I wrote about Noble in my post here back in June of this year. The company has had many new developments that I have kept to myself until now; I figure I’ll put it all together in one post to give you my updated thoughts on the investment.
First in order of discussion is the FDR Holdings acquisition that was made in the summer while the moratorium was still in place down in the GOM. There were two ways Noble created value through this acquisition: added 7 vessels to their fleet & a new agreement with Shell.
The 7 vessels that Noble acquired include 6 drilling rigs and a storage unit:
- Two bully-class drilling rigs that are jointly-held for 50% of earnings each
- Two drillships in Southeast Asia
- One drillship in West Africa
- One semi-submersible GOM rig
- One FPSO (floating production storage & offloading unit)
I want to go through the profitability of each rig & what Noble’s owners can reasonably expect from them going forward. Luckily, Noble is in an industry where all contracts are made in advance & you can have relative clarity for a few years into the future. My assumptions are that the rig utilization will be about 330 days per year (90% utilization or so… I’d say very conservative for rigs already contracted) and they will have a 40% net margin on these (also conservative, Noble normally above this at 45% overall & deeper water rigs are much more profitable). Here are the contracts (in thousands per day):
- Two bully-class: 50% each at $445
- Two drillships in Southeast Asia: $280 & $160 respectively
- One drillship W. Africa: $308
- One FPSO: guessed at $200 (2/3 of current dayrate)
- One semi-sub: $383
When multiplying out (330 days, 40% net), you end up with about $230 MM increased earning power from the rigs that were acquired.
With this acquisition, Noble purchased FDR Holdings for $2.16 B and financed it with cash on hand and 3 separate bonds totaling $1.25 B:
- $350 MM at 3.45%
- $500 MM at 4.90%
- $400 MM at 6.20%
Management has come out and stated they intend to pay down all these bonds by 2013. I illustrated the 3 bonds to show you Noble’s cost of borrowing- it’s not bad at all! They also will fare very well if interest rates rise and the price of these bonds fall because they can repurchase them at a discount to par value. It is not a question of if, but of when, interest rates will rise. I’m hoping sooner than later.
If you divide out expected earnings by the price paid ($330 MM/$2.16 B), Noble gets an initial return on its money of 10.9%! This then is offset by paying an average interest rate initially at 4.79%. The debt will be paid down in 3 years and this clearly shows that management created value for shareholders.
I also talked about the agreement with Shell and how it created value for Noble’s shareholders. This agreement just about doubled Noble’s backlog from $6.9 B to $12.9 B. Included in this agreement are:
- Globetrotter Drillship contract: $410 + 15% bonus
- Start building 2nd globetrotter drillship, contract at: $410 + 15% bonus
- Extension to Jim Thompson: $335
I’ve also added in the newbuilds that recently came to market: (Jim Day, Dave Beard, Danny Adkins, and the Scott Marks). These are not related to the Shell agreement but were not a part of 2009 earnings. Overall, they constitute an increase to earning power of about $300 MM (330 days, 40% net). Also, this agreement was to cover all operating expenses plus a small profit on all rigs in the GOM until the moratorium is lifted & drilling resumes.
If you have noticed some pressure on certain jackup rigs for their dayrates currently, it is not a good place to be. Also, with some semi-submersibles at slightly lower rates than back in 2009 (last full “normal year” for the company), I’ve adjusted their current contracts downward $100 MM as an estimate (this is conservative compared to actual economic reality).
Therefore, we take 2009 op. cash flow of $1.5 B after subtracting out capex. We then add the $230 MM from acquired rigs, $300 MM from Shell agreement & the newbuilds, and subtract $100 MM from contract pressure to arrive at $2 B in earning power for 2012. Unfortunately, not all of these rigs will be in full operation until 2012, so I figured this is the best way to estimate earnings rather than guess at which rigs will be in operation for 2011.
If you take a look at what you’re paying in the market today for $2 B in earning power (after capital expenditures) for 2012, it’s about $9.5 B today. This leads to a 21% return on earning power for 2012. There is no telling what 2011 earning power will be with the current de-facto moratorium (the Obama Administration still has yet to hand out new permits), but they are still going to earn enough to cover costs & pay down some of the debt. I’ll be happy with $1.2 B in op. cash flow (after capex) for 2011.
I have a link that shows the permits & active rigs currently outstanding in the GOM, here it is:
You will need to make a list of these figures for yourself, as they do not provide the numbers from the previous week- only the current statistics. I find it very useful to have the exact number of permits, leases, and active drilling rigs in the GOM every week- it is most likely a statistic Wall Street will not be keeping up on & gives me a slight edge over everyone else. It will be great to finally see some new deepwater permits issued.
So, although I originally recommended this stock at $7.5 B, after this acquisition & shell agreement, I still think it is a great buy at $9.5 B. I’m not adding to my position because I invested more than 1/2 my portfolio in the company from prices back at $7.5 B, but it is worth checking out. 21% annualized returns is not something to ignore. My updated price to sell out at today is $16 B or so ($62 per share).