There is little doubt that challenging conditions for the offshore drilling industry are likely to continue through 2016 and potentially through 2017.
However, this does not suggest that there will be appealing medium-term investment opportunities in the sector. Atwood Oceanics (ATW, Financial) bottomed out on Feb. 2 at $5.32 and subsequently surged to year-to-date highs of $13.66 before renewed correction. This article discusses another offshore drilling stock that has decent fundamentals and has been beaten down in the recent past, providing an investment opportunity.
Noble Corporation (NE, Financial), which touched a year-to-date high of $13.56, is currently trading 53% lower at $6.39. The discussion to follow will elaborate on the points that back my view that Noble has the potential to bounce back in the next three to six months.
Starting with the order backlog analysis, Noble reported revenue of $1.5 billion for first-half 2016 and EBITDA of $942 million for the same period, translating into an EBITDA margin of 63%. For the remainder of 2016, Noble has a backlog of $833 million, which would imply EBITDA of $521 million.
Therefore, the fiscal year EBITDA is likely to be $1.5 billion and considering annualized interest expense of approximately $230 million, the company’s EBITDA interest coverage comes to 6.4. Further, Noble had significant cash buffer of $823 million as of June. The company’s credit health is likely to remain strong through fiscal year 2016, and this is one of the key factors to consider in challenging times.
Looking beyond fiscal year 2016, Noble has an order backlog of $1.2 billion for fiscal year 2017. While the order backlog is slimmer compared to fiscal year 2016, it is still sufficient to ensure that the company’s credit health remains robust through fiscal year 2017. Just to put things into perspective, considering an EBITDA margin of 60% for fiscal year 2017, the company’s EBITDA is likely to be $715 million with the assumption that there is no backlog addition in the next 12 to 18 months. Even with this EBITDA estimate, the company’s debt servicing will remain smooth through fisca year 2017.
An important point to mention is that Noble expects capital expenditure of $250 million to $300 million for fiscal 2017. With no speculative new rig construction, the company is likely to report positive free cash flow even at current backlog levels. Clearly, the current cash buffer of $823 million is only likely to expand in fiscal 2017.
From a debt perspective, Noble Corporation has $300 million in debt maturity in 2017 and $250 million in maturity in 2018. Even for 2019, the debt maturity is small at $202 million. With high cash buffer and potential positive FCF in the next 12 to 18 months, I doubt that these debt maturities will need any refinancing. Noble is well positioned to deleverage in the coming quarters.
From the perspective of financial flexibility, Noble has $2.4 billion in undrawn revolving credit facility that matures in January 2020. While I am not expecting any utilization from the credit facility in the foreseeable future, it does provide a comfortable liquidity cushion. Once there is more clarity on sustainable recovery in the offshore drilling industry, Noble might scout for acquisition of rigs from several distressed sellers. That is unlikely in the near term.
Considering these credit factors, it is clear that Noble commands robust fundamentals and the company’s credit profile will remain excellent not just in fiscal year 2016 but also through fiscal year 2017. The recent correction is a good opportunity to accumulate the stock and decent returns are likely in the medium term. However, I still advise against any big plunge in this stock or any other name in the industry.
Disclosure: No positions in the stocks discussed.
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