Last week I nominated a company for TheStreet's "The Worst Stock in the World" campaign, which identifies stocks that should be avoided at all costs. I write exclusively about energy and, inside that space, it was easy to look at the plagued offshore drillers for the most likely candidate for a terrible stock to own. Faced with choosing a specific company within this highly stressed sub-sector, I chose Noble Corp. (NE) based upon incorrect information about the company. Being better informed today, I'm prepared to retract that column and my nomination of Noble as "The Worst Stock in the World."
My mistake was in characterizing Noble as a shallow-water specialist. In fact, Noble has a broad spread of rigs, and it would be better characterized as a deepwater specialist, as it earns 80% of revenue from deepwater drillships and semi-submersibles. This puts Noble in the same company as Transocean (RIG), Diamond Offshore (DO) and Ensco (ESV).
I also characterized its debt position inside the group as being worse than many of these, when in fact its debt position, while hardly enviable, is very much in line with the rest of the sector, as the Bloomberg data below show.
And while it is true that Noble has so far retained its lone investment-grade rating in the space for its bonds, it should also be fairly noted that its rating from Moody's is Baa3, one level above "junk," with most of the issues trading with effective yields upwards of 15%.
Noble has a relatively modern fleet of rigs and a better backlog of contracts than many of its peers, with its eight deepwater drillships all contracted for 2016 -- but it should also be noted that half of those critical contracts will run out in early 2017, making for a possibly wide gap in revenue in the years to follow. None of this is unique to Noble; all of the offshore drillers have been plagued with disintegrating day rates and uncertain new contracts, and all have been forced to stack rigs that have gone uncontracted and retire other, older rigs that cannot compete in this new low oil price environment that threatens to stay low for years to come. Noble's better backlog and younger fleet has allowed it to keep all but four of its rigs in working status in the last year.
Despite their apparent advantages to peers, however, it should be fairly noted that Noble stock has not performed better, or even on a par, with peers; whether we look at a six-month or 12-month comparison, Noble has actually been one of the weakest among offshore players with deepwater expertise:
Source: Yahoo! Finance
Noble's poor stock action could be considered troubling; Jefferies is one research firm that recently lowered its target price on the company again, this time to $7 per share. Barclays analysts, on the other hand, see few liquidity problems ahead for the company:
"NE is in an enviable position of having ample liquidity (we estimate a cash surplus of over $2bn by end of 2020 after debt maturities and new build Capex) and the lengthiest contracted status among offshore drillers with all 8 drillships locked in until at least early '17 (with 4 beyond 2018)."
Further, the company's director of Investor Relations, John Breed, made this statement:
"Noble's financial discipline remains steadfast. Our balance sheet is solid, with manageable debt maturities in each of the years 2016 and 2017 of $300 million; and only $250 million, or less, each year up to 2020. We expect to repay the $300 million notes maturing in 2016 with cash on hand. We begin 2016 with over $500 million in cash, and an undrawn $2.5 billion revolving credit facility, or about $3 billion of liquidity. We are very confident in our ability to successfully manage through this very uncertain year. It is important to understand and appreciate the work that has been done to achieve this strong industry position. Our focus in 2016 is to run our business as safely and efficiently as possible, utilizing the talented and committed workforce to deliver the best results in this challenging environment. We are highly focused this year on execution."
No one knows what the future brings, but there will likely be further restructurings -- other than Hercules (HERO) -- in the offshore world as this bust in oil prices continues. While many will fall, Noble does not seem likeliest to fall next. What the future holds for the company will mostly be subject to global prices of crude and the demand curve for the very expensive oil that Noble, and others in the space, are contracted to pull out of the oceans. Therefore, with these corrections in mind, I would no longer characterize Noble Corp. as "The Worst Stock in the World."