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Stock Pitch: Noble Corporation (NE)

Stock Pitch: Noble Corporation (NE). International Equities Division Yale Student Investment Group October 27, 2010. Overview. The Politics of Drilling 2. Background: Oil Markets & Volatility 3. Comparative Analysis 4. Valuation (DCF estimates) 5. Recent News/Developments.

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Stock Pitch: Noble Corporation (NE)

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  1. Stock Pitch:Noble Corporation (NE) International Equities Division Yale Student Investment Group October 27, 2010

  2. Overview • The Politics of Drilling 2. Background: Oil Markets & Volatility 3. Comparative Analysis 4. Valuation (DCF estimates) 5. Recent News/Developments

  3. Geographical Distribution of Fleet • Brazil 6 • Canada 1 • North Sea (Europe) 19 • Gulf of Mexico 9 • Mexico 13 • India 3 • Mediterranean 1 • Middle East 14 • West Africa 5 • Now 69 (5 of which are still under construction)

  4. The Politics of Drilling:US Operations in the Gulf of Mexico • Obama lifted ban on deepwater oil exploration in October 2010 • New permit process: • New certification process was released in 2005 • Standards recently updated again. • Possible change to 24/7 monitoring w/inspectors onboard or wireless monitoring • Future US drilling policy unclear will depend on the election • Congress banned new offshore drilling in 1981 • August 2008 Bush called to restart drilling • Still pending in Congress since Democrats strongly oppose Republican support (“Drill, baby, drill”) • Also, Republicans are calling for new oil refineries to be built in the US • No new refineries have been built since 1976 because of costly EPA regulations • Outlook: there’s a lot of backlash and emphasis on shifting to a different energy source, but in the immediate future it’s likely that drilling will continue at the same level or increase

  5. The Politics of Drilling:Middle East & Asia • Middle East: Still recovering economically oil crucial part of the recovery • Iraq’s 2011 budget focuses on increasing oil exports and prices. • Recent IMF report predicts an increase in Middle Eastern oil exports and prices • Iran will be 2011 OPEC president (term 1 year) US concerns that Iran will not be impartial or objective in oil exports and prices. • Asia: China replaced EU as Iran’s number one trading partner. Iran is their third largest oil supplier China is helping block and prevent sanctions on Iran. • Outlook: Middle East is politically unstable. Oil prices will continue to rise (both due to economic and political pressures). Concerns about a deteriorating US relationship with Iran.

  6. The Politics of Drilling:Europe • Increased political pressure to buy less oil from the Middle East (especially Iran). • Agreement between US/Britain to prevent Iranian planes from refueling in most of Europe caused Iran to announce that it will temporarily stop refueling British planes. • Outlook: EU action reflects the issues already discussed about US and Middle East oil policy.

  7. Conclusions • Concerns about BP will cause increased inspections and stringent certification processes but drilling will continue. • Much depends on the election. It looks likely that Republicans will regain Congress and try to relax regulation.   • Middle East: situation is politically volatile (especially with Iran). This could cause oil prices to spike or the supply to be cut off or reduced.

  8. Historical View of Oil • Before 1970, oil prices stayed constant around $20 per barrel • Sharp peaks in oil prices during the 1979 energy crisis and in early 2008 (shown on the graphs) • Both peaks followed by drops back to cheaper oil prices as consumer habits caught up with the oil prices • Increase in price of oil due to several factors: • Supply and demand • Oil policies • International politics • Strength of the US dollar • Recent decrease in price of oil due to decreased consumer oil consumption after recession

  9. Trends & Forces • Subject to major swings over time in the business cycle • Supply and demand: • Higher demand due to tremendous growth and development in China and India • Steady/decreasing supply due to slow growth in oil production and dwindling supply from petroleum reserves • Imbalance of supply and demand will continue in the future • Strength of the US dollar highly correlated with the price of oil • A weak dollar currently that may become even weaker due to quantitative easing, oil prices are expected to rise • Long-term price trend: Oil prices should continue to rise due to the laws of supply and demand. Long-term price history of oil confirms this.

  10. Short-Term Price Prediction • Any reasons to believe oil prices will move down in the short-term are pretty temporary and likely short-lived • As the global economy continues to recover, the US economy will becomes stronger and will purchase more oil. Before the recession, oil prices were well over $100.

  11. Balance Sheet • Current Ratio: 3.9 • Quick Ratio: 3.6 • 8,903,502,000 Total Assets • 1,635,130,000 Total Liabilities • 1,083,112,000 in Cash & Cash Equivalents • Conclusion: Balance sheet is healthy, very liquid

  12. “Staying Power” • 87 Year History • Geographically diversified • 2nd largest fleet in the world • Barriers to entry • Very liquid and has cash, flexibility for strategic opportunities • 27.5% Return on Average Equity

  13. Comparative Analysis • Key Competitors: • Transocean Ltd. • Nabors Industries Ltd. • Diamond Offshore Drilling Inc. • ENSCO PLC (ESV) • Pride International Inc (PDE)

