NEW YORK (
) -- The acquisition of privately held
, effectively known as Frontier Drilling, by oil driller
is the most significant move made by an offshore driller since the BP oil-spill crisis brought the sector to a halt.
Since April 20, when the
rig exploded and sank, Noble shares have fallen more than $13, or roughly 30%, amid the uncertain fate for all drillers.
Even when a U.S. District Court judge ruled against the federal government's moratorium on deepwater drilling in the Gulf of Mexico last week, the drilling stocks couldn't rally.
The Noble deal took some on the Street by surprise, amid the federal moratorium on drilling, but the deal had been in the works well before the Transocean rig exploded. Several analysts think the Noble acquisition should provide some immediate confidence for a stock operating in a sector that has become toxic.
The 2% gain in Noble shares on Monday didn't indicate a deal rally, though. In fact, only two drillers were showing positive returns on Monday: Noble and Transocean. It looked on Monday like an oil-drilling company either needed to make a $2 billion acquisition, or have already seen its stock fall 40%, just to eke out positive returns.
In terms of the deal being accretive to earnings, there is reason for investors to remain cautious on the Noble acquisition. On Monday, several analysts, who hadn't run the numbers yet, said that they thought the deal would be accretive. Noble said the deal would be accretive based on its internal estimate of 2011 earnings. Still, Street analysts downplayed that comment from Noble management, given that internal estimates are not public information and there is no way to judge them. Street estimates for the company are all over the place, as well, making any one estimate of the acquisition's impact on earnings a dubious benchmark. For 2011, analyst estimates' range from a low of $2.75 to a high of $6.43.
Nevertheless, the all-cash acquisition, at just under $2.2 billion, is, at the least, non-dilutive in terms of any shares being used to finance the deal.
The Noble acquisition also alludes to some immediate concerns from energy investors that do relate to the BP oil spill. For one, a key aspect of the Frontier acquisition is the relationship between the oil driller and
Royal Dutch Shell
, for which Frontier performs the lion's share of its drilling contracts.
As part of the acquisition announcement, Noble announced three new contracts with Shell, and an agreement related directly to rigs that have seen work suspended as a result of the BP oil spill.
Major oil companies like
are locked in legal battles with drillers over the invoking of the force majeure clause -- essentially using the BP oil spill to renege on contracts with drillers. Transocean and Noble both recently challenged Anadarko's force majeure claims.
Concurrent with the acquisition of Frontier, Shell agreed to pay Noble a suspension rate for any rig operations and personnel that are victims of the drilling moratorium, effectively making sure that Shell won't pursue force majeure against Noble.
"Shell, a major offshore driller has stepped in and given a vote of confidence to this space, providing clarity on Gulf of Mexico contracts and, when you look at the new contracts, pretty solid rates relative to what we would have thought a month ago," said Collin Gerry, analyst at Raymond James.
"Investor sentiment should be more positive. Deepwater drilling demand is not going to zero, and despite all the rigs coming into the market over the next year, Shell feels
it's necessary to build a rig for a ten-year contract term," said Kurt Hallead of RBC Capital Markets.
In all, the Noble acquisition of Frontier includes these contracts with Shell:
A 10-year contract on the dynamically positioned, ultra-deepwater drillship Noble Globetrotter currently under construction and due to be delivered during the second half of 2011
A 10-year contract on a second ultra-deepwater drillship to be constructed with an anticipated delivery date in the second half of 2013. Contract terms and operational capabilities are generally the same as the Noble Globetrotter
A three-year extension on the Noble Jim Thompson, a moored fourth generation semi-submersible operating in the U.S. Gulf of Mexico
The day rates that Noble will receive for the next contracts are significantly lower than previous and existing contracts, but it's always a give and take between contract length and day rates, and the terms with Shell are no different in respect to this long-standing industry dynamic. Analysts noted that one could criticize the fact that Noble is only receiving a day rate of $410,000 for a new rig under construction, as new builds tend to command higher day rates than existing rigs. Noble had announced last week that it had renegotiated the contract for its Noble Clyde Boudreaux to a day rate of $397,000, down from $600,000 previously.
"For a new build, the rate is fairly attractive to Shell at $410,000," said Credit Agricole analyst Mark Urness.
Kurt Hallead, analyst at RBC Capital, noted that the $410,000 day rate for the new build is only slightly higher than the $397,000 renegotiated last week for an existing drillship.
The Raymond James analyst took a more positive view of the push and pull between Shell and Noble on day rates, arguing that at least Noble has now stepped up, unlike other drillers, and given evidence of renegotiated rates. "It's better than getting force majeure, and some people have been assuming the worst for deepwater rates, going down to $300,000," Collin Gerry said.
The Raymond James analyst conceded that his estimate for day rates was more draconian, and the Noble renegotiations would be at the high end of what he expected. Additionally, Gerry said the $600,000 rate was well above the market rate, so Noble lost some market value there, but remains the only driller to step up and offer a concrete view of what day rates will look like in the post-BP oil spill world.
"It's hard to really get a pulse of what the market thinks is good or bad, and I don't think these Noble rates represent the leading edge. But they got long-term contracts that we don't see in this space and in exchange; they bore a little pain," the Raymond James analyst said.
Analysts described the backlog of Frontier assets as a mixed bag, and noted that, on a pure asset basis, the deal might not look like a steal. However, there seemed general agreement that the deal made Noble's cash flow and earnings profile stronger, especially in a sector currently defined by uncertainty.
"Noble made a big move," Gerry said.
recently lost a bidding war for
Nevertheless, there is still much for the Street to parse in terms of the Noble acquisition, and the stock's 2.4% rise on Monday was not indicative of investors moving back into the oil driller in droves as a call on the deal outlook. Trading of 10 million shares of Noble on Monday was right on the oil drilling stock's average daily volume.
( PDE) led another losing day for the oil-drilling stocks on Monday.
-- Reported by Eric Rosenbaum in New York.
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