Noble Corporation (NE)

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Noble Corporation (NYSE: NE) is a leading contract drilling firm in the oil and gas industry. 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 nearly 87% of its fleet deployed in international markets, including the Middle East, India, Mexico, the North Sea, Brazil and West Africa, with a majority of revenue generated from its international operations.^[1] Noble is the second largest offshore drilling company in the world, behind Transocean (RIG). Increased demand for deepwater oil exploration has enabled NE to capitalize on its world-wide fleet drilling capabilities which consist of 13 semi-submersibles, 4 drill-ships, 43 jack-ups and 2 submersibles.^[1]

The 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 nearly doubled its operating revenues from $2,100,239 billion in 2006 to $3,640,784 in 2009.^[2] The company's 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.

Company Overview

Noble Corporation generates revenue from renting its drilling rigs to oil and gas companies based on a day-rate price per rig. Increases in gas and oil prices stimulated demand for drilling activity, resulting in higher average day-rates--from 2008 to 2009, average day-rates increased 13% to $197,143.^[3] While Noble Corporation's operating expenses have remained consistent, its operating income and total revenues have skyrocketed as a direct result from the rising worldwide demand for energy, especially oil and natural gas.

Fiscal Year 2010 Summary

In 2011, Noble had net income of $773 million, a 54% decrease from the previous year, with operating revenues of $2.8 billion, a 22.9% decrease from the previous year. Contract drilling services revenue dropped mainly due to decreases in average dayrates and utilization. Jackups and Semisubmersibles generated less revenue due to decreases in dayrates from re-pricing of rigs in the Middle East, the North Sea, and Mexico, and drilling restrictions in the U.S. Gulf of Mexico.^[4]

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 2009 the average day-rate for Noble Corporation drill ships was $254,084.^[3]

• Jack-ups are stationary units that operate at water depths of up to 400 feet and are more commonly used in shallower waters. In 2009 the average day-rate for Noble Corporation’s jack-ups was $147,701.^[3]

• 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 2009 Noble Corporation’s Semi’s drilling at depths >6,000’ on average generated $417,177 in revenue, while Semi’s drilling at depths <6,000’ on average generated $253,557.^[3]

Industry Trends and Risk Factors

Moratorium of offshore drilling in the Gulf of Mexico^[5]

With controversy surrounding BP and Transocean's oil spill, the oil industry's reputation is at stake. Although Noble Corporation was not involved in the Deepwater Horizon incident, it will indirectly be affected by the lower overall consumer confidence in the industry. Safety has become a higher priority for oil companies--regulators will become more strict and companies will become more scrutinized.

On May 6, 2010, the Department of the Interior announced that no applications for drilling permits for operations on the Outer Continental Shelf will be issued until the Department of the Interior completes a safety review process of offshore drilling. Although Noble conducts 87% of its business in international markets, the moratorium will severely limits Noble's production capacity in the Gulf of Mexico.

On December 28, 2010, Standard & Poor's lowered its credit ratings outlook on Noble to A- from stable, due to expectations of the company's credit quality remaining weak because of slower permitting for deepwater-drilling in the Gulf of Mexico, lower dayrates, and negative free cash flow due to a heavy capital expenditure program. Production has decreased significantly, and since the drilling moratorium was lifted in October, U.S. regulators have approved just one well above 500 feet.^[6]

On February 28, 2011, Noble won the first US deep-water drilling permit in the Gulf of Mexico since the oil spill 10 months ago. With plans to use a containment system developed by Helix Energy Solutions Group Inc., Noble was able to meet the new standards for safety and spill control in design, casing, and cementing. The Bureau of Ocean Energy Management, Regulation and Enforcement, reports that more permit approvals are expected in "coming weeks or months." This could indicate a start in the recovery of the drilling industry.^[7]

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. Oil cost less than $20 a barrel in 2000^[8], and peaked on July 3, 2008, when crude oil futures reached a record high of $145.85.^[9] Although oil prices took a dip in 2009 due to the global financial crisis, averaging $62 per barrel^[10], prices have returned, averaging at $79 per barrel during first quarter of 2010.^[11] This allows companies such as Noble Corporation to increase its margins, as well as its revenues. Over the last decade, oil prices have fluctuated violently, but the overall trend has been beneficial to Noble Corporation, as it has been trending upwards.

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. Noble Corporation stands to profit from deepwater drilling because of its superior fleet of 62 offshore drilling units. Noble Corporation’s average day-rates for its higher end rigs can go upwards of $400,000.^[3]

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 like Katrina and Rita. 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 those hurricanes and $49.8 million in losses of insurance proceeds for their fleet of semi-submersibles. 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.

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. 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] Noble purchased Frontier for US$2.16 billion in July 2010 and Noble's fleet grew up seven units offshore drilling units.

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.^[13] 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.
• 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.
• 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.

References

1. ↑ ^{1.0 1.1} NE 10-K 2009 Pg. 2
2. ↑ NE 10-K 2009 Pg. 26
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} NE 10-K 2009 Pg. 31
4. ↑ NE 2010 10-K Pg. 35
5. ↑ "Form 8-K for HERCULES OFFSHORE, INC." 13 May 2010
6. ↑ S&P Lowers Outlook On Noble To Negative On Slow Gulf Permitting
7. ↑ Noble Energy Wins First U.S. Deep-Water Oil-Drilling Permit
8. ↑ zFacts: "Crude Oil Prices Drive up Cost of U.S. Addiction"
9. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
10. ↑ EIA: "Short-Term Energy Outlook"
11. ↑ "EIA Petroleum Navigator"
12. ↑ Rigzone.com
13. ↑ http://www.deepwater.com/fw/main/default.asp

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