Noble recently released their Annual Report (including the shareholder letter), a transcript of their conference call, and their latest proxy statement. Here’s what I gleaned from each:
Only thing really was the increase in David Williams total compensation from around $8 million to $9 million. Although I’d normally have some kind of problem with this level of compensation, you must realize just how talented this man is. You’ll see more about this below, but something keeps coming to my mind. I remember Buffett discussing, in at least one or two shareholder letters, the compensations that managements receive and how most great managers are under-paid in relation to what they bring to their organizations, whereas most mediocre & terrible ones end up making too much. In this scenario, I feel as though Williams is getting his fair compensation & I’m glad to have his representation of my interests as a shareholder. They’re definitely better than the talent over at Ensco; sorry David Einhorn, I still am sticking to my guns here and I think I made the right move (although that merger makes them significantly better positioned moving forward).
We’re now at the 90 year anniversary of this company. That should tell you something about how it’s managed (especially with the volatility of this industry over time!). Conservatism, a focus on safety & the well-being of employees, and a commitment to high returns on capital are going to continue; it’s too well-managed to expect must else unless the whole industry fails.
This was the most important thing I’ve read about Noble in the last year. I’d strongly recommend it if you haven’t seen it already. Here are the basic points:
- Government regulations & slow drilling approval process is manageable; David Williams believes in about 10 floaters operating in the GOM by the end of the year (there were 33 or so when Macondo struck)
- Many rigs have left the region and likely won’t come back (this points to the truly global offshore demand today; the market was able to absorb the excess capacity while the GOM was shut down)
- Oil majors are itching to get back into the GOM right now
- Seems to think all offshore drilling makes sense with oil above the low $70 range, although $90-110 a barrel wouldn’t make much incremental difference to Noble because the majors don’t make plans based on short-term oil fluctuations
- Squeezed the shipyards very hard on pricing for their newbuilds; shipyards are already charging 10-20% higher for the same specs & models
- Ensco/Pride have 5 uncommitted rigs moving forward; transocean & diamond have both said they won’t build on speculation (this shows that there likely won’t be self-cannibalism and further persuaded me that over-capacity isn’t likely for at least 5+ years)
- Extremely low employee turnover, especially with senior rig personnel (about 3% the last few years; far below that of other industries & significant considering the amount of building currently going on). Williams also discusses how they have the best employee relations in the industry & their training is the best
- Williams discusses how fixated he is on costs on a monthly basis- reminds me of Gene Abegg at the Rockford Illinois Bank back in the early Buffett days
- Recent commitment of 6 rigs down in Mexico, 4 of which were previously warm stacked and not earning money (this is huge for Noble; now most of their fleet is back to work & I have less worries for 2011). He also says there will be two more commitments and hints at a lot more opportunity in the next year. “We’re having a lot of serious discussions with a lot of folks about a lot of opportunities”
- Margins are great in Mexico with these jackups (surprising to me but this is due to their “remmy” crews that don’t require much in labor costs)
- Last, but certainly not least, Williams believes their earning power moving forward “is quite significant and [he doesn’t] think it’s fully reflected in the stock.” 4 years ago, they had 4 D.P. rigs (basically higher-tech floaters) and now they have 27. “We’re quickly transforming this fleet and again, I feel great about where Noble is right now”.
In addition, they’ve set themselves up as Shell’s primary drilling contractor & seem to have almost complete exclusivity. All of this has me quite excited & I think my initial analysis of Noble was pretty accurate. I didn’t have the grasp of the industry that I now have, but I still was right in the basic premise.
The industry’s annual reports:
I have been worried about over-capacity as I see virtually every major drilling company (RIG, ESV/PDE, NE, DO, & SDRL) all pushing into deepwater construction. However, not one of them is worried about overcapacity, and with the exception of the Ensco/Pride combination, not one of them is building on speculation. They’re all being welcomed into the industry with open arms and multi-year contracts. While I can’t remember any specifics that stick out, the whole industry has the same mindset for building out further into deepwater and is doing so conservatively. It seems this construction cycle will be a good thing for the whole industry, although I’m biased towards Noble’s future and think they’ll come out doing very well, if not the best.
Also, there was a hilarious little discussion in Ensco’s report about ENSCO 74. It was lost for about 9 months underwater after a wreckage and it was found 95 miles from the scene. I don’t mean to poke fun, but that was enjoyable to read.
Even though Noble may not be considered, in a traditional sense, to have a sustainable competitive advantage, it’s in an industry with a great future & enough room for all the players (Williams talked about how quickly the Jim Day was hired. Those newbuilds are direly needed by customers all over the world!). This Shell relationship is very powerful & will pretty much guarantee them profitability moving forward. I’m sticking to my valuation of about $16-17 B now and still have great confidence in their future. Next step, start issuing permits in the GOM again!