SLB Schlumberger Ltd

We reiterate our long-term Neutral rating on Noble Corporation (NE), a leading offshore drilling contractor and provider of diversified services for the oil and gas industry. It also provides labor contract drilling, engineering and consulting, and project management services through a fleet of 76 mobile offshore drilling units.

Noble failed to impress with its results in the second quarter of 2011. It failed to match up to our expectation in terms of earnings and recorded a steep decline from the year-ago results. The underperformance can be traced back to the disruption of services at five rigs. However, its backlog reflects earnings and cash flow visibility for the subsequent quarters.

As offshore activities pick up again and gain momentum, the company will return to a favorable position with the construction of seven ultra-deepwater drillships and four high-specification jackups underway. Noble will be able to take advantage of the gradually improving utilization and dayrates among its jackups and floating rigs. Many of Noble’s rigs returned to the active status at the end of the quarter.

Noble offers its services principally in the United States, the Middle East, India, Mexico, the North Sea, Brazil, and West Africa. Majority of these regions are developing at a remarkable pace and would need technically advanced, competent and flexible rigs that can be operated under diverse conditions. Mexico and the Middle East have shown increased interest for jackups. Petrobas has extended the contract lengths from three to five years for Noble’s deepwater rigs.

However, abrupt changes in the supply/demand equilibrium of drilling equipments will likely hamper the company’s performance going forward. We also remain concerned about revenue utilization due to greater safety and equipment standard. Noble is also required to deliver its newbuild on time and within budget to reap benefits.

We think most of these factors are reflected in its present valuation, leaving little room for meaningful upside from its current levels. Noble holds a Zacks #3 Rank, which implies a Hold rating for a period of one to three months. The company faces tough competition from Schlumberger Limited (SLB) and Diamond Offshore (DO).

 
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