BORR - Noble: Spearheading The Industry Recovery Despite Some Near-Term Headwinds - Buy

Summary

• Leading offshore driller Noble Corporation Plc reported somewhat mixed fourth quarter and full-year 2022 results, with 2023 profitability guidance also below expectations.
• Ongoing weakness in the North Sea markets and an elevated number of periodic special surveys will impact financial results in both 2023 and 2024.
• Profitability and cash generation this year will be heavily weighted towards the second half.
• Company has started to execute on its recently announced $400 million share repurchase authorization.
• Based on my adjusted EBITDA expectations for next year, shares remain inexpensive relative to peers at approximately 5x EV/EBITDA. With the industry recovery still in its early innings, I would urge investors to initiate or add to existing positions on any major weakness.

Note: Noble Corporation Plc ( NE ) has been covered by me previously, so investors should view this as an update to my earlier articles on the company.

On Monday, leading offshore driller Noble Corporation ("Noble") reported somewhat mixed fourth quarter and full-year 2022 results, with EBITDA of $157 million coming in towards the lower end of the $155 million to $175 million range provided by management on the Q3 conference call .

Results for the quarter were impacted by a delayed contract start for the drillship Noble Globetrotter I and the recent leg failure on the jackup rig Noble Regina Allen .

Unfortunately, both issues will continue to impact results going forward, as the Noble Globetrotter I is still sitting idle offshore Mexico due to ongoing permitting delays while the contract for the Regina Allen has been terminated.

Noble is currently developing repair plans and expects the rig to remain out of service for the majority of 2023. The company has applicable insurance coverage in place and expects full reimbursement after a $5 million deductible.

On the conference call , management provided guidance for 2023, with adjusted EBITDA expected to at least double from 2022 levels to a range of $725 million to $825 million:

To be perfectly honest, I was expecting an even better outlook, with adjusted EBITDA approaching $900 million and capital expenditures substantially below the $325 million to $365 million range provided by management.

Unfortunately, approximately 35% of the company's marketed fleet will have to undergo periodic special surveys this year. With ten-year special survey costs for a drillship ranging between $20 million and $40 million and considering 30 to 60 days of off-hire time, the somewhat muted profitability guidance starts to make sense, particularly when considering the additional impact from the Noble Globetrotter I and Noble Regina Allen as well as ongoing weakness in the North Sea markets .

Particularly, the resulting off-hire time for the company's drillships is going to hurt financial results quite meaningfully.

Profitability in 2023 could be further impacted in case of a contract award for the cold-stacked 7th generation drillship Pacific Meltem which the company has started to bid on selected opportunities:

As a reminder, we have selectively marketed our cold-stacked tier 1 drillship Meltem, which we are budgeting as a $100 million all-in reactivation project, with at least a one-year delivery timeline.

We continue to take a very disciplined approach with bidding the Meltem, which is to say that we would require a firm guaranteed contract with an attractive full payout plus return on capital in order to move forward with its reactivation.

Later on the call, management added that the company would require the customer to pay for half of the estimated reactivation costs upfront.

In addition, management does not expect many of the currently cold-stacked lower-specification drillships to return to the market anytime soon if ever:

Also, the fact that established drilling contractors are prioritizing investment in 7G drillships stranded in shipyards is also a very clear indication in our view that most of the stacked 6G rigs in the world are becoming more and more marginalized with the passage of time. Moreover, the timing of the reactivation of the sidelined drillships will continue to be spread out due to disciplined contractor bidding, significant lead times for reactivation, and a limited number of multi-year tenders in the market that would be adequate to underwrite a compelling guaranteed return for a major capital project.

Going forward, Noble expects leading edge dayrates for 7th-generation drillships to move towards $500,000 over the course of the year.

Given the ongoing weakness in the North Sea markets and repairs required on the Noble Regina Allen , 2023 Adjusted EBITDA contribution from the company's jackup fleet will be limited to approximately 10% of total Adjusted EBITDA guidance for the year.

Moreover, investors would be well-served to temper their expectations regarding the first half of this year as management projected the vast majority of profits and cash flow to be generated in the second half:

While we are not providing quarterly guidance, I would like to provide the basic directional comment that we had a couple of key factors at play that we anticipate should drive a progressively stronger contribution of both EBITDA and free cash flow as the year unfolds.

One expected factor is the momentum of day rates with the fleet continuously repricing into an improving market. And secondly, we expect operating days to increase in the second half of the year. We currently expect to generate approximately 65% of our 2023 EBITDA in the second half of the year. Additionally, our 2023 adjusted free cash flow generation will be heavily weighted to the second half of the year.

Please note that the company has commenced buybacks under its recently announced $400 million share repurchase authorization, with approximately $70 million utilized for the squeeze-out of legacy Maersk Drilling shareholders.

Subsequent to the end of the fourth quarter, Noble elected to repay $150 million of Maersk Drilling legacy debt with excess cash on hand.

According to management, the company is currently evaluating options to " optimize and simplify " the company's capital structure, which might very well result in the initiation of a quarterly dividend next year.

Even when considering the elevated number of periodic special surveys in both 2023 and 2024, I would expect the company to finish the year in a net cash position with Adjusted EBITDA likely to increase above $1 billion in 2024.

Bottom Line

Despite some near-term headwinds, Noble Corporation Plc remains on the forefront of the industry recovery with decent profitability and cash flow generation.

Based on my adjusted EBITDA expectations for next year, shares remain inexpensive relative to peers at approximately 5x EV/EBITDA.

With the industry recovery still in its early innings, I would urge investors to initiate or add to existing Noble Corporation Plc positions on any major weakness.

At this point, I remain positive on the entire industry, including leading U.S. exchange-listed players Seadrill ( SDRL ), Valaris ( VAL ), Borr Drilling ( BORR ), Transocean ( RIG ), Helix Energy Solutions ( HLX ) and particularly offshore drilling support providers like Tidewater ( TDW ) and SEACOR Marine Holdings ( SMHI ).

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