By Alex Gavrish, Etalon Investment Research, author of “Wall Street Back To Basics”
Noble Corp is in the process of separating its standard-specification drilling business into a separate company called Paragon Offshore.
Noble Corp is a leading offshore drilling contractor for the oil and gas industry. Noble performs, through its subsidiaries, contract drilling services with a fleet of 77 offshore drilling units (including two ultra-deepwater drillships and four high-specification jackup drilling rigs currently under construction), located worldwide, including in the U.S. Gulf of Mexico and Alaska, Mexico, Brazil, the North Sea, the Mediterranean, West Africa, the Middle East, India, Malaysia and Australia.
Spin-off of standard-specification drilling business
During September 2013 Noble Corp announced plan to create independent standard specification drilling company. The separation will result in the creation of two separate and highly focused offshore drilling companies. The new company will operate most of the standard specification drilling units in the Noble fleet and would also be responsible for the Hibernia platform operations. Noble itself will continue to own and operate its high-specification assets with particular operating focus in deepwater markets for drillships, semisubmersibles and harsh environment and high-specification markets for jackups. According to company’s proxy filing for the annual shareholders meeting, full separation and distribution of shares of the new unit may be preceded by an initial public offering of up to 19.7% of the shares of the new company, which will be called Paragon Offshore. Paragon Offshore will generate approximately $715 million annually in EBITDA.
According to IPO/spin-off prospectus, Paragon Offshore expects to pay a quarterly dividend of $20 to $22.5 million or between approximately $80 million and $90 million annually. Assuming a post-IPO valuation multiple of x8 EV/EBITDA, Paragon Offshore would have an enterprise value of $5,717 million, net debt of $1,525 million (assuming IPO proceeds would be repaid to parent and no new debt is raised), market capitalization of $4,193 million and share price of $16.5 (based on 254.1 million of shares outstanding).
Parent company valuation
Based on a recent price of $31.62 per share, stand-alone Noble Corp (market price of $15.12 per share) would have an enterprise value of $6,934 million and market capitalization of $3,843 million. Based on pro-forma financials for 2013 and after adjustment for estimated proceeds received from Paragon in the IPO process, this would value Noble Corp at an EV/EBITDA multiple of x5.6 and a P/E ratio of x8.2.
During 2013 Noble Corp paid a total of $1 per share in dividends, which reflects an annual dividend yield of 3.2% based on a recent share price. The company recently increased dividends further and in February 2014 paid a quarterly dividend of $0.375 per share. In an annual report filing for 2013, Noble Corp mentioned that after the latest increase the annual dividend stands at $1.5 per share, which implies an annual dividend yield of 4.7%. Assuming that dividend will stay at the same level going forward and deducting estimated dividend payments by Paragon Offshore in the amount of $85 million, Noble Corp can be expected to pay annual dividend of $1.17 per share ($296 million). On a post spin-off basis the annual dividend yield can therefore rise to a very attractive 7.7% level.
Share price underperformance
Over the last 1, 2 and 5-year periods, shares of Noble Corp significantly underperformed both the broad market index and a sector index. Without accounting for dividends, shares returned only 27.4% over the last 5 years compared to a 128.2% return on the S&P 500 Index and a 147.5% return on iShares U.S. Oil Equipment & Services ETF. In August 2013 Noble Corp appeared on a list of the 40 cheapest stocks, published by Goldman Sachs analysts (http://www.cnbc.com/id/100946609).
The stock was trading at about $39 per share back then and its price is currently by about 19% lower. Prolonged period of share price underperformance, attractive dividend yield, restructuring through the planned spin-off of standard specification drilling segment, and positioning of the remaining company to focus on the more profitable segments of the offshore drilling industry provide an interesting situation for long-term oriented investors.