James Barrow's Silent Offshore Oil & Gas Pick

GuruFocus.com

Sometimes it seems as if companies do everything within their power not to make the news. The case can be made for many businesses involved with environmental disasters, management corruption, or plain poor overall performance. Noble (NE) fits, however, in neither category. Most surprisingly, James Barrow (Trades, Portfolio) increased his share in the company after deciding to give the energy sector a bigger piece of his portfolio. Louis Moore Bacon (Trades, Portfolio) is another guru who sees prospects for growth in the firm and followed suit increasing his share. Richard Perry (Trades, Portfolio) and Richard Snow (Trades, Portfolio), however, followed Renaissance Technologies dropping of the stock. Last, given the recent drop on stock face value, there is a potential chance for taking advantage of a cheap entry point for a long-term investment.

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Keeping Up with Standards

Noble is an offshore drilling company with worldwide operations, and present in all major oil producing regions. It currently counts with a fleet of 77 offshore drilling units, and has an additional six units (two ultra-deepwater drillships and four high-specification jackup drilling rigs) under construction. Most importantly, the Noble Paul Wolff rig is slowly returning to normal operations after a ballast control incident that occurred on Friday, Feb. 28.

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During the course of 2014, Noble has the challenge of extending deadlines for above half its fleet, a task management is addressing in a progressive manner. While some rigs have been granted a considerable extension of their current contract, others have been the recipient of smaller benefits, while yet others continue waiting for an update. Nonetheless, the whole fleet remains operational and carrying out previously agreed contracts.

With the fleet under contract, Noble can focus on restructuring. The plan described by management is twofold. On one side, Noble Co. will merge with Noble-Switzerland under English law as Noble-UK. The second part concerns the separation of some of Noble's assets into a new entity SPINCO to provide strategic and financial opportunities to the two stand-alone organizations. Most important, the market welcomed the decision while the stock's face value later declined as oil prices fell and fears loomed over contract continuity.

Oil Exposure

Just like any other drilling company, Noble is greatly exposed to oil and gas prices. Hence, the drop in stock face value is understandable but unjustified. In other words, the company's fleet utilization rate has not suffered and concluding contracts have already been addressed. The information and details are fully available on their website, and give plenty of support to the theory of continued growth, a trend that is expected to find greater support once the business is fully restructured.

The potential growth for Noble is to be freed by a higher demand in the ultra-deepwater market in the Gulf of Mexico, and served by the units under construction to be delivered throughout 2014. On the other hand, the new jackup units will be delivered to the Middle East where demand for the units is on the rise. In turn, these deliveries are expected to reduce the weight assigned to the North Sea region where tax regime changes are expected. Hence, the model is being shielded from unexpected events.

Currently trading at 10.2 times its trailing earnings, Noble's stock carries a 27% discount to the industry average. Also, revenues and net income have seen improvements during the last three consecutive years, and operating margin has confirmed a positive trend started in 2011. With a restructuring in progress that will reduce debt and improve cash flow, Barrow's position increase comes as no surprise. Important for future shareholders, the stock pays a $0.37 quarterly dividend, representing a 3.19% annual yield. Hence, this stock is an interesting option for a long-term investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

This article first appeared on GuruFocus.

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