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Executives

David Larson – VP, IR

Chuck Davidson – Chairman and CEO

Dave Stover – President and COO

Analysts

Dave Kistler – Simmons & Company

Anne Cameron – J.P. Morgan

Mike Jacobs – Tudor, Pickering, Holt

Brian Singer – Goldman Sachs

TJ Schultz – RBC Capital

Dan McSpirit – BMO Capital Markets

Noble Energy, Inc. (NBL) Q4 2009 Earnings Call Transcript February 18, 2010 10:00 AM ET

Operator

Good morning. Welcome to Noble Energy's fourth quarter 2009 earnings conference call. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. David Larson. Please go ahead, sir.

David Larson

Good morning, everyone. Welcome to Noble Energy's fourth quarter and year-end 2009 earnings call and webcast. I'd like to start out today with a few introductions. On the call, we have Chuck Davidson, Chairman and CEO; Dave Stover, President and COO; and, Ken Fisher, our new CFO.

The agenda for today will include some opening comments by Chuck and review the financial results for the quarter as well as discuss our guidance and capital outlook. Dave will then talk about operating results for the quarter and the highlights of our activity levels in 2010. Ken will be available to address any financial topics during the Q&A session. As usual, we'll leave time for Q&A at the end, and try to wrap up the call in less than an hour. Should you have any questions that we don't get to, please feel free to give us a call and we'll do the best we can in answering them.

We hope everybody has seen both of our news releases that we issued this morning, one announcing our fourth quarter full year results, and the other covering our 2010 guidance. Later today, we expect to be filing the 10-K with the SEC, and it will also be available on our Web site.

I want to remind everyone that this conference call does contain projections and forward-looking statements based on our current views and most reasonable expectations. We provide no assurances on these statements as a number of factors and uncertainties actual results in future periods to differ materially from what we discussed. You should read our full disclosures on forward-looking statements in our latest news release and SEC filings for a discussion of all of our risk factors that influence our business.

We'll reference certain non-GAAP financial measures today such as adjusted net income or discretionary cash flow. When we refer to these items, it's because we believe they are good metrics to use in evaluating the company's performance. Be sure to see the reconciliations in our earnings release tables.

With that, let me turn the call over to Chuck.

Chuck Davidson

Thanks, David, and good morning, everyone. I thought maybe it would be helpful to step back a bit as we open this call up and take a big picture look at 2009. There certainly are a number of things to reflect upon. It's certainly easy to predict – forget the predicament all of us were facing at this time a year ago, probably because most of this is spent all year trying to forget them. But in reflection, I believe we at Noble Energy made some of our best decisions ever as we entered into 2009, decisions that were certainly not made easily and not without pain.

First of all, we knew a year ago at this time that we were experiencing an incredible run of exploration success, success that was delivering formidable inventory of major projects to us. These projects certainly had the potential to bring huge growth to our company over the next decade.

I think second at that time, it was clear that we were bearish on US natural gas. As a result, it made no sense for us to spend a lot of money drilling up our US gas inventory in the environment that we faced. So at the beginning last year, we cut capital. We cut it hard, initially from $2.3 billion in 2008 to $1.6 billion, and later, we lowered our 2009 budget to $1.4 billion. And then we held the line, actually ending 2009 at $1.3 billion. Harder chip with these reductions were our US onshore programs, which suffered close to a 40% cut in organic spending last year from the 2008 levels.

Looking back, I believe we would make these calls over and over again. These decisions kept us positioned well to execute our major project program. We're able to generate free cash flow for the year, strengthen our balance sheet, ending with a debt-to-book capital ratio net of cash of 14%. And we retained substantial financial firepower, which opened the door to make what I believe was a great acquisition at the end of the year. So I think we can't be happier with where we are today.

Of course, the offset was that we had to take a timeout on growth. Onshore in the US, even with the severe capital cuts, we're able to grow our volumes led by our liquid-rich Wattenberg field. We also increased our onshore footprint, adding to our large acreage positions and increasing our core Wattenberg and the growing DJ Basin opportunity set. And we achieved positive initial results on our East Texas Haynesville program, while our teams continued to improve drilling times in a number of plays throughout our portfolio.

And the deepwater Gulf of Mexico exploration results at Santa Cruz and the subsequent sanctioning of the oil development at Galapagos are important steps for Noble Energy. Success at the deepwater lease sale also allowed us to increase our inventory of exploration prospects in the deepwater Gulf of Mexico, which now contained more than 1.6 million barrels of net unrisked potential resources. Late in the year, we initiated drilling on two significant exploration prospects from this portfolio.

Internationally, we had tremendous exploration success in Israel, with our largest discovery ever at Tamar and the subsequent Dalit find. Contracting for the sale of Tamar's resources is ongoing. We announced signed letters of intent covering some $10.5 billion in gross expected revenues, with less than a third of resources committed. And we immediately moved forward with the development plans that should lead to the sanction of Tamar this year. In Equatorial Guinea, we added an oil discovery at Carmen, and we sanctioned our first West African project, the Aseng oil field.

