Why Noble Corporation Is a Buy

Noble Corporation (NE) continues to benefit from its costs management efforts. For instance, its contract drilling service costs for the quarter declined approximately 16% on the sequential basis and around 22% on a year-over-year basis. In fact, its contract drilling service costs for the quarter came in at $251 million in the quarter, 7% below the low end of the guided range of $270 million to $285 million.

This reduction in the contract drilling service costs is due to the lower-than-anticipated maintenance and repair costs, resulting from a lower-than-expected downturn.
For instance, its downtime for the quarter came in at 3.8% compared to its guidance of 6%. Also, it was significantly lower than downtime of 8.4% in the fourth quarter of 2015.

In addition to this reduction in costs, the company is reducing its capital spending. For instance, its capital expenditure for 2016 is expected to be at $800 million, which is significantly lower than the expenditures in the previous years that had averaged around $1.8 billion, as shown in the chart below.

More cost declines ahead

Looking ahead, Noble Corporation expects the contract drilling costs to decline in the range of $975 million to $1 billion as compared to its earlier provided guidance of $1.03 billion to $1.13 billion in January this year. Also, its SG&A costs are expected to be in the range of $70 million to $77 million as against earlier provided guidance of $65 million to $70 million for the year. In fact, the company anticipates its SG&A costs to come in at $17 million for the second quarter of 2016, significantly down from the expenses incurred in the same quarter last year.

Noble Corporation has liquidity of approximately $2.7 billion that should improve its financial flexibility going forward. This liquidity will further be supported by its strong contract coverage, costs reduction efforts as discussed above. Also, the company has no debt maturity until March 2017 that should sustain its liquidity position in 2016. Moreover, Noble has only $300 million of maturity in 2017 and $250 million in 2018, as shown in the chart below.


Thus, Noble Corporation remains a safe investment going forward. The company has strong contract coverage and at the same time lowering its costs structure. These cost management efforts should enable the company to maintain its liquidity position high going forward. Meanwhile, the company has low debt maturities for the next couple of years that should provide them the additional financial flexibility to support its growth. All-in-all, Noble Corporation remains an attractive opportunity with the recent dip in the stock price due to the points discussed above.
Published on Jul 19, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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