We have recently upgraded our recommendation for Noble Corporation (NE) to Neutral from Underperform due to the impressive accretion from the Frontier acquisition and a strong cash value embedded in the backlog.
On July 28, 2010, Noble closed the acquisition of its closely held rival, FDR Holdings Limited (operating as Frontier Drilling), in an all-cash deal, valued at $2.16 billion. The company acquired four deepwater and two midwater floaters, and a FPSO (Floating, Storage, Production and Offloading) unit.
On the strategic front, the Frontier acquisition brings increased contract coverage to Noble. Further, a long-term agreement with Royal Dutch Shell (RDS.A) for two of its newbuild ultra-deepwater drillships adds $6 billion to the company’s existing backlog. Consequently, we expect long-term earnings and cash flow visibility in the near to medium term.
Although we believe that the deepwater moratorium will keep offshore drillers under pressure, especially those who have exposure to the Gulf of Mexico (GoM), an uptrend in oil prices and the anticipation of better bidding activity may help them find a better growth route.
However, in its recent September fleet note, the company emphasized that the amount of expected 2010 rig downtime had increased by 36% from its last July report. This is mainly the result of the U.S. deepwater moratorium and shallow-water rigs coming off contracts in Mexico.
Noble is also not earning any revenues from the two deepwater rigs that are currently in dispute. Moreover, the company is currently trading at a significant discount compared with its peer group, highlighting concerns over GoM drill ban and future uncertainties. Thus, we remain on sidelines and have a Zacks #3 Rank (short term Hold rating) on Noble shares.
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