NE - Noble Corporation

[Phoenix01]

The GOM oil spill has resulted in the huge losses for the entire off shore drilling industry.  Noble is the most profitable off shore driller is no exception.  This has created a rare opportunity to buy into an excellent company at a huge discount.

 

The management is outstanding and shareholder friendly.  They have even gone to the extent of self-reporting FPCA violations to the DOJ & SEC.  http://www.prnewswire.com/news-releases/noble-corporation-announces-settlement-of-fcpa-matters-106698938.html

 

[CR]

Phoenix, would you mind sharing why you think its a great company?

[Myth465]

I like Noble and own Ensco (Einhorn owns as well). The sector is cheap and should do well overtime. Most of them have great balance sheets and very low debt / high cash flow yields.

[Phoenix01]

Phoenix, would you mind sharing why you think its a great company?

 

The management is key to any investment and Noble has one of the best.  They run the company very conservatively, have an outstanding balance sheet, the highest margins in the industry and an outstanding safety record.  The upper management know their rigs well and have the knowledge to maximize the return on every dollar they put into the capex.

 

The macro view also favours NE.  Peak energy and emerging market will drive up demand for off-shore drilling.  Also the potential depreciation of the $US will increase the price of oil, lower the relative value of their debt and increase the relative value of their fleet of rigs (i.e. the depreciation of the $US will be greater than that of their rigs).  This may dynamic may be one of the reasons why Buffet purchased BNI.

 

The GMO spill has created a soft market for rigs (oversupply), however the fact that the leases in the GOM have not been extended because of the spill will force the oil companies to accelerate the pace of drilling over the next few years or renew/give up the leases.  Brazil is also going to require a lot of rigs in order to achieve their 5 year ambitious off shore programs.  This points to a hard market looming over the horizon and NE has the relationships in place and the strong balance sheet to take full advantage of this pending opportunity.

 

[CR]

Why will depreciation of the $US increase the price of oil?

 

Are Brazil's offshore programs under a state control? Are there brazilian companies maturing and able to provide rigs? Basically, what relationships does NE have that are going to enable them to get these new contracts?

 

(Thanks much)

[Myth465]

Oil is priced in dollars - Canadians, and Middle Easterners kinda like a consistent revenue stream.

They want purchasing power so if the dollar weakens the price of oil raises to protect the margin for the producers. Oil has been going up due to QE2 and inflation fears.

 

I fear Brazil will kill the rig market. Most of the offshore stuff in the news is being developed by PetroBras and I believe the government wants a certain percentage of the rigs contracted to have been constructed in Brazil. I think Deep water is stable but dont want to see a bunch of new rig announcements made or new rigs coming online because that will push down rates.

 

Not sure how NE fits in and I know Ensco is building all their rigs in Singapore through Keppel. DO signed some rigs to Petrobras recently.

[Phoenix01]

Since the GOM spill, the largest portion of the NE revenue comes from Brazil.  This will likely continue because the new rigs will need some time before they come on line.  By the n hte GOM should be back to normal operations and the need for drillers will be increased because oil producers need to make up the lost drilling time before the leases on the oil fields expire.

[Myth465]

Im worried that the demand for locally constructed rigs will create supply demand issues down the road. It looks like things are in balance or tilted towards suppliers over the long term. I would like it to stay that way. Now who is going to buy Pride? Seadrill seems to be trying to roll up the industry.

 

Do you want Noble to buy Pride? I have heard they arent well run and I like Ensco deep water fleet. It would be a shame to add other assets which didnt fit their build strat.

[Phoenix01]

Im worried that the demand for locally constructed rigs will create supply demand issues down the road. It looks like things are in balance or tilted towards suppliers over the long term. I would like it to stay that way. Now who is going to buy Pride? Seadrill seems to be trying to roll up the industry.

 

Do you want Noble to buy Pride? I have heard they arent well run and I like Ensco deep water fleet. It would be a shame to add other assets which didnt fit their build strat.

 

NE is a very well-managed company with a solid balance sheet and the highest margins in the industry.  I do not know the other players in the industry, but I am sure that NE knows how to take advantage of opportunities as they arise.

 

Regarding the locally built Brazilian rigs, it takes years to build them and more years to learn how to operate them efficiently and safely.  Deep water is not an easy engineering feat and the build-up will take time.

[Phoenix01]

I have been on a NE feeding frenzy over the past few weeks.  Has anyone else been enjoying the all you can eat buffet?

[Myth465]

I rebought my ESV Leaps....

 

Still think ESV is best in class though I have never looked at Noble. Both should be money good in a few months.

