Thrifty Fleet Overhaul Is Thrilling Investors in Noble Drilling

For those looking to play the recovery in oil-services stocks, Noble Drilling (NE) is looking downright stately.

Noble shares are up 94% this year, outstripping the sector's 36% gain, as drilling activity has surged along with the price of oil. Investors like the stock because of Noble's engineering prowess and disciplined capital management, which should drive outsized gains in earnings and cash flow. And Noble is often mentioned as a potential buyer in the drilling consolidation expected by analysts.

Fleet Afoot

The strength of Noble's drilling fleet is a major selling point. Nineteen of its 33 jackups, or shallow-water rigs, can drill in water at least 300 feet deep, which means they can command higher rates. And its extensive rig upgrade program is almost complete, doubling its deep-water drilling capacity. That makes Houston-based Noble one of the best-positioned players in the industry to take advantage of this year's rise in oil prices.

Rental rates are quickly climbing for its larger jackup rigs, too. In the Gulf of Mexico, rental rates for this class of rig have jumped to $50,000 from the mid-$30,000 range in just two months. In West Africa, analysts expect Noble to contract five of six idle rigs in the coming months, at rental rates in the low-to-mid-$30,000 range.

This faster-than-expected increase has helped earnings estimates: Friday Dain Rauscher Wessels upped its 2000 and 2001 per-share estimates to $1.10 and $1.71 from $1.02 and $1.68, respectively. Noble is expected to earn 74 cents a share this year, according to First Call/Thomson Financial. (Dain hasn't participated in underwriting for Noble. It rates Noble a buy.)

Matthew Conlan, an analyst at Prudential Securities in Houston, estimates that Noble will generate cash flow of $2.05 per share in 2000 and $2.70 per share in 2001, more than any other driller in Prudential's universe except Transocean Offshore (RIG). (Conlan's firm hasn't done any equity underwriting for Noble, and he rates it a strong buy.)

Tight Control

Jim Day, Noble's chairman and chief executive, oversaw the lengthy fleet upgrade at costs very near original estimates, a feat analysts attribute to extensive engineering prior to construction. Noble's accomplishment contrasts starkly with the host of problems encountered by other drillers, including R&B Falcon(FLC), Transocean and, most recently, Global Marine(GLM).

"Just over the past several months, it's become much more clear that Noble's [newly converted] rigs are operating at the very high level [management] said they would operate at," says Matt Packard, an oil-service analyst at MFS Investment Management in Boston, Noble's third-largest shareholder.

"Noble has clearly demonstrated that their engineering and shipyard management has been superior," says Prudential's Conlan. It is "one of the very few companies which did not destroy capital during their [rig] upgrade program."

Earnings Power

Over the past month, Noble's stock has gained 18%, putting it up 113% from its February low of near 11. Yet it's still attractive, says Packard at MFS, noting that Noble traded near 40 two years ago, when its smaller fleet had less earnings power.

"One thing you need to keep in mind is that the earnings power of Noble has gone up more dramatically than the earnings power of any other offshore driller," Packard says.

Noble Share Performance Outpowers Peers Analysts credit Noble's management team for the success of its submersible to deepwater semisubmersible rig conversion program. In the past year, Noble brought into service four semisubmersibles with no operating problems. Topping off that feat, the conversion costs were very near the original budgets.

Other shareholders concur, pointing to Noble's strong position in a rebounding sector.

"I would say, yes, it is" a buy, says James Glickenhaus, a partner at Glickenhaus & Co. in New York. Glickenhaus, whose firm is long Noble, Diamond Offshore(DO), Transocean, R&B Falcon, Ensco(ESV) and Global Marine, says the sector's fundamentals are "spectacular."

Togetherness

Recent rumors have centered on Global and Noble, historically an aggressive buyer of rigs.

"The two companies are definitely talking," says one analyst who declined to be named, citing a source at Global. Newswires and industry trade publications have also noted the rumors. The analyst, whose firm hasn't done any underwriting for either Noble or Global, rates both a buy.

Citing company policy, Global declined to comment. Steve Manz, a Noble spokesman, declined to comment on the Global rumors, but says Noble is definitely interested in pursuing consolidation, has been talking to "more than one company" and wants very much to be the surviving entity.

Rumors swirled Thursday and Friday when word leaked out that Noble's chief financial officer, Byron Welliver, had retired earlier in the week. Manz says Welliver's decision to retire at 54, after 19 years with Noble, was related to a retirement package offered in conjunction with Noble's relocating staff from its Lafayette, La., office to Houston, and not to any merger talks.

Analysts like the thought of a Global-Noble combination. "These two firms have some of the best engineering departments in the business," says Lewis Kreps at Frost Securities in Dallas, who rates both stocks buy. (His firm hasn't underwritten for either company.) A larger drilling contractor would be better equipped to compete with the soon-to-be-formed drilling powerhouse of Transocean and Sedco Forex Offshore, a unit of Schlumberger(SLB).

Company Snapshots Noble Drilling combined with Global Marine would create a formidable drilling competitor
	Noble Drilling	Global Marine
Headquarters	Houston	Houston
Chrm/CEO	James Day	Robert Rose
Employees	3,250	2,700
Market cap	$3.5 B	$2.6 B
Shares outstanding	131.4M	174.4M
Institutional held	83.8%	57.8%
Sales (TTM)	$720.3M	$851.2M
Earnings (TTM)	0.84	0.64
Drilling fleet	47 drilling units	33 drilling units
	9 semisubmersibles*	6 semisubmersibles
	3 drillships	4 drillships**
	32 jackups	23 jackups
	3 submersibles
*Includes 2 units under construction; **Includes 2 units under construction.
Source: Market Guide, First Call/Thomson Financial.

With or without a merger, however, Noble's current management seems to be doing just fine.

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