Inside Wall Street: Oil Driller Noble Is a Powerful Energy Play

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With oil prices again on a steady, if uneven, ascent to the $81-a-barrel range, the oil patch is getting renewed investor attention. But even if crude prices for some reason were to stop rising momentarily, energy is one sector investors need to be in for the long haul. In particular, the oil drillers appear to an enticing group, assert some pros.

"With the expanding world economy, demand for oil -- and therefore the need for drilling -- will continue to grow," says Michael Camp, a principal at Northwest Criterion Asset Management, who is very bullish on drillers. Camp's top choice is Noble (NE), which provides offshore contract drilling services to oil and gas companies.

With its 62 offshore drilling rigs, including floating deep-water units, Noble is a major global operator active in the Middle East, North Sea, Mexico, West Africa and India. The company also provides engineering and production management services, but about 96% of its revenues come from contract drilling. It now has a backlog of about $8.1 billion, with 54% of its operating days in 2010 committed to projects. For 2011, 26% are already contracted for.

Shares of Noble have been stellar performers, doubling since Apr. 1, 2009, when they traded at $22. The stock advanced to a 52-week high of $45.54 on Jan. 11, 2010. Even so, Camp believes it has enough upward power to boost the price to the mid-$50s.

The P-E Has Plenty of Room to Grow

One reason: The stock still trades near the low end of its historical price-earnings ratio. Noble's p-e multiple peaked at an average of 36 in 2004. And the stock traded as high as $69 a share in 2008. Using Noble's current share price of $42, the p-e is down to 7.3, based on estimated 2010 earnings of $5.75 a share. If the p-e just goes up to 10, the stock would be more than $57 a share.

Noble's fast-growing deep-water rigs (which command higher rates because of tight supply), solid balance sheet and low debt put the company in an enviable position among its peers, according to some analysts. "We project that Noble will generate free cash flow of nearly $1 billion in 2010," says Standard & Poor's oil analyst Stewart Glickman. He also expects it to consider rig acquisitions and share buybacks.

In the fourth quarter of 2009, Noble repurchased 1.75 million shares for $74 million at an average price of $42.06 a share. That brought total buybacks in 2009 to 5.5 million shares. In February, Noble announced plans to pay a regular annual dividend of 50 cents a share, plus a special dividend of $1 a share, subject to ratification by shareholders at the annual meeting on Apr. 30. Glickman rates the stock a strong buy, with a 12-month price target of $58.

"We think Noble merits a premium valuation to its peers," says Glickman, who describes the stock as a "compelling value." He figures Noble will earn $5.75 a share in 2010 and $6.08 in 2011. It earned $5.85 in 2009.

"Answering the Call for Cash"

Noble's decision to pay a regular dividend and a special payout shows that management is aware of what shareholders want in enhancing their value and improving the return on their invested capital. Clearly, "it is not an outsized dividend program," says Alan Laws, analyst at BMO Capital Markets. But he thinks Noble's management, led by CEO Dave Williams, "has done a good job answering the call for cash," says Laws, who rates the stock outperform.

Undoubtedly, it's still not clear if demand for drilling rigs will significantly improve as the economy recovers. Another question is whether day rates for rigs will rise through 2011. And increasing competition in drilling is yet another.

However, James D. Crandell, analyst at Barclays Capital, believes that Noble, with its "strong balance sheet, solid backlog, diversified fleet, active new-build [of fleets] program and a strong interest in expanding its fleet," is one of the best-positioned offshore drilling companies. He rates the stock overweight with a year's target of $50 a share.

So, for investors seeking value in the oil patch, offshore driller Noble could well deliver lots of oomph to their portfolios.
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