Even with our significantly reduced capital program from a drill-bit perspective, we'll be able to replace production with new reserves. However, that's only half the story as the new rules require average pricing and that proved and undeveloped reserves be developed within five years of drill one-time negative revisions for us. I believe we've taken an appropriately conservative position, especially regarding the proved and undeveloped rule, but time will tell. Regardless, these revisions, which shifted proven reserves to probable are expected to reverse back to proven with higher gas prices and continued development. In addition, we have just now started to book some reserves from our recent exploration successes. And we would expect significant reserve additions in 2010. Dave will be covering this a bit more later in the call.

With that, let's touch on the fourth quarter results before going through our outlook for 2010. Adjusted net income for the fourth quarter 2009 was $178 million or $1.01 per share diluted after removing the adjustment items. By now, you're familiar with unrealized mark-to-market impacts on us. And I won't go through those nor will I spend any time on the return of deepwater royalty payments due to the resolution of some litigation that's been well publicized and benefited a number of oil and gas producers during this period.

But I did want to quickly comment on the impairment items. In the US, we impaired two gas properties. One was taxed then in the New Albany Shale. And that was due to the reduced gas pricing outlook. The other was our Raton gas development, the deepwater Gulf of Mexico where we experienced some mechanical on a gravel pack that (inaudible) the well performance there.

Outside the US, we took a hard look at Ecuador, given the increasingly unsubtle economic and political environment there as well as recent actions by the government that could lead to termination of our production sharing contract. While we'll certainly vigorously act to protect our interests, we determined that on a risk-weighted, the carrying value of our Ecuador investments exceeded the fair value, and we wrote it down accordingly.

Sales volumes for the fourth quarter averaged 206,000 barrels of oil equivalent per day, down slightly from our expectations, primarily due to our North Sea and Israel properties. In the North Sea, lower than expected oil volumes resulted from the timing of the FPSO repairs and the completion of the field optimization work at Dumbarton. Fortunately, those repairs have now been completed. And also, the first well at Lochranza's online as well.

Natural gas volumes in Israel were lower than expected. This was due to a couple of reasons, one was warmer than normal weather. Also, we had increased imports of competing Egyptian gas. And also, our customer there, Israel Electric, had some downtime on one of their power plants. Volumes in West Africa remained stable for both liquids and natural gas. And in the US, we continue to have strong liquid production from our deepwater properties and from our liquids focused drilling programs onshore.

Overall, our results continue to be supported by good exposure to liquids, which ultimately make up about 40% of our total volumes. Higher natural gas liquids prices continue to enhance our net debt gas prices in certain US locations. And higher oil prices have helped us in Israel. In fact, our natural gas pricing in Israel this past quarter was a record for us.

With respect to costs, we wrapped up a good year of performance in the fourth quarter. Our lease operating expense, DD&A, explorations, G&A, all came in generally in line with our expectations. Our effective tax rate for the quarter on an adjusted basis was a little lower than guidance. Capital expenditures for the quarter were $384 million making the total for 2009 just over $1.3 billion. With discretionary cash flow for the year of nearly $1.7 billion, we generated about $375 million of free cash flow, certainly a very impressive result given the environment and challenges we faced this past year.

Total debt at the end of the year was down to $2 billion. And we ended the year with $2.7 billion in liquidity. That's between our cash and our available credit facility.

Before touching on our capital and guidance, let me just mention four key objectives that really frame our 2010 programs. First is that we want to make sure that we progress with the development and assessment of our projects. These are clearly our most leveraging investments. Second on the list is to maintain our strong existing production base such that when the major projects do come on stream, that they deliver true incremental growth. Third is to continue the momentum from explorations. And in that regard, we'll be testing high impact opportunities in all three of our main exploration basins this year. And finally, we want to make sure we retain our strong financial capacity. These objectives are what we are focused on as we move our company forward this year. And I think we are in excellent position to deliver on all of those.

In 2010, our capital program is planned to be $2.5 billion. That of course excludes the purchased for the DJ Basin assets. It also excludes the non-cash capital that's being approved for the Aseng FPSO's capitalized lease. We continue to increase the allocation of our capital for long term investments. Our major projects development and exploration capital will make up some 60% of our program in 2010, up from just over 40% last year. The execution of our major projects come with significant capital outlays of about $1 billion in 2010, but of course, the majority being allocated to Galapagos, Aseng, and Tamar. Galapagos is expected to come on production next year, and both Aseng and Tamar in the following year in 2012.

Twenty percent of our capital program in 2010 or about $500 million is focused on exploration and appraisal activities, targeting an estimated 700 million barrels of net unrisked new resources that we could potentially add to the portfolio. This represents a continued commitment to a significant exploration program for Noble Energy. In addition to the large investments and new acreage and seismic data, we'll be participating in seven high impact wells, with five of them being in the deepwater Gulf of Mexico, one in Equatorial Guinea, and one in Eastern Mediterranean.

