By Global Hunter Securities ($29.33, Aug. 9, 2011)
Off 41% from its recent high as of Monday’s close and the worst performer in its group year-to-date, we believe at its current level Noble no longer warrants a Reduce rating. Thus, we are upgrading to a Neutral rating and maintaining our price target of $33 per share.
Execution via delivered rigs and newbuilds pending delivery remain crucial to Noble (ticker: NE) gaining investor confidence and hitting our earnings expectations, although at its current valuation of 8.9 times and 6.0 times our 2012 earnings per share and earnings before interest, taxes, depreciation and amortization (Ebitda) assumptions, respectively, along with trading below tangible book value (TBV) and our fleet-value estimate, we believe the stock is trading at or close to a floor.
We believe crude has been oversold and that the offshore drillers will move higher on improving fundamentals and oil prices rebounding, Noble included.
This is a valuation upgrade. Trading at 8.9 times and 6.0 times our 2012 EPS and Ebitda estimates, respectively, Noble is trading at about 21% and about 13% discounts to its respective five-year average multiples.
Additionally, it is below its current TBV ($31.06 per share) and our fleet value estimate of $30 per share. At current levels we believe the risk/reward for being short the name is poor.
Offshore drilling fundamentals are slowly improving. We believe fundamentals are progressing in the right direction with tendering activity and utilization moving higher across all rig classes. Pemex [Mexico’s state-owned energy firm] and Saudi Aramco [Saudi Arabia’s national oil company] are in the market for a plethora of jack-ups [drilling rigs], Southeast Asia tendering has been very active, and this morning Seadrill (SDRL) announced two three-year contracts for high-spec jack-ups at about $145,000 per day, indicating high-spec rates may be finally moving higher on limited supply.
Positive floater data points are likely to emerge over the next few weeks, with Pacific Drilling [traded in Norway] winning a three-year contract for a newbuild in Brazil, Petrobras (PBR) is likely to award additional contracts for up to four incremental floaters currently in international markets and, specific to Noble, we understand it is close to securing greater than a year of work for the idle Amos Runner (8,000-foot semisubmersible) in the Gulf of Mexico.
We remain cautious on revenue utilization returning to prior-cycle levels due to increased safety and equipment standards. Additionally, the substantial number of uncontracted newbuilds coming online (98 rigs) remains a headwind, particularly for companies with older assets. Specific to Noble, we believe it must deliver its newbuilds on time and on budget, which it recently revised in its most recent fleet status report. These factors make Noble a riskier play than some of its peers, which leads us to institute a Neutral rating rather than Accumulate.
— Brian Uhlmer
— Ryan Fitzgibbon
The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.
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