Noble Corporation wins large-scale contract extension with Exxon Mobil – Buy (NYSE:NE)
To note: Noble Corporation (NYSE:NE) has been covered by me before, so investors should consider this an update to my previous articles on the company.
Last week, leading offshore driller Noble Corporation (“Noble”) reported less than stellar fourth quarter results and issued a new fleet status report both have already been discussed by fellow contributor Vladimir Zernov.
Therefore, this article will focus primarily on the statements made by my management during the conference call that followed and on the company’s outlook following the merger project with Maersk Drilling later this year.
While the fourth quarter certainly did not go as originally planned by management, Noble Corporation enters fiscal 2022 in excellent financial shape.
The recent to sell of four jackups to ADES International reduced net debt to just $22 million at year end.
Liquid assets were $869 million, comprised of cash and cash equivalents of $194 million and the company’s unused revolving credit facility of $675 million.
Noble only has $216 million in long-term debt.
The company’s state of the fleet report largely confirmed the trend witnessed Competitor Transocean (RIG) Last Week: The Gulf of Mexico (“GoM”) is hot right now with limited availability of ultra-deepwater drillships, resulting in continued daily rate increases. Unfortunately, activity in most other regions of the world continues to lag, particularly in Asia.
In fact, continued weakness in this region caused Noble to retire its last remaining semi-submersible rig”Noble Clyde Boudreaux“.
West Africa is not looking much better at this stage, but according to management there has been a recent increase in bidding activity with “a large part of the opportunities in Ghana and Nigeria“.
Even Norway won’t see much upside this year because “the lull created by the pandemic works through the project pipeline“. That said, client Equinor (EQNR) has exercised options on the firm’s flagship asset.”Noble Lloyd Noblewhich will keep the world’s largest jackup rig operating until February 2023 with nine one-shaft options remaining.
The UK part of the North Sea remains very competitive with additional downtime expected for the company’s three jackup rigs in the region. Currently, only the Noble Hans Deul is contracted while Noble Houston Colbert and Noble Sam Hartley are hot stacked.
Management provided a more constructive view of Brazil, with the active fleet expected to increase by 10 floats or around 50% over the next few years.
Guyana continues to be a bright spot for Noble thanks to the company’s long-term commitment trade authorization agreement (“CEA”) with ExxonMobil (XOM). During the fourth quarter, Noble was awarded an additional 7.4 years of drilling, which will keep drillships in ultra-deep water Noble Tom Madden, Noble Sam Croft, Noble Don Taylor and Noble Bob Douglas work until November 2025.
Assuming at least stable daily rates, I would conservatively estimate the resulting order backlog addition at $700 million and potentially much more, depending on how the market moves, as the daily rates earned by each platform will be updated semi-annually at the projected market rate at the time the new rate takes effect, subject to a scale discount and a performance bonus.
As the award is still subject to government approval and final sanction for the Yellowtail Development ProjectNoble did not include this most recent expansion in its year-end backlog of approximately $1.2 billion.
In the Gulf of Mexico in the United States, the company has seen customers exercise options in the range of $300,000 for drillships”Noble Faye Kozak” and “Noble Stanley Lafoss“while the drillship Noble Globetrotter I will become available to work at GoM in July 2022.
At this point, the company does not envision a near-term reactivation of the old cold-stacked Pacific Drilling drillships”Pacific Meltem” and “Pacific Scirocco“due to a lack of long-term contract opportunities at sufficient rates.
While not exactly a surprise, it contrasts somewhat with statements made by NOV Inc. (NOV) management during the company’s recent conference call which pointed out “reactivation discussions on more than a dozen stacked floating platforms“.
Keep in mind that reactivating a cold drill ship could require an initial investment of up to $100 million.
Given the limited one-time exposure to the currently burning GoM, the anticipated additional downtime for some of the company’s jack-up rigs in the North Sea, and the withdrawal of the Noble Clyde Boudreauxthe company’s fiscal 2022 guidance for revenue and adjusted EBITDA remained unchanged at $1.050-1.125 billion and $300-335 million, respectively.
