Yesterday, oil drilling provider Noble Energy (NE) announced that its board of directors is considering creating a master limited partnership (MLP) structure for a portion of its drilling rigs. This news came after Noble had just spun off its jack-up rig business into a separate business named Paragon Offshore (PGN).
With the spin-off of Paragon, Noble is left with a high-quality drilling fleet that is among the youngest in the industry. Fleet age is a key asset in this business, more so today, when energy prices are declining and contract rates for drillers are showing declining trends. At the current price of $21 per share, Noble's MLP consideration is perhaps an attempt to maintain a lucrative payout in a more tax efficient structure.
Currently, Noble shares yield over 7%. If offers one of the best yields in the industry. Typically, when non-MLP dividend yields get this high, it can be a sign that the market doesn't have confidence that the yield will be maintained. One of the biggest drillers in the land, Transocean (RIG), currently yields 9.9%. This is likely to be short-lived. Either shares will rise as investor gain confidence that the payout is sustainable, or the company will reduce the payout in order to conserve cash.
A big draw to investors in these companies is the payout. Thanks to declining share prices, the drilling industry is one of the highest-yielding. However, if day-rates continue to weaken, the dividend is at risk. Fleet maintenance is the primary cash priority for these businesses.
A business such as Noble, with an average fleet age of less than 14 years (typically rigs are cold-stacked as they approach 30 years of age), may be on to something very accretive to investors in contemplating an MLP structure. An MLP would allow the company to make capital upgrades and distributions prior to taxation.
Patient investors will find some value in this space today. The recent bear call by Goldman Sachs that oil would fall to $70 by mid 2015 has many on edge. At the same time, China reportedly purchased approximately 34 tankers of oil, for the country's strategic petroleum reserve, from the Middle East. That is equivalent to about 18 million barrels.
Modern fleet drillers like Noble, Ensco (ESV), and Rowan (RDC) could find themselves in a sweet spot for opportunistic investors.