As I mentioned before, we have two tests underway at Deep Blue and Double Mountain in the deepwater Gulf of Mexico. We'll also be appraising a large Gunflint discovery with one or two wells this year, and participating in at least one other test in the deepwater Gulf of Mexico. In Equatorial Guinea, we'll be drilling an additional oil prospect. And late in the year, we anticipate resuming exploration in the Eastern Med, looking to build on our tremendous success that we've had already there in Israel. So we have a lot of important impactful things on the exploration and appraisal front. And we certainly expect continuous activity throughout the year.

We anticipate 2010 daily productions to average between 211,000 barrels and 224,000 barrels of oil equivalent per day, with the midpoint of the range being up about 3.5% from our 2009 level. In the US, we expect slight overall growth led by our onshore development programs, which again are focused on liquid-rich developments as well as emerging plays, as well of course as folding in a partial year's production from the DJ Aseng acquisition. In the deepwater Gulf of Mexico, we expect natural to decline in our existing properties in 2010, but of course, looking forward, the deepwater production additions in 2011 with the Galapagos startup.

Internationally, we expect slight growth overall led by increased natural gas demand in Israel and from our developments in the North Sea in China, offset by some decreases at Alba in Equatorial Guinea resulting from scheduled facility maintenance there.

So there's a lot on our plate for 2010 as we move forward in developing these world-class major projects as we build our – build on our exploration success with new discoveries and certainly keeping ourselves well-positioned as we enter this new decade. With that, I'll turn the call over to Dave.

Dave Stover

Thanks, and good morning, everyone. I'd first want to briefly highlight our recent acquisition that it's still expected to close toward the end of the first quarter. These assets are a great fit with our Wattenberg position, and also continue to expand our position outside of this field in the DJ Basin. This opportunity was made possible by a tremendous effort on both sides to quickly evaluate, negotiate, and reach a definitive over the holidays.

Looking at what this acquisition contributes, we're excited about adding over 50 million barrels of oil equivalent of proved reserves in this area by the end of the first quarter, with potential to at least double that number through development of the large inventory of probable and possible opportunities. With a couple of thousand projects and a high liquid yield, we expect to ramp up the rig activity on these properties from currently one operated rig to three by mid-year, with additional increases next year. This will drive our production growth profile from around 10,000 barrels of oil equivalent per day currently to an average of 20,000 in 2012.

We already own some interest in a number of these properties in Wattenberg. And this hold on allows us to implement a growth program for these assets similar to what we accomplished with the 2006 US exploration assets. In addition, the acreage outside the Wattenberg field comes with some existing seismic that is currently being processed and will help us evaluate additional running room in the DJ Basin.

Turning to our current operations at Wattenberg, our drilling activity was increased in the fourth quarter to five rigs. And we have since added a sixth rig early in 2010. Record drill times in Wattenberg continue to be achieved on the order three days spud to spud. After the acquisition closes, we expect to add two additional rigs to the field mid-year, and plan on operating at least eight and up to nine rigs in the field for the remainder of 2010.

As we continued to focus on the liquid potential of this field, we conducted a three-well horizontal program Niobrara program late in 2009 after extensive study of this opportunity, and looking at results from an early 2009 test. Two of the recent wells have been completed, with the third completion scheduled to commence in the next couple of weeks. The initial well results have been encouraging. And we planned to have one rig in Wattenberg focused on horizontal Niobrara drillings throughout the year.

As most are aware, there's been a lot of interest in horizontal Niobrara running room in the DJ Basin. Applying the same geoscience processes and technical discipline that has proven successful in our other exploration plays, we will drill some horizontal Niobrara oil tests outside of the Wattenberg field during the second half of the year. Our future drilling efforts in the basin will be assisted by having over 300 square miles of 3D seismic by the end of the year. Including our holdings in the Wattenberg field, we've built a substantial acreage position of over 700,000 net acres in the central DJ Basin.

Overall, we will allocate $480 million for continued development of Wattenberg in 2010, targeting over 1,000 total projects, including new drills, refracs, and tri-fracs. Approximately 20 of the new drills will be horizontal Niobrara tests. And we will continue to look for additional potential in other zones at this prolific field as well.

At our Iron Horse field in Wyoming, we finished a two-pad 16-well program late last year. The first pad of wells has been completed, with the second pad scheduled to come on line in early March. Based on the results we have seen so far, we will return to drilling on the second half of 2010, with plans for about 15 new drills targeting this liquid-rich play.

In East Texas, our first Haynesville completion continues to perform well. And we drilled our second and third wells in Shelby County during the quarter. The second well, the Peace 1 was completed at the end of January. In the first two weeks of sales, the well averaged 7 million cubic feet per day, but exhibited drawdown behaviors every bit as strong as the first well. We are purposely constraining the flow back rate to test ways to maximize recoveries from this area. Completion operations are underway at the third well. And we're currently drilling the fourth. Noble Energy has now taken over operatorship on the joint venture acreage. And we just recently brought in a second rig as we target 11 Haynesville new drills in 2010.

