While political tensions escalate in the Middle East and the Israeli-Palestinian conflict lingers on with increasing bloodshed, the word is that Egypt and Israel might be on the verge of a massive $60 billion natural gas deal. The respective leaderships are in the process of negotiating an agreement that would see Israel exporting natural gas to Egyptian liquefaction plants.
When the news was first announced last week, it coincided with Israel resuming aerial bombardment of Gaza. While an umpteenth ceasefire might have been agreed upon this week, this Israel-Egyptian agreement -- should it go ahead -- would send shockwaves through the Middle East's hitherto political alliances. And to think that until last year Egypt had basically thrown any prospects of trade with Israel out of the proverbial window, owing to the then-in-power Muslim Brotherhood's stance…
Even so, while the political analysts and international relations commentators mull over the diplomatic implications of the deal, which wouldn't be finalized till the year's end, for investors there is an intriguing prospect surfacing. And it revolves around Noble Energy (NYSE:NBL) and its Israeli partner, Delek Group, who would be responsible for delivering around 6.25 trillion cubic feet of natural gas from the Leviathan offshore to Damietta port's LNG facilities in Egypt, along with Idku, which is another coastal town.
NBL's Mixed Bag
NBL's triple whammy was orchestrated by Colorado's legislative changes, the Gaza conflict and Denver-Julesburg Basin's growth, which was reflected in the mixed Q2 report. The report manifested $192 million worth of net income, which had a $0.52 dilution per share. The $1.39 billion revenue was in accordance with the 21% year over year consensus recording growth, with the $0.87 earnings per share being slightly above expectations.
The sales volumes in Q2 saw a 13 percent hike with the average comprehended crude oil and condensate price increasing by 5.9 percent. The achieved comprehended price for natural gas liquids was 15 percent and 10 percent for natural gas itself.
The overall production of oil and gas witnessed a 14 percent hike, taking the number to 290,000 oil barrels per day. The Q3 and Q4 targets for NBL are believed to be around 305,000 and 330,000 barrels per day, respectively.
The growth for DJ basin's production might have witnessed growth in Q2 but the output took a nosedive, with more than 60 wells seeing a plunge.
NBL and Delek are projected to send natural gas to Egypt via pipelines under the Mediterranean Sea. An agreement with BG Group was signed in June for the delivery of gas to Idku, with another deal signed with Union Fenosa Gas in May, to send gas to the Demietta plant. The deals are expected to be finalized by the end of the ongoing calendar year. Tamar has already started production, with Leviathan expected to follow suit in 2018.
As far as Israel is concerned, it would be able to cash in on the deal with Egypt since it would be more convenient for the country to deliver gas to LNG facilities as compared to constructing LNG plants itself. The construction of infrastructure related to LNG would result in billions of dollars' worth of expenses and consume eons in time. Furthermore, the question marks over regulatory requirements needed for the inception of the facility make it a cumbersome process for Israel.
Israel would be able to earn billions from natural gas export, and Egypt would be able to bridge its natural gas shortfall while NBL would be able to improve its outlook through this agreement. With NBL struggling to create optimism back home, the deal comes as a timely boost for the company.
According to the legislative changes in Colorado, oil and gas wells are allowed to be drilled down to 2,000 feet-1,500 feet more than the current limit. This would drastically reduce the drilling capacity and well counts of the likes of NBL. The legislative amendment would be enforced in November, around the same time the Israeli-Egyptian gas deal would be finalized.
While the Colorado verdict and the ongoing Gaza conflict lowers NBL's outlook, which should result in a price plunge for the stock, the end of Q4 would be crucial for the company. Following the Colorado verdict, NBL's outlook had plummeted with price targets down in the mid-$80s from the earlier $95 on average. What is also expected is that the company's $1.38 billion quarterly revenue, which was up 20.4% year-on-year in Q2, would fall significantly in Q3 and Q4 with the expected earnings per share hovering around the $3 mark.
However, if the Israel-Egypt natural gas deal gets the green signal, the losses that NBL would suffer November onwards owing to the increase in the drilling depth limit should be countered, and it might look good to touch the $90s again, rising from the current $70.92 price. This is especially true when one factors in the prognosticated changes in the global oil and gas prices.
In case NBL manages to come up with a strategy to counter its domestic shortcomings, NBL could end up being a lucrative purchase by the turn of the year, and could be eyeing triple figures in stock price with the Israel-Egypt gas deal playing its due part.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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