[Phoenix01]

I have also been buying LEAPS in NE.  There was hardly any premium for the 2013 calls.

 

The ESV shares seem expensive.  I just looked quickly and the market cap is roughly 6 times sales.

[Myth465]

ESV just bought Pride and the earnings arent in the numbers yet from what I can tell they are more or less the same price. I spent a tiny bit of time looking into NE yesterday.

 

Basically DO is the cheapest but they have an older fleet, RIG is cheap but they have alot of debt and are dealing with the overhang of Macando, Seadrill has a ton of debt and doesnt seem that cheap, and ESV and NE both seem cheap without any legacy issues.

 

I am sure both will do well, I just know and like ESV management. Been watching them for 4 years. They overpaid a bit for Pride but it was basically the perfect acquisition from an Ops perspective. All drillers are trading at lows similar to DWH. Basically very cheap.

[alpha231616967560]

I like this comparison tool at SmartMoney - http://www.smartmoney.com/quote/NE/?story=competition

 

When these boys are all lined up, DO looks more impressive than I would have expected...

[Phoenix01]

It looks like NE has turned the corner.  They just nailed a solid quarter and look like they are back on course with improved sales and margins.  There is still lots of upside before they are back to their traditional usage rates and associated profit margins.

 

http://www.marketwatch.com/story/story?Guid=d47fa3cf-a239-4c93-a23d-3682a4a663ce&link=MW_latest_news

 

http://phx.corporate-ir.net/phoenix.zhtml?c=98046&p=irol-newsArticle&ID=1619204&highlight=

 

 

Cheers

[FCharlie]

Hi all.

 

I need someone to shoot as many holes in my idea as possible.

 

NE Noble Corp.

 

One of the largest offshore drillers in the world.

 

$1.5 billion market cap. $5.6 billion EV

 

Where to begin?  How about Noble paid cash dividends between Jan 1, 2011 and Dec 31st 2015 of $4.68/share, or 80.7% of today's share price.

 

How about the backlog they have contracted with Shell alone is over a billion dollars greater than Noble's entire market cap.

 

Most in the industry expect market recovery around 2019-2020. Noble has $822 million of cash on hand. Their debt maturities are well laddered out to 2020 with $300 million due next March, $250 million due March 2018, and $200 due March 2019.

 

Noble is free cash flow positive today and should generate enough cash from operations to fund most of these debt maturities. They have cut their dividend to two cents per quarter, and I wouldn't mind if they cut it to zero.

 

Noble tendered earlier this year for a huge chunk of it's bonds at a very wide discount to par. They only received $36 million face value of bonds, purchased for $24 million. The market quickly bid the bonds up to just above the offer price. Yet today Noble's long dated maturities still trade in the 60-72 cents range. Given the cash on hand, the expected free cash flow, a possible dividend cut to zero, Noble could be buying this debt in the open market.

 

This company has a very modern fleet of rigs, with an average age of only ten years. Most of their rigs are either working, or actively bidding on contracts. If the industry deteriorates further, they could save significant money by cold stacking rigs. The cost to keep them warm stacked is in the range of $40,000 per day for the semi subs and deep water drill ships, and about $15,000 per day for the jack ups.

 

This industry has been decimated. Industry veterans feel it is still getting worse but I see a clear path for Noble to survive even if things do get worse. The industry produces about 25% of the worlds oil supply. At some point, depletion will become a real factor and the only way to make money in this industry if you are an E&P company is to drill for oil. Global demand has been on a trend line of annual growth of approx 1.5 million barrels per day for years.

 

The main arguments I'm hearing from people is that the industry hasn't hit bottom so why invest now, that Shale, or tight oil, will replace deep water and offshore, that Saudi Arabia will continue to bury the price to drive out shale, that their is no moat around these companies therefore there is no reason to buy them at any price..    I'm hoping for some good responses and feedback so I can keep testing this idea. It's an average sized position for me today but I'm building it every week.

 

Thanks all.

 

 

[nsa122]

Interesting enough that I'll take a look. At first glance, the executive compensation seems distastefully high, but that's a widespread condition I grant.  One question, why do you prefer Noble over several other beleaguered offshore drilling companies?

[benjamin1978]

Noble's fleet is better than many of their competitors but average age of 10 years is hardly state of the art in this sector. Having contracts is good, but they're not ironclad; there have been too many instances over the past year and a half where an operator negotiated better terms on existing contracts, or sometimes simply found some excuse and cancelled them. The burden is on Noble and other contractors to keep these rigs in good condition so that the operator can't cancel on nonperformance. The five year SPS maintenance on these rigs cost a fortune, so I would make sure that capex is properly accounted for in your DCF or whatever. At the moment the rig market is still massively oversupplied with a bunch of idle rigs, so that means the Shells of the world have many alternatives that are potentially lower-priced. Things have improved lately, but if oil prices take another dive, contract modifications will resume. Cold stacking a rig can save you money now, but when you bring it back it'll cost a shit ton especially with the newer generation drillships. But I agree with you there's price point for these things. Personally I just don't know where it is.

