As it turned out, the major drillship deal with Exxon Mobil (XOM) (I wrote about it here) was only sufficient enough for a one-day spike in Noble Corp. (NYSE:NE) shares back at the beginning of February. The stock briefly traded above $1.00 and trended down on liquidity fears and broad coronavirus-related sell-off. As I write these words, Noble Corp. stock is trading close to just $0.50, which means there is just about $125 million of capitalization left - the market is clearly pricing in a chance of a potential bankruptcy.
At the end of February, Moody’s downgraded Noble’s corporate family rating (CFR) to Caa2 from Caa1, its senior unsecured notes ratings from Caa2 to Caa3 and its senior guaranteed notes from B3 to Caa1. Under Moody’s methodology, obligations rated Caa are judged to be of poor standing and are subject to very high credit risk. The rating agency noted: “The outlook is negative reflecting Noble’s unsustainable capital structure and an expectation that the pace of improving business fundamentals will be slow while liquidity shrinks”.
As a reminder, Noble finished the fourth quarter with $105 million of cash on the balance sheet, short-term maturities of $62.5 million, long-term debt of $3.8 billion and $660 million of borrowing capacity available under the credit facility. During the recent earnings call, the company stated: “[…] current expectations for negative free cash flow generation […] could lead to meaningful draws under the revolver over the next two years”.
Right now, the market is acting as if Noble Corp. will enter restructuring negotiations with lenders in the near term. While the company’s finances are indeed weak, I do not expect this to happen in the upcoming months. Noble Corp. has sufficient liquidity for 2020 and will certainly wait to see what the next wave of jack-up re-contracting brings in terms of contract duration and dayrates.
In 2020, the following jack-ups stand to roll off their current contracts: Noble Lloyd Noble (UK; customer could the contract as early as September 1), Noble Sam Hartley (UK; mid-April 2020), Noble Sam Turner (Denmark; early March 2020), Noble Houston Colbert (UK; late May 2020), Noble Tom Prosser (Australia; August 2020), Noble Mick O’Brien (Qatar; late March 2020), and Noble Hans Deul (UK; mid-March 2020). The UK rigs are at risk given the rather gloomy comments about the state of the UK market made by various drillers during the recent earnings season. Failure to find a contract for Noble Lloyd Noble will present a major problem given the fact that the rig is currently getting as much as $451,000 per day from Equinor (EQNR), so the company’s liquidity situation will materially depend on its ability to find a job for this rig.
As per the previous fleet status report, the next fleet update is expected to be published on April 9, 2020, so investors and traders will have to wait for a month to get a fresh look on the contracting situation, although news about some contracts (if they are made) may come earlier.
It remains to be seen how the current coronavirus situation will impact the contracting activity in the jack-up space. Shallow water drilling is less sensitive to oil price changes than deepwater drilling. In addition, contracts have significant lead times, so it is unlikely that oil producers would make a U-turn based on short-term data if they previously planned to drill a certain number of wells.
While Noble Corp. shares trade in the penny stock territory, it is not the worst punished driller this year - Pacific Drilling (PACD), Diamond Offshore (DO), Borr Drilling (BORR), and Seadrill (SDRL) have lost more ground in 2020. Out of the above-mentioned companies, only Diamond Offshore is currently not priced for bankruptcy fears - the other companies all have to deal with such fears to a certain extent. So, Noble Corp. is in a middle of a broad-based panic due to huge debt, slow pace of the offshore drilling recovery, especially in the floater segment, and coronavirus on top of all these negative factors.
Noble has recently received a continued listing standard notice from NYSE, and a reverse stock split is certainly a possibility - though not in the near term. In my opinion, the company has sufficient liquidity for this year, and only a true catastrophe in the oil market can force it to enter preemptive restructuring negotiations. In this light, I believe that Noble Corp. will offer an opportunity for a speculative momentum upside trade at some point. Fundamentally, the company remains financially weak, so any long-term bet on Noble Corp. comes with a real risk of losing the principal of the investment.
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