It’s no secret that international growth (especially in markets such as China and India) has been driving global energy demand. Per the Economist, worldwide energy consumption will grow about 3.5% by the end of 2008, and oil prices are expected to remain relatively high.
However, emerging markets such as Brazil are also playing a pivotal role on the supply side as well. With the recent discovery of the Tupi and Jupiter fields off the coast of Rio de Janeiro, Brazil could find itself among some of the largest holders of oil reserves in the world. The location of these reserves (deep water) is beneficial for leading oil services companies such as Noble Corp. (NYSE: NE).
Overview
Noble Corp has a long history in the oil and gas industry, tracing its roots all the way back to 1921 (where it operated a single rig in southern Oklahoma). However, the firm is hardly living in the past, as it has positioned itself to be a leading player in deepwater offshore drilling. The recent announcement of $4 billion in probable contract renewals with Brazil’s state-owned Petrobras, shows the company is well positioned to capitalize on oil services demand growth in the region. And this growth could be even more substantial than initially thought, as current estimates put Tupi and Jupiter reserves in the range of $50-$70 billion barrels of oil (not to mention the gas reserves). In addition, Noble is also developing key projects off the coast of Mexico, India, Australia, and West Africa (which is thought to become another key deepwater region over the next few years).
Metrics
From a valuation perspective, I like that Noble trades at just under 12x trailing twelve month (TTM) earnings, while its peers trade at around 18x TTM earnings. This may partially reflect the stock’s above average beta (a measure of risk) of 1.4 vs. the industry average of 1.1.
However, I really like what I see in terms of profitability as gross, operating, and EBITD margins all are well above the industry averages. Further, the firm’s TTM net margin is well above its 5 year average of 29.9% at 40.3%. This is good stuff given its industry peer metrics are 13.1% and 21.5% respectively. I also like the EPS growth story: TTM and Q4 ‘07 EPS growth is high and way above industry averages, while the 5 year EPS growth rate is slightly below average. This could mean some of Noble’s strategy is beginning to pay off, and the market just hasn’t fully priced this into the stock yet.
Finally, I don’t see any serious leverage risks as debt / equity is a reasonable 0.2 vs. the industry at 0.5. I won’t dock them for a decline in Free Cash Flow growth, as this is a capital intensive industry and I think they are investing heavily in all of the right places.
Risks
Any stock pick has an associated level of risk - and this is no exception. While I believe emerging markets will continue to expand due to a rapidly emerging middle class (especially China) this could change in a heartbeat. Further, commodity prices are relatively high right now - and may not correctly reflect the level of supply. If the market reprices this could affect the industry across the board. Finally, while geologists are pretty good at finding and estimating reserves when it comes to oil - they can definitely be wrong. If the estimated reserves at Tupi and Jupiter prove to be far less than expected, this will adversely impact Noble’s stock price.
In Sum
I believe Noble Corp is well positioned to take advantage of global demand for oil and gas. While there isn’t much of Graham’s “margin of safety” at its current price, the stock doesn’t look too expensive given its prospects and strategy. I’d keep an eye on this one moving forward, as Noble’s bets could have big payoffs in the future.
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