 

It's tempting to think that because these rig contractors trade at deep discount to TBV or "NAV" there's downside protection. In reality value is a function of earnings and oil prices, and if you were to scrap a rig, sadly with a lot of these things there isn't even much steel that is worth selling.

 

In terms of oil supply vs. demand, I don't have the first clue. In the long term though I do worry about things like electric cars could do to the demand side of the equation. Lots of people claim the oil market is under-supplied right now, as if it's a simple calculation to calculate supply and demand on a global scale - where visibility in places like China and Russia are notoriously low - and we should just trust that number on the screen lol. But somebody smarter than me will probably figure this out and they will make money on this and I will not. 

[arcticfox]

I would recommend a review of the Loews conference call to get a real feel for the industry.

http://seekingalpha.com/article/3994228-loews-l-q2-2016-results-earnings-call-transcript?page=9

 

From my perspective this area is a timing question, this downturn based on what the industry insiders are saying is that it has been prolonged, and thus I think time horizon for investment is a key consideration.

 

 

[DTEJD1997]

Hi all.

 

I need someone to shoot as many holes in my idea as possible.

 

NE Noble Corp.

 

Thanks all.

 

The marginal benefit from cutting a $.02/quarter dividend would be almost zero at this point.  If the dividend were completely eliminated, that would force another wave of selling.  Certain funds HAVE to hold dividend paying stocks.  Also, some individual investors would also sell out.

 

These guys have a TON of debt compared to their cash flow.  Remember, you can't really look at TTM cash flow...you need to look at the upcoming 12-24 months.  That is almost certainly going to be much, much lower.

 

Revenue was $3.1BB for the TTM.  What will it be 12 months from now?  24 months from now?  Could it go down to $2BB?  Less even?  What will cash flow be at that point?  $500MM?  Now you've got a debt to EBIDTA ratio of 8?

 

All contracts for rigs are risky at this point.  For the companies leasing the rigs at OLD RATES, the new rates are so much lower it would make sense for them to break the contract and litigate it...That is a very real issue here.

 

If I remember correctly, all analysts see these guys losing money in the upcoming 12 months.  The only question is if it is going to be lot OR is it going to be a tremendous amount.

 

Also, 10 year fleet age, while not ancient, is hardly state of the art...

 

NE is hardly the worst in the industry, but there are better choices. 

 

If the cycle is flat, or declines, I think NE is in trouble.  If it gets better, then NE will do very well.

[nsa122]

Thank you very much for the reading recommendation, arcticfox, very educational. Would anyone else tend to favor Diamond Offshore given the Loews involvement, their track record and the transparency/forthrightness in their communication?

 

A couple of excerpts I found interesting:

 

QUESTION:

Back about a year ago when oil was priced at around, I think, $35 a barrel and Diamond's stock was trading below $30 you bought back some stock, I am sure with an eye on where you thought two-year oil was going to be...So, both Diamond and CNA might be attractive to you – not as attractive, but can we talk about the price of oil, the price of a 10% dividend yield and your willingness to buy back subsidiary stock as opposed to your own?

 

James S. Tisch - Loews Corp.

When we bought back the shares of Diamond, I think that, we did not anticipate that the decline in offshore drilling would be as bad as it has been. We didn't anticipate that oil prices would go into the $20s, we didn't anticipate that oil companies would cut back their capital budget so dramatically. And we certainly didn't anticipate that utilization today of drilling rigs would be at the levels that they're at. So, I think we were surprised and I daresay that the rest of the market was surprised by what's happened in the offshore drilling industry. But now, I think, we recognized very clearly exactly where we are in that business.

 

QUESTION:

Do you see a dumping, so as to speak, of rigs by the industry creating good opportunity – better opportunities for pricing rigs?

 

So the – in my opinion, the cycle is different, slightly different this time than last time, because in the cycle, say, in the late 1980s, early 1990s, you were able to buy rigs, re-commission them for very little and bingo, you would be back in business. This time, the cost to re-commission the rig after it's been in stacked mode for a few years can, in some instances, be measured – can be greater than a $100 million.

 

So it doesn't – the economics aren't – are not driven by whether you pay $5 million for the rig or $7 million for the rig.

