As of the end of 2013, Noble Corp. (NE) was a leading offshore oil and gas drilling contractor and held one floating production storage and offloading unit (“FPSO”), 14 semisubmersibles, 14 drillships and 49 jackups (included six under construction). As part of a global restructuring announced near the end of 2013, Noble began the process to spin off a portion of its assets as a separate entity in a 100% stock dividend with the new company named Paragon Offshore (PGN).
In Aug., Noble Corp. completed the spinoff to shareholders on a one Paragon share to every three Noble Corp. share ratio and Paragon began trading as a separate public company. In the spinoff, Paragon took Nobles’s standard specification drilling business that included 5 drillships, 3 semisubmersibles, 34 jackups and the FSPO.
From Aug. forward, Noble Corp. is focusing on holding only high-specification assets with a focus on deep water and ultra-deepwater markets for drillships and semisubmersibles as well as harsh environment and high-specification markets for jackups.
Over recent years, the market in which both Paragon and Noble compete has experienced significant supply expansion, which has, and is anticipated to continue to have, a negative impact on what either company will be able to receive in day rates in the future. Day rates are what a drilling contractor charges oil and gas companies on a per day basis to utilize equipment. In response to these changes Noble’s focus on more technologically advanced, high-specification equipment that faces less market competition and higher day rates is in sharp contrast to the lowest cost provider business model that Paragon must employ to remain competitive, making the spin-off a logical strategy.
NE – Earnings Summary
Noble ended 2013 with $4.3 billion in sales and $783 million in net income. In the first quarter of 2014, Noble reported that contract drilling margins had improved and the addition of new drilling rigs was able to produce a 29% increase in sales to $1.25 billion producing $256.3 million in profits, up 70% from the same time last year. Earnings per share for the quarter were 99 cents, solidly beating Analyst consensus estimates of $0.70 a share.
In Noble’s second quarter, total revenue increased to $1,240.4 million from $1,017.4 million in the same period last year. Net income for the quarter was up 33% from the same period last year from $193.3 million to $257.5 million driven by higher daily rates.
Noble Offers Significant Dividend Yield
Since September, the market has soured on Noble’s stock as there is increasing uneasiness with the effects that Russian sanctions and other geo-political risk will have on the energy markets. This has forced a significant divergent of returns between Noble and the market, but also presents a buying opportunity to get in on a stock that has a great dividend yield and is well positioned in the industry.
Noble’s dividend yield is currently 7.3% and the fleet upgrades and spin-off leave Noble with a stable of high-grade of assets to leverage well into next year and beyond. Analyst have a 12-month consensus price target of $29.5, although several have recently downgraded the stock on overall energy market concerns including stagnant demand and the oversupply of capacity caused by too many rigs coming available, thus dropping day rates. Given Noble’s focus on high-specification rigs and more difficult drilling, I believe its exposures to these conditions are not as severe as some expect.
Noble stock is a great buy for income investors looking to hold the stock well past 2016, as energy market and global-political implications may whipsaw the price in interim periods.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
