Noble Corp.: From Euphoria To Despair And Back Again

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About: Noble Corporation plc (NE)
by: Fun Trading
Summary

Noble Corp. released its fleet status on September 9, 2019.

Only two jackups got awarded a contract extension. I have estimated the contract backlog at ~$2.1 billion.

The recent drop under $1 and the subsequent stock recovery is telling us that the market has serious doubt about the company's survival and shifts from euphoria to despair.

Image: The Jackup Noble Tom Prosser Source: Noble Corp.

September Fleet Status Analysis

Noble Corp. (NE) released its fleet status on September 9, 2019.

The company indicated one contract extension for the jackup Noble Mick O'Brien. The rig has been awarded a contract extension from late October 2019 to late March 2020, in the Middle East. According to Bassoe Offshore, the day rate is $85K/d.

Also, the Noble Tom Prosser jackup rig had five of six option wells exercised extending the contract to August 2020.

On the negative side, the company said that the Noble Johnny Whitstine rig had experienced 18 days of operational downtime at zero dayrate during 2Q 2019.

Various Issues That The Company Is Facing

The fleet is fully contracted for the Jackups and Drillships while the Semisubmersibles segment is lagging, as we can see below:

Source: NE Presentation

I have estimated the contract backlog at ~$2.1 billion as of September 9, 2019. The most significant amount comes from the Drillships with $1.2+ billion or 58% of the total backlog, followed by the Jackups with an estimated $788 million.

The backlog stretches to 2023 with $357 million estimated remaining in 2019 and $910 million estimated in 2020.

The backlog erosion has been tremendous since 2Q15 where the company had $8.7 billion in contract backlog.

The company indicated in a recent presentation that 95% of the marketed fleet is working under contract, which is reasonably good all considered. However, despite this impressive accomplishment, the company is not generating enough free cash flow to lower its high debt level that I will discuss below.

Let's look at the free cash flow, which is a critical financial gauge.

The company is showing a yearly loss of ~$160.7 million with a sizeable loss of $22.2 million the last quarter alone.

Part of this negative free cash flow comes from the acquisition of two new jackups from PaxOcean, at an excellent acquisition price with a long-term contract attached.

This fact has created higher CapEx and increased the loss of free cash flow, especially in the first quarter as you can see on the chart above. Ultimately, these jackups will be generating long-term revenues.

The last jackup was acquired on February 14, 2019, for a total consideration of $83.75 million ( following the acquisition of the Noble Johnny Whitstine rig in September 2018).

Unfortunately, the actual daily rates are not nearly enough to provide a sufficient profit margin, period. The question is where this extra-cash could come if 95% of the marketed rigs are already operating?

The net debt is $3.70 billion as of June 30, 2019.

Net debt increased to $3.70 billion as of June 30, 2019, which is not a threat with a limited normalized CapEx post-2019 estimated at $150-170 million annually.

Total liquidity as of June 30, 2019, was ~$1.45 billion comprised of cash and equivalents of $153.77 million and availability under revolving credit facilities of $1.3 billion. The cash on hand has been cut more than half this quarter compared to the same quarter a year ago.

The survival of the company depends mainly on the strength of the expected "recovery," which turns out to be much more elusive and weaker than expected. When I say intensity, I mean longer contract duration and higher daily rates.

The recent drop under $1 and the subsequent stock recovery is telling us that the market has serious doubt about the company's survival and shifts from euphoria to despair in less than a few weeks. I see this trend continuing further.

Technical Analysis

NE is forming a descending channel pattern with line support at $0.70 and line resistance at $2.00. Finviz got it almost right, but the line support should be drawn from the low in June and the low in August just below $1. For the line resistance, the parallel should start from the top in July/August.

I do not recommend investing in NE, but trading the stock short term could be interesting. It is a difficult task and demands a constant adaptation and focus. Thus, I recommend selling NE at $2 or above and wait for about $1.50, which is the intermediate support, to start buying back a little. However, if oil prices turn bearish again, which is likely, the stock will retest the $1 threshold (double bottom) and may go even lower as I indicated above.

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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.

Additional disclosure: I trade NE frequently.