Noble Corporation predicts that additional capital expenditures necessary to comply with new regulations for drilling in the Gulf of Mexico should not exceed $10 million per rig.  In the company’s second quarter 10-Q report filed with the SEC yesterday, management indicates that the exact amount required for rig retrofits cannot be precisely determined pending the release of final regulations.  The amount required for each rig is expected to vary based on its age.  It is also possible that Noble may incur similar costs for certain rigs that are presently located outside the Gulf of Mexico.

Earlier this month, we wrote about new requirements under consideration in Congress that could create competitive advantages for offshore contract drillers with relatively modern fleets.  In particular, minimum standards for blowout preventers could require redesigns for rigs that lack sufficient space for the larger units.  We noted that Noble CEO David Williams informed analysts that the cost for upgrading the company’s fleet could be easily managed.

Noble predicts that 2010 capital expenditures will be approximately $1.2 billion excluding additional capital expenditures related to the Frontier acquisition which was completed in late July.  Within the context of the company’s regular capital expenditure program, the cost of retrofitting rigs currently deployed in the Gulf of Mexico should have only a minor overall impact.

More complete coverage of Noble’s Q2 results were provided in an article on July 20 written at the time of the company’s initial press release on Q2 results.  We initially profiled Noble in early June as part of a series of articles examining potential opportunities in the oil and gas industry created by market reaction to the Deepwater Horizon disaster.

Disclosure:  The author of this article owns shares of Noble Corporation.

Noble Corporation Forecasts Manageable Cost for Retrofitting Gulf Rigs
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5 thoughts on “Noble Corporation Forecasts Manageable Cost for Retrofitting Gulf Rigs

  • August 12, 2010 at 3:03 pm
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    Ravi,

    You examined both Noble and Ensco. I think I know the answer, but I am curious why you only established a position in Noble and not in Ensco at that time.

    The reason I ask is because I established a position in both around that time, and I want to know your take on it

    Thanks

  • August 12, 2010 at 3:08 pm
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    I liked both and thought that the downside risks were roughly equivalent but felt that the upside for Noble at then-prevailing valuations was slightly better *assuming* that deepwater exploration plays an increasingly critical role in the coming decades. While Ensco is actively building up its deepwater fleet, Noble has more current capabilities in deepwater.

    I also thought that Noble had the balance sheet to weather the storm and, although I certainly did not predict the Frontier deal, that’s the kind of flexibility that a strong balance sheet w/minimal debt provides in times of distress.

  • August 12, 2010 at 5:01 pm
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    Ravi,

    In the short-run (prior to the Frontier deal), the uncertainties surrounding the deep-water moratorium for Noble were greater. But, now that Shell has agreed to pay a reduced day rates for its GOM deepwater contracts during the moratorium, and then resume the contract at the original contract rate, the situation a lot better and clearer.

    In the medium term, the jackup supply is going to affect Ensco probably more (in terms of % of revenues) than Noble – assuming that the world continues to need deepwater drilling (which both of us think is true). So, the upside seems greater for Noble.

    Is that similar to your reasoning for taking a position in Noble?

    Thanks
    Rishi

    • August 12, 2010 at 5:50 pm
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      Yes, I agree with what you are saying. Ensco has a fleet of relatively modern jackups (of the independent leg variety) that are more capable than the players that have really been hammered by the slow demand for jackups (such as HAWK which has relatively obsolete mat based jackups). Still, Ensco does seem more exposed to continued pressure in dayrates for jackups and is not exposed to as much upside from the deepwater which is where I think the best demand will be in the years to come.

  • August 12, 2010 at 6:16 pm
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    Even though Ensco has a relatively modern fleet that has helped it to maintain high day rates, this will erode to some extent once the uncontracted jackup newbuilds start flooding the market.

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