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Noble Energy (NYSE:NBL)

Q1 2011 Earnings Call

April 28, 2011 10:00 am ET

Executives

David Larson - Vice President of Investor Relations

David Stover - President and Chief Operating Officer

Charles Davidson - Chairman, Chief Executive Officer and Member of Environment, Health & Safety Committee

Kenneth Fisher - Chief Financial Officer and Senior Vice President

Analysts

Gray Peckham - Susquehanna Financial Group, LLLP

Brian Singer - Goldman Sachs Group Inc.

Dan McSpirit - BMO Capital Markets U.S.

David Kistler - Simmons & Company International

Patrick Rigamer

Kenneth Carroll - Johnson Rice & Company

Leo Mariani - RBC Capital Markets, LLC

John Herrlin - Societe Generale Cross Asset Research

Irene Haas - Wunderlich Securities Inc.

Rehan Rashid - FBR Capital Markets & Co.

Operator

Good day, everyone, and welcome to Noble Energy's First Quarter 2011 Earnings Call. Now, I'd like to turn the conference over to Mr. David Larson. Please go ahead, sir.

David Larson

Thanks, Jennifer. Good morning, everyone. Welcome to Noble Energy's First Quarter 2011 Earnings Call and Webcast. On the call today, we have Chuck Davidson, Chairman and CEO; Dave Stover, President and COO; and Ken Fisher, CFO.

This morning, we issued our earnings release for the first quarter and it is available on our website. Later today, we expect to be filing our 10-Q with the SEC and it will also be on our website then. The agenda for today's call will begin with Chuck discussing the quarter, and he will highlight our ongoing major projects. Dave will then give a detailed review of our operational programs and the plans for the remainder of the year. We'll leave plenty of time for Q&A at the end and plan to wrap up the call in less than an hour. We would ask that participants limit themselves to one primary question and one follow-up. Should you have any questions that we don't get to during the call this morning, please call us and we'll do our best to answer you later.

I want to remind everyone that this webcast and conference call does contain projections, forward-looking statements based on our current view and most reasonable expectations. We provide no assurances on these statements as a number of factors and uncertainties could cause actual results in future periods to differ materially from what we discuss here today.

You should read our full disclosures on forward-looking statements in our latest news release and SEC filings for a discussion of the risk factors and the influences that they have on our business. We'll reference certain non-GAAP financial measures today such as adjusted net income and/or discretionary cash flow. When we refer to these items, it is because we believe they are good metrics to use and evaluate 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.

Charles Davidson

Thanks, David, and good morning, everyone. I'm going to begin this morning with a high level review of our strong first quarter results and then have some opening comments on the operations side. Dave will then follow with a deeper look at our major projects and our exploration programs across the globe.

Adjusted net income for the first quarter was $240 million or $1.35 per share after adjusting for primarily a large unrealized commodity derivative loss, particularly on the oil side as prices strengthened from year end. Versus the first quarter of last year, our adjusted net income was up 74%.

Our GAAP net income was $14 million or $0.08 per share diluted. Strong sales volumes, price realizations and good cost control all contributed to our outperformance versus most analyst expectations. Our quarterly revenues were almost $900 million, up 23% from the first quarter last year, with half of the increase related to volume and the other half from liquid prices. During the first quarter, the WTI benchmark traded significantly lower than oil price on both the Gulf Coast as well as international oil price at Brent. This worked strongly to our advantage as about 60% of our oil is tied to the premium oil markets.

Total sales volume for the first quarter averaged 215,000 barrels of oil equivalent per day, which is about the quarterly guidance range we've provided earlier in the year. The outperformance was driven by our international portfolio, which contributed 101,000 barrels of oil equivalent per day or 47% of our total volume. We had strong liquid sales in Equatorial Guinea in the North Sea, which delivered very high cash flow from over 30,000 barrels of liquids per day between the 2.

In Israel, we sold 140 million cubic feet per day on average, a 60% increase over our gas sales in the first quarter of last year. Israel's natural gas imports from Egypt were interrupted in early February as a portion of the export system from Egypt was damaged, resulting in no sales to Israel for about 5 weeks. This, of course, increased demand for our in-country production. Natural gas pricing in Israel strengthened in the first quarter, with blended prices moving above $4 as a result of being partially linked to global liquids markets.

Earlier this week, the pipeline export system from Egypt was again damaged, resulting in suspension of natural gas sales to Israel. As a result, we expect demand from Mari-B Gas to increase above seasonal norms for a while and have attempted to account for this in our second quarter guidance. But information on when imports may resume is quite limited at this point.

