Noble Energy: Drilling Its Way To New Heights (New Update)

Apr. 4.14 | About: Noble Energy, (NBL)

Summary

Assessments available of undiscovered oil and gas resources in the Levant Basin Province, Eastern Mediterranean.

Noble Energy details initiative in financing the development of the natural gas resources of Eastern Mediterranean for $1 billion in upfront payments and future shared revenue.

Political developments surface in Israel and Cyprus and neighboring countries such as Jordan and Turkey, also recent U.S. Geological Survey discovery results.

Conclusions and outlook with five-year stock price forecast.

Noble Energy Inc. (NYSE:NBL) has been extremely successful in its exploration in the Eastern Mediterranean (Cyprus and Israel) with vast discoveries of natural gas estimated at about 37 trillion cubic feet (TCF). Already some of the natural gas is being used in Israel and has replaced supplies previously provided by a pipeline from Egypt.

Noble Energy Inc.'s task now, together with the Governments of Cyprus and Israel as well as neighboring countries such as Turkey, is to determine how to proceed in the further production and utilization of this vast resource. This coordination will inevitably involve a variety of factors such as national utilization in electricity generation, home heating, the production of petrochemicals, desalination and exports either as liquefied natural gas or "LNG" to Europe and/or Asia through sea pipelines or land pipelines through Turkey to Greece and beyond to Europe.

As reported by the Wall Street Journal "The leaders of the Greek and Turkish communities on Cyprus launched a fresh bid to end the island's 40-year divide." Such negotiations aim at re-uniting the two communities with common citizenship of an independent, federal Cyprus, which will continue as a member of the European Union and has received the support of the United States, the European Union, Greece, Turkey and the United Nations. For internal purposes, the Greeks and Turks of Cyprus will also have separate local citizenship. The negotiations will not be easy but at last, there is hope of reconciliation.

Stock Price Performance and Results in 2013

The previous report on Noble Energy Inc. emphasized the statement in the 2012 annual report that:

"Our latest forecast projects that we will double in size, with a 17 percent compound annual growth in production over the next five years. Looking ahead, we envision years of sustainable material growth driven by the development of major exploration discoveries and unconventional U.S onshore resources. This is a very exciting outlook."

Noble Energy's annual report for 2013 disappointed many investors and subsequently the PPS dropped as many shareholders were speculating on the forward-looking statements from 2012. If shareholders had taken immediate stock of the positive figures in Noble Energy's 2013 report, without considering the proposed ambitious forward statements presented in 2012, we'd see that, in fact, based on adequate reserves of oil, natural gas as well as new initiatives both in the US and abroad, not much of Noble Energy's projections in 2012 deviated from the results in 2013.

In fact, as shown in Table 1, total production in barrels of oil equivalent BOE increased from 86.88 million in 2012 to 100.01 in 2013, a 15.1% increase, and total revenue increased from $4,223 million to $5,015 million or by 18.75% during the same time. This increase was helped only slightly by an increase in the price from $48.61 to $50.14 per boe. The company expects 2014 production at 110.23-117.53 million boe.

Disappointing investors was the 2013 annual report as mentioned above, which was probably due to a drop of net income to $978 million in 2013 from $1,027 million in 2012, a decrease of 4.77%. Expectations were probably for a significant increase augmented by the improvement in the price per boe.

A significant increase in proved reserves from 1.19 billion boe in 2012 to 1.4 billion boe in 2013, an increase of 19%, was hardly noted in the author's opinion. This should be regarded as the most significant achievement of Noble Energy Inc. in 2013, which was supplemented by entering the shale revolution in the US by acquiring a 50% interest in approximately 90,000 gross acres in the Marcellus of Pennsylvania with net risked resources of 1.8 TCF in natural gas. The addition to reserves in 2013 replaced more than 3.5 times the annual production.

The composition of the proved reserves remained practically the same with liquids at 31% in 2013 as compared to 30.15% in 2012 but developed proved reserves were 60% in 2013, up from 39% in 2012, thus providing the company the basis to continue earnings much more than would the result of depending on natural gas with its much lower price on an energy equivalent basis.

Development of reserves, exploration for new discoveries and preparation for higher production involve a lot of expenses and as shown in Table 2 practically all categories increased in 2013. In addition, profits from derivatives declined. Most companies usually report losses from derivatives. Noble Energy Inc., on the contrary, seems to win in this category even with odds stacked against the company.