As the proposed merger with Maersk Drilling is expected to close within the next two months, the initial focus will likely be on consolidating and achieving the expected annual synergies of $125 million.
The acquisition will add a fleet of 19 rigs (11x jack-ups, 4x semi-submersibles, 4x drills) with a total order book of nearly $2 billion. Like Noble, Maersk Drilling currently has two hot-stacked jack-up rigs (Maersk Resolution and Mountain Maersk) in the North Sea while a semi-submarine with lower specifications (Maersk Explorer) remains hot in Azerbaijan.
The rest of the fleet is working. The company recently signed a new framework agreement with AkerBP for the supply of two platforms offshore Norway over a period of five years with a total contract value of approximately $1 billion.
Unfortunately, Maersk Drilling is not exposed to the Gulf of Mexico.
For fiscal 2022, the company expects adjusted EBITDA of between $210 million and $250 million, up from $346 million last year. Keep in mind that the company recently sold the self-elevating platform”Maersk Inspirerfor $373 million, including its long-term, high-margin contract with Repsol (OTCQX:REPYY) that reduced backlog by $440 million. form, I would estimate an adjusted EBITDA of up to $50 million per year.
At the end of December, Maersk Drilling had liquid assets of nearly $1 billion, consisting of $557 million in cash and the company’s undrawn revolving credit facility of $400 million. Net debt calculated at $505 million.
Excluding merger-related costs and assuming no immediate synergies in fiscal 2022, the combined company’s Adjusted EBITDA would be north of $500 million with higher scenarios. optimists provided in the merging presentation now more and more realistic:
Please note that the new company remains committed to implementing a sustainable capital return policy which could very well make Noble the first offshore driller to resume paying dividends next year.
Given the improving market environment and assuming the business achieves expected synergies, adjusted EBITDA for fiscal year 2023 should easily exceed $700 million, which would correspond to an EV/EBITDA ratio adjusted by 5.5, roughly in line with my estimate for industry leader Transocean next year, but in contrast to Noble Corporation, Transocean still faces over $400 million in interest charges annuals.
In addition, Transocean faces great uncertainty regarding so-called “CAT-D” platforms. transoceanic equinox, Transoceanic Endurance, Transocean Encourage and Transocean Enabler, a series of purpose-built semi-submersible rigs under contract with Equinor. Platforms currently represent more than 25% of Transocean’s annual revenue and an even higher percentage of the company’s adjusted EBITDA, with contracts currently set to expire between Q4 2022 and Q1 2024. Extending these contracts at sufficient rates will be critical for Transocean given the need to address significant debt and extend the company’s credit facility next year.
On the other hand, Transocean has decent exposure to the Gulf of Mexico and recently secured a new short-term contract for the drillship. Asgard in deep waters at a high multi-year rate of $395,000.
At least in my opinion, the rising tide is going to lift all platforms, which keeps me bullish on the industry as a whole. At this point, I continue to prefer restructured players like Noble and Valaris (VAL) given their ability to generate significant amounts of cash at considerably lower daily rates than indebted players Transocean and Borr Drilling (BORR).
But if the float market recovery started to gain momentum with sufficient conditions for the reactivation of cold rigs, a high-leverage player with a large number of cold drill ships like Transocean would likely start. to outperform their peers.
I remain somewhat hesitant to recommend pure play jack-up Borr Drilling as the shallow water market remains competitive and the company still has to deal with short term debt maturities. In addition, liquidity is expected to remain tight.
With the first major market finally showing decent improvement, I remain positive about the offshore drilling industry.
Noble Corporation remains among my favorites given a reasonable valuation, good contract coverage, healthy balance sheet and strong liquidity.
Additionally, the upcoming merger with Maersk Drilling should allow the combined company to generate significant free cash flow over time.
At this point, I strongly expect the new Noble Corporation to be the first publicly traded offshore driller in the United States to announce a dividend policy next year.
As industry stocks tend to trade in correlation with oil prices, I would consider using days of low oil prices to initiate or add to existing positions.