Missing from international volumes this quarter is natural gas from Ecuador, where the government terminated our production sharing contract in late 2010 as they have moved to a more service contract set-up there in their country. We continue to work with Ecuadorian government to finalize compensation for our Block 3 assets. A significant progress on the agreements has been made recently which should pave the way towards our full exit from the country.

In the U.S., we sold 114,000 barrels of oil equivalent per day for the quarter, with 45% of our total U.S. volumes being liquids. I'm really pleased with our growth in the DJ Basin, driven by both legacy as well as our new horizontal Niobrara drilling programs in Wattenberg. DJ Basin volumes grew 12% over the first quarter 2010, with 60% of the growth being liquids. Our onshore U.S. operations were somewhat impacted by winter storms in the first quarter of this year, reducing volumes by about 2,000 barrels equivalent per day on average.

Total U.S. oil volumes were down versus last year, but this was primarily a result of the 6,000-barrel a day onshore mature oil asset sale that we completed last year. On the natural gas side, our volumes were relatively flat as higher volumes in the DJ Basin offset natural decline in the Rockies and mid-Con [Mid-Continent] areas, as well as in the Deep Water Gulf of Mexico.

Our unit cost performance for the quarter was very strong and certainly benefited from high volumes coming from low cost areas such as Equatorial Guinea and Israel. As a result, our lease operating expense and DD&A per unit rates were below the low end of our annual guidance ranges.

Exploration expense for the quarter included some significant seismic expenditures where we wrapped up a 3D acquisition offshore in Nicaragua and a 2D offshore shoot in France. In addition, we've began adding to our 3D data in the DJ Basin in support of the horizontal Niobrara program.

G&A was a little higher than our expectations for the quarter due to continuing staffing needs in support of our major projects and exploration programs. We incurred an $18 million rig standby charge in the first quarter related to a portion of our time on the ENSCO 8501, which was stacked while we are waiting on a permit to return to drilling. In addition, we also had a non-cash charge of about $10 million related to the increased value of Noble Energy's stock held in a deferred compensation plan.

Interest expense was a bit higher than our guidance for the quarter due to our accelerating of planned bond offering. As a result of favorable market conditions and strong investor demand, we issued $850 million of 30-year bonds at an attractive coupon rate of 6%. In our earnings release this morning, we adjusted our annual guidance for interest expense to account for this new debt. We also adjusted our effective tax rate guidance for the year, largely as a result of recent Israel and U.K. tax changes. For the first quarter, our adjusted effective tax rate and percent deferred were both 34%.

We generated very strong cash flows in the quarter with $576 million of discretionary cash flow versus $545 million of capital expenditures. Our cash balance grew to $1.4 billion from both strong cash flows as well as proceeds from the debt offering after completely paying down our credit facility.

Total debt at the end of the quarter stands at $2.8 billion, and we ended the period with liquidity of over $3.5 billion. Our debt-to-cap ratio net of cash is at 17%.

Regarding our outlook for the second quarter, we expect volumes to be between 208,000 and 218,000 barrels of oil equivalent per day. Versus the first quarter of this year, our U.S. volumes should be relatively flat with growth from the DJ Basin programs offsetting the natural decline in the offshore and other onshore areas. Internationally, volumes will likely be down slightly impacted by some planned downtime in both the North Sea and Equatorial Guinea. As a result of the latest disruption of Egyptian gas imports to Israel, we're now assuming second quarter gas sales in Israel will be roughly equal to the first quarters. We put a wide range on our volume estimate for the quarter partly due to the issues surrounding Israel's imports of gas from Egypt, which continue to be highly uncertain.

I want to finish up by touching on each of our 4 major areas, all of which are pursuing exciting growth. Onshore in the U.S., we continue to make substantial progress on the horizontal Niobrara program, the DJ Basin. We've now identified over 2,000 potential drilling locations on our 400,000-acre Wattenberg position are containing unrisk potential of 600 million barrels equivalent net to Noble Energy's interest. We're accelerating the program where we continue to see strong well results in the core and on the edges of the field.

In addition, our per well drill times continue to see significant improvement as we drill more wells in this play. With the horizontal program at Wattenberg in full development mode and the exploration upside for the North, we feel very good about where this program is headed.

In the Deepwater Gulf of Mexico, we were certainly pleased to get the industry's first drilling permit post-moratorium to return to operations at Santiago. Our team did a great job in preparing us in the industry to get back to work in the Deepwater Gulf. We've now seen a number of drilling permits issued across the industry, and I believe this is a direct result of the industry making significant enhancements to its ability to respond to an incident and to reduce the likelihood of an incident happening.