Overall, we will be operating in average of 12 to 13 rigs onshore during 2010. As mentioned, we will run about eight on average in the Wattenberg; two in East Texas; two for Western Oklahoma and Texas Panhandle; and then our final rig, which is currently operating in the Piceance and the Iron Horse in the second half of the year. Total US onshore capital, excluding the acquisition costs will be approximately $860 million, around a third of our company capital.

Moving to deepwater, fourth quarter operations included a successful sidetrack at our Swordfish property. You will remember we had a gapped well that watered out during the third quarter last year, and we brought a rig in to sidetrack into an oil (inaudible). Results were very positive, and the full impact of the oil, up to 25,000 barrels of oil net is expected at the end of the first quarter. The well just started flowing at a curtailed rate of about 15,000 barrels of oil per day net as full production has been delayed due to a third party export pipeline repair.

We anticipate spending about 22% of our 2010 capital in the deepwater Gulf of Mexico, with a focus on three key areas. One will be moving forward our sanctioned Galapagos project, with a target of about 8,000 barrels of oil equivalent per day net in mid-2011. Our shared rig, New ENSCO 8501 is expected to arrive later this quarter and initiate drilling on the Santiago exploration test, a lower risk prospect in the Galapagos complex. The rig will then move to the completion of the two to three producers. As a reminder, development plans include subsea tiebacks to BPs in the NaKika facility.

Second and as Chuck mentioned, we'll have a very active exploration year in 2010, with at least three significant new exploration tests, two of which are currently underway at Deep Blue and Double Mountain. We also anticipate participating in another large third party prospect in the second half of the year. Noble operates Deep Blue and BHP operates Double Mountain. At Deep Blue, another block that contained a portion of the prospect was brought into the unit during the fourth quarter. We now hold a 33.75% interest in this prospect, which we have characterized as greater than 200 million barrels and our largest deepwater Gulf of Mexico pre-drill prospect to date. Those wells are drilling ahead, and we should have results by the next earnings call.

The third area of deepwater focus in 2010 is the appraisal of large Gunflint discovery. After Deep Blue, our rate will proceed to drill one and possibly two appraisal wells at Gunflint. Designed to really help us understand the extent and the size of the structure, the wells will assist in the ultimate planning for development. Adding in the three significant exploration tests, we will have five impactful exploration and appraisal wells in the Gulf of Mexico this year. With one operated full time rig and second operated rig on a sharing arrangement, we'll be very active in the deepwater in 2010.

Now, let's move to international, which comprises about 45% of our 2010 planned capital program. Fourth quarter sales volumes were lower than expected in Israel as we were impacted by warmer than normal weather, larger allocations of current demand being met by gas imports, and downtime at the Dalit power plant. A heat-combined cycling unit went down in the fourth quarter, and was expected back online later this quarter. Net income during this outage is 10 million to 20 million cubic feet per day.

The weather trend has continued through January as temperatures have been about five degrees warmer than normal, much different than what we've experienced here in the States. Although Israel saw some brief periods of more normal winter weather earlier this month, it has returned to milder temperatures recently.

New natural gas deliveries from Mari-B Israel Chemicals Limited commenced late in the fourth quarter, and volumes are still on the commissioning phase. We expect these volumes to ramp up over the year, ultimately accounting for 15 million cubic feet per day net. Late this quarter, we will begin drilling two additional development wells at Mari-B. These two wells will be completed by mid-year and designed to be able to produce 150 million to 200 million cubic feet per day each. This will help ensure that the Mari-B field can maintain full platform deliverability around 600 million cubic feet per day until Tamar comes online. These wells will also have the added benefit of providing for future storage injection capability.

We are continuing to move Tamar forward on schedule, targeting first deliveries in 2012. The very positive progress in the marketing side has been made, now having to secure two LOIs for the sale of natural gas. We have ongoing discussions with a number of potential customers. And I will expect we'll continue to sign additional agreements over the next year. Our plans are still to sanction Tamar this year based on continued progress, instituting better confidence as far as development plans, and further progress in defining an onshore receiving terminal.

We recently completed our 3D seismic acquisition in the region, our focus now on processing the data over the next few months. Based on the final processing, our current plan is to drill a significant exploration prospect late this year before moving the rig to complete our development drilling at Tamar. Prospects to be set depend on the 3D interpretation and the discussions we'll be having with our partners. In total, we were spending approximately $530 million, just over 20% of our capital in the Eastern Med in 2010.

In the North Sea, repairs at the FPSO were completed, which resulted in downtime Dumbarton for most of the fourth quarter. In addition, a facility modification designed to de-bottleneck the Dumbarton field and tie-in Lochranza were finished. The first well at Lochranza is on line, bringing current total net production from the complex to 9,000 barrels of oil equivalent per day. The second well at Lochranza is currently drilling with additional production estimate to come on at the end of this quarter. Further development work at Dumbarton is planned for 2010, with additional production, in fact, in the second half of the year.

As we have mentioned before, we are conducting a market test for a North Sea asset. As of yet, we haven't seen an offer that is compelling enough to move forward with divesting. So although open to the possibility of a sale, we will continue optimizing the production from these oil assets, which generate significant cash flow.

