Noble Corporation (NYSE:NE)

10/18/2010

 
October 14, 2010
Current Price – US$35.90


Noble Corporation (NE) is the world’s second largest publically traded provider of diversified services for the oil and gas industry with annual revenues of $3.6B. The Company performs contract drilling services with its fleet of 62 mobile offshore drilling units located in key markets worldwide. 

So far the company has managed to execute admirably on its long-standing business strategy to actively expand international and offshore deepwater capabilities through acquisitions, rig upgrades and modifications, and to redeploy assets in important geological areas. In doing so it has developed superior margins and returns to equity (Op. Mar. 55%, ROE 22%), and a rock solid balance sheet churning out prodigious amounts of free cash flow ($1.4B FCF on $3.6B Rev.) while continuing to invest in growth of its capital equipment base and returning value to shareholders through share repurchases and growing dividend payments. The full value of the company’s shares do not appear to be recognized in the current market, however, a correction to prices seems likely as recessionary conditions improve and supply/demand dynamics return to a pre-recession state.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Noble Corporation of US$49.82.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       38.8%
Dividend yield   0.5%
Total return     39.3%


Risks

Listed below are some of the key risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Global Economic Conditions - This business depends on the level of activity in the oil and gas industry, which is significantly affected by volatile oil and gas prices. Recent worldwide instability in the financial and credit sectors and economic recession could have a material adverse effect on the company’s financial position, results of operations and cash flows.

Competitive Landscape – A combination of recent recessionary conditions, reduced oil prices and high historical economic profit within the industry suggest increased likelihood of industry consolidation and the potential for build-out of excess capacity and increased vertical integration by oil producers. The extent and impact of these developments is unpredictable and may have a negative impact on revenues and margins.

Regulation - Governmental laws and regulations, including environmental laws and regulations, may add to costs or limit drilling activity.


The Numbers

Share Price ($US)   35.65 
Market Cap ($US B)   9.1 
No. Shares (M)   257 
ROE   21.9%
ROA   17.6%
P/E Ratio   6.3
Price/Sales Ratio   2.7
Price/Book Ratio   1.3
Current Ratio   3.9
Interest Coverage   1200
Total Debt/Equity   10.0%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

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