Our Deepwater Gulf plans for 2011 are proceeding, with Santiago now drilling, and we are working with the government on the permit for Deep Blue. We hope to take the rig from Santiago to Deep Blue to complete the side track we were drilling there at the time of the moratorium. We're also preparing to submit a permit for the first Gunflint appraisal well, and we're targeting to spud that well later in the year, perhaps after Deep Blue.

In Israel, we are operating 2 rigs offshore, one which has now commenced development drilling at Tamar and the second rig, which is currently drilling an appraisal well for natural gas discovery at Leviathan. The rig at Leviathan will continue with various exploration and appraisal drilling in Israel for the majority of the year, and we maybe bringing a third rig to the region to test the very nice-looking prospect offshore Cyprus later this year.

The Israel tax and royalty issues are now behind us. Our focus right now is in making sure that we keep Tamar on schedule and on budget. The demand for natural gas in Israel continues to grow, certainly highlighted by the inconsistency of natural gas imports, as well as the continued strength in global liquid and coal prices. Our existing and potential customers are asking for higher volumes of clean, reliable domestic natural gas there in Israel.

Recent trends suggest our demand for that projections for Israel gas may have been too conservative, which means we are going to have to plan earlier for growth beyond the first phase of Tamar.

In Equatorial Guinea, the project at Aseng continues to make outstanding progress, and we're actually seeing now that first oil could be earlier in 2012 than we have previously planned. In addition, we're currently drilling in the Carmen-Diega area. The initial appraisal test there was successful with both oil and gas encountered, and we're proceeding with a sidetrack operation to fully evaluate the resource potential. In the second half of the year, we will also drill 1 to 2 additional oil exploration wells, likely offshore Cameroon.

There's a lot to be excited about at Noble Energy. On the production side, the near-term outlook is certainly looking very strong with 7,000 to 8,000 barrels of oil equivalent coming from Galapagos and 3,000 barrels of oil equivalent coming from South Raton in the Deepwater Gulf. We'll soon be adding an extra 10,000 barrels of oil in the U.S. Combine that with the Aseng production and you've got 27,000 barrels plus coming online within a year's time, over a 12% increase in total company volumes and all priced at levels above West Texas Intermediate based on today's markets.

This is just the beginning of the projects that really kick start production, cash flow and margin expansion that should continue for Noble Energy throughout the remainder of the decade. After South Raton, Galapagos and Aseng, the growth continues with startups at Tamar and Alen, which carries us through the end of 2013.

Growth in the middle of the decade is expected to be driven by Carmen, Diega and Gunflint while West African Gas and Leviathan Gas supports late decade growth. Also during the entire period, we expect strong ongoing contributions to our growth from the Niobrara development. However, this is not the end of the story as we've got continuing exploration appraisal programs ongoing in all 4 of our core areas that are designed to deliver more major projects. It's a great line-up in portfolio with many reasons to be excited about. So with that, Dave, I'll turn it over to you.

David Stover

Thanks, Chuck. I will provide an overview of our 4 key operating areas, focusing on both the major project developments as well as our exploration and appraisal plans for the remainder of the year.

Starting with U.S. onshore, the horizontal Niobrara play in the DJ Basin continues to be a very exciting story for us. We remain on target to drill over 70 horizontal Niobrara wells in 2011, with over 80% of them in Wattenberg as we continue to increase our activity in this field. We now have 4 horizontal rigs operating in the basin, having recently added a fourth rig. In combination with 7 vertical rigs, we're operating 11 total rigs in the basin, all of which are currently in our 400,000-acre Wattenberg position.

As we go throughout the year, 3 of the horizontal rigs will stay in Wattenberg with the other moving between Wattenberg and our DJ Basin acreage to the north. Initially, our horizontal Niobrara program was planning on 20 days, spud to rig release, versus our recent performance, which has been under 10 days. And in fact, our most recent well was just under 9 days. With this dramatic improvement in drilling efficiency, we will likely not add a fifth horizontal rig until later this year when we start to expand into our 2012 program.

Wattenberg horizontal Niobrara production performance continues to be very positive, both in the core of the field and on the north and eastern edges as we are focused on accelerating the development in this field. In the quarter, we have completed 8 wells to date, with average initial 24-hour IPs of over 850 barrels of oil equivalent per day. These wells have averaged about 640 barrels oil equivalent per day during their first month with liquid contribution over 55%.

One of our recent core wells, the B1 [ph] well, has been on production for over 4 months now. Its rate is still around 400 barrels of oil equivalent per day. About a month ago, we celebrated the first year anniversary of the Gemini well, which has now produced over 200,000 barrels of oil equivalent and is still averaging almost 300 barrels of oil equivalent per day.

