Credit rating agencies are concerned about the highly volatile oil and gas market, which exhibits cyclical patterns in earnings. Noble Corporation (NE), one of the largest offshore drilling contractors in the U.S., has established a solid name for itself in this tough environment. In today’s FA Alpha Daily, we will explore the company’s ability to navigate current market conditions and determine if the caution expressed by rating agencies is justifiable.
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The oil and gas exploration and production industry, particularly in the realm of offshore drilling, is an area that often draws close examination from rating agencies.
This sector is marked by its cyclical nature due to varying global demand and supply, geopolitical factors, and regulatory shifts, leading to notable price changes.
Such cyclical patterns can lead to inconsistent earnings for companies in this field, which tends to worry credit evaluators who prefer predictable cash flows to ensure debts are managed properly.
Offshore drilling contracts, often large-scale and long-term in nature, add another layer of complexity.
These contracts are typically awarded through competitive bidding processes and involve detailed operational and financial planning due to the significant investment and time required.
In this context, Noble Corporation (NE) stands out as a significant player. As one of the largest offshore drilling contractors in the United States, Noble Corporation has established a strong foothold in this challenging environment.
However, rating agencies often view the company through a lens of caution due to the industry’s cyclicality. And right now, oil prices are struggling. They’re down more than 13% since the beginning of November.
Unlike many of its competitors, Noble Corporation has a robust portfolio of drilling contracts and a record of operational excellence in offshore drilling.
The company benefits from long-term contracts that provide a more stable revenue stream, even in an industry known for its fluctuations.
This stability is crucial, especially when considering the high operational costs and investment risks associated with offshore drilling projects.
Moreover, Noble Corporation’s operational strategy in managing these projects is noteworthy.
It involves detailed planning and execution, ensuring efficiency and cost-effectiveness. This approach not only mitigates the risks associated with offshore drilling, but also positions the company to capitalize on market opportunities when they arise.
Despite these strengths, rating agencies often categorize Noble Corporation as an average risk entity, focusing on the industry’s inherent cyclicality.
They may not fully recognize how Noble Corporation’s strategic approach to offshore drilling and contract management sets it apart from typical exploration and production companies.
Thus, S&P has given Noble Corporation a “B+” credit rating. This rating suggests there’s about 24% the company might not be able to pay its debts in the next five years, which places it in a category of higher risk.
When we look at how well Noble Corporation runs its business and its current financial health, we think it should be seen as much less risky.
We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.
In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
The CCFP chart shows that Noble Corporation’s cash flows are more than enough to serve all its obligations going forward.
The chart shows that the company is in a firm financial ground and will be able to satisfy its obligations in the near future.
Remarkably, the company has no debt maturities going forward. Thanks to its strong cash flow, the company could manage its debts without trouble, if it had any.
Additionally, the company’s proven business approach is set up to boost its profits through its stable offshore drilling contracts.
That’s why we think that Noble Corporation deserves a much safer credit rating.
Here at Valens, we’ve assigned the company an “IG4” rating. This rating places it in the safer investment category, with 2% risk of default.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
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SUMMARY and Noble Corporation (NE:USA) Tearsheet
As the Uniform Accounting tearsheet for Noble Corporation (NE:USA) highlights, the Uniform P/E trades at 11.6x, which is below the global corporate average of 18.4x, but above its historical P/E of -69.7x.
Low P/Es require low EPS growth to sustain them. In the case of Noble Corporation, the company has recently shown a 148% Uniform EPS shrinkage.
Wall Street analysts provide stock and valuation recommendations, that in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Noble Corporation’s Wall Street analyst-driven forecast is for a 1027% EPS growth and a 68% EPS growth in 2023 and 2024, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Noble Corporation’s $46 stock price. These are often referred to as market-embedded expectations.
Furthermore, the company’s earning power in 2022 was below the long-run corporate average. Moreover, cash flows and cash on hand are 3x its total obligations—including debt maturities and capex maintenance.
Overall, this signals a low dividend risk.
Lastly, Noble Corporation’s Uniform earnings growth is above its peer averages, but is trading below its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
This analysis of Noble Corporation (NE)’s credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.