Description

SUMMARY

• ~20 % free cash flow yield for 2024/25 and growing with contracted backlog providing visibility
• Returning capital to shareholders (dividends + stock buybacks).  Investors will make an acceptable return even if there is no re-rating
• Limted financial leverage (currently 0.6x EBITDA)
• Very supportive fundamental industry tailwinds driven by demand / supply dynamics
• Material merger synergies adds to 2023 & 2024 cash flow - creates value and provide a further downside buffer

BACKGROUND 

Like much of the offshore drilling industry Noble went through bankruptcy and emerged in 2020 with a materially reduced debt load.  It acquired Pacific Drilling in 2021, bolstering its fleet and extracted $30 million of synergies.  In Oct'22 it completed the acquisition of Maersk Drilling which is expected to yield $125 million of synergies by YE24.  Post these acquisitions Noble will be a top 3 player with a high spec fleet, a de minimus amount of debt, a >$4billion contract backlog and a commitment to return 50% of free cash flow to shareholders.  

WHY NOW

There has been an inflection in fundamentals that's not yet captured in valuation.  This will become evident in the company's cash flow generation through 2023 and into 2024+

COMPANY OVERVIEW 

Post the acquisition of Maersk the Noble fleet is high spec and concentrated in floaters and harsh environment jackups (north sea) 

• Floaters - 15 drill ships and 3 Semis
• Jackups - 5 Ultra harsh environment and 8 harsh environment all operating in the North Sea 

INVESTMENT CASE 

• ~20% free cash flow yield for 2024/25 with exit rate >30%
  • Cash flow inflection through 2023 as contract reactivations complete
  • >$2bn of aggregate FCF in 2024/25 (exit rate >$1.5bn)
  • $4.6 billion contract backlog - >70% contracted for 2023; 1/3 contracted for aggregate 2024/25 
• Returning Capital To Shareholders
  • Underleveraged balance sheet 
  • commitment to return 50% of cash flow to shareholders 
  • $400 million buyback program in place - $100 million repurchased to date 
• Industry Fundanentals Best In At Least A Decade
  • Global spending by upstream E&P for offshore increasing significantly after a decade of underinvestment. 2023/24  capital commitments expected to be ~2x the average of the last decade 
  • Supply was permanently retired from 2014 onward (including through restructurings) with essentially no new builds.  
    Very unlikely there will be new builds in future (or for it to occur dayrates would need to be much higher than current to justify the expenditure).  Thought of another way the value of Noble's fleet is trading at very large discount to replacement cost 
  • Utilization levels now >90% and approaching sold out levels in most places projecting forward into the near future
  • Drillers have consolidated - top 3 players now ~2/3 of the supply and demonstrating discipline in reactivating supply 
  • Dayrates have increased but this is not fully reflected in backlogs (legacy contracts will roll to spot rates as contracts end) 
• Limited Financial Leverage
  • 0.6x ND/EBITDA with large portion of debt bullet HY bond maturing in 2030 
• $125 million of merger synergies from Maersk transaction. $60m done to date with remainder to be done by end-24 

Simple write-up as this is a fairly straight forward thesis.  If industry fundamentals hold its difficult to not see the company generating material cash flow versus the current valuation and this should find its way back to shareholders. The inflection in cash flow is already happening and will become increasingly evident in the coming quarters  

Happy to provide more details in Q&A if there are specific topics of interest or questions 

Catalyst

• Cash flow inflection and return of capital to shareholders.