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Faisal Humayun
Faisal Humayun
Articles (681) 

Noble Corporation: Credit Analysis After 1st-Quarter Earnings

Front-end loaded backlog and deleveraging will keep credit metrics healthy

June 06, 2016 | About:

Noble Corporation (NYSE:NE) is among the few stocks in the offshore drilling industry with robust fundamentals. I recently discussed Diamond Offshore (NYSE:DO) from a credit perspective and Noble Corporation is also worth discussing from a credit perspective with the stock having declined meaningfully in the recent past. Investors can consider some exposure to Noble Corporation on this correction from a medium-term perspective.

Starting with the balance sheet, Noble Corporation currently has $300 million in short-term debt maturity, and that remained the same in March compared to December 2015. However, the company’s long-term debt has declined from $4.2 billion in December 2015 to $3.9 billion as of March. Therefore, the focus is on deleveraging, and this is likely to improve the company’s credit metrics.

The second credit positive for Noble is a comfortable debt maturity profile with no major debt maturity in the near term. In the first quarter, Noble paid $300 million for senior note maturity with cash in hand, and the company expects to pay $300 million senior notes maturing in first-quarter 2017 with cash. Further, debt maturity of $250 million and $202 million for 2018 and 2019 is likely to be paid with internal cash flows. In other words, Noble has no debt refinancing pressure in the next two to three years.

I mentioned that Noble can repay debt through internal cash flows and the reason for this is the company has minimal capital expenditure in the coming years. The company’s capital expenditure for 2016 is likely at $800 million and for 2017 is likely to be in the range of $250 million to $300 million. Therefore, with no speculative new rigs for delivery in the coming years, Noble will have cash buffer to deleverage unlike Seadrill (NYSE:SDRL), which still has a pipeline of new rigs for delivery that is being postponed.

The reason for being relatively confident on robust cash flow for debt repayment is the fact that Noble has an excellent front-end loaded order backlog that will ensure that cash flow remains strong and credit metrics remain healthy in the coming 12 to 24 months. Just to put things into perspective, Noble has order backlog of $1.6 billion for the remainder of 2016 and an order backlog of $1.5 billion for 2017.

With these positives in consideration, Noble can rally from oversold levels, and the stock is worth considering for the next three to six months. Oil prices trending higher can also support upside for Noble.

However, I have taken a short-term investment horizon as it is entirely likely that the offshore industry conditions will remain depressed through 2016 and 2017. In such a scenario, stocks with good credit health can also witness volatility. From oversold levels, Noble Corporation is likely to rally, but renewed downside cannot be ruled out on industry specific factors.

It is also important to note that once the current backlog slims down and not backlog is added, the day rates will be meaningfully lower and EBITDA margin compression can depressed stocks in the industry. Therefore, remain cautiously optimistic even on stocks that have healthy credit metrics.

Disclosure: No positions in the stocks discussed.

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About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with ten years of experience in equity research, credit research, economic research and financial modeling.

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