Acquisition Of Diamond Offshore And $500 Million Contracts Will Boost Deepwater Drilling Prospects

Key Takeaways

• Strategic acquisition and rig retirements strengthen operational efficiency, enhancing profitability and cost savings.
  
• Secured contracts and recovering demand bolster future revenue visibility and earnings growth potential.
  
• Oversupply and regional demand weaknesses, coupled with political uncertainties, challenge Noble's revenue growth and earnings potential despite cost-cutting efforts.

Catalysts

Operates as an offshore drilling contractor for the oil and gas industry worldwide.

• The strategic acquisition of Diamond Offshore has bolstered Noble's strong position in deepwater drilling, and the integration is expected to achieve synergies of $100 million, potentially enhancing profitability and margins.
  
• Noble has secured over $500 million in new contracts, improving revenue visibility for 2025 and 2026, which is expected to support future revenue growth.
  
• The global deepwater demand is anticipated to recover, potentially increasing from an estimated 100 rigs to 105-110 rigs by late 2026-2027, which could drive higher utilization and day rates, thus boosting revenue and earnings.
  
• The decision to permanently retire underperforming rigs, such as the Meltem and Scirocco, is a strategic move to reduce costs and increase cash flow by shedding $20 million in annualized stacking costs, which improves net margins.
  
• Noble's continued focus on its high-spec fleet and recent contract fixtures for Tier 1 drillships holding firm in the mid
• to high $400s may stabilize and improve future earnings potential.

Noble Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Noble's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.4% today to 12.7% in 3 years time.
• Analysts expect earnings to reach $459.8 million (and earnings per share of $2.84) by about March 2028, up from $448.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $606 million in earnings, and the most bearish expecting $379.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.9x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the US Energy Services industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.41%, as per the Simply Wall St company report.

Noble Future Earnings Per Share Growth

Risks

• The emergence of a mid-cycle low in the deepwater market, with contracted deepwater demand dipping from 105 to 100 rigs and marketed utilization falling from 94% to 89%, suggests a near-term softness which could impact Noble's revenue and net margins.
  
• There is a diminished call on reactivations of idle capacity due to an oversupply of rigs, leading Noble to retire some of its drillships. This action, while potentially reducing costs, could also limit future earnings capacity if demand rebounds quicker than anticipated.
  
• Regional demand weaknesses, particularly in West Africa and Asia Pacific markets, combined with possible delays in rig demand recovery, could hinder revenue growth.
  
• Political influence and fiscal and regulatory uncertainties in regions like the North Sea could complicate forecasting upstream investments, impacting future earnings and contract stability.
  
• Nobles' 2025 guidance indicates utilization gaps and lower revenue contribution from its stacked assets, reflecting potential challenges in achieving full fleet utilization, which could affect their earnings outlook.

Valuation

• The analysts have a consensus price target of $37.545 for Noble based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $33.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $459.8 million, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $24.71, the analyst price target of $37.55 is 34.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.