Among major names in the offshore drilling sector, I have written with a bullish outlook on Diamond Offshore (DO, Financial) recently.
Noble Corp. (NE, Financial) has also been on my investment radar in the past and I have been generally bullish on the stock because of strong balance sheet fundamentals.
Investors need to remain cautious, and I don’t advise fresh exposure to the stock. The reason for writing on Noble is that the stock has corrected sharply by 30.2% year to date and might seem interesting at current levels. But investors should stay on the sidelines.
Current fundamentals
As of June 30 Noble had total debt of $4.0 billion and annualizing first-half EBITDA the likely EBITDA for the year will be $550 million. This translates into leverage of 7.4, which is high as compared to companies like Diamond Offshore and Transocean (RIG, Financial).
Further, the company has guided for 2017 interest expense of $290 million and this translates into EBITDA interest coverage of 1.9. The chart below compares some of the key credit metrics for Noble with Diamond Offshore and Transocean.
It is clear that Noble has relatively weak credit metrics even when the company can still smoothly service debt. Importantly, if one had to choose among offshore drillers for investment, the other peers would get preference over Noble.
On looking at Noble on a stand-alone basis, the key positive is that the company has cash and equivalents of $603 million as of the second quarter. With no new rig capital expenditure, the cash buffer can be used for debt repayment.
Further, with no new rig capital expenditure, it is likely that Noble will continue to report free cash flow in the coming quarters. While credit metrics might not improve in the next 12 months, I don’t see it worsening significantly.
The order backlog concern
For offshore drilling companies, the key concern for the next 12 to 24 months is the pace of order inflow and the potential EBITDA margin compression. As of June 30 Noble had a total order backlog of $3.2 billion.
For the remainder of the year, the company’s order backlog stands at $468 million and for fiscal 2018 the backlog is $825 million. But the backlog drops significantly, to $651 million, for fiscal 2019. In terms of rig utilization, the days committed for fiscal 2018 is 37% and for fiscal 2019, it’s only 25%.
This is where I see concern as oil prices remain volatile and it is still too early to talk about rapid order inflow. Even with an order backlog of $825 million for fiscal 2018, I see some stress related to the company’s credit health and if the order backlog for fiscal 2019 fails to improve significantly, the balance sheet health can worsen.
Noble stock saw recovery recently from 2017 lows of 3.1. This recovery was backed by oil moving higher. But with Brent moving above $58 per barrel and again declining below $55, the concerns are high related to sustained recovery for the offshore industry and this can potentially take Noble lower.
Conclusion
Noble has a fleet of 28 rigs with 10 rigs warm or cold stacked. Further, Noble has rigs that are going off-contract October to December. It remains to be seen if these rigs can be re-contracted in the foreseeable future.
The key factor to note here is that even if industry recovery is seen in fiscal 2018, other offshore drillers have better credit metrics.
I advise investors to remain on the sidelines. It is also worth noting that deep corrections can provide exciting short-term opportunities. I would look for a short-term trading opportunity related to Noble, not a long-term investment.
Noble touched lows of $3.16 on Aug. 21. Subsequently, the stock surged to $4.62 by Sept. 27. This 46% upside in just over one month is a good example of trading opportunities that offshore drilling stocks can present even as industry sentiments remain uncertain.
Disclosure: No positions in the stocks discussed.
