Inside Wall Street: Noble expands offshore drilling

Cheap valuation of one of the world's largest oil-service companies is attracting investors.

By Gene Marcial Jan 15, 2013 2:25PM

Oil derricks copyright Comstock, CorbisAlthough crude oil prices remain weak and oil-and-gas producers are struggling with strong headwinds, investors are starting to come back to energy stocks, some of which now have compelling valuations. 


One sector where that is particularly true is in oil-and-gas drilling services, which often serve as an early indicator of activity in the oil industry.

 

A company that's catching the eye of investors is Noble (NE), one of the world's largest offshore drilling companies. 


Noble has been headquartered since 2009 in Switzerland, a more favorable tax jurisdiction than its former home, the Cayman Islands. Investors are attracted by the company's recent efforts to expand its fleet of rigs capable of deepwater offshore drilling and jack-up rigs for shallow-water operations.

 

Adding to the positive outlook is the company's projected earnings growth, which analysts say is quite impressive. Some observers figure Noble's earnings in 2013 will double to somewhere between $4.09 and $4.40 a share, from 2012's estimated range of $2.07 and $2.13. In 2011, the company earned $1.46 a share.

 

Moreover, the stock's valuation is compelling, according to analysts. One other favorable factor: Royal Dutch Shell (RDS.A) is its biggest customer.

 

"Noble remains attractive with a valuation at the low end of its peer group, strong jack-up rate momentum, and a solid deepwater growth model," says John Keller, analyst at investment firm Stephens. He continues to rate the stock, now trading at $37.50 a share, as "overweight" with a 12-month target price of $46.

 

Based on his 2013 earnings projection of $4.09 a share on projected revenues of $2.36 billion, the stock is trading at a price-to-earnings (P/E) ratio of just 8.9, compared to its 2011 P/E range of 19 to 32. Keller's price target of $46 a share implies a P/E multiple of 11.            

 

Also a big bull on Noble is Edward Muztafago, analyst at Societe Generale, who rates the stock as a "buy," with a price target of $48 a share based on an earnings estimate of $4.20 a share for 2013, and $5.30 for 2014.

 

Noble's return-to-valuation measure is compelling, says Mustafago, earning a 16.3% return on investment capital over the last 10 years, "placing it at the front of the pack." He expects the industry-leading reinvestment success will continue, as Noble gains greater leverage in its ultra-deepwater and shallow-water drilling operations through its "new-build rig program."

 

The analyst says the currently high return-to-valuation measure is very attractive, with Noble trading at a substantial discount to its peers. Noble has long been viewed as a "premium driller," says the analyst. In seven years through 2014, Noble will have invested $13 billion in fleet enhancements, including four ultra-deepwater semi-submersibles, five ultra-deepwater drill-ships, and nine high-spec jack-ups.

 

"This proactive strategy should ensure Noble maintains it status as a first-class rig provider," says Muztafago,. The company is "best in class at a discount," he argues. 

 

One positive development for Noble is the easing of regulatory risk in the U.S. Gulf of Mexico as the permit process gets back on track, says Stewart Glickman, analyst at S&P Capital IQ. He rates the stock as a "buy" with a price target of $46 a share.

 

Given its aggressive new-build rig program, some may consider Noble as a high-risk offshore drilling play, he says. Nonegtheless, he argues that the company can use its operating cash flow and tap its debt facilities to finance its expansion efforts.

 

"We still view the regular dividend as secure," says Glickman. The dividend yield is 1.4% with a payout ratio of about 23%, which he sees as manageable.

 

One big plus for Noble is its not-often-mentioned link with Royal Dutch Shell: It has purchase agreements with Noble. Royal Dutch's backlog orders amounts to $13.7 billion as of the end of 2011. So Royal Dutch, says Glickman, accounts for some 63% of Noble's total order backlog.

 

That "represents a vote of confidence, in our view, by Royal Dutch in Noble's strong track record, including a best-in-class safety performance," says the S&P analyst. The implications of the Royal Dutch-Noble relationship can only be favorable, indeed.

 

Tags: NEoil
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