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Noble Corporation (NYSE: NE) is a contract drilling firm in the oil and gas industry. The firm has been very successful of late, posting a 74% increase in 4Q2007 profits and setting a record for earnings per share in the past year. Noble's business model depends on a mix of short-term and long-term contracts with national oil companies and independent producers; major oil companies are a small percentage of its business. This helps shield NE from the volatility of the consumer market for oil and has contributed to its longevity.
As an offshore oil exploration and production firm Noble Corporation has approximately 86% of its fleet deployed in international markets, including the Middle East, India, Mexico, the North Sea, Brazil and West Africa. [1] In 2006, 28% of Noble’s revenue came from U.S. Gulf of Mexico operations while 72% of revenue was generated from international operations.[2] Noble is the third largest offshore drilling company in the world, behind Transocean (RIG) and Santa Fe International (GSF). Increased demand for deepwater oil exploration has enabled NE to capitalize on its world-wide fleet of 63 offshore drilling units, including 13 semi-submersibles, 3 drill-ships, 44 jack-ups and 3 submersibles. [3] Noble's fleet, however, is just 40% of the size of the combined fleets of Transocean and GSF, which announced in summer 2007 that they planned to merge their fleets, and its smaller size may be an obstacle to Noble's long term performance.
In the short term, the recent surge in the rising worldwide demand for energy and geopolitical turbulence in oil-rich nations over the past several years have driven up oil prices and day rates for drilling contractors, and as a result Noble Corporation has doubled its operating revenues from $1,066,231 billion in 2004 to $2,100,239 billion in 2006.[4] The company's recent success has been tied to high oil and natural gas prices because high energy costs entice producers to either extend or take up new contracts with large drilling firms like Noble that are capable of drilling more wells.
[edit] Company Overview
Noble Corporation generates revenue from renting its drilling rigs to oil and gas companies based on a day-rate price per rig. The recent increases in gas and oil prices have stimulated demand for drilling activity, resulting in average day-rates costing nearly twice as much in 2006 than costs in 2005. While Noble Corporation's operating expenses have remained stable in recent years, its operating income and total revenues have skyrocketed as a direct result from the rising worldwide demand for energy, especially oil and natural gas.
In 2007, demand for oil dipped slightly, especially in the United States, causing refiners to scale back their production. If this trend continues, NE may see a decrease in demand for its contract drilling services, since companies won't need to develop new sources of oil when they haven't maxed out their current sources. This trend may not persist into 2008, however, and if it does Noble's international portfolio should protect it from the effects of fluctuating consumer demand in any one location, even a market as large as the U.S.
[edit] International Operating Revenues
In 2006 international contract drilling revenues increased $451.2 million (48%) as strong demand for drilling rigs stimulated substantial increases in average day-rates. Average day-rates for Noble’s international fleet increased from $60,922 to $83,417 (37%) in 2006 as compared to 2005. Higher average day-rates were received across all rig categories. [5]
[edit] Domestic Operating Revenues
In 2006 domestic contract drilling revenues increased $264 million (97%) as strong demand for drilling rigs in the U.S. Gulf of Mexico market drove higher average day-rates. Average day-rates for Noble’s domestic fleet increased from $74,056 in 2005 to $178,684 (141%) in 2006. Higher average day-rates were received across all rig categories. [6]
[edit] Rig Specific Revenue Breakdown
- Drill ships are solely used in Noble's international operations. Drill ships are used for exploratory drilling of new oil and gas wells in deep water depths of up to 6,000 feet. In 2006 the average day-rate for Noble Corporation drill ships was approximately $100,000. [7]
- Jack-ups are stationary units that operate at water depths of up to 400 feet and are more commonly used in shallower waters. In 2006 the average day-rate for Noble Corporation’s jack-ups was approximately $77,000 for international operations and approximately $100,000 for domestic operations. [8]
- Semi-submersibles are floating units that can operate at water depths of up to 3,000 meters. Because of their greater capabilities, the demand for Semi’s has increased as interest in deep water drilling and exploration grows. Semi-submersibles generate the most revenue per day-rate depending on drilling depth. In 2006 Noble Corporation’s Semi’s drilling at depths >6,000’ generated approximately $140,000 in international operations and $270,000 in domestic operations. Semi’s drilling at depths <6,000’ generated approximately $153,897 in international operations and approximately $130,864 in domestic operations. [9]
[edit] Industry Trends and Risk Factors
- Noble's day rates are tied to natural gas and oil prices- The economic conditions of oil and gas prices have been the major factor in Noble's success. Noble's re-investment of capital into expanding its fleet paid off as prices continued to rise and the day rates for drilling contracts continued to go up. The company has purchased new ultra-deepwater rigs that are capable of earning day-rates of up to $500,000. As exploratory work intensifies, the increase in demand for drilling rigs relates to the rising demand for oil and gas in emerging industrialized countries such as China and India. As a result, the global economic cycle has been heavily impacted by the economic growth of developing nations.
