjoy modest upside on a distributable cash flow and relative valuation basis.
Meanwhile, although RDC still generates healthy free cash flow, Jefferies sees risk that medium-term earnings disappoint as the upturn in jackups and ultra-deepwater markets looks challenged from a profitability standpoint.
The group is taking a beating today amid broad losses in energy stocks: PACD -9%, RIG -8%, ATW -7.7%, ESV -7.5%, SDRL -7.3%.
A third to a half of the 440K energy sector jobs lost in the global oil industry collapse may never come back, as a combination of more efficient drilling rigs and increased automation is reducing the need for field hands, which will hamper Pres. Trump's promises for a flood of new energy sector jobs, according to a Bloomberg report.
Rigs have become so much more efficient that the shale industry can use about half as many as it did at the height of the boom in 2014 to amass the same oil output; for example, Nabors Industries (NYSE:NBR), the world’s largest onshore driller, says it expects to cut the number of workers at each well site eventually to about five from 20 by deploying more automated drilling rigs.
Companies were too busy pumping oil and gas to worry about head count during the boom, the downturn gave them time to rethink the mix of human labor and automated machinery in the oil fields, says Evercore ISI's James West.
Ensco (NYSE:ESV) -7.6% premarket after pricing an upsized private placement of $750M of exchangeable senior notes due 2024, with an option to purchase up to an additional $112.5M aggregate principal amount of notes.
ESV plans to use the proceeds to fund the cash portion of its concurrent exchange offers for outstanding senior notes.
JPMorgan is out with its top stock picks for 2017, but as Jack Hough of Barron's points out, the "shorts" list is far more interesting because Sell recommendations from the sell-side are so much rarer than Buys.
Of the 14-name shorts list, nine have price targets 10% or more below the current level.
GE has 10% potential downside thanks to its too-rich valuation relative to free cash flow versus peers.
Federated Investors (NYSE:FII) could fall 14% thanks to its exposure to the struggling active-management industry.
Trucker C.H. Robinson Worldwide (NASDAQ:CHRW) has 16% downside as favorable contracts reset to depressed industry levels.
Archer Daniels Midland (NYSE:ADM) has a price target 18% below the current value as a strong dollar and trade troubles with Mexico crimp profits.
A 45% price decline could be in store for driller Forum Energy Technologies (NYSE:FET), with good assets and a healthy balance sheet, but way too fancy of a valuation.
There's also Intelsat (NYSE:I), which JPMorgan says could be a zero as new competition squeezes the heavily leveraged company.
Other shorts: Cornerstone OnDemand (NASDAQ:CSOD), Ensco (NYSE:ESV).
Among the 36 energy stocks in the benchmark SPDR Energy ETF, 13 are up by at least 10%: MRO +21.6%, RIG +19.6%, MUR +15.7%, DVN +15.2%, NFX +15.2%, HES +14.8%, APC +13.6%, HAL +13.6%, CXO +11.3%, XEC +10.9%, EOG +10.5%, COP +10.4%, CHK +10%.
Continental Resources (CLR +23.6%) soars to a 52-week high, making founder and CEO Harold Hamm, already the wealthiest U.S. energy billionaire, another $3B richer.
Offshore drillers are broadly sporting double-digit gains: ESV +24.8%, ATW +20.6%, RIGP +18.7%, SDRL +16.5%, DO +15.7%, RDC +15%.
"For all E&P stocks, this is a bullish call for sure, because price is directly correlated with cash flow," says Luana Siegfried, energy equity research associate at Raymond James, which sees U.S. crude reaching $60/bbl by year-end.