Risk, Reward Balance Noble - Analyst Blog
June 03 2011 - 1:28PM
Zacks
We maintain our Neutral recommendation for Noble
Corporation (NE) as disappointing first quarter results
and the effect of the drilling ban in the Gulf of Mexico (GoM) were
balanced by rising commodity prices as well as improvements in
international jackup markets.
Noble registered depressed first quarter 2011 earnings due to
lingering concerns related to GoM drill ban last year and thereby
experienced lower utilization and dayrate.
Again, Noble's existing fleet is fairly challenged with several
older, less capable assets facing a tough demand environment. On
the arrival of newbuild rigs into the market, many of the company’s
older rigs, floaters as well as numerous jackups will face the
threat of departure, resulting in a risk of earnings dilution from
the retirement of older spec rigs. Hence, Noble’s old and less
efficient fleet in a cutthroat environment could prove
detrimental.
However, offshore drillers are enjoying improved market
conditions with an uptrend in oil prices and better bidding
activity. Importantly, the recovery in the international jackup
market is coinciding with a return to the GoM, which we believe
bodes well for Noble.
With continued increase in tender activity as well as the influx
of contracts globally, management remains optimistic about broader
recovery in jackup demand, led by the North Sea, Mexico, Southeast
Asia and the Middle East. Notably, Noble believes that North Sea
jackup dayrates will soon exceed $100,000 due to the building
backlog and strong bidding activity for 2012.
Like other offshore contract drillers, Noble has also initiated
to evaluate its existing fleet to determine the future of non-core
assets. The company is aggressively upgrading its fleet through
newbuilds and acquisitions, which will add to its earnings
power.
With a strong balance sheet and low debt (last quarter’s
debt-to-capitalization ratio stood at 29.2%), we believe the
company can easily fund the current newbuild program. We also
expect the deepwater market segment to deliver strong growth for
the foreseeable future. With the company’s strong backlog position
(approximately $13.1 billion), Noble’s earnings and cash flow
visibility will be more promising in the near to medium term.
The company, like its competitors Diamond Offshore
Drilling Inc. (DO) and Helmerich & Payne
Inc. (HP), holds a Zacks #3 Rank, which translates to a
short-term Hold rating.
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
HELMERICH&PAYNE (HP): Free Stock Analysis Report
NOBLE CORP (NE): Free Stock Analysis Report
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