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Offshore Driller Noble Retires Three Semi-Submersibles, Cuts 2015 Capex

Executives with the worldwide offshore driller Noble Corp. plc said they began to see warning signs for the industry in the fourth quarter and believe the environment for drilling contracts will remain tough for the foreseeable future -- at least until oil prices stabilize.

The London-based company reported a $595 million loss ($2.38/share) from continuing operations in 4Q2014, which included a noncash, after-tax charge of $713 million ($2.86/share) for its decision to retire three semi-submersible rigs. Revenues for 4Q2014 were $805 million, compared to $829 million in 3Q2014 and $725 million in 4Q2013. For the full-year 2014, Noble reported a net loss of $152 million (60 cents/share) from continuing operations, with revenues totaling $3.2 billion.

During an earnings call Thursday, CEO David Williams said the company's decision to retire the semi-submersibles -- the Noble Paul Wolff, Noble Driller and Noble Jim Thompson -- would save more than $300 million in capital expenditures (capex).

Williams said the rigs were already more than 30 years old and were either "already or soon to be scheduled for significant upgrades or refurbishments that had already been done on other rigs within the fleet. Consequently, we concluded the best course of action was to permanently retire each rig from service."

CFO James MacLennan said Noble would spend $585 million on capex in 2015, including $70 million on its newbuild program and $315 million on major projects. By comparison, the company spent about $1.9 billion on capex in 2014, most of which ($1.3 billion) went to the newbuild program.

"This is a tough contracting environment," said Simon Johnson, senior vice president for marketing and contracts. "We are focused on building on our considerable backlog and harvesting our strong customer relationships and capturing the value inherent in the Noble fleet. That said, we continue to observe numerous signs of stress in the offshore industry during the fourth quarter, and our view is that this market dynamic is not expected to abate materially in the near term."

Johnson said an imbalance in offshore rig supply became evident in late 2013. The offshore drilling industry suffered further after oil prices collapsed in the second half of 2014, and especially during 4Q2014.

"The timing of the price weakness was critical as it occurred during our customer's 2015 capital budget cycle," Johnson said. "As oil prices continue to decline, customers readjusted planned spending activity downwards.

"The fallout from these events [has] been featured on mainstream media reports on a daily basis. The current climate clouds our ability to make a reasonable judgment of when the market might moderate and improve. Operators are taking a wait-and-see approach that could well extend into the middle of the year. A significant first step towards recovery would be stability in the price of crude oil and higher levels than those experienced today...Stability is very likely more important than a return to [$100/bbl] oil."

Johnson added that despite some recent exploratory failures in offshore Greenland, New Zealand, the Angola pre-salt and the Norwegian Arctic, there have been "several notable discoveries" in the Gulf of Mexico (GOM). He added that he was optimistic that one of Noble's rigs, the Danny Adkins, would remain in the GOM after it finishes its contract in June.

The Adkins "has got an excellent operational record," Johnson said. "It's been drilling some technically challenging wells. The specification of the rig is in the top shelf of those available in the near-term market in the GOM. We are, like everyone, considering every opportunity for our rolling rigs outside of the markets that they're currently in. But at this stage, we are quietly confident that we'll get ongoing work for the Adkins. As I say, that's going to be driven by specification, its reputation. And at this stage, we're not concerned."

Williams added that it was unclear how long it would take for the offshore drilling industry to recover.

"As Simon pointed out, what we need to see is some oil price stability before we see operators kind of calm down and settle into an environment that makes sense," Williams said. "I think most people think that the old price can't stay down very long. 'Very long' is relative. In our business, we still have to deal with the supply question. Exactly how long [that] takes to manifest itself, we don't know.

"What I can tell you is that after looking around the landscape of other competitive drillers, I like where we sit. We've got the backlog this year [that] covers about $3 billion. We've got good coverage into next year. The oil price will settle down, and we will see our operators get back into what's the new normal."

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