Noble (NYSE:NE) has been on a transformational journey, which involved a well timed spin-off of 42 standard capability rigs and further involves the addition of high specification rigs to the company's fleet. The current downturn in the industry has depressed sentiments in terms of stock price, but the company's plans are steadily moving forward.
This article looks at the company's current plans and its impact on shareholder value creation. I conclude that Nobel can be accumulated at current levels as the company has some good shareholder value creation plans on the horizon.
Before looking at any other factor, I want to mention that Noble has no capital expenditure due in 2015 and a $500 million capital expenditure due in 2016. I therefore expect that the company's $4.7 billion long-term debt will decline over the next 2-3 years. I also expect that Noble will not place any further rig orders in 2015 considering the current market condition.
Therefore, from a financial perspective, Noble is well positioned. The company generated an operating cash flow of $1.4 billion for the first nine months of 2014, which translates into an annualized cash flow of $1.8 billion.
For 2015, the company has a firm order backlog execution of $3.2 billion, which implies that the company 2015 operating cash flow will be in the range of $1.5 to $1.8 billion. With no capital expenditure due in 2015, the company free cash flow will be the source of shareholder value creation.
Noble has a current annual dividend payout of $1.5 per share and this translates into a dividend yield of 9.2% considering the current stock price of $15.7.
I strongly believe that this dividend will continue through 2015 and if market conditions improve towards the end of 2015, I expect an increase in dividends in 2016. With Seadrill (NYSE:SDRL) having suspended dividends and with my opinion being that Transocean (NYSE:RIG) will also suspend dividends, Noble is a good bet for investors seeking high dividends.
Noble also intends to create shareholder value through share repurchase and I believe that this is another good strategy considering the point that the company will have FCF in excess of $1 billion in 2015.
According to the company's October 28, 2014 news release, the intention is to seek shareholders approval to repurchase of up to an aggregate of 37,000,000 shares, or approximately 15% of the Company's ordinary shares outstanding. The meeting for approval is scheduled for December 22, 2014 and once approved; I believe that Noble will trend higher.
Another move, which has been impacted by market conditions, is the plan to float a MLP. I believe that Noble will pursue this plan once the market conditions improve, and an MLP can further unlock value as has been seen in the past with companies like Seadrill and Transocean among others. While the MLP is not coming immediately, investment at current levels can boost returns when market conditions improve.
From a risk perspective, it is important to mention here that the company's current order backlog of $10.6 billion is heavily concentrated with one client.
As of September 2014, 60.8% of the company's order backlog was with Shell. However, Shell's S&P long-term rating is AA with a stable outlook and Moody's long-term rating is Aa1 with a stable outlook. I therefore see a low probability of cancellation of contracts with a strong counterparty.
I must also add here that the company's contract coverage is 69% for 2015 and this might be a concern if market conditions remain sluggish.
However, the contract backlog of $3.2 billion in 2015 comes from the 69% contract status. Even if the contract coverage remains at 69%, Noble is well positioned to generate operating cash flow in excess of $1 billion.
In conclusion, Noble looks interesting at current levels and the company has several shareholder value creation plans in the coming quarters.
The biggest advantage for Noble is no capital expenditure in 2015. The company's free cash flow will reduce debt, keep dividends stable and create shareholder value through a potentially big share buyback program.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.