Noble Corp Looks Interesting For 2015

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Dec 28, 2014

Noble Corp (NE, Financial), which operates as an offshore drilling contractor is an attractive stock to consider for 2015. This article discusses the reasons to be bullish on Noble for the coming year from a capital appreciation as well as from a dividends sustainability perspective.

The first reason to be bullish on Noble is the company’s current valuation. Noble is currently trading at a trailing twelve month EV/EBITDA of 3.68. I believe that the valuations are very cheap considering the fact that Noble has a firm order backlog of $3.2 billion, which will be executed in 2015. The strong order backlog for the year ensures that the company’s revenue, EBITDA and cash flow will remain healthy even when the overall offshore market outlook remains weak.

The second reason to be bullish on Noble is the company’s current dividend payout and dividend yield. Noble has an annual dividend payout of $1.5 per share and at a current price of $17.33; the stock offers a dividend yield of 9.9%. In my opinion, the company’s dividend payout will sustain in 2015 and this is a big positive factor.

Seadrill (SDRL, Financial) suspended dividends in the third quarter of 2014 and I expect Transocean (RIG, Financial) to lower or suspend dividends in the coming quarters. Amidst this, a dividend of $1.5 is healthy. I believe that the dividend is sustainable because the company’s firm order backlog of $3.2 billion for 2015 will ensure sufficient cash inflow for dividends and comfortable debt servicing.

The third reason to be bullish on Noble is the company’s recent approval on the share repurchase plan. On December 22, 2014, shareholders approved a proposal authorizing the Company to purchase from time to time up to 37,000,000 ordinary shares or approximately 15% of the Company's outstanding ordinary shares.

I believe that this is a significant value creation move for shareholders and 15% of outstanding shares being lined up for buyback means that the EPS can be boosted significantly in the coming years. The company’s decision to repurchase shares is also an indication of the high financial flexibility and the perception of the management that the stock is undervalued at current levels. I am of the opinion that Noble will move higher on the share repurchase plan in 2015.

The fourth reason to be bullish on Noble for 2015 is the fact that the company has no capital expenditure for the coming year. Further, the company has only $500 million in capital expenditure in 2016. With no capital expenditure in 2015, the entire operating cash flow can be used for share repurchase, dividends and reduction in debt.

I believe that dividends will remain steady in 2015 and the company will use the excess cash flow to reduce debt as well as repurchase shares. Therefore, there are multiple value creation opportunities in the offering in the coming year for shareholders.

Noble’s capital expenditure and fleet renewal timing has been excellent as opposed to Seadrill, which still have significant capital expenditure coming in 2015 and 2016. While Seadrill’s debt can still increase in the coming year, Noble is on a debt reduction path along with other value creation initiatives.

In conclusion, Noble is an attractive investment option at a current EV/EBITDA of 3.68. I believe that the stock has significant upside in the coming year as share repurchase commences. I also believe that investors will continue to enjoy a stable dividend of $1.5 per share through 2015. Considering these factors, I recommend Noble for exposure in the coming year. The stock is among the selected offshore drilling stocks that I am bullish on for 2015.