Noble Corp.: Paragon Litigation Bites With A $100-Million Charge

Summary

• Noble Corp. reports Q2 2019 results.
• Operating cash flow gets back into the positive territory.
• Noble Corp. records a $100-million charge relating to the ongoing Paragon litigation.

Noble Corp. (NYSE:NE) has recently reported its Q2 2019 results. This earnings season has been very challenging for drillers, and Noble Corp.’s report was also not without problems.

The company reported revenues of $293 million and a loss of $152 million or $0.61 per share. The biggest driver for this loss was a $100 million charge for the ongoing Paragon litigation which was included in the G&A expense on the balance sheet. As a quick reminder, Paragon was a spin-off from Noble which was conducted at an unfortunate time of the oil price crash and quickly went bankrupt. My non-lawyer opinion is that Paragon had little if any chance to survive due to the oil price crash and the major downside in the offshore drilling market but at that time no one knew what was coming.

However, a general financial overview of the problem is not the same as a real-life court battle, and apparently Paragon litigation trust lawyers have something up their sleeves so that Noble Corp. has to record a charge. During the earnings call, Noble Corp. stated: “[…] we have consistently maintained that we would be willing to settle before going to trial if that could be accomplished on reasonable terms”. In my view, a $100-million hit in the current situation is not good news at all. While the charge has been recorded, the case has not been settled yet, so uncertainty over this matter remains and will have some negative impact on the stock. Now, back to the financial statements.

The company’s cash position continued to deteriorate, dropping from $187 million in Q1 2019 to $154 million in Q2 2019. However, operating cash flow has turned positive after slipping into the negative zone in the first quarter. Noble Corp. stated that it expected that 2019 would be the low point of EBITDA generation. The company will have a wave of jack-up re-contracting in 2020, and assuming that current positive trends in the jack-up markets persist (I expect so), it will be able to deploy its rigs at higher rates. Thus, I believe the company’s view that the next year will be better in terms of EBITDA generation as completely realistic.

However, the pace of such improvements is very important. Noble Corp. seems to be a bit nervous since it decided to amend its 2017 credit facility, eliminating the 55% debt-to-total cap ratio with senior guaranteed debt to EBITDA covenants and decreasing the size of the facility from $1.5 billion to $1.3 billion. It looks like Noble Corp. expects that the equity component of the balance sheet will continue to decrease, which is not surprising since the company is expected to continue losing money on a GAAP basis, and that this decrease could lead to problems with the debt-to-total cap ratio covenant in the future.

Source: Seeking Alpha Essential

On the positive note, Noble Corp. will begin to disclose day rates, starting from the next fleet status report which is expected to be published on September 9. Transocean (RIG) also stated that it is intending to disclose all day rates going forward. In my opinion, this is a signal that the rates have started to move in the right direction, and that companies are afraid that investors will underestimate day rates if they are kept undisclosed.

Noble Corp.’s shares have been beaten so hard that they are now basically fluctuating in the whereabouts of the $2.00 level, showing less reaction to industry and market developments in comparison with the company’s peers. The market is in an excessive panic mood and it does not look like this mood will change in August as everyone is waiting whether the U.S. will proceed with its tariff threat on China and what counter-measures will be implemented. I’d expect see-saw action in offshore drilling stocks for the rest of summer.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.