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We maintain our Neutral recommendation for Noble Corporation (NE - Analyst Report) as disappointing first quarter results and the effect of the drilling ban in the Gulf of Mexico (GoM) were balanced by rising commodity prices as well as improvements in international jackup markets.

Noble registered depressed first quarter 2011 earnings due to lingering concerns related to GoM drill ban last year and thereby experienced lower utilization and dayrate.

Again, Noble's existing fleet is fairly challenged with several older, less capable assets facing a tough demand environment. On the arrival of newbuild rigs into the market, many of the company’s older rigs, floaters as well as numerous jackups will face the threat of departure, resulting in a risk of earnings dilution from the retirement of older spec rigs. Hence, Noble’s old and less efficient fleet in a cutthroat environment could prove detrimental.

However, offshore drillers are enjoying improved market conditions with an uptrend in oil prices and better bidding activity. Importantly, the recovery in the international jackup market is coinciding with a return to the GoM, which we believe bodes well for Noble.

With continued increase in tender activity as well as the influx of contracts globally, management remains optimistic about broader recovery in jackup demand, led by the North Sea, Mexico, Southeast Asia and the Middle East. Notably, Noble believes that North Sea jackup dayrates will soon exceed $100,000 due to the building backlog and strong bidding activity for 2012.

Like other offshore contract drillers, Noble has also initiated to evaluate its existing fleet to determine the future of non-core assets. The company is aggressively upgrading its fleet through newbuilds and acquisitions, which will add to its earnings power.

With a strong balance sheet and low debt (last quarter’s debt-to-capitalization ratio stood at 29.2%), we believe the company can easily fund the current newbuild program. We also expect the deepwater market segment to deliver strong growth for the foreseeable future. With the company’s strong backlog position (approximately $13.1 billion), Noble’s earnings and cash flow visibility will be more promising in the near to medium term.

The company, like its competitors Diamond Offshore Drilling Inc. (DO - Analyst Report) and Helmerich & Payne Inc. (HP - Analyst Report), holds a Zacks #3 Rank, which translates to a short-term Hold rating.

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