Noble's Second Quarter Results Show Strong And Improving Fundamentals For Offshore Drilling Companies

| About: Noble Corporation (NE)
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Noble Corp (NYSE:NE) announced its second quarter 2012 earnings results on July 18, 2012. The quarter's results were substantially better than the prior year's quarter and illustrate the current strength in the offshore drilling business as a whole. David Williams, Noble's Chairman, President, and CEO stated as much in the company's announcement that is linked above. He stated,

Quarterly results, when compared to the first quarter, include improvements in revenues, margins, and cash from operations. These improvements are the result of continuing strength in the offshore drilling business.

Noble reported contract drilling revenues of $848 million for the quarter, an increase of 14% over the preceding quarter and 43.9% over the prior year quarter. This also beat analysts' expectations by about $4 million. The company's net income also beat expectations, coming in at $159.8 million versus $54 million in the prior year quarter. This represents an increase of approximately 33% over the preceding quarter and a whopping 195.5% increase over the prior year quarter. This continues the company's year-long streak of increasing net income. This is also the second quarter in a row in which the company has beaten analysts' earnings estimates.

Noble has been committed to improving and modernizing its rig fleet over the past few years and the company is seeing the early effects of that. Williams stated,

The first half of 2012 was highlighted by the commencement of operations on our first new ultra-deepwater drillships and the award of a contract for the first of our newbuild jack-ups, the Noble Regina Allen, a JU3000N high-specification unit. Also, as previously reported, in early July, we were awarded a three-year term contract for the second of new ultra-deepwater drillships under construction at Hyundai Heavy Industries Co. Ltd., the Noble Bob Douglas, representing a total contract value of approximately $677 million. These contracts are evidence of the strong customer demand for drilling rigs with advanced technical specifications and operational efficiencies, and we continue to evaluate high quality opportunities for the remaining uncontracted drillships and jackups in our fleet expansion program.

This fleet expansion program is likely to be a major source of growth for Noble over the next few years. Noble's fleet status report shows that the company has a total of eleven offshore rigs under construction. This eleven rig total consists of five ultra-deepwater drillships and six high-specification jack-ups. This newbuilt program is smaller relative to the size of company's fleet than some rivals such as SeaDrill (NYSE:SDRL) but there is a lot to like here with respect to being a driver of growth. The mix of rigs here is interesting. Long-term readers may remember articles that I have written over the last several months that explain the tremendous opportunities available in the ultra-deepwater environment for rig owners. These are still present and, if anything, now look more promising than when I first wrote that article.

The increase in the number of ultra-deepwater rigs that Noble will have to service the space because of its fleet expansion should allow the company to participate in this growth. Mr. Williams stated during the earnings conference call, however, that operators in the resurgent North Sea area prefer ultra-deepwater semisubmersibles to drillships. The fact that Noble's ultra-deepwater newbuilds are all drillships could make it difficult for the company to expand in that area. Mr. Williams appears to be considering expanding the newbuild program to include semisubmersibles, based on his statements during the Q2 2012 conference call. If the company does this then that would effectively solve this problem. Meanwhile, ultra-deepwater drillships are still in very high demand so it is unlikely that this will hurt the company.

As I discussed in an article published on May 30, demand for jack-up rigs is also strengthening. Noble's six newbuild jack-ups will allow the company to take advantage of this trend and, in fact, Noble's contract for the Noble Regina Allen that Mr. Williams mentioned in the company's presentation provides strong support for this. This newbuild jack-up was awarded a contract that is expected to last for 18 months at a dayrate of $230,000. This is one of the highest dayrates for a jack-up rig that has been seen in the current industry upcycle. While jack-ups are nowhere near as profitable as ultra-deepwater rigs, the five remaining uncontracted newbuilds should have a significant impact on Noble's bottom line if the company can manage to secure similar contracts for them.

Another factor that drove Noble's increased profits this quarter is an improvement in the company's revenue efficiency. A low revenue efficiency is a serious drag on earnings because it lowers contract drilling revenues. A high revenue efficiency means that the company is achieving close to its potential maximum amount of revenue from the contracts that it has. This is an area in which Noble struggled in 2011 but management was firmly committed to correcting this issue. Management's efforts in this area have paid off in the latest quarter. Through a number of operational and process improvements, Noble managed to reduce the amount of unpaid downtime to under 3%. The company is committed to improving this further. If successful, these process changes will have a positive result on future profits.

Noble lent support to previous statements made by managers at SeaDrill and Transocean (NYSE:RIG) about the rapidly tightening supply of offshore drilling rigs. Noble stated that the entire supply of ultra-deepwater rigs available in 2012 is now contracted out. Furthermore, the company stated that the entire supply of ultra-deepwater rigs available in 2013 is also contracted out. These statements apply not only to Noble's supply of such rigs, but apply to the entire worldwide fleet. The company stated that customers are now discussing contracting out many of the ultra-deepwater rigs that will be available beginning in 2014. The company believes that there will be a large number of contract announcements regarding these rigs coming out in the near future.

This is excellent news for the owners of these rigs as the revenues from them are now secure until that long. There is no longer any uncertainty about the ability of offshore drilling companies to recontract out these rigs as they become available. This also shows how the very strong demand for ultra-deepwater rigs combined with a limited supply for such rigs have resulted in a sellers' market. This situation should be good for the growth of companies that have ultra-deepwater newbuilds leaving the shipyard over the next few years. These include Noble, SeaDrill, and Pacific Drilling (NYSE:PACD).

Disclosure: I am long SDRL.