Noble Corporation Is Highly Undervalued

| About: Noble Corporation (NE)
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Noble Corporation has seen its stock price take an impressive hit recently dropping by more than 85% from the start of the oil crash.

Noble Corporation has a total of 30 rigs with a young average age of just 10 years. At the same time, the company has a respectable backlog.

Given that Noble Corporation can handle an oil crash that lasts until the mid-2020s, I recommend investing in the company at the present time.


Noble Corporation (NYSE: NE) is an offshore drilling contractor based in London, United Kingdom. The company is the successor of the Noble Drilling Corporation and one of the largest drilling contractors in the world. The company also operates in most other major markets in the oil industry moving its fleet of dozens of rigs across the world from job to job.

Noble Corporation Rig - Noble Corp

Despite this market strength, Noble Corporation has had an incredibly difficult time recently. Noble Corporation's stock peaked at just under $35 per share in mid-2014. From that point, the company's stock dropped by more than 85% to it's late-September 2016 lows of less than $5.5 per share. Since that point, the company's stock has recovered by 10% to less than $6 per share.

Despite this price crash, as we will see, Noble Corporation still has impressive potential as a highly undervalued offshore driller.

Noble Corporation Fleet Advantage

Now that we have an overview of Noble Corporation, it is now time to discuss the company's fleet advantage.

Noble Corporation Fleet Overview - Noble Corporation Investor Presentation

Noble Corporation has an incredibly well positioned fleet. The company has a total of 30 rigs with 8 drillships, 8 semisubmersibles, and 14 jackups. More importantly, the company has been growing its fleet with the size of its jackup fleet alone doubling from 2012. The company has a young average fleet age of just 10 years. This fleet means the company can handle the oil crash without having to worry about spending enormous amounts of capital on renewing its fleet.

Noble Corporation Total Revenue 1H 2016 - Noble Corporation Investor Presentation

Noble Corporation's impressive fleet also means that the company has an impressive backlog. The company earned total revenues of $1.5 billion for the first-half of 2016. The company earned the majority of these revenues from the United States, but also has its revenue well spread out.

The company's revenues come from a number of different rig types, but primarily from ultra-deepwater rigs which make up almost 80% of the company's revenues. Ultra-deepwater rigs tend to have longer contracts that provide income for many years, including during a market downturn. However, it also means that the company's source of income is concentrated primarily in its ultra-deepwater fleet.

But overall, as we can see from this, Noble Corporation has a strong fleet that continues to provide it with a large amount of income.

Noble Corporation Operational Performance

Now that we have discussed Noble Corporation's fleet advantage, it is now time to discuss the company's operational performance.

Noble Corporation Fleet Downtime - Noble Corporation Investor Presentation

Since the start of the market crash, Noble Corporation has done an impressive job of reducing its market downtime. The company's market downtime has increased from the double-digits at the start of the crash all the way down to less than 3% in the most recent quarter. The company forecasts that its downtime will continue to decrease from its 2015 average downtime of roughly 5% helping the company's profit margins and income to remain strong.

Noble Corporation Drilling Costs - Noble Corporation Investor Presentation

At the same time, Noble Corporation has managed to keep its contract drilling costs low. The company's drilling costs have been cut by almost 40% from mid-2015 to the company's 3Q 2016 guidance. The company is practicing efficient stacking of rigs and with additional measures currently under review expects to be able to lower its costs even further.

By lowering these costs, Noble Corporation is increasing its ability to handle a drawn out oil crash.

Noble Corporation Strong Contract Coverage

Now that we have discussed the company's fleet advantage along with the company's operational performance, it is now time to discuss the company's contract coverage.

Noble Corporation Operating Precentage - Noble Corporation Investor Presentation

Noble Corporation has a well-positioned fleet. However, the company has to deal with a growing number of rigs going off of contract, the company's floating rigs are committed for 42% of days compared to just 28% in 2017 and 25% in 2018. The company's jackup rigs are 85% committed for 2016 dropping all the way down to 36% in 2018. That shows how many of the company's rigs are coming off of contract.

Noble Corporation needs to find additional contracts for its rigs. That's it plain and simple. The company can handle a drawn own crash, but someday, a few years down the road, if the country doesn't manage to get another contract it will be in a tough position. However, for now, the company's contracts are continuing to earn it profits and the company continues to have a respectable backlog.

Noble Corporation Financial Strength

Now that we have discussed Noble Corporation's fleet advantage along with the company's operational performance and contract coverage, it is now time to finish up by discussion Noble Corporation's financial strength.

Noble Corporation Liquidity - Noble Corporation Investor Presentation

Noble Corporation currently has $3.3 billion in liquidity of which $0.8 billion is cash. The company's recent contract settlement with Freeport-McMoRan (NYSE: FCX) of $0.54 billion in 2Q 2016 should add to its cash pile. The company received the Noble Lloyd Noble in July 2016 using cash on hand for a total of $0.4 billion. That means that Noble Corporation has no major expenses coming up along with $1.3 billion in cash.

Noble Corporation Debt Maturity Schedule - Noble Corporation Investor Presentation

Now that we have discussed Noble Corporation's cash, it is now time to discuss this cash with the company's debt maturity schedule. The company has managed to decrease its debt coverage from 40% in early-2015 to 35% in mid-2016, significantly below the company's debt covenant of 60%. That means the company could, should it choose, take out significant amounts of debt to increase its financial strength, or undergo an acquisition.

This $1.3 billion in cash for Noble Corporation is enough for the company to cover its debt obligations from now until the early-2020s. Given the company's several billion of backlog, the company should earn enough profits from this backlog to cover some of the company's additional debt obligations. Covering these debt obligations means that Noble Corporation can handle a market crash until the mid-2020s.


As a result we can see that on top of Noble Corporation's impressive operational results and fleet, the company also has an impressive financial strength. And, as we can see, by combining this company's financial strength with its debt maturity schedule, Noble Corporation can handle a drawn out oil crash to the mid-2020s.

Since their bottom at less than $30 per barrel in January 2016, oil prices have already managed to recovery by almost doubling to present prices of $50 per barrel. Given that most deepwater drilling is profitable at $60 per barrel, that means that Noble Corporation has almost a decade to see prices recover by just another 20%.

As a result of this company's impressive assets and strong financial position, I recommend investing in Noble Corporation at the present time.

Disclosure: I am/we are long NE, FCX.

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.