In China, we are completing the second two additional horizontal wells from our existing platform at CDX field. The rig will then move to a program of production and injection wells designed to be hooked up to the second platform, which will be installed late in 2010, with expected production, in fact, mainly in 2011.

Turning to West Africa, the capital budget for 2010 is approximately $440 million, excluding the non-cash capital associated with the FPSO conversion for our liquid discoveries. We have a rig at Aseng beginning our 10-well development program, which includes a mix of gas injectors, water injectors, and horizontal production wells. A second rig is scheduled to be in the field to assist with development by mid-year. The FPSO conversion is proceeding along as planned. And we are still expecting a 2012 production startup. We're targeting initial net oil production at 16,500 barrels of oil per day, with designed capacity for about 26,000 barrels of oil per day net.

At the same time, we have a second West Africa project team working Belinda, moving towards the sanction in 2010, while another group is working separately with the Equatorial Guinea and Cameroon governments to evaluate gas monetization options for the large resource base with discovering this region.

Our 2010 exploration plans for West Africa included a couple of potential oil tests and some additional 3D seismic. We're currently adding an exploration tail to one of our development wells at Aseng, targeting a separate a Miocene oil prospect named Sofia [ph], a nice tie-in candidate to the Aseng development if successful. At the same time, we're intending to look at a significant oil exploration test later in the year. Depending on our rate schedules and final approvals, we're targeting a fourth quarter test for this Miocene prospect.

We'll also be shooting some 3D seismic in the first half of the year in our Cameroon acreage. So West Africa will continue to be an active exciting area for us in 2010.

Just a quick mention on the shape of our 2010 volumes, of note, the first quarter will be the lowest quarter of the year as there is significant scheduled downtime plans for equipment maintenance, upgrades, and replacements at the Alba field, and downstream plans in Equatorial Guinea. This activity was budgeted with the first quarter net effect estimated to be 11,000 barrels of oil equivalent per day, lower than typical run rate, impacting both our liquid and natural gas production proportionally. We expect total company production in the first quarter to range from 195,000 barrels to 201,000 barrels of oil equivalent per day as a result. As the plants come back online, Israel demand increases, continued Rockies growth, including the impact from the asset acquisition and enhancements at Dumbarton and Lochranza, the second half of the year should average 220,000 barrels to 230,000 barrels of oil equivalent per day.

Finishing up with our reserves picture, we reported year-end proved reserves under the new SEC rules were 820 million barrels of oil equivalent. Despite constraining our capital spending and emphasizing capital discipline, we replaced over 100% of both our US and international productions for drilling and project development. This includes removing five millions barrels of oil equivalent as a result of our decision to plug and abandon our main fast field. However, proved reserves were significantly impacted by the new SEC price rules and our conservative application of the new five-year requirements for PUD development. We did not assume significant increases in onshore US capital spending over the next five years. As a result, for our onshore US reserves, our proved undeveloped percentage actually decreased from 25% to 32% this year.

Our overall reserves remain well balanced between liquids and gas as well as between the US and international. In the US, additions were driven largely by development programs in the Rockies as well as from the Galapagos project and the deepwater Gulf of Mexico. Internationally, additions benefited by partial bookings at Aseng. Looking to 2010, we expect significant reserve additions from Tamar and Belinda, positive gas price improvements, and closing the recent acquisition.

This year's positioned to be one of the most exciting and noteworthy years for Noble Energy. The combination of sanctioning Tamar and Belinda, drilling at least seven impact deepwater wells around the globe, and expanding our DJ Basin activity will provide a high level of interest each quarter. In each of our four focus areas, onshore US, deepwater Gulf of Mexico, West Africa, and Eastern Med, we're applying our successful geoscience processes to further explore our large adjacent acreage positions. We've also developed strong project teams and processes to execute our portfolio of major projects on time and on schedule.

At this time, James, we'd like to go ahead and open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take our first question from Dave Kistler with Simmons & Company.

Dave Kistler – Simmons & Company

Good morning, guys.

Chuck Davidson

Good morning, Dave.

Dave Stover

Good morning, Dave.

Dave Kistler – Simmons & Company

Quick question in the Wattenberg, can you discuss the current permitting environment? Is that getting a little easier? And we've thinking about having a rig directed to the Niobrara there. Can you just give us any color on what does that in terms of your ability to wrap up activity?

Dave Stover

Yes, Dave. I think we've seen some nice improvements in the permitting situation up there, especially over the last couple of months. We've seen – go from down in maybe 20 to 30 permits a month to – I think the last month I checked, we had up over 70 to 100 permits. So we've seen a significant improvement, and a lot of focus on attention up there by the commission. And so, a lot of times between our folks and the commission folks working hand-in-hand to make sure that the whole new process has eased somewhat and as far as understanding what information's needed and getting the right information to them.

As far as the horizontal piece, we have some applications in – permit applications in now. I think as I mentioned in the call, our expectation is we'll start out with one rig dedicated to the horizontal program. And then, we'll see where we go from there based on results. But based on that one rig, we don't see a problem on the permitting part of that.