Overall, the performance of Noble Energy Inc. in 2013 was in line with management predictions and new opportunities with possible large oil discoveries in the Eastern Mediterranean as well as new ventures in the US shale revolution provides considerable hope that the author's previous forecast of a share price of $140 in 5 years may be quite conservative.

Performance in Natural Gas

As shown in Table 1, in physical production terms Noble Energy Inc. continues to be a natural gas company with production in the US and abroad. In 2013, natural gas production was 38% of the total in boe abroad, 31% in the US and the remaining 31% was in oil and liquids.

A deliberate management decision after a recent collapse in natural gas prices in the U.S. markets, especially in 2012, has re-directed efforts toward liquids production, which now provides 72.14% of total revenue. Still natural gas proved reserves have a ratio (reserves/production ratio) of 17.62 years as compared to an R/P ratio of 9.67 years for liquids. Average natural gas prices in 2013 were $3.727 per thousand cubic feet in the US as compared to $2.734 in 2012. In the past few weeks, extraordinary cold weather in the US has led to an increase of natural gas prices but how the weather will affect future consumption and consequentially prices for the rest of 2014 cannot be forecasted

Natural gas prices outside the US have been much higher with an average of about $11.00 in Europe and $16.00 in Asia per thousand cubic feet. The great discovery of natural gas by Noble Energy Inc. in the Eastern Mediterranean is very valuable because prospective markets as previously said will be in the home countries of Israel and Cyprus, perhaps neighboring countries such as Jordan and Turkey but mostly in Europe and Asia.

In this respect, it may be stated that natural gas reserves discovered by Noble Energy Inc. are estimated at about 33TCF in Israel and most likely much more than 5 TCF in Cyprus, which could meet the national demand of these two countries and leave a lot for exports for many years to come. As reported by the Wall Street Journal in its article "Landmark Deal with Jordan Turns Israel Into Gas Exporter" the two countries were near agreement between Israel's Delek Group Ltd (OTCPK:DGRLY) and Noble Energy Inc. and the Arab Potash Co., a fertilizer company with a plant in Jordan to extend a gas pipeline from an Israeli chemical plant to APC, located across the Dead Sea in Jordan.

Note, that the Geological Survey in March 2010 published an "Assessment of Undiscovered Oil and Gas Resources in the Levant Basin Province, Eastern Mediterranean" with estimates at a mean of 1.7 billion barrels of recoverable oil and a mean of 122 trillion cubic feet of recoverable gas. Consequently, much more gas and even oil are expected to be recovered in the Eastern Mediterranean with additional drilling, as further reserves will be required.

Table 1: Noble Energy Inc. Performance 2010 - 2013

2010

2011

2012

2013

PRODUCTION-TOTAL-MILLION BOE

72.33

74.95

84.46

93.52

OIL-MILLION BOE

19.71

20.44

31.39

32.85

NGLS-MILLION BOE

5.11

5.48

5.86

5.86

NATURAL GAS-MILLION BOE

47.51

49.03

47.21

54.81

REVENUE-MILLION $

2,713

3,404

4,223

5,015

EXPENSES-MILLION $

1,988

2,951

3,196

4,037

NET INCOME-MILLION $

725

453

1,027

978

NUMBER OF SHARES-MILLION

354

357

359

363

STOCK EQUITY-MILLION $

6,848

7,265

8,258

9,184

EQUITY PER SHARE-$

19.34

20.35

23.00

25.00

NET INCOME PER SHARE-$

2.05

1.27

2.86

2.69

DIVIDEND PER SHARE-$

0.36

0.40

0.45

0.55

P/E RATIO-END YEAR

23.00

37.17

17.78

25.32

LONG-TERM DEBT-MILLION $

2,272

4,100

3,736

4,566

ASSETS-MILLION $

13,282

16,444

17,544

19,642

COSTS-$/BOE

27.49

39.37

37.83

43.17

PRICES-$/BOE

37.51

45.42

50.00

53.62

FUELS RESERVES-MILLION BOE

365

369

357

436

R/P RATIO-FUELS-YEARS

14.71

14.24

9.58

11.26

NATURAL GAS RESERVES-MILLION BOE

726.83

840.50

827.33

971.33

R/P RATIO-GAS-YEARS

15.30

17.14

17.52

17.72

RETURN ON ASSETS-%

5.46

2.75

5.85

4.98

NUMBER OF EMPLOYEES

1,772

1,876

2,190

2,527

YEAR-END PRICE PER SHARE-$

43.04

47.20

50.87

68.11

Click to enlarge

Table 2: Noble Energy Inc. Expenses 2013 and 2012

2013

2012

Lease operating expense

530

431

Production & ad valorem taxes

188

151

Transportation & gathering

132

91

Exploration

415

409

Depreciation, depletion and amortization

1,568

1,370

General & Administrative

433

384

(GAIN) Loss on derivatives

(36)

