Today’s recommendation is an offshore drilling contractor well positioned to profit from the evolution of its market. The stock also pays a small dividend; the current yield is about 1.5%. Here’s Argus Research’s Philip Weiss with the recommendation:
“After some tough sledding in 2011, BUY-rated Noble Corp. (NE) has gotten off to a good start in 2012. We are reiterating our $50 target price.
“We believe the market environment will continue to improve based on the strong outlook for operator capex and exploration activity and relatively high oil prices. We also believe that Noble’s gross margins likely bottomed in the second quarter, and note that the day-rate outlook in the deepwater, floater and jackup markets continues to brighten.
“Noble has been using the strength of its balance sheet and $14.5 billion revenue backlog to help finance the construction of ultra-deepwater and high-specification jackup rigs during a period of market weakness. We think this will serve the company well in an improving market environment. Historically, the industry has not been able to build when the market was weak because it was not able to finance the activity. We think that Noble’s efforts to use its financial strength in advance of the next market up-cycle will leave it better positioned to benefit from improved conditions over the next few years. We believe that the earnings power associated with the drillships and high-specification jackups that it is building without contracts could ultimately benefit earnings by more than $1.50 per share. Improving gross margins closer to historical levels could also add appreciably to results.
“From a market perspective, conditions in the U.S. Gulf of Mexico continue to improve. We also do not think the shares fully reflect the company’s strong prospects for deepwater exploration activity outside the Gulf, particularly in Brazil and West Africa.
“Despite the decline in results from 2009 to 2010 and from 2010 to 2011, our positive view of Noble is based on its future prospects rather than its recent difficulties. We believe that margin expansion, the earnings power of newbuild rigs and the potential for higher day rates position Noble well for strong earnings and cash flow growth. Over the long term, we believe business fundamentals for the drilling industry are sound, further supporting our BUY rating.”
- Philip H. Weiss, Argus Weekly Staff Report, April 24, 2012