We have completed 18 wells, testing the outlying edges of Wattenberg. Average 24-hour IPs have been 750 barrels of oil equivalent per day, with 30-day averages of about 430 barrels of oil equivalent per day and liquid contribution exceeding 70%. The 3 most recent completions in this area at IPs ranging from 850 to 1,100 barrels of oil equivalent per day. Three of these wells have now been producing about 3 weeks, with current production rates of 710 and 920 barrels of oil equivalent per day.

As Chuck mentioned, we have now identified over 2,000 horizontal Niobrara locations just in Wattenberg, with 600 million barrels equivalent of potential to Noble Energy, none of which has been booked as proved reserves.

On the processing side, DCP's planned expansion is set to be online in May, which fits well with our field plans. Our team continues to evaluate the next steps in the development of this major resource. We are looking at longer laterals in the field, with plans to drill a 7,000-foot lateral in the second quarter and perhaps additional longer laterals later in the year. The goal is to further enhance recovery, so we continue to study several potential initiatives on that front. Our current thinking is that with 4 horizontal wells in a section, recoveries are only about 5% of oil and gas and price combined with the vertical well program that is still less than 10% Niobrara recovery for a section.

In our 440,000-net acre horizontal Niobrara position north of Wattenberg, we continue to expand our geologic knowledge base and test different completion scenarios. We drilled 3 wells and completed 4 in this portion of the basin during the first quarter. Our seismic program that require 1,000 square miles of 3D in the DJ Basin is underway. We'll be using the results to enhance our understanding of this area and assist in our well planning as we go forward.

Moving to the Deepwater Gulf of Mexico, we re-entered the Santiago prospect and Mississippi Canyon 519 about 2 weeks ago. Santiago is a third prospect in the greater Galapagos project, combined with the previous 2 discoveries at Isabella and Santa Cruz. In about 40 days, we should have results from this well. Success at Santiago would allow us to bring this well on production next year.

Chuck mentioned receiving the first permit to return to deepwater drilling in the Gulf was great recognition to our company. In early April, we brought together key personnel and service providers for a one-week in-depth walk-through drilling Santiago well on paper, with the chance to review the well operations and evaluate contingencies with all key stakeholders. We also held a spill drill with the BOEMRE, Helix Containment Group and over 225 company and contract employees before spudding the well.

At Galapagos, we're anticipating first oil in the early part of 2012. The 2 existing wells at Santa Cruz and Isabella are ready to go when final facility modifications at Na Kika are completed and the pipelines are tied in. South Raton, our other near-term oil development in the Gulf, everything is on schedule for the first oil by the end of 2011.

On the drilling side, we hope to operate our one rig continuously through the remainder of the year, dependent on receiving the permit at Deep Blue and Gunflint. Should things go as planned, we could be on Deep Blue in the third quarter then move to Gunflint in the fourth quarter.

Internationally, I'll start with our operations in West Africa and then finish in the Eastern Mediterranean. At Aseng, we completed the drilling and well completions during the first quarter. All subsea equipment system integration tests have been performed, with the installations scheduled to begin in May, and the FPSO is progressing along schedule. Aseng start of first production now looks to be moving up for midyear 2012 to earlier in the year. When it comes online, it will add over 17,000 barrels of oil to our net daily production.

We continue to work the Alen development as well. Fabrication of the wellhead jacket, central production platform and motor control center have all commenced. We are analyzing jackup rig tenders for the 3 production well slots and hope to sign a contract in the next quarter. Our project team has ordered all of the drilling tubulars, and we anticipate the subsea trees arriving in country in August this year.

As a reminder, Alen is another multi-darcy reservoir, and we're estimating a net impact of 18,500 barrels a day of condensate in late 2013.

We previously mentioned our intention to return to appraisal and exploration drilling this year in West Africa. Recently, we were able to complete our rig work at Aseng and drill our appraisal well in the Carmen Diega area a little earlier than expected. The appraisal test was successful encountering a column of both gas and oil, setting up 1 to 2 sidetracks to help define the resource size. The 2 sidetrack program would be finished by the end of the second quarter.

We're also planning to drill 1 to 2 exploration wells in the second half of the year. Based on an early look at the 3D processing, these wells are likely to be in Cameroon. Currently, we are maturing and prioritizing multiple prospects, initially targeting those with over 100 million barrels of oil equivalent gross resources. These prospects are higher risk than the previous program as we target deeper oilier plays. Our teams continue to hold discussions on gas monetization in West Africa where we've discovered around 4 trillion cubic feet of gross natural gas.

Noble was recently named to chair an industry and government group in Equatorial Guinea working to define a gas development scenario. We also continue to work with the government of Cameroon to progress gas development options for that country.

