Noble Corporation - Required Jackup Sale To Shelf Drilling Looks Just Bad

Jun. 23, 2022 10:26 PM ETNoble Corporation Plc (NE)SHLLF24 Comments
Henrik Alex profile picture
Henrik Alex
14.42K Followers

Summary

  • Discussing proposed $375 million sale of five modern jackup rigs to competitor Shelf Drilling.
  • Noble appears to be on the receiving end of the deal with Shelf Drilling picking up a fully operational subsidiary with sizeable backlog at a bargain price.
  • Divestment has been required by the UK antitrust watchdog. As a result, anticipated closing of the merger has been delayed to the end of Q3.
  • Frankly speaking, I would have preferred Noble to avoid this fire sale and rather terminate the merger with Maersk Drilling but both companies have been steadfast in their commitment to the transaction.
  • Two weeks ago, I would have likely downgraded Noble based on the disappointing divestment terms but after the recent 30% sell-off, I decided to keep my "buy" rating on the shares.
Gas-Plattform und Jack-Up Rig

DJDPhotographics/iStock via Getty Images

Note: Noble Corporation (NYSE:NE) has been covered by me previously, so investors should view this as an update to my earlier articles on the company.

On Thursday, leading offshore driller Noble Corporation ("Noble") announced the sale of five jackup rigs to competitor Shelf Drilling (OTCPK:SHLLF) for $375 million in cash in an anticipated move to address regulatory concerns regarding its proposed merger with Maersk Drilling:

(...)

The Remedy Rig Sale Agreement includes the rigs Noble Hans Deul, Noble Sam Hartley, Noble Sam Turner, Noble Houston Colbert, and Noble Lloyd Noble (the "Remedy Rigs") and all related support and infrastructure. Associated offshore and onshore staff are expected to transfer with the Remedy Rigs. Following the sale, Noble expects to continue to perform the current drilling program for the Noble Lloyd Noble under a bareboat charter arrangement with Shelf Drilling until the second quarter of 2023 when the primary term of its current drilling contract is expected to end. The charter arrangement would pass the economic benefit of the drilling contract to Shelf Drilling. Drilling contracts for other Remedy Rigs are expected to be novated to the Buyer, subject to the clients' consent. Noble will provide certain customary transition support services to the Buyer for a limited period of time. The Buyer is expected to finance the acquisition through equity and debt financings by the Buyer and Shelf Drilling, but the purchase is not conditioned on such financing. The Remedy Rig Sale is expected to close promptly following closing of the Business Combination (and following receipt of CMA approval).

While both Noble and Maersk Drilling have been quite clear about their belief in the financial and strategic rationale underpinning the transaction remaining intact and compelling for all stakeholders irrespective of the required divestment of the majority of Noble's jackup rigs, I am very disappointed by the terms of the proposed transaction.

Keep in mind that Shelf Drilling not only gets 5 modern jackup rigs including all related support and infrastructure but also picks up an estimated $250 million in backlog.

To put things in perspective: The Noble Lloyd Noble is among the largest and highest-specification jackup rigs in the world and was delivered to the company at an estimated cost of almost $700 million just six years ago.

The loss of the company's flagship and sole NCS-compliant jackup rig is particularly disappointing given the superior cash generation potential of the unit.

The required sale of the Noble Houston Colbert also hurts as the rig just recently was awarded a 3.5-year contract offshore Qatar.

In sum, Shelf Drilling gets a fully operational subsidiary ready to compete in the North Sea, an area where the company has not been active so far while Noble loses a quarter of its entire fleet.

Quite frankly, I am not sure if the projected benefits of the proposed combination with Maersk Drilling will really make up for the loss of five modern jackup rigs and their sizeable backlog.

Anyway, the $375 million in cash proceeds from the sale will further bolster the combined company's liquidity.

Noble now expects to launch the exchange offer for shares of Maersk Drilling in August and the closing of the merger to occur near the end of Q3, an approximately three-month delay relative to the original timeline.

Please note that the UK antitrust watchdog has not yet approved the business combination. In addition, completion of the merger remains subject to acceptance by holders of at least 80% of Maersk Drilling shares.

Bottom Line

Suffice to say, Noble appears to be on the receiving end of this deal as Shelf Drilling not only acquires a fleet of modern jackup rigs but also enjoys the benefits of picking up a fully operational subsidiary and a decent amount of backlog.

Frankly speaking, I would have preferred Noble to avoid this fire sale and rather terminate the merger with Maersk Drilling but both companies have been steadfast in their belief in the strategic rationale of the transaction.

Well-founded recession fears have hit oil-related stocks hard in recent weeks but I do not expect any major impact on offshore drilling budgets at this time.

That said, with industry stocks usually trading in close correlation with oil prices, investors need to prepare for recent volatility to continue.

Given the uncertain outlook, I have reduced my exposure to oil-service and shipping stocks quite meaningfully in recent weeks. Nevertheless, I remain positive on the offshore drilling industry going forward.

Two weeks ago, I would have likely downgraded Noble based on the disappointing divestment terms but after the recent 30% sell-off, I decided to keep my "buy" rating on the shares for now.

This article was written by

Henrik Alex profile picture
14.42K Followers
I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.Despite not being a native speaker, I always try to deliver high quality research at no charge to followers and the entire Seeking Alpha community.

Disclosure: I/we have a beneficial long position in the shares of NE either through stock ownership, options, or other derivatives. 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.

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