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Leading contract drilling company, Noble Corporation (NE - Analyst Report) reported third quarter 2012 earnings of 45 cents per share, failing to meet the Zacks Consensus Estimate of 50 cents. Reported earnings also dropped 15.1% from the year-earlier profit of 53 cents per share mainly due to extended downtime from rigs in the Gulf of Mexico (GoM) and offshore Brazil.

However, total revenue in the quarter jumped almost 20% to $884.0 million from $737.9 million in the comparable quarter last year, but missed the Zacks Consensus Estimate of $898.0 million. Contract Drilling Services contributed $833.2 million (up 18.2% year over year) to the total revenue, mainly on the back of improved rig utilization overall.

Operating Highlights

Total operating income in the quarter shot up 8.8% to $178.9 million from the year-ago level of $163.6 million. Operating income from the Contract Drilling segment experienced an 8.6% annualized growth and recorded $173.3 million in the quarter versus $159.6 million in the year-earlier quarter.

Total rig utilization was 78% in the quarter compared with 76% a year ago. Overall average dayrate was $168,608 versus $151,782 in the year-ago quarter.

Average dayrate for semisubmersible rigs registered about 5.4% year-over-year improvement to $331,900. Average capacity utilization was 83% versus 84% in the year-ago period. Drillships experienced an average dayrate of $267,166 versus $225,669 in the year-ago quarter, while average capacity utilization was 73% versus 60% in the comparable quarter of last year.

Average dayrate for the company's jackups was $97,857 compared with $89,352 in the year-ago quarter. Average capacity utilization increased to 83% from the year-ago level of 82%.

Financials

At the end of the third quarter, the company had a cash balance of $218.5 million and long-term debt of $4.6 billion with debt-to-capitalization ratio of 35.6% (versus 35.0% in the preceding quarter). During the first nine-month period ending September 30, 2012, Noble invested $1.2 billion in capital projects. Over the year, Noble expects to spend $1.8 billion in total, including approximately $580 million for newbuild construction programs.

Our Take

We reiterate our long-term Neutral recommendation on Noble Corporation, a leading offshore drilling contractor and provider of diversified services for the oil and gas industry.

Noble has failed to match our expectation mainly due to the delays in the deployment of two new drillships, one offshore Brazil and the other in the GoM.

Although the company’s third quarter results were adversely affected by a number of operational issues and delays in returning rigs to work, the fundamentals remain strong and Noble remains busy in securing contracts for both floating and jackup rigs at significantly higher dayrates. The owner of the world's third-largest offshore drilling fleet foresees continued successes for its offshore drilling business.

We see long-term earnings and cash flow visibility in Noble’s impressive backlog position, which will be enhanced by the recent agreement for newbuilds. The company’s backlog, as of September 30, 2012, stood at $14.8 billion.

The company also remains committed to improving operational performance in the final quarter of 2012 given that the operational issues have now been resolved with the exception of a few.

Again, tough competition from its larger peers such as Transocean Ltd. (RIG - Analyst Report) and Diamond Offshore Drilling Inc. (DO - Analyst Report) is a concern.

Over the longer term, we expect the stock to perform in line with the broader market. The company retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

 

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