Moving to the Eastern Med [Mediterranean]. At our existing Mari-B field offshore Israel, we will be completing the compression installation project in the next couple of weeks. This project is especially important as we move toward the summer, a period of increased demand for electricity. As Chuck mentioned, events concerning Israel imports of gas from Egypt result in Mari-B seeing some very high volumes in the first quarter for a period of around 5 weeks. Our ability to meet this demand, as well as the current situation, highlights the benefits for the last year's Mari-B investments that increased our deliverability and flexibility.

Earlier this month, we held a drilling operations at the Leviathan Deep test as a result of the casing oil identified near the mud line. We have ordered the necessary equipment, a hanger and some additional liner, which should arrive in June. We anticipate resuming drilling operations at the Leviathan #1 for this deeper interval in the second half of the year.

The Sedco Express rig has moved to the Tamar field and has begun development work. We have 4 wells to drill at Tamar, with completion operations on 5, taking approximately one year's time. In the meantime, we have spud the first appraisal well at Leviathan, approximately 8 miles from the discovery well. We're drilling this well with the Pride North America rig and anticipate results by July. We plan to immediately perform a flow test of this reservoir and then use this rig for additional appraisal and exploration activity.

In addition to our Israel program, there is a lot of interest on our part and in Cyprus to test the Cyprus prospect as soon as possible. Depending on rig tendering and well permitting in a best-case-scenario, we could spud the Cyprus prospect in the fourth quarter of this year. This is an important prospect for a number of reasons, including the well Cyprus could play in the monetization of Eastern Med gas.

At Tamar, the project is continuing on schedule and budget, with plans to commission gas in the late 2012. With the development rig on location and platform construction already underway, we're making critical progress to ensure we meet Israel's growing natural gas needs. All major contracts have been awarded, and we are focused on technical and commercial execution.

In addition, given the importance in getting this project online as soon as possible, we took steps to source additional materials so the project timing would not be affected by the Japan earthquake. Taking the world's second-largest deepwater gas discovery in the last decade, with first production in 4 years will be quite an accomplishment.

In summary, we're working through a long-term strategy that is rapidly moving towards significant growth for us and our shareholders. Each of our core areas has major projects under development, as well as ongoing exploration and appraisal programs. In the second quarter, we will see increased horizontal well activity in Wattenberg, the results from Santiago and the sidetrack extensions in the Carmen Diega area, along with the initial testing of the Leviathan appraisal well. At the same time, the ongoing developments at South Raton, Galapagos, Aseng, Tamar and Alen moved closer to production.

Longer term, we continue to evaluate and progress new venture opportunities in both the U.S. and international regions, so there is a tremendous amount of activity with continued results coming from all areas. At this time, Jennifer, we'd like to go ahead and open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first from Leo Mariani of RBC.

Leo Mariani - RBC Capital Markets, LLC

You folks talked about 3 wells you drilled in the Niobrara outside of Wattenberg, any additional color there? I mean, are those wells on production and are you guys kind of more or less encouraged by kind of what you're seeing up there?

David Stover

Yes, a couple of those are on production, just recently been put on production, Leo, it's still early. I think I'd say we're definitely not discouraged up there. If you go back to what we talked about, our strategy right now is focusing on ramping up the activity in Wattenberg where we can continue based on that amount of activity, we can continue to test some of the different completion and even directional aspects of the play. At the same time in the north, we've now got a few more penetrations to put in our database and tie in with the geologic understanding. By midyear, we'll have additional seismic. And based on the activity and what we learned in Wattenberg and the seismic in the north, then we'll be able to expand the program up north in the second half of the year.

Leo Mariani - RBC Capital Markets, LLC

Okay. Jumping over to Cyprus, you guys seem pretty excited about getting up there to drill the prospect. Can you give us any sort of parameters around kind of potential size of the prize there?

Charles Davidson

We have not disclosed yet what the size of the prospect is, other than it's a sizable prospect. I mean, obviously, from a material standpoint, we believe it's important to test it. We're still doing some work there, and we're also working with the government on permits. So given the sensitivity of the information in that region, we've not made any disclosure on the parameters on it yet. I think that's going to have to wait until we get closer to project on drilling.

Leo Mariani - RBC Capital Markets, LLC

Okay, I guess would it be fair to assume that this could be similar to what you guys have done in Leviathan and Tamar over time?

Charles Davidson

Well, I think we've said that Leviathan was the largest prospect that we saw in that region. So I think Leviathan is, in our view, still on the upper end of the range. But there are several multi-TCF prospects that we see in the region, and Cyprus is important for the reasons Dave says now, and because of its attractive prospect and it's sizable, but it's also in Cyprus, which could play a very important role on how we ultimately look at gas monetization in this region.

