Noble Corp. (NE, Financial) is a stock in the offshore drilling sector that has been beaten down in the last 12 months, but surged by 12% after the company announced its first-quarter results. I believe this rally will sustain for the company in the foreseeable future.
Backlog support
For offshore drillers, new contracts have come at a slow pace and day rates have been declining. Noble's old order backlog serves as a key support for challenging times, which is an advantage.
In the first quarter, Noble reported revenue of $363 million and operating cash flow of $142 million. For the remainder of fiscal 2017, the company still has a backlog of $745 million, implying annual revenue of $1.1 billion. Importantly, the $745 million backlog would ensure operating cash flow of $280 to $300 million for the remainder of the year.
For fiscal 2018, the company has an order backlog of $845 million, which will ensure cash flow in excess of $300 million. In addition, industry conditions are likely to improve along with the backlog.
The key point is Noble will continue to report decent numbers in terms of cash flow, which will keep the stock firm even though new orders are coming in less frequently.
Improving fundamentals
There is no doubt the key factor for the company’s long-term fundamental health is gradual improvement in the order backlog, which remains a concern across the industry. Noble is likely to see an improvement in fundamentals in the next 12 to 24 months, which sets the company apart when compared to peers like Seadrill (SDRL, Financial).
To put things into perspective, Noble does not have any speculative new rig deliveries and the company expects 2017 capital expenditures to be in the range of $115 million. With first-quarter 2017 operating cash flow of $142 million, the company’s investment requirements for the year are fulfilled by first-quarter cash alone.
Therefore, Noble is on its way to report healthy free cash flow in 2017. I expect the company to use its excess cash to repay debt in 2017 as well as in 2018. With no major capital expenditures expected in fiscal 2018 and current cash flow visibility in excess of $300 million, the company’s fundamentals will see gradual improvement.
Importantly, I do not see any debt servicing concerns in the next 24 months, suggesting the stock sentiment will remain positive if oil trends higher.
Broad markets are trading at rich valuations, and undervaluation for Noble might be relatively overshadowed by broad market correction. Therefore, I suggest investors have minor exposure in this attractive name in the offshore industry. A big plunge in the stock is not advisable at this point of time.
Conclusion
Noble has a quality fleet and the company’s order backlog will ensure the offshore driller survives times of crisis.
Over the next 12 to 18 months, watch oil price trends. If oil trends above $55 to $60 per barrel, Noble has significant upside potential.
Disclosure: No positions in the stock.
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