Noble to Switch Rigs - Analyst Blog

Noble Corporation (NE) signed a memorandum of understanding (MoU) with Petroleo Brasileiro SA (PBR or Petrobas), to swap Noble Muravlenko with Noble Phoenix due to below par performance by the former.

Under the terms of the MoU, Noble Phoenix, currently under contract with Royal Dutch Shell Plc (RDS.A) in Southeast Asia, would be moved to Brazil to substitute Noble Muravlenko later this year. Noble expects an estimated non-cash impairment charge of $40 million, which will likely be included in its first quarter 2011 results due to the cancellation of the upgrade of the Noble Muravlenko rig. The discarded upgrade program was scheduled for 2013.

Importantly, the earnings of Phoenix will be equivalent with Noble Muravlenko at $290,000 per day with a 15% potential bonus through 2015. The Noble Muravlenko is currently working with Petrobras under a six-year contract ending in 2015 at the same dayrate.

In connection with Noble Phoenix' contract cancellation with Shell, Noble expects to book first quarter 2011 non-cash gain of approximately $55 million. However, the deal is pending Petrobas' board approval and release of the unit by Shell.

Moreover, an affiliate of Noble signed a Letter of Intent with a subsidiary of Shell, for a new five and one-half year contract for a newly built deepwater rig. The new rig is expected to come online in late 2013.

Per the contract, a new unit will have a dayrate of $410,000, along with a 15% performance bonus, as well as $18 million for mobilization and another $10 million based on performance. The contract calls for 10,000 foot water depth capability, 200 man quarters and DP-3 station keeping.

Following the suspension of the moratorium in the U.S. Gulf of Mexico, companies in the offshore oil industry are trying to enhance their deepwater assignments. Additionally, offshore drillers are experiencing improved market conditions with an uptrend in oil prices and better bidding activity. Likewise, as a contract drilling company, Noble is also making constant efforts to take advantage of low costs associated with rig construction in recent times, including expansion and upgrade of its ultra-deepwater rig fleet.

We see long-term earnings and cash flow visibility with the company's solid backlog position, which will be further enhanced by the recent agreement for newbuilds. However, we remain cautious as the offshore drillers face a number of headwinds, including a lack of pricing power. Tough competition from its larger peers such as Transocean Ltd. (RIG) and Diamond Offshore Drilling Inc. (DO) is also a concern.

Our long-term Neutral recommendation for the stock remains unchanged and the company holds a Zacks #4 Rank (short-term ‘Sell' rating).

 
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