Noble Stock: Required Jackup Sale To Shelf Drilling Looks Bad (NYSE:NE)

Gas-Plattform und Jack-Up Rig

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Note: Noble Corporation (NYSE:NE) has been covered by me previously, so investors should view this as an update to my earlier articles on the company.

On Thursday, leading offshore driller Noble Corporation (“Noble”) announced the sale of five jackup rigs to competitor Shelf Drilling (OTCPK:SHLLF) for $375 million in cash in an anticipated move to address regulatory concerns regarding its proposed merger with Maersk Drilling:

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The Remedy Rig Sale Agreement includes the rigs Noble Hans Deul, Noble Sam Hartley, Noble Sam Turner, Noble Houston Colbert, and Noble Lloyd Noble (the “Remedy Rigs”) and all related support and infrastructure. Associated offshore and onshore staff are expected to transfer with the Remedy Rigs. Following the sale, Noble expects to continue to perform the current drilling program for the Noble Lloyd Noble under a bareboat charter arrangement with Shelf Drilling until the second quarter of 2023 when the primary term of its current drilling contract is expected to end. The charter arrangement would pass the economic benefit of the drilling contract to Shelf Drilling. Drilling contracts for other Remedy Rigs are expected to be novated to the Buyer, subject to the clients’ consent. Noble will provide certain customary transition support services to the Buyer for a limited period of time. The Buyer is expected to finance the acquisition through equity and debt financings by the Buyer and Shelf Drilling, but the purchase is not conditioned on such financing. The Remedy Rig Sale is expected to close promptly following closing of the Business Combination (and following receipt of CMA approval).

While both Noble and Maersk Drilling have been quite clear about their belief in the financial and strategic rationale underpinning the transaction remaining intact and compelling for all stakeholders irrespective of the required divestment of the majority of Noble’s jackup rigs, I am very disappointed by the terms of the proposed transaction.

Keep in mind that Shelf Drilling not only gets 5 modern jackup rigs including all related support and infrastructure but also picks up an estimated $250 million in backlog.

To put things in perspective: The Noble Lloyd Noble is among the largest and highest-specification jackup rigs in the world and was delivered to the company at an estimated cost of almost $700 million just six years ago.

The loss of the company’s flagship and sole NCS-compliant jackup rig is particularly disappointing given the superior cash generation potential of the unit.

The required sale of the Noble Houston Colbert also hurts as the rig just recently was awarded a 3.5-year contract offshore Qatar.

In sum, Shelf Drilling gets a fully operational subsidiary ready to compete in the North Sea, an area where the company has not been active so far while Noble loses a quarter of its entire fleet.

Quite frankly, I am not sure if the projected benefits of the proposed combination with Maersk Drilling will really make up for the loss of five modern jackup rigs and their sizeable backlog.

Anyway, the $375 million in cash proceeds from the sale will further bolster the combined company’s liquidity.

Noble now expects to launch the exchange offer for shares of Maersk Drilling in August and the closing of the merger to occur near the end of Q3, an approximately three-month delay relative to the original timeline.

Please note that the UK antitrust watchdog has not yet approved the business combination. In addition, completion of the merger remains subject to acceptance by holders of at least 80% of Maersk Drilling shares.

Bottom Line

Suffice to say, Noble appears to be on the receiving end of this deal as Shelf Drilling not only acquires a fleet of modern jackup rigs but also enjoys the benefits of picking up a fully operational subsidiary and a decent amount of backlog.

Frankly speaking, I would have preferred Noble to avoid this fire sale and rather terminate the merger with Maersk Drilling but both companies have been steadfast in their belief in the strategic rationale of the transaction.

Well-founded recession fears have hit oil-related stocks hard in recent weeks but I do not expect any major impact on offshore drilling budgets at this time.

That said, with industry stocks usually trading in close correlation with oil prices, investors need to prepare for recent volatility to continue.

Given the uncertain outlook, I have reduced my exposure to oil-service and shipping stocks quite meaningfully in recent weeks. Nevertheless, I remain positive on the offshore drilling industry going forward.

Two weeks ago, I would have likely downgraded Noble based on the disappointing divestment terms but after the recent 30% sell-off, I decided to keep my “buy” rating on the shares for now.

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