[Granitepost]

Older thread on Noble at:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ne-noble-corporation/msg29084/#msg29084

[SharperDingaan]

A few pointers - we have a long standing position in PD and nothing in NE.

 

If you want to be in drillers, there are many better nearer term drilling sectors and candidates.

 

NE will most likely survive the cycle, but we put it to you that it may well look very different to what it looks like today. At some point they are going to have to make painful 'scrap' decisions on the fleet - not just cold versus warm stacking. When they do, it will also tell you where they think the future business is - and how much.

 

Absent a sustained higher oil price, there is little reason to think that the tide will not continue to flow out for quite some months yet. Most would be hedging an existing position, and lifting it only when the tidal change becomes evident. Cash gain on the hedge funding additional shares at the time the hedge is lifted.

 

SD 

 

[FCharlie]

 

 

The marginal benefit from cutting a $.02/quarter dividend would be almost zero at this point.  If the dividend were completely eliminated, that would force another wave of selling.  Certain funds HAVE to hold dividend paying stocks.  Also, some individual investors would also sell out.

 

These guys have a TON of debt compared to their cash flow.  Remember, you can't really look at TTM cash flow...you need to look at the upcoming 12-24 months.  That is almost certainly going to be much, much lower.

 

Revenue was $3.1BB for the TTM.  What will it be 12 months from now?  24 months from now?  Could it go down to $2BB?  Less even?  What will cash flow be at that point?  $500MM?  Now you've got a debt to EBIDTA ratio of 8?

 

All contracts for rigs are risky at this point.  For the companies leasing the rigs at OLD RATES, the new rates are so much lower it would make sense for them to break the contract and litigate it...That is a very real issue here.

 

If I remember correctly, all analysts see these guys losing money in the upcoming 12 months.  The only question is if it is going to be lot OR is it going to be a tremendous amount.

 

Also, 10 year fleet age, while not ancient, is hardly state of the art...

 

NE is hardly the worst in the industry, but there are better choices. 

 

If the cycle is flat, or declines, I think NE is in trouble.  If it gets better, then NE will do very well.

 

DTE,

 

You make the point about the dividend cut being of no benefit, but that is with regard to it's impact on share price. Honestly, I as a shareholder, do not care at all about the dividend. I don't care if there is a wave of forced sellers. The 8 cents per year is almost $20 million cash. The long dated debt is trading in the 60-70 cent range. I say to hell with the dividend and use the cash to buy up $30 million of debt.

 

They do have a ton of debt, but a large portion of it is not due for the next 25 years. $1.7 billion to be more specific. The debt coming due in the next few years is $300m, $250m, & $200m.  NE has depreciation of $595m and estimated CapEx in the $200-225m range. Even as contracts roll off and ships are idled, NE should generate enough cash to pay off the next three years of maturities.

 

Debt to EBITDA ratios are not the measure of compliance for NE's debt covenants. Debt covenants can also be renegotiated and I think people forget that.

 

Contracts at risk in my opinion is the greatest uncertainty here. The fact that a company can walk away, whether for valid reasons or not, is scary. I like that Shell is Noble's largest customer. Diamond's largest customer, Petrobras, has a more blatant history of breaking contracts. Not saying that Shell won't  walk away from any contracts, but for some reason I feel more comfortable with Shell than Petrobras.

 

All analysts see GAAP losses, but that doesn't mean negative free cash flow.

 

Regarding NE vs. industry competitors, I wish I could combine NE & DO together honestly. I love them both actually. DO has the financial backing of Loews and I think that is incredibly reassuring in this market. However, DO has a lot of older rigs, some of which date back to the 1970's. Even though they have been upgraded, I can't imagine any of those ever returning to work. My guess is that ALL of DO's current cold stacked rigs are gone for good and will be scrapped.

 

Thanks for your response and your feedback.

[awindenberger]

FCharlie,

 

Based on your research, what level do oil prices need to be at in order for oil company's to increase their offshore drilling activities? I haven't done a deep dive, but here are my concerns:

 

1. Fracking techniques seem to be improving at a fast rate, allowing companies to profitably extract at lower price levels. Fracking has been put to massive use in North America, but is only starting to be applied in much of the world. My concern is that increased fracking means the oil price will never get back into the $70+ range for more than short-term spikes.

 

2. I'm a strong believer that electric-cars are about to start ramping up the S-Curve. I think there's a strong chance that by 2025, half of all new cars will be EVs. Transportation makes up over 50% of oil demand, demand that won't be replaced by other uses.

 

3. While the sector has been impaired, I don't believe we've seen any bankruptcies yet. I feel like we need to see at least one or two to indicate a true bottom.