Must-know: An investor's guide to off-shore driller Noble Corp. (Part 6 of 9)
Why Noble continues to expand its jackup fleet size
Jackups comprise 62% of Noble’s MODU fleet. At an average day rate of $111,414, jackups earn less than drillships and semi-submersibles that charge average day rates of $327,336 and $356,396, respectively. It may puzzle investors why Noble would maintain a sizeable jackup fleet and plan to keep some jackups after the proposed spinoff. (More information about the spinoff will follow in an upcoming series). Investors may also wonder why Noble continues to increase its jackup fleet size. The off-shore industry as a whole had 131 jackups under construction up to 2017, according to Noble’s Cowan and Company 3rd Annual Ultimate Energy Conference.
Why Noble would invest in jackups
The rationale behind this strategy is partially explained by the geographical analysis in part 4 of this series. In the diagram, the two lightest shades of blue show the percentage of oil reserves that can be reached by jackup rigs. This means that 100% of the Persian Gulf and over 50% of the North Sea, Asia Pacific, West Africa, and Mexican Gulf regions can be accessed entirely by jackups. While Noble has existing jackup operations in these regions, it’s not uncommon to find rigs that were originally constructed in the 1970s and the 1980s. At the Cowen & Co. Ultimate Energy Conference of December 2013, Noble revealed that rigs constructed after 2008 earn average day rates of $239,400—more than double over Noble’s average of $111,414. Customers are willing to pay higher premiums for new equipment, and considering that jackups are the least capital-intensive rig to produce, new jackup construction is a successful strategy for Noble to increase its margins.
What the competitors are doing
Drilling activity at deepwater levels and above is expected to be a large area of growth opportunity for Noble Corp. and its peers. But the high utilization rate and day rates have driven companies to place large quantities of orders for floaters that drill in those environments. The resulting focus from competitors moving on to deepwater operations could negatively affect the segment’s supply and demand balance as well as day rates–whether short-, medium-, or long-term. In this way, purchasing jackup vessels still makes sense for a company such as Noble Corp.
Correction note: As part of the first paragraph in this article, Market Realist originally stated, “It becomes even more confusing as to why Noble is planning on increasing the size of its jackup fleet from 49 to 131 units by the end of 2017.” This was an error. The 131 units were misinterpreted as increases to Noble’s jackup fleet. However, the figure actually refers to increases in the industry overall. This article was originally published on January 27, 2014. It was corrected and updated on January 29, 2014.
Browse this series on Market Realist:
- Part 1 - A must-know investor’s guide to off-shore driller Noble Corp. (NE)
- Part 2 - A key overview of Noble Corp.’s services and revenues
- Part 3 - Why Noble Corp.’s fleet structure is crucial to its business
- Basic Materials Industry