According to a 13G filed with the SEC, Jeffrey Tannenbaum’s Fir Tree owned 21 million shares of Noble Corp , a $9.1 billion market cap contract offshore driller operating globally. This looks to have been a very big move for Fir Tree: the hedge fund had not owned any shares of Noble as of the end of December, per its 13F filing, and the size of this new position seems to make it larger than any Fir Tree owned at that time.
Contract drilling revenue, which is by far the largest source of revenue for Noble, grew by 31% last year compared to 2011. Costs increased as well, but with some expenses (notably depreciation and SGA) growing at considerably lower rates than revenue. The company reported earnings per share of $2.05 for the year (up from $1.46 a year ago, reflecting an impressive growth rate on the bottom line). Cash flow from operations came close to doubling, though Noble did have to raise cash in order to help cover its capital expenditures (of course, the high level of CapEx--$1.7 billion compared to the market capitalization of $9.1 billion--would be expected to drive more growth going forward).
Noble currently trades at 18 times trailing earnings, so the company will have to continue to deliver earnings growth in order to make it a good value at these levels. Analysts are bullish with consensus for 2014 implying a forward P/E of only 8. With offshore drilling activity depending on high oil prices (since offshore wells are expensive to drill, the price of the produced oil over the life of the well must be high in order for the internal rate of return to make sense for an oil company), the stock carries a beta of 1.7.
Billionaire David Tepper’s Appaloosa Management initiated a position of 1.3 million shares in the company during the fourth quarter of 2012 (check out Tepper's stock picks). Adage Capital Management, managed by Phil Gross and Robert Atchinson (who had previously worked at Harvard Management), reported ownership of 4.9 million shares in Noble as of the end of December (find Adage's favorite stocks). David Gallo’s Valinor Management also liked the stock, increasing its stake by 70% to a total of 3.9 million shares.
Other offshore drillers include Transocean , Ensco , and Diamond Offshore Drilling; most of Nabors Industries' operations occur onshore, but it does operate some offshore rig assets as well. Noble is even with this peer group in terms of where it is valued compared to forward earnings estimates: all five end up in the 7-10 range. In some cases, the trailing P/Es aren’t exactly high either, and combining that fact with high growth expectations results in quite low five-year PEG ratios. Ensco, for example, is valued at only 11 times its trailing earnings. Transocean had to take a large write-down last year, but its adjusted earnings per share would place it at a similar level. We’d also note that billionaire activist investor Carl Icahn has taken a large stake in Transocean and has been pushing for the company to return more cash to shareholders.
Noble does appear to have strong growth prospects, so much so that the company has room to fall short of analyst targets and still turn out to be a good value. However, the same can be said for other companies in offshore drilling, including some where the trailing earnings multiple is actually in or closer to value territory, and therefore the business is less dependent on growth. As a result we’d recommend that interested investors start looking at Ensco or Transocean and then consider Noble and the rest of its peers if those companies turn out to have substantial issues.
This article was originally published as Hedge Fund Takes 8.3% Stake in This Offshore Driller on Fool.com
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