The Value Line Investment Survey

Noble Corp. provides offshore contract drilling services to the oil & gas industry. This global company currently operates a fleet of 58 rigs, including 42 jackups, 10 semisubmersibles, three submersibles and three drillships. The driller is upgrading three rigs to ultradeepwater semisubmersibles, and has two jackups under construction. Noble shares are timely for the year ahead, and, given good prospects for energy demand, they also offer worthwhile 3- to 5-year appreciation potential to 2011- 2013. We recommend this issue to investors with a long-term view.

Well-Oiled Fundamentals

These are boom times for the oilfield services industry. During the past few years, a sharp rise in demand for energy in developing nations, especially India and China, along with a significant decline in the value of the dollar, have sent oil prices soaring to over $100 a barrel. Exploration & production (E&P) companies have increased the worldwide rig count with the aim of pumping out more oil to take advantage of record prices. Despite the rig additions, the availability of drilling capacity has stayed tight, allowing oilf ield services companies to charge profitable rates.

Noble has benefited from the favorable situation in the E&P industry. Over the past three years, revenue and earnings growth has exploded, and the positive trend is spilling over into 2008. The company has more than 80% of its total rig operating days under contract for the rest of this year, with the bulk of business coming from lucrative international markets (e.g., Brazil, the Middle East, and Africa).

It’s true that the tight drilling market has resulted in a shortage of qualified technical personnel, and costs to hire and retain employees have risen. Nonetheless, Noble has, so far, been able to pass on a fair portion of increased employment costs to customers, supporting net profit.

A Gusher from Brazil

Brazil is currently one of the hottest markets, in light of a massive offshore discovery, the Tupi find in the Santos Basin. Noble has signed a memorandum of understanding with Petroleo Brasileiro for drilling under multiyear contracts, amounting to as much as $4 billion. This new business raises the company’s total backlog to over $10 billion. The terms of the proposed deal call for the utilization of a semisubmersible rig in Brazil at a dayrate of $490,000, up from its current rate of $165,000. Another similar rig would be contracted at $295,000 a day, versus the present take of $115,000 a day. Also, two drillships, now undergoing upgrades, would be utilized at dayrates of $400,000 and $345,000, up from $138,000 and $135,000, respectively.

A Stable Financial Platform

Noble has a firm financial footing. The stock’s Safety rank is 3 (Average) in line with most other equities in the industry. (Noble carries a Financial Strength rating of B++ and the stock has a decent Price Stability score of 55 out of 100.) Cash flow is strong, allowing for continued substantial investment in operations and the payment of a token dividend. Debt service requirements are very modest.

Investors should consider that the oilfield services industry is quite volatile, and there are concerns that a weak U.S. economy will drag down global oil demand. Still, in our view, the long-term supply/demand outlook is positive for companies such as Noble.

Michael P. Maloney
Senior Analyst