Noble announced first quarter 2015 earnings yesterday (5th May 2015) which beat Macquarie Equities Research (MER’s) estimates. MER released a research report on the same day, reiterating its ‘Outperform’ rating on the commodity company with a 12-month price target of $1.35. Read on for more excerpts….
 
Event
Noble’s just-reported 1Q15 clean net income supports MER’s (and MER believes consensus’) full year expectations. MER also welcomes the higher level of disclosure around operating divisions and fair value balances, though some may have expected more here. 1Q15’s weak operating cash flow, whilst partially explained by timing issues, does take some of the shine off. But overall, this was a solid start to the year for the “new Noble”.
 
Impact
1Q15 clean net income of US$118m came in ahead of MER’s US$100m estimate, covering 24% of MER’s (and consensus’) full year estimate. The 37% year on year (YoY) decline should be taken in the context of a difficult comparative (1Q14 was Noble’s second best quarter ever). Sequentially MER saw a material improvement versus the US$12m logged in 4Q14.
 
Looking at the new divisional split, the new Energy segment did well despite weak market backdrops as Noble increased its share in the oil liquids market and was able to register a surprising 25% volume growth in thermal coal. Gas & Power was held back by a slow start in gas specifically, which MER needs to investigate more. Mining & Metals was held back by aluminium and iron ore (coking coal volumes were up 70% YoY though).
 
Weak cash flow takes some of the shine off. A key driver of the US$600m operating cash outflow in 1Q15 was a big decline in accounts payable, which Noble’s commentary suggests is in large part due to timing issues around trade in the oil segment (e.g. 4Q14 registered a similarly big increase in this balance). 2Q15 should give MER a better sense of the ‘normalised’ trend (and whether there is such a thing). In this context MER would note, however, that Noble also announced today that it has secured commitment for the full US$2.25b revolving credit facility it launched in April under ‘normal’ terms.
 
More disclosure of fair values. Noble is now providing quarterly updates on its Level 3 fair value balances (i.e. those that are hardest to value). In 1Q15 MER could see that Noble generated US$11m of cash from these balances, while the P&L incorporated a US$10.8m unrealized loss (and thus didn’t ‘pad’ the result). Overall, the net fair value balance (levels 1-3) actually declined by 9% which may allay some concerns in this area.
 
Earnings and target price revision
No change. Noble’s new disclosure will require a revamp of our model though.
 
Price catalyst
12-month price target: S$1.35 based on a Price to Book methodology.
 
Catalyst: Noble is hosting a sell side lunch in Singapore on May 11th where MER can explore cash flow dynamics and operational trends in more detail.
 
MER’s action and recommendation
Noble’s annualized return on equity (ROE) is back up to 9%, from 1% in 4Q14. If this trajectory can hold, with more normal cash conversion, we remain confident that Noble can go back to trading at a premium to book value, as implied by MER’s target.

Source: Macquarie Research - 6 May 2015