World oil tendencies feed prospects
Noble Switzerland performs contract drilling services with a fleet of 76 mobile offshore drilling units, and is currently constructing an additional 10 oil rigs. Customers are almost equally divided between private companies and national government, and operations have spread to all oil producing geographies. Lately, management has focused on improving operational efficiency to boost revenues, having a visible positive impact over last quarter´s earnings. Issues concerning operational downtime however, continue and are sufficient reason to raise some alarms.
The first challenge to Noble Switzerland ´s performance remains operational challenge. So far, it has improved quarter-over-quarter supported by flat operating costs, fewer shipyard days, and improved drilling margins. The increment of deepwater exploration has also raised the demand for jackups and floaters, which is expected to at least remain at current levels. But the most important challenge awaiting the firm is an expected unbalance between supply and demand of oil rigs. Hence, construction of new rigs should be quick in order to locate them before the market is saturated.
A strong growth driver for Noble Switzerland is a strong backlog, estimated to have reached $16.2 billion in the back of a preference for deepwater drilling. The company has also seen been able to raise day rates for semisubmersibles, and two drillships will be delivered next year, meaning an additional $693 million per rig in revenues from the Mexican Gulf region. The other regions have seen a rise on demand for jackups, and the Noble Scott Marks and Noble Roger Lewis jackups secured three year contracts at a day rate of $257,500 in the North Sea, West Africa and in the Middle East region.
Financially, Noble Switzerland is moderate due to recent capital investments and rising debt. However, margins remain strong and revenues continue to improve year-over-ear. Trading at 16.9 times its trailing earnings, the stock carries a 10% premium to the industry average. Curiously, Richard Perry bought stock from the company and turned into the largest guru holding a position with one transaction. James Barrow also made an important acquisition. I share the feeling as the company continues adjust and improve performance in the back of a positive environment.
Dependent on the North American gas industry
Patterson-UTI Energy, in opposition to Noble Switzerland, is an onshore drilling company and international exposure is considerably smaller. Even though the firm has not been able absorb synergies associated with rising deepwater drilling, growth has been driven by growing premium land rig fleet and the expected demand uptick for such services. The firm has spread activities in the back of the North American gas boom, and presence has limited to the US and Canada. Given that drilling services account for almost 70% percent operating income, and the volatility of the natural gas fundamentals forward growth is questioned.
Two important characteristics of Patterson-UTI Energy are the technologically-advanced Apex rigs and continued investment to improve current technology. Today, the company is the second largest drilling contractor in the US with a reputation for fast moving, fast drilling, and safer rigs than the competition. Technologically advance drills with an irreproachable reputation are factors capable of offsetting the volatility that characterizes the gas industry in North America.
Recently, Patterson-UTI Energy has retired about 35 drilling rigs. This had a double positive impact on the company. First, the move is expected to somewhat balance a market experiencing overcapacity. Second, it reinforces the company’s reputation for safe operation. Hence, the $1 billion investment on new drilling rigs and technology improvement is all the more important for future performance, as the firm risks losing customers if rigs are not quickly replaced.
The balance sheet for Patterson-UTI Energy is strong and the stock currently trades at the industry average of 15.3 times its trailing earnings. Richard Snow, the largest guru holding a position, has slightly reduced his stake to cut some profits. But Irving Khan continues to increase his stake, while Jim Simmons turned into the third largest guru holding a stake with a single purchase. I share their optimism, but hold doubts concerning the future of the gas industry in North America.
Oil & gas and international exposure
I prefer Noble Switzerland to Patterson-UTI Energy because of its international presence. Also, changing market preferences have worked in the favor of the firm. Its products are at the technological frontier and development has not seized. Last, future prospects easily offset the small price premium that the stock currently carries.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.