- Noble benefits from a need for new sources of oil through deepwater exploration- Traditional oil producing basins have matured, particularly on land, and oil exploration and production companies have started to look for new reserves in challenging, deepwater environments. The recent increases of oil and gas costs have enabled offshore drilling contractors to engage in deepwater oil exploration that was once too expensive to pursue. For Noble, the prospect of entering new long and short-term contracts is more economically feasible because it profits from exposure to rising day-rates with short-term contracts. The company also mixes in long-term contracts to protect itself if day-rates plummet. In the near future Noble Corporation stands to profit from deepwater drilling because of its superior fleet of 63 offshore drilling units. Noble Corporation’s average day-rates for rigs that can operate at depths up to 1500 meters can cost as much as $250,000.
- Severe weather conditions could hurt Noble's revenues- Severe weather conditions threaten the entire offshore contract drilling industry, especially those concentrated in hurricane prone areas such as the Gulf of Mexico. These areas are especially vulnerable to environmental disasters as we witnessed with Hurricanes Katrina and Rita in 2005. With 28% of its operations in the GOM Noble Corporation recorded a $20 million charge of insurance recoveries for the non-reimbursable portion of damages sustained in the 2005 hurricanes and $49.8 million in losses of insurance proceeds for their fleet of semi-submersibles.[10] Operating days are far less during hurricane season because storms can delay or completely halt operations for several days. Moreover, rigs can be damaged and maintaining, upgrading or replacing rigs is very expensive.
- Competition is emerging from alternative energy markets- Rising oil prices have led both consumers and companies to seek out alternative sources of energy and invest in renewable energy such as nuclear, solar, wind, biofuels, and ethanol. As the global consumer demand shifts toward renewable energy sources due to recent environmental concerns over climate change, this change in consumer consciousness may adversely affect the oil and gas industry. With the advent of hybrid and fuel cell vehicles and the cost of gasoline becoming dangerously close to $4 per gallon, consumers have become less inclined to purchase gas guzzling SUV’s opposed to more fuel-efficient cars. As a result offshore contract drilling companies stand to lose if the oil and gas industry encounters a sudden decrease in demand.
[edit] Competition
In the offshore contract drilling industry, competition is primarily encountered on a regional basis. For 87 years Noble Corporation has been able to sustain its longevity by retaining one of the highest industry-wide utilization rates for its rigs in both the international (97%) and domestic (96%) arenas.[11] Noble Corporation's utilization efficiency is significant when compared to the overall rig utilization statistics for the entire competitive rig fleet which is 85.4%.[12]
High utilization rates indicate large profits because most of Noble Corporation's revenue is generated through its day-rates. High day-rates and continual increases of oil and gas prices may indicate that discovering new deposits of fossil fuels is becoming more difficult.
Noble Corporation encounters significant regional competition. Below are listed NE's major competitors.
- Transocean (RIG)- Transocean Inc. claims to be the world's largest offshore drilling contractor with a drilling fleet of nearly 150 highly specialized units.[14] Transocean Inc. recently announced a merger with the GlobalSantaFe Corporation.
- Diamond Offshore Drilling (DO)- DO owns one of the largest drilling fleets in the world, a total of 44 ships, including 30 semisubmersibles, 14 jack-ups and one drillship. DO's operations are primarily based in the Gulf of Mexico and Asia.[15]
- Pride International (PDE)- Pride owns a global fleet of 272 rigs, consisting of two deepwater drillships, 12 semisubmersible rigs, 28 jackup rigs, 16 tender-assisted, barge and platform rigs and 214 land-based drilling and workover rigs.[16]
- ENSCO International (ESV) ENSCO International's offshore rig fleet includes 43 jackup rigs, one ultra-deepwater semisubmersible rig and one barge rig. In addition, it has three ultra-deepwater semisubmersible rigs. Its operations are concentrated in the geographic regions of Asia Pacific, Europe/Africa, and North and South America.[17]
| Transocean[18] | Noble[19] | Diamond Offshore Drilling | Rowan Companies[20] | ENSCO International[21] | |
|---|---|---|---|---|---|
| Average Dayrate | $211,900 | $139,948 | N/A | $156,200 | $139,882 |
| Average Fleet Utilization | 90% | 95% | N/A | 94% | 91% |
| Average Number of Rigs | 139 | 62 | 44 | 21 | 46 |
[edit] Footnotes
- ↑ Reuters.com
- ↑ NE 2006 Annual 10-K Report, pg. 4.
- ↑ Google Finance
- ↑ NE 2006 Annual 10-k Report, pg.18.
- ↑ NE 2006 Annual 10-k Report, pg.22.
- ↑ NE 2006 Annual 10-k Report, pg.23.
- ↑ NE 2006 Annual 10-k Report, pg.21.
- ↑ NE 2006 Annual 10-k Report, pg.21.
- ↑ NE 2006 Annual 10-k Report, pg.21.
- ↑ NE 2006 Annual Report 10-k, pg.19.
- ↑ NE 2006 Annual 10-k Report, pg.21.
- ↑ Rigzone.com
- ↑ http://www.rigzone.com/data/rig_report.asp?rpt=mgr
- ↑ http://www.deepwater.com/fw/main/default.asp
- ↑ http://www.wikinvest.com/stock/Diamond_Offshore_Drilling_(DO)
- ↑ http://finance.google.com/finance?q=NYSE:PDE
- ↑ Google Finance
- ↑ RIG 2007 10-K
- ↑ NE 2007 10-K
- ↑ RDC 2007 10-K
- ↑ ESV 2007 10-K
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