Noble Corporation

On 6/11 I opened a position in Noble Corporation (ticker: NE) by purchasing 200 shares for $5,458. I will look to purchase additional shares on further price weakness.

Noble is an offshore contract oil well driller, and its stock price has been hit tremendously hard in recent weeks as a result of the BP Deepwater Horizon incident. While Noble has no involvement with the Gulf disaster, the market is generally concerned with the effect that an extended moratorium on offshore drilling and new costly regulations could do to Noble's long term prospects. Additional concerns surround the company's ability to complete drilling projects currently under contract. I believe these concerns are overblown and at current prices, Noble represents a compelling bargain (slightly less of a bargain after its 10%+ gains since I purchased the stock).

Noble is an international operation with around 62 drilling platforms or rigs. Just over 20% of the company's revenues come from US based operations, and the remaining is spread throughout the world. Maintaining this level of jurisdictional diversity should be a big help if the Obama administration prolongs the current moratorium on drilling. Also helpful is the company's conservative capitalization - it maintains roughly the same amount of debt as cash on its balance sheet. By way of comparison, Transocean, another offshore driller, operates with a substantial amount of debt (roughly $9B to $13B of tangible assets).

Noble currently trades at around 5x last year's earnings and 3.2x EV/EBITDA. Notwithstanding the company's current challenges, this extremely low valuation allows for a sufficient margin of safety. In addition to a compelling valuation, Noble is a high ROA and ROE business, especially over the last ten years as the global economy has boomed and energy prices have risen (a trend I believe is likely to continue). Given the pace of our energy consumption, I'm also skeptical of claims that global oil consumption will decrease or be replaced. Offshore drilling may not be a choice given global energy needs.

Bottom line - I believe the Deepwater Horizon disaster has created an opportunity to purchase an excellent company at a compelling valuation.