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Tuesday, April 21, 2009

Establish Noble Corporation Covered Calls

A new covered call position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Noble Corp(NE) covered calls as follows:

Established Noble Corp Covered Calls for May09:
04/21/09 Bought 500 NE @ $26.37
04/21/09 Sold 5 NE May09 $27.50 Calls @ $1.02

Noble Corporation provides contract drilling services for the oil and gas industry. It supplies its 43 jack-ups and 20 deepwater rigs to a worldwide exploration and production market for corporate and state-owned customers in the Gulf of Mexico, Brazil, Middle East, W. Africa, and India.

Noble Corp's stock is now very attractively priced -- the entire company is valued slightly below the liquidation value of its rig fleet. And it is also attractive on several other key valuation metrics, including: (1) lowest P/E ratio in 20 years; (2) strong balance sheet with debt-to-capitalization declining to 11.7%; and a good cash position; (3) an ongoing commitment to share buybacks; (4) strong and increasing cash flow; (5) very strong recent cost control performance. These results are a testimony to the capabilities being demonstrated by the relatively new senior management team. This Covered Calls Advisor believes that the decision to re-domicile to Switzerland (from the Caymans) was one important demonstration of management's good strategic vision. And in the highly cyclical oil & gas industry, their prudent, conservative approach to cost controls as well as contract management seems very sensible. If oil pricing can show some stability at $45+ over the next few months (which this advisor believes is very likely), then the current softness in rig demand should begin to improve -- and Noble is well positioned to benefit as this occurs. In addition, management's future growth focus on worldwide deepwater rigs should serve it well.

Some potential results from this covered calls transaction are as follows:

Absolute Return if Stock Price Unchanged at $26.37: +3.9%
= $1.02/$26.37
Annualized Return if Unchanged(ARIU): +56.4%

Absolute Return if Exercised at $27.50: +8.2%
= [($1.02+($27.50-$26.37)]/$47.05
Annualized Return if Exercised(ARIE): +119.0%

Downside Breakeven Price Point: $25.35
Downside Breakeven Protection: 3.9%

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