Noble 'Well Positioned' for Offshore Activity Growth

Drilling contractor Noble Corp. is well positioned to benefit from improving offshore activity and the continued robust ultra-deepwater outlook despite third quarter earnings coming in below estimates, according to a Friday analyst report from Barclays Capital.

The company has good rig availability through 2013 and beyond through its aggressive newbuild program and continues to attack fleet issues head-on, said Barclays analyst James C. West, noting that, "A spin or sale of older assets has returned to the forefront and we believe this transaction would further high-grade the company's fleet."

Noble reported third quarter 2012 earnings per share of 45 cents Wednesday, below Barclays' estimate of 52 cents, and total operating income was $179 million, lower than Barclays' forecast of $204 million. Noble's third quarter earnings were impacted by lower-than-expected utilization for the Noble Bully I (UDW drillship) and Noble Bully II (UDW drillship), unplanned downtime on units in Brazil due to labor and permitting complications and Hurricane Isaac, according to the Barclays note.

Evidence of the continued robust outlook for ultra-deepwater drilling includes sold-out supply, recent exploration successes and the proliferation of coastal countries proceeding with licensing programs, according to the analyst note.

"While ultra-deepwater day rates have largely plateaued at around $600,000, we think the next leg up could be imminent," West noted. There are roughly four ultra-deepwater rigs available for the first half of next year, and Barclays believes absorption of these units could result in another scramble for availability and a subsequent jump in day rates moving into 2013.

Noble experienced start-up issues in the third quarter with the Globetrotter I (UDW drillship) and Bully I rigs, which it took delivery of in the first half of 2012.

"Unplanned downtime for newbuilds industrywide will be commonplace over the next two years as deliveries accelerate," according to an Oct. 19 report from GHS Research.

Because Noble has the most newbuild exposure of the group, GHS expects estimates to be ratcheted lower for Noble over the next two to three quarters as these rigs work through bottlenecks and likely miss utilization expectations for those not adequately accounting for shakedown periods.

While Noble believes ultra-deepwater rig rates could move higher if operators are willing to pay for immediate use, GHS estimates that day rates will not move above the $600,000 through $625,000 range to which investors have become accustomed.

"While we agree with NE that UDW [ultra-deepwater] rates may trend slightly higher in response to increased labor and spare component costs, we'd argue the incremental day rate is equally offset by the incremental cost," GHS noted.

Non-Newbuild Ultra-Deepwater Units Enjoy Day Rate Momentum

Non-newbuild ultra-deepwater units are experiencing good day rate momentum, as evidenced by recent fleet status reports, said Barclays in a separate Oct. 19 analyst note on Diamond Offshore. The Houston-based drilling contractor's recent aware for the Ocean Endeavor (UDW semisub) at a day rate of $522,000, up from $285,000, also is evidence of that momentum.

Deepwater day rates are improving, and Diamond continues to add substantial backlog to its mid-water fleet, Barclays noted.

"The company is executing well and has done a good job in mitigating unplanned downtime and controlling costs," said West. "However, the bifurcation between older and newer equipment continues. As a result, some of the company's rigs are becoming disadvantaged."

While Diamond has taken steps towards high-grading its fleet, Barclays believes these are so far insufficient to replace lost earnings power.

Diamond saw its third quarter earnings fall by 31 percent as the contract driller's revenue decline continued amid lower day rates, Dow Jones reported Thursday.

However, GHS analysts noted that the company management's ability to navigate the offshore drilling cycle has been drastically underappreciated.

"'The company has stomped consensus estimates by at least 20 percent for five consecutive quarters," GHS analysts noted. "The "weathered" fleet has performed considerably better than its peer group and management has done a superb job controlling costs. With several rigs working well below market rates set to re-price over the next several months, we believe that consensus estimates will continue to trend higher."