Market Overview
The market came under some pressure last week as the S&P 500 fell 1.16%, the Dow lost 2% and the Nasdaq declined by 1%. And while the market lost ground, I would note that it was a holiday-shortened week, and stock and option volumes were down dramatically.
The Stock – Noble (NE)
Why the Strength
Schlumberger recently said that it expects a huge wave of offshore contracts in the next couple of years as big players love the price dynamics (85% of offshore fields are profitable even at $50 oil; most future rig bookings will be for fields that have a breakeven of $40 or below!) and the realization that, while green energy is growing, fossil fuels will be needed for a very long time. Combined with limited supply, that’s boosting dayrates for offshore drillers, which, after many years of dry times, have shaped up operations and are poised to see their bottom lines soar.
Thanks in part to a big merger with Maersk last year, Noble (based in Switzerland) is one of the big players in the offshore drilling group, with 31 total rigs, including 15 modern ultra-deepwater (UDW) drillships (which often grab the best dayrates), 11 of which are Tier 1 (making up 24% of the global supply of those super high-end ships). Noble has inked nearly a quarter of the industry’s UDW contracts in recent years, with a current average dayrate of $400,000—but with the market tight (90%-plus utilization in UDW), dayrates continue to advance, nearing $500,000 in recent weeks. And all of that means Noble has a long runway of business coming in ($4.6 billion backlog as of early May) that’s just starting to hit the bottom line.
In Q1, EBITDA was up five-fold from low levels a year before, while earnings were in the black for the fourth straight quarter—and analysts see both figures kiting higher for at least the next year and a half, with $6 of earnings per share possible next year. With low leverage (just 0.6x cash flow), Noble is looking to return more than half of free cash flow to shareholders, with an active share buyback program underway. It’s a solid cyclical story.
Technical Analysis
Despite oil stocks acting poorly over the last year, NE was able to work its way to higher highs last November and this February before getting walloped during the March banking worries. But shares held the 35 level (and the 200-day line) repeatedly over the next three months, and now we see the buyers pouncing, with NE surging two straight weeks to new highs on some impressive volume. Stop — 40
The Covered Call Trade
Buy Noble (NE) Stock at 47, Sell to Open August 45 Strike Calls (exp. 8/18/2023) for $3.50, or a Net Price of 43.5 or less
Static Return: $150 per covered call (3.44%)
Breakeven: 43.5
Covered Call Return (if assigned): $150 per covered call (3.44%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 43.5 or less. (In this case 47 minus 3.50 = 43.5. Or another example is you could pay 46.80 for the stock and sell the call for 3.30, which also equals 43.5)
For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on July 18, 2023.
