As Noble Plans Split, You Should Plan to Buy

by Aaron Levitt | September 26, 2013 1:21 pm

As Noble Plans Split, You Should Plan to Buy

It’s been a pretty good year for the owners and operators of deepwater drilling rigs. As we continue to dive deeper and deeper to find new sources of crude oil supplies, day rates for the most advanced drilling rigs have surged to pre-recession highs and now command upwards of $600,000 per day to rent[1].

That’s put a lot of coin in Noble’s (NE[2]) pockets — as well as those of its shareholders.

However, things may be getting even better for the offshore driller. Following the lead of other offshore drilling players like SeaDrill (SDRL[3]) and Transocean (RIG[4]), Noble is planning to make itself a “pure” deepwater rig operator by splitting itself into two separate firms.

As a result, the companies will be able to focus strictly on their respective markets, which should command higher multiples and dividends down the line.

For shareholders, this is a win-win in the offshore drilling world[5].

Some of the biggest elephant finds in the energy sector recently have all come offshore in some of the deepest waters of our oceans. In fact, last year was a record year for such discoveries. Overall, more than 50 ultra-deepwater fields were found in 7,500 feet of water or greater.

Prospecting these fields is a technical and expensive undertaking. For firms like Noble that own advanced ultra deepwater drilling rigs, that can mean some serious profits. Already, Noble has been capitalizing on this trend towards deeper waters, as seen with its recent deal with Norway’s Statoil (STO[6]) to prospect the harsh North Sea[7].

However, Noble’s latest moves will solidify its position as one of the deepwater kings.

The driller’s plan calls for the firm to split itself into two separate companies — one focused on ultra deepwater and harsh environments, the other shallower seas — in order to unlock shareholder value. That value will come from through an initial public offering[8] of as much as 20% of the new company’s shares[9], as well as a tax-free distribution of stock to current NE investors.

The new company will focus on standard/shallow water drilling[10] and own 45 vessels. Overall, the shallow water-focused firm will hold own five drillships, three semisubmersibles, 34 jackup rigs, two submersibles and one floating production storage and offloading (FPSO) unit and will manage the operations of one platform — Noble’s Hibernia.

The remaining company will be a lean, mean deepwater machine[11] and hold 35 of the highest specification drilling rigs designed to work in harsh environments and some of the deepest water. Noble has plans to build nine more deepwater rigs to add to this arsenal as well.

Noble expects investors to approve the spin-off by the second quarter of 2014, with the IPO being completed the by the end of 2014.

And all in all, this is going to be a big win for shareholders in NE and the new company.

By separating the assets, both firms will be able to have more focused business and operational strategies. Cutting through the red tape and removing the fat will boost the valuation of their assets, earnings and ultimately share prices.

Analysts at Global Hunter Securities[12] estimate that the shallow water unit will generate between $860 million to $910 million in EBITDA in 2014, while deepwater Noble will produce between $1.8 billion to $2.2 billion in EBITDA. Those estimates are more than what NE is predicted to do as one firm.

Noble — the deepwater driller — will be strategically positioned to grow its backlog and earnings as more firms look towards the deep to find oil[13]. That will make it a real growth engine for a portfolio as day rates and deepwater rig demand continues to surge.

This should help it trade at higher multiple than its current forward P/E of under 9. According to analysts, the split should be 5% to 10% accretive to Noble based on how its rival offshore drillers are trading.

Meanwhile, “Shallow Co.” will be more of steady-eddy firm — providing less capital appreciation but more in the way of dividends as it will be focused on fewer high-margin businesses. Currently NE as a whole pays about 2.6% in dividends. But by freeing itself from high CAPEX spending[14] for new advanced rigs, “Shallow Co.” could boost that higher.

Essentially, Noble is allowing long-term shareholders to have their cake and eat it too. Do you want high growth or dividends? How about both?

In the meantime, NE shares are trading for peanuts when compared to other deepwater firms like SeaDrill. Given the company’s future plans to split and the growth that could come from that move, now could be the best time to snag up shares of the offshore driller.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. $600,000 per day to rent: http://investorplace.com/2013/08/higher-production-costs-sink-major-energy-stocks-exxon-shell/
  2. NE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NE
  3. SDRL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDRL
  4. RIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIG
  5. drilling world: http://investorplace.com/2013/08/forget-the-marcellus-the-upper-devonian-is-the-shale-superstar/
  6. STO: http://studio-5.financialcontent.com/investplace/quote?Symbol=STO
  7. North Sea: http://investorplace.com/2013/09/snatch-up-this-norwegian-oil-producer-statoil/
  8. initial public offering: http://investorplace.com/ipo-playbook/
  9. 20% of the new company’s shares: http://www.bloomberg.com/news/2013-09-24/noble-corp-sees-splitting-in-half-to-focus-on-deepwater-rigs.html?cmpid=yhoo
  10. standard/shallow water drilling: http://investorplace.com/2013/07/3-stocks-to-buy-for-a-rig-revitalization/
  11. lean, mean deepwater machine: http://investorplace.com/2013/09/5-energy-stocks-getting-leaner-and-meaner/
  12. Analysts at Global Hunter Securities: http://www.thestreet.com/story/12049454/1/the-deal-noble-plans-spinoff-for-part-of-its-drilling-business.html?puc=yahoo&cm_ven=YAHOO
  13. oil: http://investorplace.com/2013/08/five-electric-small-cap-energy-stocks/
  14. CAPEX spending: http://investorplace.com/2013/09/kinder-morgan-report-just-a-yawn/

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