Noble Drilling provides an attractive play on domestic and international jackup and deepwater drilling markets, with near-term upside from potential deepwater rig conversion projects, says S. Magnus Fyhr, vice president and oilfield service analyst for Jefferies & Co. in Houston. The firm has a Buy on NE, with a 12-month price target of $63 per share. Headquartered in Houston, Noble Drilling operates one of the largest offshore drilling fleets in the world, with exposure to such key offshore markets as the North Sea, West Africa, Brazil and the Middle East. Its fleet consists of 49 rigs, including 10 domestic jackups, 24 international jackups, nine semisubmersibles, three drillships and three submersibles. The company also provides turnkey drilling, drilling project management and contract engineering. In recent years, it has expanded its presence in the ultradeepwater market through its successful rig conversion program. "Noble Drilling continues to benefit from increasing Gulf of Mexico drilling activity, with nine of its 10 jackups currently working contracts that are set to rollover at higher dayrates within the next two months," Fyhr says. The company's current average domestic jackup dayrate is $43,000. In addition, with an international fleet of 24 jackups, three semis and three drillships, Noble Drilling has significant leverage to a recovery in the global offshore markets. Says Fyhr, "We believe jackup dayrates [in those markets] are poised to increase, since NE's international fleet is approaching full utilization." Utilization of the company's international jackup fleet averaged 87% in second-quarter 2000 versus 62% in the first quarter of the year. During the past two years, Noble has also successfully entered the ultradeepwater market through its EVA-4000 rig conversion program. This program has allowed the company to use its own proprietary design to convert its three-column semisubmersible rigs into ultradeepwater semis at a lower cost and in a shorter construction time than a new-build project. Says Fyhr, "With the fourth-largest deepwater fleet in the world, Noble intends to continue building that fleet through possible upgrades. Right now, the company has three rigs-the Ilion, the Noble Dave Beard and the Fri Rodli-that could be upgraded to a water-depth capability of 6,000 to 7,500 feet within 18 to 24 months. We estimate that each upgrade could add about 20 cents per share to Noble's annual earnings." Another plus for the company is its solid balance sheet. "With $130.5 million in cash at the end of the second quarter and an estimated 2000 debt/EBITDA multiple of two, Noble has plenty of liquidity to continue to expand its deepwater fleet," says Fyhr. "Also, we estimate that the company will generate free cash flow of about $340 million in 2001 and $627 million in 2002, which should allow it to pursue attractive acquisition and consolidation opportunities during the next few years." Attractively valued, Noble's stock is currently trading at 13.4 times estimated 2002 earnings per share-a discount to its large-cap peers, Transocean Sedco Forex and Global Marine. Note: Analysis took place 9-25-00 when NE closed at $44.94 per share and was reaffirmed 10-30 when $40.50. Currently, some 135.6 million shares are outstanding. The recent 52-week price range was $53.50-$18.68.