Thursday, January 15, 2009

Barrons: Noble Drilling Trading Below Breakup Value

Here's some interesting news on a stock I was high on for a long time, Noble Drilling Corp. (NE). They are an offshore oil driller with a great competitive advantage in terms of leases, locations, and how the company is structured. The problem is its be massacred with the price of oil. I owned it for quite awhile in 2008, but currently have no position.

Barron's has an online exclusive out today saying the stock is now trading below breakup value.

Friedman Billings Ramsey Managing Director Robert MacKenzie estimates that Noble's liquidation value is $24 a share. (In valuing Noble's fleet, MacKenzie estimates what these rigs would be sold for in the open market after depreciation. To be conservative, he takes 30% off last fall's peak prices for rigs.)

Noble's shares closed at $21.04 on Wednesday.

"Noble is trading below the worst-case intrinsic value" of its fleet of rigs, says MacKenzie. "That doesn't mean that it's not going to trade down in the near term, but anytime you can get an investment-grade company at less than what it seems to be fundamentally worth, it's a good investment over a prolonged period."

It helps that Noble has "by far the strongest balance sheet" among its peers with debt to capitalization of 7%, adds MacKenzie. Carrying a universally Stable rating by credit agencies, its long-term debt is rated Baa1 by Moody's and A-minus by both Standard & Poor's and Fitch.

Now, the stock price isn't going to resume higher unless a few key things happen, and the most important one would be crude oil heading higher. The key reasons why its business model flourished over the past year are in question. With demand soft, there is no need for oil companies to pay big money for offshore oil leases. Noble is okay for the near term, as they have leases locked in (usually about a year out) with high dayrates, but the market trades on anticipation of future events.

Saying the stock is trading below breakup value is great from a value standpoint, but it doesn't mean you're going to make money by buying the stock. The company likely won't breakup and sell off its assets, and those breakup values could prove to be grossly inflated if the recession lasts for a long time, or if we see a major shift from crude oil to alternative energies (this will happen, but it will take some time).

Bottom line, if you're looking to buy an oil stock, its a good buy. They are positioned well and ready for a major bounce if oil prices come back. A lot of the downside risk has been taken out of the stock, and if you're willing to be patient, this could be a nice buy.

Disclosure: No position

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