Operator

We'll hear next from David Kistler from Simmons & Company.

David Kistler - Simmons & Company International

Real quick in Israel, obviously, Mari-B's been getting pulled on a lot harder than it has in the past, certainly for this seasonal timeframe as you highlighted Q2 similar that way. Q3 is typically your high season. If I understand correctly, you kind of timed Tamar to come on and back fill Mari-B as it fades off. Is there any concern that there'll be a time period where Mari-B can't be pulled on as hard just because the resource is in place before Tamar comes on?

David Stover

Dave, I think you've described it very well is that the schedule for Tamar is such that it should come onstream really for a couple of reasons at the right time. One is, is that we see that Mari-B depleting and that at some point in 2013 as deliverabilities starts to decline and we can't meet full deliverability requirements at that time. And then also, the market itself in Israel continues to grow. It's growing this year and it's growing next year. And that's based on our expected production outlook for Mari-B. Well, one quarter's worth of higher demand doesn't change the picture too much. If this continues, everyone's aware that, that could accelerate the depletion of Mari-B because of these higher draws. And so we certainly have the deliverability now. We've got a compression project that we're finishing up, and that should help maintain the deliverability of Mari-B. But as we get into 2012, if we're still seeing where Egyptian imports have been reduced or eliminated and we're drawing on domestic supply higher than what our expected case, it could accelerate the depletion of Mari-B. So it's something that we work closely with the government and with our customers on and we will have to do a lot of careful planning because as you recognize, domestic gas in Israel right now has tremendous value.

David Kistler - Simmons & Company International

Is that causing the Tamar or the negotiations with respect to the gas that's coming out of Tamar, that people are signing up for purchase agreements to accelerate? Obviously, it would be making it more positive but has activity accelerated around that? And I have one more question if I can sneak it in after that.

David Stover

Well, on the Tamar, we're seeing the whole market for Tamar evolve as a result of all the things that have happened over the past several months. We've got customers that had made purchases from Egypt that are now looking to see how they can backstop supplies, and then of course, Tamar is the only real choice there, as well as our own traditional customers starting to talk to us about even higher levels of purchases than what they talked about before. I think this is also helped by the fact of the announcement of Leviathan, which means that we've got Tamar backstopped with another great supply of gas. And so it just solidifies the reliability and the sustainability of this domestic gas source. And so we're seeing growth in demand, growth in market over and above what we had expected a year ago. And I think you have one more follow-up that you're going to sneak in.

David Kistler - Simmons & Company International

I did. This one is more on liquidity. With $3.5 billion in cash or credit availability, yet kind of looking at the funding gap for '11 and '12 that you've outlined for us in the past, it covers that many times over, can you talk a little bit about the strategy of having that much liquidity? Are we looking at accelerating some other long-term projects or in markets where we've seen weak natural gas, considering acquisitions and kind of that -- I'm not trying to direct it that way, I'm just curious to understand because it certainly seems like you have more than enough liquidity at this point.

Kenneth Fisher

Yes, this is Ken Fisher. I mean, we had a very deliberate attempt to maintain a conservative balance sheet and ensure we could fund through any kind of commodity price cycle and deliver the major projects online over the next few years and see that ramp up in production and subsequently cash flows, so very deliberate. As we look forward, as Aseng comes online, you start to see those cash flows, the Galapagos and Aseng really will accelerate. At the same time, we're starting to think about mid-decade and you have the Leviathan discovery announced in December. We're feeling good about the ability to deploy capital into the Niobrara. So I would expect us to continue to think about ensuring strong liquidity, keep a conservative balance sheet and be able to ride out any kind of thing and also be positioned to fund what will be the second half of the decade's growth. So I'd expect us to maintain conservative metrics and strong liquidity and be able to do what the exploration and development program allows us in terms of developing the resource.

Operator

We'll hear next from Brian Singer of Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc.

Following up a little bit on that last question, you had mentioned 2 additional exploration wells in West Africa later this year. Can you sort of refresh us on your overall inventory of exploration prospects there? How many are drill-ready? And whether you see that as a place to further accelerate exploration activity in the event that the oil prices remain high?

David Larson

Yes, Brian, it's Dave. I think just on that note, when you look at our current inventory, and these are the things that are just kind of on the table now moving forward in maturation, there's probably plus or minus 7 prospects that we're really working pretty hard right now. But I think that gives us a good inventory to choose from as we're looking at the end of the year and into the first part of next year. And I think that the next phase there is continuing to look at the next generation of prospects in West Africa that maybe aren't as clear from seismic and start to look at things that are more on the regional nature and more of -- take a lot of geologic and geoscience work. But the long and short of it is, I think we'll be continuing to explore and have a lot of activity there for a number of years. And we've got a nice set of prospects right in front of us now to continue to mature and get ready for later this year and into next year.

