Image: Jack-up Noble Sam Turner
Noble Corporation (NE) is showing some signs of life this quarter. However, it was much more palatable with the recent October fleet status that I have analyzed recently, than in the third-quarter results.
I am not wearing the rose-colored glasses that seems to be the recent analysts' trend, and I still view the offshore drilling situation as a struggling environment that will not be solved anytime soon. On the other hand, we have recently witnessed some encouraging developments that give us reason to be more optimistic both in the premium Jack-ups and floaters' segments. But the question is, what it will take to stop this concerning backlog erosion?
On the one hand, as oil prices are getting a steady momentum and are solidly trading above $70 per barrel, the rig contracting activity and utilization are on the rise; asset values are increasing. Optimism starts to get some serious lift.
Consequently, we may be entering an early stage of a long-trend reversal as we speak, and at this stage, NE presents an excellent opportunity for a prudent accumulation, especially after the recent sharp retracement.
Adam C. Peakes the CFO echoed this new optimism in the conference call:
Noble posted a very solid results for the third quarter, extending the favorable trend that we have shown throughout 2018 supported by strengthening industry fundamentals and Noble's excellent fleet composition and position. Our third quarter performance demonstrated impressive growth in fleet operating days, higher contract drilling services revenue and an improving EBITDA profile.
Noble Corporation PLC - 3Q'18 and Balance Sheet history. The raw numbers
|Total Revenues in $ Million||804.3||793.6||896.7||857.7||612.0||894.8||385.2||410.2||363.0||278.1||266.2||329.6||235.16||258.37||279.41|
|Net Income in $ Million||178.4||159.0||325.8||−152.2||105.5||322.9||−55.1||−1,303.0||−301.7||−96.21||−99.48||−12.98||-142.33||-628.06||-81.59|
|EBITDA $ Million||445.1||434.3||601.6||110.1||324.5||630.0||153.6||−1,223.0||182.8||110.6||82.4||29.58||64.45||-713.06||94.74|
|Profit margin % (0 if loss)||22%||20.0%||36.3%||0||17.2%||36.1%||0||0||0||0||0||0||0||0||0|
|EPS diluted in $/share||0.72||0.64||1.32||−0.62||0.42||1.28||−0.23||−5.30||−1.24||−0.38||−0.40||−0.10||-0.58||-2.55||-0.33|
|Cash from operations in $ Million||368.6||399.3||484.4||510.1||172.4||686.8||103.5||165.6||141.9||112.4||44.8||154.9||54.91||-1.02||-10.58|
|Capital Expenditure in $ Million||118.3||90.4||71.4||142.5||89.3||69.6||433.1||67.9||38.4||29.2||19.1||71.3||33.82||42.06||73.46|
|Free Cash Flow in $ Million||250.3||308.9||413.0||367.6||83.1||617.2||−329.7||97.7||103.5||83.2||25.7||83.6||21.1||-43.08||-84.03|
|Cash and short-term investments $ Billion||0.08||0.25||0.16||0.51||0.24||0.82||0.43||0.73||0.52||0.60||0.61||0.66||0.46||0.41||0.33|
|Long-term Debt in $ Billion||4.86||4.84||4.49||4.46||4.16||4.13||4.13||4.34||4.04||4.04||4.05||4.05||3.84||3.84||3.90|
|Dividend per share in $||0.375||0.375||0.375||0.15||0.15||0.02||0.02||0||0||0||0||0||0||0||0|
|Shares outstanding (diluted) in Million||242.7||242.0||242.0||242.0||242.8||252.3||243.2||243.2||244.2||244.8||244.9||245.0||246.2||246.7||246.8|
|NE Backlog in $ billion||9.4||8.7||8.1||6.9||6.2||4.1||4.7||3.3||3.5||3.2||3.2||3.0||2.8||2.6|
Source: Noble Filings and Morningstar
Trends and Charts: Revenues, Earnings Details, Free Cash Flow, and Backlog discussion
1 - Quarterly revenues
Noble Corp. indicated a net loss attributable to the company of $81.591 million or $0.33 per diluted share. The results for the third-quarter 2018 included a discrete tax benefit totaling $25 million, or $0.10 per diluted share, and excluding the impact of the discrete tax benefit, the Company would have reported a net loss attributable to Noble Corporation of $107 million, or $0.43 per diluted share.
Revenues this quarter of $279.4 million were up 5% compared to a year ago and up 8.1% sequentially. Third quarter revenues were partially impacted by a modest increase in total fleet downtime to 5.2% from 2.1% in the preceding quarter. The increase was attributed to complete the repairs on the standard jack-up Noble Joe Beall.
EBITDA improved in the third quarter to $94.74 million compared to $77 million in the preceding quarter.
2 - Free Cash Flow
Free cash flow is an essential element that I always indicate in my analysis. FCF should be sufficient and of course, material, if we can consider the business model as viable.
Total FCF ("TTM") is now minus $22.4 million according to Morningstar.
Adam C. Peakes said in the conference call:
Capital expenditures in the third quarter were $136 million, which included $94 million relating to the purchase of the newbuild jackup Noble Johnny Whitstine that the company acquired in late September. Approximately $34 million of the purchased price was paid with cash on hand and the balance of $60 million with seller-finance with a four-year term.
