We believe Noble’s active risk management framework has helped it to avoid major balance sheet-related write-downs, even as commodity prices fell rapidly in 2H08.

Lower levels of inventory. Expectations of softer prices led the company to lower inventory levels: in 3Q08, inventory was US$2.1bn (equivalent to 23 days of sales), -14% QoQ, with 94% of this classified as readily marketable or hedged inventory. We think this trend of lower inventory levels continued into the 4Q08.

VAR framework in place. The quarterly net profit was also achieved with Noble's VAR in the daily range of 2.64–1.74% of shareholders’ funds (the daily range last year was 4.59–0.59%). Noble did not run on a VAR risk- management model prior to 2007.

Rising cash levels. Cash levels rose by 37% QoQ to US$1.1bn in 3Q08, helped by a US$1.5bn reduction in current assets, ex cash (led by prepayments, which fell by 30% QoQ). This trend may have continued in the 4Q08 given a continued fall in commodity prices in the quarter. The nominal net gearing ratio in 3Q08 fell to 108% from 132% 2Q08. Adjusted for readily marketable/hedged inventories, the 3Q08 net gearing ratio would have been 4%, which would have continued to decline in 4Q08. The sale of Portman shares in a privatisation exercise would have added nearly US$90m to its cash balance in 4Q08. We expect a further reduction in gearing levels in 1H09 because of reduced working capital needs due to lower commodity prices.

The key risk remains lower volumes that lead to lower profitability being priced-in. We expect a 20% contraction in overall volumes for FY09, with net profit of US$293m, -43% YoY.Earnings revision
Our investment thesis for Noble revolves around the theme that careful inventory management and lower financial gearing ratios will lead to a perception of reduced risk levels. A better-balanced and more-diversified profit pool should enable it to remain profitable this year, albeit at lower levels. Noble currently trades at a FY09E PER of 7x and a P/BV of 1.1x. Our target price of S$1.35 implies a FY09E PER of 10x. FY08 results are slated for 26 February.