Barron’s has published a brief article making a bullish case for Noble Corporation.  Jay Palmer, writing for Barron’s, believes that Noble is well positioned for a world in which deepwater drilling will account for a growing share of production as China and other emerging countries continue to demand more oil.  The article points out that Noble has a solid balance sheet and significant international operations that should mitigate the risk of further disruption in the Gulf of Mexico due to the federal moratorium put in place in response to the Deepwater Horizon disaster.

Here is a brief excerpt from the article:

Noble is certainly a more attractive investment than its competitors. Transocean has run up a load of debt to buy its 135 rigs, while Noble’s debt is a modest 9% of total capital. In addition, Transocean’s operating profit margin of about 35% lags behind Noble’s 50%. Diamond, for its part, also carries a lot of debt while its stock trades at around 2.3 of book value, high relative to Noble’s 1.2.

One reason why Noble remains out of favor with investors is the company’s move this summer to purchase Frontier Drilling for $2.16 billion, money that investors would rather has seen distributed as a special dividend.  The move, however, was quite canny, immediately doubling Noble’s backlog and adding seven rigs to its fleet. The deal also boosted the portion of revenue coming from deepwater rather than shallow-water operations, and deepwater is where the future action is.

Click on this link to read the full Barron’s article (subscription required)

Barron’s believes that Noble also has potential advantages due to its presence in Brazil and the “bonanza of offshore finds” recently discovered in that country’s waters.  The article pegs fair value at $47 per share, or 44 percent higher than Friday’s close of $32.70.

Regular readers of The Rational Walk are already familiar with Noble which we profiled in early June when the shares traded near $28 due to panic in the industry associated with the uncapped Macondo well which was still spewing oil in an uncontrolled manner at the time.  Since our article appeared, shares have recovered by approximately 17 percent and the company has also paid a 0.665 per share dividend.

While the Barron’s article has the basic information, readers can revisit the articles in The Rational Walk’s series for a more complete analysis of Noble:

Readers who are interested in Noble’s competitors may find the following Rational Walk articles to be useful:

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

Barron’s Spots a Gusher in Noble Corporation
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5 thoughts on “Barron’s Spots a Gusher in Noble Corporation

  • September 5, 2010 at 6:36 pm
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    Ravi,

    Looks like Barron’s has finally caught up with our mindset. Took ’em a full month, but I guess that’s to be expected from our “efficient market”… haha.

    I really liked your previous analysis from Noble & commented about a month ago. I found a new company I think you would find particularly interesting. Buckle Corporation (BKE). The report I wrote up is on my website- I’d love for you to read it. Stock is currently down from less traffic in malls~ short-term problem.

    Normally, investment ideas aren’t supposed to come knocking, but I believe this is a unique situation. Please take a look at it. schn1eck7.wordpress.com

    Andrew

  • September 5, 2010 at 10:39 pm
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    Hi Andrew, I recall looking at the Value Line report for Buckle recently but forgot the details – will take a look at VL and your link – thanks for commenting.

    Ravi

  • September 6, 2010 at 8:41 pm
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    Ravi, I hate to bother you, but it is killing me that I haven’t heard your thoughts on the Buckle report yet. You ended up with the same results exactly after studying the drilling industry and you are still the only person in the world I found who believed in Noble for the same reasons. If you didn’t find the link to download it, here it is:

    schn1eck7.files.wordpress.com/2010/08/buckle1.pdf

    I wouldn’t bother you like this unless I knew I had something real. It’s a quick read.

    Andrew

  • September 6, 2010 at 9:08 pm
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    Andrew, I read your document earlier today and also reviewed the Value Line report. However, I have not read the 10-K and I’ve never been in a Buckle store so I have to try to visualize the concept. A few comments from my (very) limited knowledge of the company.

    Any retailer that grew sales and earnings during the recession must have some important competitive advantages – particularly given Buckle’s lack of promotional pricing. I noticed from the VL report that the company has been growing earnings and cash flow faster than sales in recent years – meaning that margin expansion has been responsible for a significant part of the EPS progress – net margin went from 8.8% in 2000 to 14.2% last year. While margin expansion is good to see, it raises the question of whether the current margins are sustainable. I suspect they probably are given that margin compression did not occur during the worst of the recession – but something to consider.

    I like the fact that the company is paying a reasonably high dividend and they apparently paid special dividends in 2007, 2008, and 2009. The VL analyst thinks they may pay another special dividend this year due to the lower div tax rate that expires at the end of 2010. No doubt high ownership levels by management has influenced this policy.

    So I like what I see and will have to read up on this some more. With retail, so much depends on the concept and the durability of the brand. Even without having been to a Buckle, I can say that I wouldn’t be able to personally relate to what they sell (I buy $15 jeans at Target!) but that’s not to say that the concept can’t be evaluated by talking to people in the target demographic.

    Anyway, you’ve motivated me to add Buckle’s 10k to my reading list – I may write a post on it or email you if I have more comments once I read it – thanks for the idea!

  • September 7, 2010 at 1:54 am
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    Absolutely. I am glad you took to it the way I first did. I was still skeptical until reading through the last 5 years of annual reports and then spoke with a few managers, but it all checks out (for me anyway).

    The margin growth over time was fueled mainly by stealing customers from PacSun, as shown through steadily higher inventory turnover, steadily increasing same-store sales, and PacSun’s fundamentals being absolutely destroyed (Check out THEIR value line page, not pretty).

    Their cash flow has grown in part from higher margins, but their store counts are also growing rapidly. That is where the true growth will come from in the future.

    I try not to chase dividends, but they can’t hurt. If they pay it out, I expect them to announce the special dividend in the next two weeks (we’re close to the time they announced them the last 3 years, all 2nd/3rd week in September). Just a heads up.

    Thank you very much for reading my report- I know I’m no writer, but it’s the best way to get ideas out there. I’d like to hear your final thoughts after researching to see where you’re coming from, and feel free to ask any questions.

    Also- a quick tip I recently learned. If you want to speak to top management at any business, call up their offices at 7:30 AM, or before their secretaries show up for work. You can get ahold of them directly and get some of your questions answered before their days start.

    Andrew

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