Dave Kistler – Simmons & Company

Okay. And then, just thinking about how that relates to the 2010 capital budget, if I'm not mistaken, the additional assets you acquired in the Wattenberg DJ Basin are in some respects self-funding. But can you talk just a little bit about if that is the case and what that means as far as capital allocation going forward in that area?

Dave Stover

I think, yes, specific to the assets we're picking up, you're right in this case that they are self-funding. This year, I think when we're looking at total capital, it'll be in probably that $70 million to $80 million-type range. And that's included in the numbers that I talked about, for example where I said Wattenberg would be around $480 million. That includes the capital for the acquisition that we're bringing in.

David Kistler – Simmons & Company

Okay that’s helpful. And then just one thing that I may have missed, I apologize, can you give us an update on the North Sea asset sale, where that sits? And if it’s something you covered, I apologize for missing it.

Chuck Davidson

Yes, Dave. This was mentioned. So far we’ve not seen any kind of proposal there that really gives us the value we’re expecting from those assets. And while we’re – we still have them available for sale because of the high cash flow we see out of the properties and certainly the strong oil price environment we’re seeing, we’ll just optimize that net production until if or when we see an acceptable offer come in.

David Kistler – Simmons & Company

Okay. And then just jump and just one clean up issue on Israel, I know you guys are processing that 3D size maker completing the chute there. Do you have any timing around when you’ll be looking at that?

Chuck Davidson

Well, over the course of the next few months, we will have the processing complete, and that at that point we’ll engage discussions with our partners to decide on how we’ll proceed with the program up for the later half of the year. But everything’s going well. Acquisition went well on it. And so it’s in the processing and interpretation stage now. So we’re looking forward to seeing the results of that and working with our partners on, as Dave talked about, what the plans to resume exploration later this year.

David Kistler – Simmons & Company

Great. And then just last question in Israel, thinking a little bit about the variability of consumption due to weather, as we – as you guys increase your sales volume there, is that something that you expect to see significant volatility around? Or as you increase that volume, will that actually mute the volatility of that particular area?

Chuck Davidson

We’ve got several moving pieces, one of course was the plant downtime, which we expected to be back, and that will be helpful. We spent a lot of time as we look at this forecasts and budgets to try to hit through that variability. There is really nothing we can do about weather, and because of the amount of electricity that is now generated from natural gas as the demand for power swings. And of course we also saw demand impact at this past year because of just the overall economy in Israel as well. As that swings, it swings our outlook. We’ve done our best job to try to forecast that going forward. Burt it is uncertain. There’s no question. And it’s why we put a sizable range around some of those volumes.

David Kistler – Simmons & Company

Great. Well thank you guys for the additional clarifications.

Chuck Davidson

Yes. Thanks, Dave.

Operator

We'll take the next question from Anne Cameron with J.P. Morgan.

Anne Cameron – J.P. Morgan

Hi, good morning guys.

Chuck Davidson

Good morning.

Dave Stover

Good morning.

Anne Cameron – J.P. Morgan

Just a question about the Rockies, are you guys seeing any increase leasing activity by your peers in that region?

Chuck Davidson

It’s hard to comment on what’s going on with the peers. I mean we read everything that everybody else does, but that’s about as much as we can tell.

Anne Cameron – J.P. Morgan

Okay. Great. And the 3D seismic that you’re acquiring for the DJ Basin, can you give us an idea is that covering and how much of your position and where roughly?

Chuck Davidson

It’s over fairly a large area and different pieces of it. I think by the end of the year, we should have about 300 square miles in. I think currently we have about 80 square miles that we’ve started processing on already. So we’ll continue to build out that position this year, and then look at what we want to do for the next year.

Anne Cameron – J.P. Morgan

Okay. Great. Thanks. And just one on the Gulf of Mexico, can you tell us what that depth you’re at Deep Blue?

Chuck Davidson

No. We can't. We don't really get into details over this as we’re drilling. What I’ll remind you of is both these wells, Deep Blue and Double Mountain are going to the 30,000 plus range. So they still have some time left to go on this. We’ll be drilling this. As we get deeper into the well, drilling will slow down. So we still get way's to go. And as I said earlier, I think the real next news on either of those will be shortly before the next earnings call based on timing.

Dave Stover

Just as a reminder, those are both very significant wells that are classified as tight holes by ourselves and our partners. So we won’t be able to release any information on the wells until they’re basically – we've got the result and everyone is signed off on that.

Anne Cameron – J.P. Morgan

Okay. Great. Thanks. I appreciate it, guys.

Operator

Next we’ll hear from Mike Jacobs of Tudor, Pickering, Holt.

Mike Jacobs – Tudor, Pickering, Holt

Good morning, everyone.

Chuck Davidson

Good morning, Mike.

Mike Jacobs – Tudor, Pickering, Holt

Chuck, in the onshore portfolio, just thinking about your anticipated activity level this year and the recent acquisition, do you have a different view of East Texas and the strategic role it could ultimately play in your portfolio?

