Noble Corporation’s (NE) third quarter 2010 earnings of 39 cents per share missed the Zacks Consensus Estimate of 42 cents and the year-earlier quarter’s profit of $1.58 per share. Lower-than-expected results were mainly due to the impact of the Gulf of Mexico (GoM) drilling moratorium. We have adjusted third quarter results for 5 cents per share of transaction costs associated with the acquisition of FDR Holdings Limited (‘Frontier’).
Total revenue in the quarter dropped approximately 32% to $612.6 million from $905.6 million in the comparable quarter last year. Reported revenue also fell short of the Zacks Consensus Estimate of $641 million. Contract Drilling Services revenue was $584.9 million, down about 33% on a year-over-year basis.
Third Quarter Highlights
Total operating income in the quarter was $108.4 million compared with $504.4 million in the year-earlier quarter. Operating income from the Contract Drilling segment was $109.1 million, down more than 78% year over year.
Total rig utilization in the third quarter was 79% compared with 83% in the year-ago quarter. Overall average dayrate was $126,581 versus $196,900 in the third quarter 2009.
Average dayrate for the semisubmersible rigs (6,000 feet or greater) were $203,316, compared with $434,435 in the year-earlier quarter. Average capacity utilization was 89% versus 98% in the year-ago period. Semisubmersible rigs, which are capable of working less than 6,000 feet, experienced an average dayrate of $102,589 versus $261,167 in the year-ago quarter, while average capacity utilization was 94% versus 100% in the comparable quarter last year.
Average dayrate for the company’s jackups was $90,791 compared with $143,388 in the year-ago quarter. Average capacity utilization decreased to 77% from the year-ago level of 80%.
The company’s backlog as of September 30, 2010, stood at $14.0 billion following the Frontier acquisition.
Financials
At the end of the quarter, the company had cash balance of $367.2 million and long-term debt of $2,723.4 million with debt-to-capitalization ratio of 27.8%.
During the quarter, the company invested $355 million in capital projects and repurchased 4 million shares at an average cost per share of $32.67, bringing the total number of shares repurchased in 2010 to 6.1 million shares as of September 30, 2010.
In July, Noble wrapped up the acquisition of its closely held rival, FDR Holdings Limited, in an all-cash deal, valued at $2.16 billion.
Outlook
We remain positive on the company’s Frontier acquisition, which brings increased contract coverage to Noble and strong cash value embedded in the backlog. Consequently, we expect long-term earnings and cash flow visibility in the near to medium term.
We remain concerned owing to the far-reaching effects of the GoM drill ban and related U.S. policies that are expected to hit hard in 2011 and beyond. Moreover, as of September 30, Noble had 72% available rig days booked in 2010, which has fallen drastically to 49% for 2011.
Although we believe that the deepwater moratorium will keep offshore drillers under pressure, especially those who have exposure to the GoM, an uptrend in oil prices and the anticipation of better bidding activity might help them find a better growth route. Our Neutral recommendation for Noble shares reflects our positive outlook on deepwater GoM activity. However, our short-term Sell (with the Zacks #4 Rank) rating implies near-term tentativeness in this region.
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