Excluding the portion of the rig repurchase that was seller-financed, capital expenditures for the third quarter would have been $76 million or $42 million when all spending related to the Noble Johnny Whitstine is excluded. This adjusted total is in line with our quarterly guidance.
And he added,
The capital expenditures include the Noble Clyde Boudreaux upgrade and reactivation, which was completed in August and reactivation programs for the Noble Tom Madden, Noble Globetrotter II and Noble Sam Croft.
Note: The company adjusted Capital expenditures for 2018 to $220 million as the result of the cash outlay of $34 million related to the purchase of the Jack-up Noble Johnny Whitstine, while excluding the $60 million that is seller-financed and payable in four years. Excluding the impact of the rig purchase, 2018 capital expenditures would total $185 million compared to Noble previous guidance of $150 million.
3 - Quarterly Backlog history and discussion
As of September 30, 2018, the company's contract backlog totaled $2.5 billion, with $1.5 billion attributable to the floating fleet and $1.0 billion to the jack-up fleet.
The market is getting some momentum, and the tone of the conference call is now definitely positive for the future, and the company is hopeful that tendering activity in both floaters and jack-ups will translate to some contracts starting in early 2019 or even sooner.
While the jack-up now shows signs of a full recovery, the floaters' market is still lagging stubbornly behind, but activity seems to pick up. In the conference call, Robert W. Eifler said:
Fundamentals in the offshore drilling industry continue to improve during the third quarter; leading to what I believe is clear evidence of a broadening recovery...
Beside an evident recovery that is spreading Robert Eifler had some positive comments about the floaters' segment, which is crucial at this stage of the game. He said:
During the third quarter, it became increasingly evident that more customers were focused on floating rig needs. Industry wide, tendering activity is on pace to outperform 2017 by 15% to 20% and the global decline in backlog days per floating rig appears to have stabilized according to IHS. Although contract durations remain short, crucially we anticipate that the last of the top tier drillships under long-term warm stacked will return to active status in the coming months which could be a catalyst for pricing improvement.
Unfortunately, the day rates have not improved significantly, and the average contract duration is still limited. It is why I believe the recovery will be a U shape recovery until day rates start to move up again and enough to stop the backlog erosion that is a definite concern.
Note: Noble acquired a new Jack-up recently called the Johnny Whistine. I recommend reading my article about this purchase by clicking here.
4 - Net debt Net debt is about $3.57 billion as of September 30, 2018, which is not a threat with a limited CapEx for the next few years. Total liquidity at September 30 was $2.2 billion comprised of cash and equivalents of $326.32 million and availability under revolving credit facilities of $1.8 billion.
Another source of concern is that total cash is slowly eroding and is now almost 50% lower compared to the same quarter last year.
Net debt to EBITDA ("TTM") is still too high at about 13x.
Conclusion and Technical analysis (short-term)
Noble Corporation released its third-quarter 2018 results on October 31, 2018. While Noble reported another lukewarm result overall which topped estimates nonetheless, it was clear that the message was that the offshore drilling industry is on its way to recovering from a terrible market environment, which started almost four years ago. The caveat is that it is coming at an agonizing pace.
So agonizing regarding revenues and cash flow in fact, that I begin to be a little concerned by Noble's debt level, and its ability to survive long-term as it is. So far, after analyzing the recent October fleet status, the progress in contracting has not stopped a backlog erosion, and we are now at $2.5 billion compared to $9.5 billion in 1Q'15. This is the bottom line for me.
Net debt to EBITDA ratio is showing some troubles ahead if the recovery is not followed by substantially higher daily rates. Based on four times 3Q EBITDA the net debt to EBITDA ratio is well over 10x.
However, if we believe Adam C. Peakes when he noted in the conference call,
The signal is suggesting we are in the early stages of the cyclical recovery or becoming more evident and we expect these favorable trends to drive further financial improvement in the fourth quarter. In addition, we are increasingly optimistic regarding prospects for 2019 as we experienced a growing number of opportunities and benefit from our premium fleet and strong regional distribution.
then, in this case, we should not be concerned, and 2019-2020 will be just fine.
One elegant solution to turnaround faster would be to merge with another company in this Industry that could be a complementary match; which means a better debt profile and a weaker fleet overall. Diamond Offshore fits the requirements in my opinion.
Finally, nothing has been said by the company about the Paragon Offshore litigation?
NE experienced a decisive negative breakout of its rising channel pattern late in October and crossed its long-term support at $5.25 as well.
However, NE stabilized around $4.75 which gives us a new support point to correct the old line support at $5.75 to now $4.80 (I recommend buying cautiously assuming a strong oil prices environment), creating a new ascending triangle pattern with line resistance at $5.25 (I recommend selling about 30-40% of your position), and line support at $4.80.
However, both line resistance and line support at too close to the apex, and it suggests that NE will experience another decisive breakout soon. The direction is dependent on the future price of oil.
Generally, ascending triangle patterns are considered bullish, which means that NE is expected to cross the resistance at $5.25 and eventually tests a new resistance that I see at $6. However, if oil prices continue to collapse then NE may break out again on the negative side and retest the $3.50 low set in April (Double bottom with strong buy recommended).
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NE over 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.