Noble Corp: A Value Play

The recent Deepwater Horizon disaster has not only affected the companies (BP, Transocean)directly associated with it but also has led to financial market reacting by punishing stock prices of company associated with oil and gas exploration in the Gulf of Mexico. Stocks such as Halliburton (HAL), Schlumberger (SLB), Noble Corp (NE)had fallen close to their 52 week low. In some cases, the massive sell-off could be due to deterioating fundamentals. However in this case, it seems that the market is over-reacting to the industrial accident and these oil related stocks maybe under pressure due to investors' confusion and uncertainty over the accidents and its repercussion on the industry.

The massive sell-off has provided value investor with an opportunity to evaluate and identify stocks where the market had over-reacted. A value play that could be identified is Noble Corporation (NE),one of the companies that provide equipment and services for oil and gas drillers in the Gulf.

Noble Corporation is a company that provides offshore contract drilling, engineering, and production management services to the oil and gas industry. Noble’s current fleet includes 62 mobile offshore drilling units comprised of 43 jackups, 13 semisubmersibles, 2 submersibles, and 4 drillships. The company currently has six semisubmersible rigs operating in deepwater locations of the Gulf of Mexico.

From the financials, revenue per share has been increasing from $3.30 in Year 2000 to 13.90 in Year 2009. Earnings per share has also been increasing from $0.61 to $6.42. The high operating margin and net margin illustrates Noble Corp's market position in the industry. Besides that it has also been able to generate high ROE. These solid financial condition had been achieved with decreasing debt-to-equity ratio. Noble is a capital intensive business but management has not relied excessively on debt to finance capital expenditures.



The company has also been generating significant free cash flow with increases in every year. This cash flow has been deployed mostly toward expansion of the fleet (newbuilds) or enhancements to the existing fleet. Beside strong investment in its fleet, Noble also places great emphasis on training its people in safety, operations, management and leadership program. Noble has delivered its best ever safety performance which is paramount in the aftermath of the Deepwater Horizon disaster.



Despites Noble's solid financial results, it does face certain impact to its revenue due to the recent six month moratorium on deepwater drilling. Noble derives its revenue from a diversified list of countries (United States, Benin, Brazil, Canada etc.) with Mexico accounting for 29% of its revenue in 2009. The bulk of the revenue is associated with deep water drilling activities. Noble currently has 6 rigs deployed in Gulf of Mexico and with the halt to drilling, these rigs might have to be left idle.

However, it is reasonable to believe that the halt in deep water driling will be a temporary measure. In the long run, the United States government will allow deepwater driling with tougher regulation. Noble Corporation appears to be well positioned with its diversified revenue stream and strong managment team to weather the temporary halt in drilling and grow its business. Moreover, it has also delivered solid financial result with minimal leverage in recent years. Using the cash flow and its financial, the intrinsic value of the company is at $113.79 which exist a huge margin of safety.