Perhaps the only thing more masochistic than reading income statements from offshore oil rig companies is having money invested in offshore oil drillers. The past three years have been brutal as oil and gas producers have scaled back spending or shifted spending to quicker, easier development projects like shale. For Noble Corporation (NYSE: NE), this past quarter was more of the same: modest declines in revenue and earnings.
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However, its management thinks that we are about to see a shift in the offshore market, and it's making one subtle change to its fleet to prepare for an upswing. Here's a look at the most recent results and what Noble's doing to prepare for a market upturn.
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||$266.2 million||$278.1 million||$385.4 million|
|Operating income||($55.6 million)||($43.9 million)||($2.2 million)|
|Net income||($96.8 million)||($93.3 million)||($55.1 million)|
Noble's results don't look good, but they don't indicate the company is in deep distress, either. Revenue declined slightly from three jackup rigs completing contracts in the quarter. Fortunately, though, Noble was able to get two of those rigs new contracts that will start in December and February, respectively. Ultimately, Noble held serve in the quarter as it was able to replace most of its expiring revenue with new contracts.
The more promising news out of these results is that Noble is still bringing in plenty of cash from operations even though earnings have dipped into the red. So far this year, the company has been able to cover all its capital spending and reduce its debt load by $300 million and still have $600 million in cash on hand at the end of the quarter. Management plans to pay back all $250 million in senior notes due in 2018 with cash on hand and will likely do the same with other debts due between now and 2022.
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These results stack up rather well compared to Noble's offshore rig peers so far. While some have been more successful than others at winning new contracts for rigs, all of the major offshore drillers have reported flat to declining revenue yet again in the third quarter.
The best news the company received this past quarter was a three-year contract award for one of its ultra-deepwater drillships. The contract with ExxonMobil will begin at the end of November and will do work in both the U.S. Gulf of Mexico and off the coast of Guyana on Exxon's Liza discovery. Liza is one of Exxon's most promising projects that is moving at lightning speed.
The result of these new contracts or contract extensions means that Noble has been able to keep its revenue backlog flat at $3.2 billion compared to the beginning of the year.
What management had to say
Offshore rig company executives have been hot and cold about the near-term prospects of the business. Based on CEO David Williams statements, it appears that Noble falls on the slightly optimistic side of things.
We believe our industry continues to demonstrate that the early stages of recovery have begun. Discussions with customers about their future rig needs have intensified throughout the year and have resulted in contract awards across numerous regions. As we sharpen our focus on 2018, we expect these early signs of recovery to yield measurable benefits to Noble. Our current contract backlog of $3.2 billion is expected to provide revenues in 2018 that exceed $860 million, with revenues of over $700 million in 2019, and these estimates exclude contract awards since the conclusion of the third quarter and any future awards. Also, our current expectation for 2018 is to generate positive free cash flow, as we have demonstrated in 2017.
Noble's management is also backing these statements up with some corporate actions as well. Unlike many of its peers that have cold stacked their idle rigs -- shutting down all operations and do preservative maintenance -- Noble has now warm stacked -- maintain basic operations and regularly check running engines and equipment -- its drillships. Warm-stacked rigs cost more to keep going, but it means that they are ready to deploy at a moment's notice. This suggests that Noble foresees that its rigs will get work sooner rather than later.
What a Fool believes
Noble isn't winning much additional work, but it's winning contracts to keep its running fleet still on the water and generating revenue. With demand for offshore rigs still stuck in the mud, this is all investors can ask for.
The fact that management has elected to keep its drillships warm stacked is a promising sign. It should make it easier for Noble to market its rigs to potential customers compared to peers with cold-stacked rigs. Based on its current contracts, it should be in relatively decent shape for a couple of quarters. Any chance of success beyond that will involve winning new contracts with those warm-stacked rigs.
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