(154)

Asset Impairments

86

104

Other

43

25

Total expenses

3,359

2,811

Click to enlarge

Financing Reserves

Financing of the natural gas reserves in the Eastern Mediterranean should not be a significant problem. Investment interest will likely come from Israel and US sources as well as other countries such as China and perhaps Japan with their vast foreign exchange reserves and their large investments in energy projects throughout the world. The impact on PPS in terms of sentiment may be judged by an even bigger discovery of natural gas from offshore Mozambique, which is estimated at more than 60 TCF. Eni of Italy and Anadarko Petroleum (NYSE:APC) of the US made the discoveries in 2011 and 2012.

The Wall Street Journal in an article "Eni, CNPC Link up in Mozambique" reported that China National Petroleum Corp. agreed to pay Eni $4.21 billion for 28.6% of Eni's subsidiary Eni East Africa and, therefore, a 20% interest in an offshore gas field known as "Area 4" that is one of the biggest natural gas discoveries of the past decade. A similar agreement has been made by Anadarko Petroleum, which is reported to have discovered 15-30 TCF offshore Mozambique with the Oil & Natural Gas Corp. Ltd of India for more than $2 billion. These successful financing operations are only examples of Noble's ability to finance its current ample reserves.

Financing Reserves

On February 24, 2014, it was reported that Noble Energy Inc. has already acted in this direction. Noble Energy Inc. has signed a pact with Australia-based Woodside Petroleum Ltd. (WP.LAX) to sell offshore Israel natural gas licenses for over $1 billion in upfront payments and future shared revenue. Under the terms of the non-binding pact, four companies, including Noble, are participating as sellers of their 25% interest in the licenses to Woodside. Noble says it intends to continue as an upstream operator with 30% working interest, and following the completion of the deal, Woodside will operate any liquefied natural gas development of the field. Noble, which has been operating in offshore Israel since 1998, has said the so-called Leviathan project is the company's largest exploration success in its history. On Thursday, (February 20, 2014) Noble said total compensation is anticipated to include $525 million in cash payments plus $502 million in shared future revenue. An additional payment of $19 million, net to Noble, will be made should Leviathan exceed a set target.

The author believes that Noble Energy Inc. and/or the Governments of Cyprus and Israel should undertake a serious study on the feasibility of constructing a gas to liquids plant for the production of diesel and other products.

Conclusion

The company's initiative in financing the development of the natural gas resources of Eastern Mediterranean is by signing an agreement with Woodside Petroleum Ltd. for a total of $1 billion in return for 25% of Noble Energy's interests with Woodside taking responsibility for LNG developments while Noble will continue with upstream natural gas production. The company's initiative in oil exploration in the Eastern Mediterranean offers prospects of three billion barrels of oil resources. It also has its initiative for oil exploration in the Falkland Islands, offshore Nicaragua and offshore Sierra Leone and its entry into the shale oil and gas revolution in the Marcellus and DJ Basin in the US. Also, there is its approach to Mexico showing interest in that country's new policy of inviting foreign oil companies in its area of the Gulf of Mexico. All this illustrates a company with wide knowledge, expertise and ready to undertake new ventures in order to maintain and preferably increase its growth prospects of both oil and natural gas.

Despite the initial disappointing reaction of investors to the results of Noble Energy Inc. in 2013, the author continues to believe that the company is on the right path, its achievements and discoveries and new initiatives justify his projection in his original report for a stock price of $140 in five years and now believes that the stock price per share could reach $200 at least if the oil discovery in the Eastern Mediterranean is made. It is further believed that the development of the natural gas of Cyprus and Israel in the company's license area could add considerably to the value of the stock although a little more than five years will be required.

Disclosure: I am long NBL, CLR, EOG, PXD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.