Brian Singer - Goldman Sachs Group Inc.

And beyond those 7, the next generation prospects, could you classify those as higher risk or just you need more time to be able to get them to a point where the 7 are?

David Stover

I think both. I think there will be higher risk at this point until we have a chance to really work them because they are tie in more into fewer underlying geologic work, and they're not quite as obvious from the seismic or not quite as clear so that, in and of itself, adds a little more risk to those. But as all of these, you continue to work through them and derisk them as you work through the maturation of the prospects.

Brian Singer - Goldman Sachs Group Inc.

And then on Leviathan, Chuck, you highlighted and, David, you highlighted as well the importance of Cyprus drilling later this year. In the interim, can you give us an update on any recent conversations regarding LNG monetization for Leviathan out of Cyprus?

Charles Davidson

Well, I think that those discussions are in the very early stages on a number of options on how you could carry out export projects. So there's really nothing to discuss at this point in terms of any details, other than that is one option that's being looked at. It's, I think, a viable option. But of course, it would, I think, be clarified. The scope would be greatly clarified after some exploration drilling in Cyprus so that we really knew what the scale of a potential project would be over there and in how the source gas would be contributed between Israel and Cyprus. But there are some other options that are being considered as well. And we've got a team now that's really working hard to start working through a number of options as the reality that clearly there is an opportunity to have this basin being a major supplier of global gas in the future.

Brian Singer - Goldman Sachs Group Inc.

Great. And lastly, on the Niobrara, you mentioned the potential to accelerate activity there. Can you just talk about, based on the various constraints within Wattenberg, what you think the max rig count is that you could deploy on your acreage and whether you are at all at a position to consider adding another rig or more than half a rig in the DJ Basin?

David Stover

Well, I think when you look at the rig pace, you're really looking at how many wells you can drill in a year. When we've talked about the efficiency, we've seen an improvement. We're now drilling twice as many wells with a rig now as we could beginning of last year. So I think for our program that we have laid out this year, I think we're in a good shape with the 4 rigs we have. And then as we look at accelerate and expanding into next year's program, which we expect to see a significant increase, that's about the time we'll start to add rigs toward the end of this year. I think even if you look from first quarter to second quarter, Brian, you're going to see a significant increase in drilling activity, horizontal drilling activity, 4 is up in Wattenberg, probably see almost twice as many wells drilled in the second quarter than the first. And really, that's coming off the heels of some of these really nice results we've seen on the latest wells we have competed down there. I mentioned the 3 most recent wells outside of the core area in Wattenberg, and those have been some of our better wells in that whole area. In fact, if you look at those 3 wells, each of those are product performing granted they're only in the first 2 or 3 weeks, but each of them are product performing above the tight curve. Along with that last well I mentioned, it's been producing about 4 months in the core area. That's performing above the tight curve. So when you go back and actually look at the Wattenberg area and you look at the last 9 wells that have been on production for, say, over 3 months to give us enough updated, it's on comfort in projecting EURs. Probably 7 out of those 9 are actually performing above our tight curve or at least at our tight curve on an EUR basis. So all of that continues to give us this momentum to keep expanding and accelerating that program down there.

Charles Davidson

And I think also just to add a little bit more is we're working on the other pieces to support it. Besides the other rigs, there is a lot of land work that had to be done ahead of these wells, working with the service providers. We can't just turn this on overnight. So some of this involves planning many months ahead. And I think the teams are already starting on a 2012 program on increased activity. And also, we're working with the state of Colorado on new field rules that will help facilitate the drilling within the Wattenberg field and perhaps make some of the land work in the field a little bit easier as well. So our whole goal is to accelerate. It's not can we, it's we will. And we're moving forward as quickly as we can. As Dave noted, it's already started to happen as a result of the pace of drilling that we're able to do even today.

Kenneth Fisher

So you kind of have to get out in front of that 6 to 12 months to get that really ramped.

Operator

Our next question will come from Rehan Rashid from SBR.

Rehan Rashid - FBR Capital Markets & Co.

Just 2 quick things. One, on offshore France, any update on timing of drilling there? And maybe I've missed this in the beginning, when do you back to the discovery well at Leviathan and deepening of it?

David Stover

Okay, first one on France, we shot 2D seismic programs, so we're evaluating that. The next step there will be to decide where we want to shoot a 3D program. So that puts actually timing for drilling or recommendations for drilling probably still a couple of years out. When you look at the deep Leviathan, probably the earliest we could get back on that would be after we finish the Leviathan appraisal well, after we appraise and test that. So I'd say the earliest we'd be back to that would be in the third quarter.

