Must-know: An investor's guide to off-shore driller Noble Corp. (Part 7 of 9)
Why capital expenditures dominate Noble’s cost structure
Oil contract drilling is a very capital-intensive industry. Between 2005 and 2012, Noble increased its capital expenditures at a CAGR of 24.95%, and the company spent over $1.79 billion this past year. This growth was initially caused by reconstruction of existing rigs, but it’s now largely made up noble’s Jackup buildup. In comparison, Transocean, Seadrill, and Diamond Offshore saw their capital expenditures grow at CAGRs of 27.9%, 24.55%, and 11.5%, respectfully (D&A as percentage of sales). Other costs these companies face include room and board for the crews aboard the rigs as well as daily costs of running and maintaining the rigs. Industry-average earnings before interest and taxes make up about 27.67% of revenues.
Why offshore drilling companies can be highly levered
The majority of capital expenditures in this industry are debt-financed, making oil contract drillers highly levered. This is another case where Noble stands out. Comparing debt to equity and debt to total assets, Noble has the second lowest ratios, but this is supported by the fact that of the companies compared in this analysis, Noble also pays the lowest interest rates on its debt. When the coupon rates on its outstanding bonds average out, Noble pays a weighted average interest rate on its debt of about 4.96%. Of Noble’s debt, 28.6% will mature between now and 2017, while 37.94% will mature between 2019 and 2022—nothing will mature in 2018. The remainder of Noble’s long-term debt—about 33.46%—will mature between 2040 and 2042. It’s very likely that Noble’s debt schedule will change as the company continues to expand its jackup fleet and improve and rebuild its older rigs in the fleet.
How Noble maintains its cash holdings
Because of Noble’s fleet expansion strategy, capital expenditures have made cash outflows from investing consistently greater than cash inflows from operations for the past three years. In response to this trend, Noble has issued over $1 billion in bonds each year for the past three years. This is why Noble has been able to maintain its cash holdings but has also increased its leverage each year.
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