Noble Misses Estimates, Gulf Spill to Blame

| About: Noble Corporation (NE)
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Noble Corporation (NYSE:NE) reported second-quarter 2010 earnings of 93 cents per share, well below the Zacks Consensus Estimate of $1.09 and the year-earlier quarter’s earnings of $1.54 per share. The quarter’s lower-than-expected results were mainly due to the impact of the Gulf of Mexico (GoM) moratorium on Noble's floater fleet. We have adjusted the reported quarter earnings per share for 6 cents related to higher tax expenses and 2 cents related to Nigeria FCPA investigation.

Second-Quarter Highlights
Total revenue in the quarter dropped approximately 21% to $709.9 million from $898.9 million in the comparable period last year. Contract Drilling Services revenue was $687.5 million, down 21% on a year-over-year basis.

Total operating income in the quarter was $268.5 million compared with $485.8 million in the year-earlier quarter. Operating income from the Contract Drilling segment was $411.9 million, down more than 33% year over year.

Total rig utilization in the second quarter was 80% compared with 84% in the year-ago quarter. Overall average dayrate was $156,683 versus $198,270 in second quarter 2009.

Average dayrate for the semisubmersible rigs (6,000 feet or greater) were $355,450, compared with $408,510 in the year-earlier quarter. Average capacity utilization was 92% versus 94% in the year-ago period. Semisubmersible rigs, which are capable to work less than 6,000 feet, experienced an average dayrate of $253.697 versus $251,945 in the year-ago quarter, while average capacity utilization was the same for the comparable period at 100%.

Average dayrate for the company's jackups was $96,677 compared with $157,381 in the year-ago quarter. Average capacity utilization increased to 81% from the year-ago level of 80%.

At the end of the quarter, the company had cash balance of $1,083.1 million and long-term debt of $751.0 million, representing a debt-to-capitalization ratio of 9.4%.

In the reported quarter, Noble also signed an all-cash deal to acquire its closely held rival, FDR Holdings Limited (operating as Frontier Drilling), for a total consideration of $2.16 billion. The company expects to close the transaction by the end of the July 2010.

Noble's total backlog as of June 30, 2010, was approximately $6.7 billion, down from $7.5 billion at the end of first quarter 2010 (excluding Frontier).

As the Frontier deal and a long-term agreement with Royal Dutch Shell (NYSE:RDS.A) for two of its newbuild ultra-deepwater drillships will provide an additional $6 billion contract backlog to Noble’s existing backlog, the earnings and cash flow visibility will be brighter in the near- to- medium term, in our view.

However, we remain concerned about the near-term headwinds related to pricing power and ongoing uncertainty in the GoM. The company’s highest concentrated jackup exposure and the GoM drill moratorium are expected to weigh on its valuation. Moreover, as of June 30, 2010, Noble had 61% available rig days booked in 2010, which has fallen drastically to 35% for 2011. Hence, we continue to maintain our Underperform recommendation for Noble.