Diamond Offshore Acquisition Will Position Fleet For Future Deepwater Demand

Key Takeaways

• Acquisition of Diamond Offshore enhances fleet synergies, positioning Noble for future revenue growth with 41 rigs.
  
• Anticipated uptick in deepwater drilling demand could boost utilization rates and increase future EBITDA.
  
• Operational risks from Diamond Offshore integration, market headwinds, and potential rig stacking could impact Noble's revenues, margins, and profitability.

Catalysts

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

• The acquisition of Diamond Offshore is expected to enhance Noble's fleet with increased synergies, creating a strong combined company with 41 rigs, fueling future revenue growth.
  
• Noble's Return of Capital program, including share repurchases and dividends, is projected to boost earnings per share by leveraging excess free cash flow.
  
• The strong backlog of contracts, including recent extensions and new awards in the Gulf of Mexico and Brazil, provides visibility for revenue streams through at least 2028.
  
• Industry indicators suggest an uptick in demand for deepwater drilling in late 2025 and beyond, which is expected to increase utilization rates and boost future EBITDA.
  
• Expected reductions in capital expenditures from 2024 to 2025, following the peak of a 5-year SPS cycle, should lead to improved free cash flow and net margins.

Noble Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Noble's revenue will grow by 17.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.0% today to 18.6% in 3 years time.
• Analysts expect earnings to reach $803.8 million (and earnings per share of $5.02) by about December 2027, up from $501.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $898.3 million in earnings, and the most bearish expecting $555 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2027 earnings, up from 9.4x today. This future PE is lower than the current PE for the US Energy Services industry at 15.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.88%, as per the Simply Wall St company report.

Noble Future Earnings Per Share Growth

Risks

• The integration of Diamond Offshore could pose operational risks, as achieving the targeted $100 million in synergies is not guaranteed, potentially affecting EBITDA and cash flow.
  
• There exists uncertainty around utilization white space in the first half of 2025, which could pressure revenues if demand does not materialize as expected, especially impacting contracted rig units.
  
• Market headwinds and higher taxation in the North Sea pose challenges, potentially affecting the jack-up fleet's utilization and contract rates, which could lead to fluctuating revenues.
  
• Delays in projects due to customer capital discipline and various operational reasons might postpone rig contracts' commencements, impacting revenue timelines and operational cost recovery.
  
• Potential stacking of rigs if demand does not meet expectations could lead to increased costs and reduced operating efficiency, affecting net margins and profitability.

Valuation

• The analysts have a consensus price target of $43.73 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 $64.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.3 billion, earnings will come to $803.8 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 8.9%.
• Given the current share price of $29.47, the analyst's price target of $43.73 is 32.6% 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.