Chuck Davidson

Well I think, first of all, we’ve been very encouraged by the results that we’ve been seeing there in Shelby County on our Haynesville position. And I would say that it's still a very attractive force, one that we would be interesting in growing our position. But as we’ve said many times in the past, it has to be at the appropriate value. As far as East Texas versus Rockies, there has been one thing that’s changed a bit over the past year. Number one is the market in the Rockies in terms of the natural gas potion has certainly improved. We’ve seen differentials comeback. And I think with the decreases in gas drilling in the Rockies, it’s allowed that gas market to dramatically improve. And there’s probably less fear now of trapped Rockies gas from what there was maybe a year ago.

But the other thing, which of course you’re well aware of is just that there’s the liquid-rich plays there with the opportunity we saw to add this property in the Wattenberg area was very positive. And there’re other plays that are obviously being evaluated by the industry. So it’s that some old go to where the best value is. We like the US onshore business. We would be interested in adding another core area to our portfolios somewhere along the way. And we continue to be on the lookout for that.

Mike Jacobs – Tudor, Pickering, Holt

And you touched on the Niobrara play earlier, and just wondering if I can ask a conceptual question at least on the application of new horizontal technology. As you know better than us, the Niobrara gets thicker in some areas across the DJ. How do you think about the trade off between better rock properties and thicker net pay as it’s driving the location of the 20 wells that you’re citing for the 2010 program?

Chuck Davidson

I think one thing that Dave talked about, we’ve really been applying our whole exploration process to this area. And so we’ve approached it from a regional area, from a regional concept, and truly trying to understand all the mechanisms that might drive it. I don't want to comment on any particular results that we – or any conclusions that we’ve drawn. It’s very competitive. And quite honestly, I’d like to see us test that in the field and really see if we can confirm some of our thoughts.

Mike Jacobs – Tudor, Pickering, Holt

Okay. And a follow-up question on the Mediterranean, Chuck, I think in your prepared comments, you specifically mentioned another well in Israel, not in Cyprus . Am I reaching or does that suggest that you’ve at least cited the next location? And I know it’s early with your partners. But can you give us some update as to your thoughts on what the inventory could look like?

Chuck Davidson

Well, I'll try to be careful. And if I misspoke, I apologize. I'll try to be careful and talk about only the Easter Mediterranean, which includes both Israel and Cyprus, and our acreage covers both. And when it gets downs to it, we’ll have to look at all the opportunities and select the best one. But that decision's not been made.

Mike Jacobs – Tudor, Pickering, Holt

Okay. Great. Thank you.

Chuck Davidson

Thank you.

Operator

We’ll move on to Brian Singer with Goldman Sachs.

Brian Singer – Goldman Sachs

Thank you, and good morning.

Chuck Davidson

Good morning, Brian.

Dave Stover

Good morning.

Brian Singer – Goldman Sachs

A question on Israel, you talked about the weather issue. You also mentioned increase imports. Can you just give a little bit more color and whether you think that that could – whether that will be expected that it will fall off or whether that could continue to – and hit it will otherwise be greater growth out of your production?

Chuck Davidson

Yes. The reference on the increased imports really goes back to when you compare fourth quarter of this past year to fourth quarter of the previous year. It was just over the past year that the imports really start. We start to see the big increase in the imports probably from 150 million to a couple of 100 million a day. I think going forward, it’s hard to say how that will play out. We’re going to make different assumptions on how that'll split that out. But I think from what we’ve seen, it’s been in that 150 million to 200 million a day range on the imports. And that’s obviously has an impact when you compare it versus a year ago where there was essentially none. That’s where that comment comes from, Brian.

Brian Singer – Goldman Sachs

Okay.

Dave Stover

I think also, Brian, that we’ve seen a lot of moving pieces in 2009 because of various price discussions that have not only incurred between ourselves and our customer, but also between our customer and the Egyptian suppliers. And that put some uncertainty in the market. Maybe those have been resolved now, we’ll see. Certainly, we're pleased with the price enhancements that we got on our gas. But we have seen the Egyptian imports. And unfortunately, the weather in 2009 was not a great year for demand there. But that, we can't do anything about, and we'll just have to watch the import situation. It's obviously got political implications as well as just commercial issues.

Brian Singer – Goldman Sachs

Thanks. And then, secondly, can you just touch on any changes, if at all, in what you’re seeing in terms of rig and service costs offshore versus onshore, Wattenberg?

Chuck Davidson

Yes. I don't want to get too far into that because we’re still in the middle of negotiating prices on some of these pieces. But I think it’s fair to say you’re seeing the service sectors trying to recapture some of the costs that they lost over the last year. I think that the challenge is to at what level do we see costs come back in on some of that. That's speaking mainly from an onshore perspective. Offshore, I think they’re pretty flat with what we’ve seen over the last year. We really didn’t see the big decreases in the offshore, especially the Big Deep water programs that you saw more on the onshore piece.

Brian Singer – Goldman Sachs

And are you seeing any changes at all on the steel side of things? And where do you stand on contracting all that steel-related infrastructure for West Africa and Israel?

