June 10th marked a significant day for shareholders of Noble Corporation plc and Diamond Offshore Drilling, Inc.
Shares of Noble Corporation rose by approximately 5.4%, while Diamond Offshore Drilling saw a substantial 10.3% increase. These moves were driven by the announcement that Noble Corporation will be acquiring Diamond Offshore Drilling in a cash and stock transaction valued at just over $2 billion.
This acquisition not only expands Noble Corporation’s footprint in the offshore drilling space but also opens the door for significant operating synergies. The success of this deal, however, will hinge on whether those synergies are realized, a prospect the market currently views positively.
The Deal Structure
The acquisition is structured as follows: upon completion in the first quarter of 2025, shareholders of Diamond Offshore Drilling will receive 0.2316 shares of Noble Corporation for each Diamond Offshore Drilling share they hold, along with $5.65 per share in cash.
Based on the closing prices on June 7th, this translates to $15.52 per share for Diamond Offshore Drilling shareholders, representing an 11.4% premium over the closing price on that day. After the merger, Diamond Offshore Drilling shareholders will own about 14.5% of the combined company.
For investors, the choice between acquiring shares of Noble Corporation or Diamond Offshore Drilling depends largely on the belief in the merger’s completion and the realization of projected synergies.
Analysis indicates that Diamond Offshore Drilling offers a more attractive return profile if the deal proceeds, particularly given the current discount and the implied upside.
Strategic Benefits and Synergies
The combined entity will operate a fleet of 41 rigs, including 28 floaters and 13 jackups, significantly boosting its operational capacity. At the end of the first quarter of 2024, Noble Corporation reported a backlog of $4.48 billion, up from $3.74 billion a year earlier.
Diamond Offshore Drilling added about $1.88 billion in backlog, an increase from $1.60 billion in the first quarter of 2023. Combined, the firms will have around $6.5 billion in backlog, reflecting additional contract awards after the first quarter.
Noble Corporation’s management anticipates cutting approximately $100 million in annual run-rate costs post-transaction, with 75% of these cuts expected in the first year alone. Historical data supports the feasibility of these synergies.
For instance, aligning Diamond Offshore Drilling’s performance with Noble Corporation’s robust margins from 2023 could yield an additional $173.2 million in EBITDA. Even using the most recent quarterly data, potential annualized cost savings of $57 million seem achievable.
Confident in these projections, Noble Corporation has already increased its quarterly distribution by 25% to $0.50 per share.
Financial and Operational Impact
Noble Corporation has a strong operating history compared to Diamond Offshore Drilling. From 2022 to 2023, Noble Corporation’s revenue surged by 83.1%, from $1.41 billion to $2.59 billion. In contrast, Diamond Offshore Drilling’s revenue increase was a modest 25.5%.
While Diamond Offshore Drilling has shown impressive bottom-line improvements, these gains stem from a low base, making them less significant in the broader context.
The acquisition’s success for Noble Corporation will depend on realizing the projected synergies. Evaluating the price to adjusted operating cash flow and EV to EBITDA multiples, assuming synergies are achieved, shows that Noble Corporation is acquiring Diamond Offshore Drilling at a discount to its own trading multiple.
Another valuation metric is the price paid for the backlog each company brings. Noble Corporation’s multiple stands at 1.44, while Diamond Offshore Drilling’s implied buyout price as of June 7th yields a lower multiple of 1.07. This indicates a substantial discount on future revenue for Noble Corporation.
Market Volatility and Risks
Investors must consider the offshore drilling market’s inherent volatility. Both companies declared bankruptcy in 2020 and restructured in 2021, highlighting the sector’s challenges. Concerns about future oil prices and OPEC+ production cuts add to the uncertainty.
However, the combined entity’s larger size provides a revenue buffer, potentially insulating it from market downturns. Global demand for rigs is expected to grow at a 6% annual rate until 2028, supporting long-term stability.
Conclusion
The acquisition of Diamond Offshore Drilling by Noble Corporation presents an intriguing opportunity. While Diamond Offshore Drilling shareholders stand to gain the most, there remains additional upside potential. Assuming the transaction proceeds, Diamond Offshore Drilling offers a better return profile than Noble Corporation.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
