BORR - Noble Corporation: Strong Buy On Growing Revenue And Profitability

2023-04-04 23:26:54 ET

Summary

• After a bankruptcy and timely acquisitions, Noble Corporation Plc is profitable on growing revenues.
• Based on the peer average EV/Sales and estimated FY 23 revenue, NE's fair value share price was estimated at $62.37.
• NE most recently traded at $39.60; over 50% upside is implied.
• I recommend investors buy NE at current market prices.

Background

I routinely survey the oilfield services ((OFS)) sector for quality and value. I recently identified Noble Corporation Plc ( NE ) as a top OFS pick in a previous analysis, Highest Quality Oilfield Services Stocks . Furthermore, I identified NE as a possible outperformer in the offshore drilling sub-sector in the course of my analysis of Transocean ( RIG ) entitled Transocean's Backlog Does Not Support Current Valuation .

Substantial Transformation

Since June of 2020, Noble Corporation Plc has undergone a substantial transformation while drastically reducing its total liabilities and ongoing financing expenses.

NE: Total Liabilities, Net Interest Expense, and Activity

Since June 2020, NE has filed and exited bankruptcy, acquired its former competitor Pacific Drilling, regained NYSE listing, and completed a merger with Maersk drilling. Over the period, total liabilities and net interest expenses have been reduced 65% and 74%, respectively.

Offshore Revenues Are Rebounding

Offshore Drilling Revenues

Quarterly revenue is plotted from June 2020 forward for NE and its offshore drilling peers. Recently, revenues across the industry have rebounded from their early 2021 lows. NE quarterly revenue (plotted in dark blue) has increased from $220M in mid-2020 to $586M in FQ4 22 (+166%).

NE Is Profitable on Growing Revenue

NE Revenue and Normalized Net income

While quarterly revenue has more than doubled recently, NE has also become profitable. Normalized net income has increased from -19% in mid-2020 to its most recent value of 23%. FQ1 23 estimated revenues are expected to remain elevated at $540.5M while decreasing slightly from FQ4 22 revenues of $586M.

Relative Quality

NE and its offshore drilling peers were evaluated using a quality matrix with factors including Price/Sales, Net Income Margin, Free Cash Flow Margin, and Net Debt/Market Cap. The values for each provider's factors were normalized by means of statistical percent ranking with relation to the group. The quality matrix for each driller was calculated as the sum of the percent ranks of each factor.

Offshore Drillers: Quality Matrix Chart

The above chart is sorted in descending order of the best quality (highest matrix score) to the poorest quality (lowest matrix score).

Offshore Drillers: Quality Matrix Plot

The quality matrix is presented graphically in the stacked bar chart above. Based on reasonable value, superior profitability & free cash flow, and low debt, NE outranks all of its peers.

Fair Value Estimate

Assuming that the sector as a whole is fairly valued, NE's six offshore drilling peers were selected for relative valuation based on average EV/Sales.

The peer average EV/Sales of 3.77 is comparable to NE's current figure of 4.32. However, NE's FY 23 revenue is expected to increase substantially over FY 22 revenue.

EV, Market Cap, and Share Price were estimated as follows:

1. EV = Average Peer EV/Sales * Estimated 1Q 23 Revenue * 4
2. Market Cap = EV - Net Debt
3. Estimated Share Price = Estimated Market Cap/Outstanding Shares

Based on the peer average EV/Sales and estimated FY 23 revenue, NE's fair value share price was estimated at $62.37.

NE Potential Comes with Risk

Demand destruction and recession are both risks across the entire oil and gas sector. Oil and gas markets are volatile and subject to fear and speculation. Recession, or even continued fear of recession, could drive energy markets down.

Offshore drilling is a particularly volatile sub-sector and has suffered disproportionately in previous energy sector downturns. Investors would be wise to add a carefully considered NE position to a well-built portfolio.

Final Thoughts and Recommendations

The offshore drilling appears to be in the beginning of a recovery. After a bankruptcy and timely acquisitions, Noble Corporation Plc is profitable on growing revenues. Based on the quality matrix, NE beats its offshore peers with reasonable value, superior profitability & free cash flow, and low debt.

Based on the peer average EV/Sales and estimated FY 23 revenue, NE's fair value share price was estimated at $62.37. NE most recently traded at $39.6; over 50% upside is implied. I recommend investors buy NE at current market prices.

A path is made by walking. - Zhuangzi

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