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Freeport’s Capex Cut Could Weigh Negatively on Noble

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Noble’s backlog

Noble’s (NE) backlog as of September 30, 2015, stands at $8.1 billion, or 245% of the trailing-12-month revenue.  The fall in backlog is similar to other offshore drillers (XLE) such as Ensco (ESV), Seadrill (SDRL), Transocean (RIG), Atwood Oceanics (ATW), Diamond Offshore (DO), Rowan Companies (RDC), and Pacific Drillers (PACD).

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The backlog of 2016 to 2017

Noble’s 2016 backlog stands at $2.5 billion. This is 75% of the company’s revenue over the last four quarters. This means that if the company isn’t able to secure new contracts, the company’s 2016 revenue will be, at most, 75% of its revenue over the past four quarters. Additionally, the backlog for 2017 stands at $1.6 billion, or 48% of the revenue for the past four quarters.

Threat to backlog?

Freeport announced on December 9, 2015, that its capex (capital expenditure) cut will include plans to idle two of the three contracted deepwater drillships in the Gulf of Mexico. Noble comes under risk as it has two drillships contracted with Freeport while Rowan Companies (RDC) has one rig. Compared to Rowan’s rig day rate, Noble’s rigs have a higher day rate. This increases the possibility that both of Noble’s rig would be idled.

In a conference, Noble’s management didn’t provide any major answer to this. The company said that the announcement was unanticipated, and further added that there were firm contracts with Freeport, so Freeport wouldn’t be able to walk away without negotiating.

Possibilities

As Noble stated, the contracts are firm, and this gives the assurance that there won’t be any termination straight away. The negotiations could turn into a “blend and extend” agreement, as that’s common these days in the offshore drilling industry. In “blend and extend” contracts, the day rates are reduced while the contract term is extended. This mostly doesn’t change the total backlog, but it also doesn’t match with Freeport’s decision to “idle two rigs.” Additionally, we have seen in some cases that oil companies idle rigs then pay a small portion of the day rate to the offshore driller until the contract ends. In the case of Freeport and Noble, this can be a high possibility if the contract allows it. But whatever the case may be, Freeport’s decision is a negative to Noble.

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