Noble Corporation: Investors Should Look Beyond Mediocre 2024 Guidance - Buy

seekingalpha04-17

Adjusted for reimbursable and one-time items, Noble Corporation reported in-line Q4/2023 results, highlighted by decent free cash flow generation.Backlog remains near multi-year highs, with ...

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Strong Q4/2023 Free Cash Flow Generation In late February, leading offshore driller Noble Corporation or \"Noble\" reported mixed fourth quarter results, with top line outperformance offset by lower-than-expected earnings per share. However, adjusted for reimbursable and one-time items, contract drilling revenues and adjusted EBITDA were very much in line with expectations. Company Press Releases / Regulatory Filings While profitability was down from record Q3 levels, cash flow from operations of $287 million and free cash flow of $165 million represented new highs for the company since its emergence from chapter 11 in early 2021. Noble also declared a quarterly cash dividend of $0.40 per share, which was paid on March 21 to shareholders of record as of March 8. The company ended the year with $361 million in cash and cash equivalents and around $600 million in debt. Backlog Remains Near Multi-Year Highs Backlog of $4.8 billion was up slightly on a sequential basis, with approximately 77% attributable to Noble's floater fleet: Annual Report on Form 10-K For this year, approximately 65% of total available days are committed. Please note that this metric includes cold-stacked rigs: Annual Report on Form 10-K Weaker-Than-Expected 2024 Guidance On the conference call, management provided full-year guidance below consensus expectations at that time:   Company Presentation Particularly, the first half of the year is expected to be weak with a number of rigs still undergoing extensive contract preparations and some 6th generation assets likely to sit idle. On the conference call, management pointed to some opportunities for these rigs with the potential to increase Adjusted EBITDA in Q4 and beyond (emphasis added by author): A key variable to our fourth quarter EBITDA exit rate will be the contribution from the three 6G rigs that are currently showing white space massive status report. We currently have active conversations behind each of these available 6G rigs, and shoring up work for these rigs would translate to an annualized adjusted EBITDA exit rate for 2024 of between $1.3 billion and $1.4 billion, assuming our other model assumptions hold. In addition, with 45% of the company's active fleet scheduled for special periodic surveys, Noble is facing another year of elevated capex requirements. Fleet Status Report As a result, free cash flow will be nothing to write home about but is still expected to increase from last year's $181 million number: We do expect to see an increase in free cash flow for full year 2024 versus 2023. Due to the aforementioned factors, we expect to be modestly free cash flow positive in the first half of 2024 prior to any capital return to shareholders, with nearly all of the free cash flow for the year weighted to the second half. As we have said before, we would look to return the substantial majority of our free cash flow to shareholders. Given the muted cash flow outlook, I would expect the company's quarterly cash dividend of $0.40 per share to remain unchanged. Jackup Segment Not Likely To Be Impacted By Saudi Aramco Fallout While floaters will continue to contribute the lion's share of revenues and cash flow going forward, management projected an improved performance of the jackup segment:  Our jackup contribution is expected to increase in 2024, going from approximately 10% of our gross margin in 2023 to approximately 15% of our gross margin in 2024.  With the majority of the company's jackup fleet located in the North Sea, potential Saudi Aramco (ARMCO) fallout is likely to be limited as this region is unlikely to experience a massive influx of suspended rigs from Saudi Arabia. However, due to Noble's lower-than-expected 2024 guidance, I have reduced my forward Adjusted EBITDA estimates. Valuation and Price Target Valuation-wise, Noble currently trades at slightly above 5x EV/Adjusted EBITDA based on my reduced estimates for 2025:   Author's Estimates Consequently, I am lowering my price target from $59 to $55 based on an unchanged EV/Adjusted EBITDA multiple of 6x:   Author's Estimates While approximately 17% upside from current levels isn't exactly mind-blowing, investors should note that the company is expected to increase profitability and cash flows further in 2026. Using my 2026 Adjusted EBITDA estimate would yield a $62 price target for the shares, thus providing for approximately 32% upside. However, a number of peers are offering materially higher upside, but investors should keep in mind that companies like Diamond Offshore Drilling (DO) and Valaris (VAL) are still lagging Noble in terms of profitability and cash generation which increases the risks associated with an investment in these companies. Author's Estimates Bottom Line Adjusted for reimbursables and special items, Noble Corporation reported in-line Q4/2023 results highlighted by substantial free cash flow generation. However, the company provided full year 2024 guidance below consensus expectations due to a material number of rigs experiencing or facing near-term idle time. That said, with the recent lull in deepwater contracting activity widely expected to be short-lived, investors should focus on the industry's strong medium-term outlook.  While I have lowered my estimates and price target somewhat, I am reiterating my \"Buy\" rating on the shares and would consider using pullbacks as an opportunity to initiate or add to existing positions.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428995347"}