Chuck Davidson

Well, as we’ve talked about before when we've talked about some of these sanctioning of these projects, timing actually worked out pretty well for us as far as both pricing and availability of equipment and steel, so to speak. When we went and put in place some of our bids and so forth in our contacts and that thing for example, we got much better pricing than we obviously would have forecasted the year before that. And I think on the big projects that we’ve already sanctioned, the Aseng, Galapagos, and so forth, we’re in good shape on both cost and availability.

I think when you look at some of the other pieces on our normal onshore program, we negotiate and put in place contracts on probably one to two-year basis on most of those, though we’re in good shape in all that too. So for a lot of these, we have pretty much fixed prices on a lot of these equipment, so not really concerned from what we’re seeing on that aspect right now.

Dave Stover

I think, for instance Aseng, that was a contract that basically set the price up front. So it’s not – we won't see loaders with steel prices on something like that, obviously concerned about potential additional tariffs on imported oil country tubulars down the road. And yes, we’ll see what that impact might be if that fully rolls through.

Brian Singer – Goldman Sachs

Thank you.

Chuck Davidson

Thanks, Brian.

Operator

TJ Schultz with RBC Capital has our next question.

TJ Schultz – RBC Capital

Hi, guys. Just one quick question, can you touch on any plans or activity this year in the Granite Wash? I thought you had mentioned previously a possible test figure, anything going on there?

Dave Stover

Yes. We’re actually going to drill. We’ll actually take our rig from our Cleveland play, one of the rigs – one of the two rigs over there in that Cleveland play in Western Oklahoma. And we’ll go over and drill probably two to three horizontal Granite Wash wells, probably up around that Buffalo Wallow area. We should have those down by mid-year, and that’ll give us a better feel of what that looks like in that particular area.

TJ Schultz – RBC Capital

All right. Great. Thanks, Dave.

Dave Stover

Thanks.

Operator

Our next question comes from Dan McSpirit with BMO Capital Markets.

Dan McSpirit – BMO Capital Markets

Gentlemen, good morning, and thank you for taking my questions.

Chuck Davidson

Hi, Dan.

Dan McSpirit – BMO Capital Markets

In the Haynesville, you talked about purposely constraining the flow back on recent wells drilled or future wells drilled. Can you talk about the process, the technique, maybe a clue on choke size, and what improvements are expected at least in terms of managing the reservoir pressure here going forward?

Chuck Davidson

This is something that's still gone in the testing stage, Dan. And obviously, working with our partner, we've come up with a plan at least for the next couple of wells to try and keep the choke size somewhat reduced and not open these up quite as much as maybe have been the initial trend out here in this play, and start the – get some comparison. It’s probably going to take a few months to really get a better feel for how that – things to work.

But this is based on a lot of the science and modeling of some of these that folks have now had a little more time to sit back and look at. As I said, it’s going to take a few months to play out and get some production history to really see how these declines, especially over the first 90 days, 90 to 120 days or so, if these wells play out on one scenario versus another. We at least have upfront here on the first two wells, one well that’s been tried in each method, and we’ll have two good baselines to compare against here.

Dan McSpirit – BMO Capital Markets

Okay, okay. Got it. And then turning to offshore, Israel and the 3D seismic survey that you’re now down the process of processing, if you like what you see, and I’ll take the lead then and assume that you will, how early do you mobilize a rig to resume exploration?

Chuck Davidson

We made the decision on the rig last year. And so, really the New Sedco rig, which will be arriving – the Sedco express will arrive sometime probably late third quarter. And really, it’s just a matter of where we allocate it's time. It’s under a longer term contact to our cells for both development work at Tamar as well as exploration work. So we’re all set on the rig. We made preparations a long time ago. And it will arrive early enough that we can do some exploration work and not impact our development program in Tamar at all.

Dan McSpirit – BMO Capital Markets

Okay. Thank you. And then, if we can talk about economics or expected economics, yields and costs, recognizing that it’s still early days in drilling the Niobrara on a horizontal basis, but any early thoughts on yields and costs per well in that play? Also the same question with respect to your – the two to three horizontals near Buffalo Wallow that you plan to drill on the Granite Wash play?

Chuck Davidson

The Niobrara is in the tight hole category. I’ll let Dave talk about – I think he already talked about our outlook on Granite Wash, but he has any other comments on that.

Dave Stover

Yes. On the Granite Wash piece on Buffalo Wallow, we’re probably thinking those are more in the plus or minus five Bcf-type targets for those, and cost price $6 million to $7 million I think. Again, we’re only going to do a couple of them here and see what that looks like, and then regroup from there.

Dan McSpirit – BMO Capital Markets

Very good. Thank you again.

Dave Stover

Thank you.

Operator

There are no further questions. I'll turn the conference over to Mr. David Larson for any additional closing remarks.

David Larson

Thanks, James. I want to thank everybody for their interest in Noble Energy, and have a great day.

Operator

That does conclude today's conference. Thank you for your participation.

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Source: Noble Energy, Inc. Q4 2009 Earnings Call Transcript
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