  14. Comparative Analysis

  15. P/E Ratio • NE: 7.94 • Peers: 50.07 • NE has a lower P/E ratio, which can mean lower growth expectations or a less expensive stock. • NE is trading at a significant discount to its peers • Current share price * (Average P/E Ratio / (NE’s P/E ratio) = expected share price = $34.25 * (25.03/7.94) = $107.97

  16. P/B Ratio • NE: 1.25 • Peers: 2.58 • NE has a lower P/B ratio, which makes a stock more attractive to investors looking for stocks with lower price per dollar of equity on the balance sheet. • Once again, NE is trading at a significant discount to its peers • Current share price * (Average P/B ratio) / (NE’s P/B ratio) = expected share price = $34.25 * (1.36/1.25) =$37.26

  17. Projected Earnings • NE: 8.03 • Peers: 22.63 • NE has a lower price-to-projected earnings ratio than its peers, which can mean lower growth expectations or lower future growth expectations • NE is trading at a significant discount to its peers • Current share price * (Average P/PE Ratio / (NE’s P/PE ratio) = expected share price = $34.25 * (10.12/8.03) = $43.16

  18. Market Cap/EBITDA • Market Capitalization = $8,890,000,000 (8.89 bil) • EBITDA = $2,419.06 • Market Cap/EBITDA = 3,674,981.19 • Current share price * (Average Market Cap/EBITDA ratio) / (NE’s Market Cap/EBITDA ratio) = expected share price = $34.25*(5,710,938.00/3,674,981) = $53.22

  19. DCF Valuation:Scenario 1 (“Best Case”) • DCF Value = $67 • 97% increase from current price • Assumptions: • Analyst Consensus Growth Rates: -50% this year, 35% next year, 10% next 5 years, 3% thereafter • WACC = 9% • All expenses constant at average percent for last 5 years * Note: NE has had 36.60% annual earnings growth per year for the past 5 years.

  20. DCF Valuation:Scenario 2 (“Middle of the Road”) • DCF Value = $49 • 42% increase from current price • Assumptions: • 25% worse than Analyst Consensus Growth Rates: -54% this year, 25% next year, 7.5% next 5 years, 2.25% thereafter • WACC = 9% • All expenses constant at average percent for last 5 years

  21. DCF Valuation:Scenario 3 (“Middle of the Road”) • DCF Value = $37 • 7% increase from current price • Assumptions: • 50% worse than Analyst Consensus Growth Rates: -57% this year, 17% next year, 5% next 5 years, 1.5% thereafter • WACC = 9% • All expenses constant at average percent for last 5 years

  22. DCF Valuation:Scenario 4 (“Worst Case”) • Assuming a strong correlation between earnings and oil prices (historically somewhat true, but sales have increased each of the past 5 years, including oil’s big drop during the crisis) • DCF Value = $34 • 0% change from current price • Assumptions: • Oil price stays constant at $65/barrel (05-07) • -40% growth rate this year to reach 2006 level earnings • 0% growth rate every year afterwards • WACC= 9% • All expenses constant at average percent for last 5 years

  23. Recent News & Developments 1. Q3 Conference Call (10/21/10) 2. Acquisition of Frontier Drilling Resources 3. Rig contract negotiations (w/Shell & Anadarko) 4. Offshore Drilling Moratorium 5. Recent Upgrades

  24. Q3 Conference Call • Qtrly earnings: Numbers were just below expectations but guidance/outlook was positive • Utilization for Noble jack-up fleet is better than average at around 77% • Concern: fleet upgrades needed to meet new blowout preventer standards • Upside: Pemex loosening age restrictions on rigs, Petrobras looking to drill

  25. Quarterly Earnings (cont.) • *Note: Compared to revenue of $426 million, or $1.63 per share for the third quarter of 2009 • *Analysts’ earnings estimates throughout Q3 were revised downward from about 93 cents to reflect the BP oil spill

  26. Acquisition of Frontier Drilling Resources • Completed this quarter, was bought in June 2010 • Acquired 6 new floating drilling units • Diversification: mid-water presence, Arctic • Long-term debt increase by $3 bil • Positive cash flow expected from acquisition in 2011 • Took advantage of Frontier’s distress after the BP oil spill

  27. Contract Negotiations w/Shell & Anadarko • Shell agrees to provide standby rates  compensation to Noble even though rigs are not operating during moratorium • About ¼ of normal day rates, at about operating cost • Anadarko force majeure dispute • “Going to be a slow process”

  28. Offshore Drilling Moratorium • Bureau of Ocean Energy Management (BOEM) still imposing de facto moratorium via permit process • Just 2 rigs have received the new BOEM permits this last month • Could be influenced by political winds from upcoming elections

  29. Recent Upgrades • In response to Q3 conference call, Citi upgrades this Monday • Price target of $42.00 • Changed to “buy” rating • BofAalso reaffirms buy rating

  30. Conclusion - BUY • Extremely cheap and undervalued compared to peers on the basis of P/E, P/PE, P/B, and EBITDA • Discounted Cash Flow projections show the stock is worth between 0-90% more than its current share price. This implies 90% potential upside for little to no potential downside. • Pristine balance sheet • Global macro trends in oil and politics on balance favor more offshore drilling in the long run. • Recent news confirms positive expectations about NE

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