Operator

Our next question comes from John Herrlin of Societe Generale.

John Herrlin - Societe Generale Cross Asset Research

Three quick ones. Is the Cyprus prospect biogenic or catagenic?

David Stover

No, we have not disclosed any of the prospect characteristics of it, John, other than...

John Herrlin - Societe Generale Cross Asset Research

It's worth a shot.

David Stover

Other than to say it was that it is in the same basin and -- that's about it.

Charles Davidson

We've kept it very tight.

John Herrlin - Societe Generale Cross Asset Research

Okay, that's fine. With West Africa, in terms of other drilling, are you going to start getting more base now? Are you going to look and send them on in age plays that are more abyssal in nature, more distal like what you're seeing in Ghana?

Charles Davidson

Well, I think what we're doing in Equatorial Guinea and Cameroon is still pretty much related to the things that we've had before, except that we're just -- we're moving a little bit deeper in the section. But I think, for instance, some of them look similar not positionally, but they are in at least some of them have and we're hoping that others are sourced from oil and have -- are in the oil window there. But Dave referenced and we haven't talked about any reference of other exploration plays that we're looking at, but there are more in their infancy and they're really not even right to talk about yet.

John Herrlin - Societe Generale Cross Asset Research

Okay, that's fine. Last one for me is on the Wattenberg. More activity there obviously given the fact that it's liquids advantaged. Are you concerned about any future processing constraints given the NGL rich nature of the gas? And what kind of contracts are you running, percent of proceeds or keep hold?

Kenneth Fisher

Yes, these are pretty much percent of proceeds contracts, John. I think as far as takeaway capacity, we mentioned just briefly but the Duke facilities there, they're doing some expansion on the gas processing side. So we'll see a nice expansion here midyear and then later in the year and then again in 2013. I know they have some nice expansion plans.

John Herrlin - Societe Generale Cross Asset Research

What's nice volumetrically, Dave?

Kenneth Fisher

I think by 2013, they have added close to a couple hundred million a day of additional capacity.

Operator

Gray Peckham with Susquehanna International has our next question.

Gray Peckham - Susquehanna Financial Group, LLLP

Just quick on the Israeli tax changes. Can you just kind of outline what has changed and which of your projects is going to apply to?

Charles Davidson

Well, I think in terms of the tax rate, there is a part of the tax change that applies to existing assets. It's not nearly as much of an impact as some of the future projects. So that impacts Mari-B. And we have to keep in mind that part of this was to remove a depletion allowance, which we were using at Mari-B. So all of that gets wrapped up. And of course, as we noted on our revised tax guidance that both Israel and the U.K. tax changes have impacted us. Going forward, in Israel, we've got -- they have outlined what the rate is for projects such as Tamar that comes on by 1/1/2014, and of course, we've got some better tax rates on that and then later projects, they've got another rate that they've applied as well. So it covers a gamut with a minimal impact on existing production, sort of an intermediate impact on Tamar and then later projects would see the full effect of their change. But again, we have to keep also in mind that while they've added a tax levy, the corporate tax rate in Israel is declining. And so as a result, it's expected to move down from what it was at 25%, to 23% this year and it's expected to move down to, I think, about 18% in the course of a few years. So you've got a few moving pieces there, but that's all been rolled into our estimate of effective tax rates.

Operator

Irene Haas of Wunderlich has our next question.

Irene Haas - Wunderlich Securities Inc.

I have a question actually on one bullet in your press release here. I noticed that you are collecting 3D data offshore in Nicaragua. And then my question for you is you got to feel that there's something promising to be looking at to spend the money, kind of curious as to how big the grid are? And are you looking for gas or oil and generally feel for end user, where would the product go to once if you're successful?

David Stover

Yes, Irene. I think we've talked a little bit about Nicaragua in the past. We just finished the 3D shoot and have been evaluating that. Our objective there is to get that ready so we can make a decision as to whether we want to drill something next year or not and by the time we get to our budget process later in the year. Again, we've got about 2 million acres down there, and what we're looking for are a fairly large oil prospects but still fairly high risk at this point. And we'll get a better feel for that risk as we work through the 3D program here.

Irene Haas - Wunderlich Securities Inc.

Okay, if I may have one more follow-up question is really offshore France, you've done your 2D and such. Is this a biogenic play? And if yes, roughly what age of sediment you're looking at and what delta system does it come from?

David Stover

Yes, until we work through some things there, we're not disclosing our real exploration strategy there, other than it is a Mediterranean play, and it is -- we would assume that it is gas-based, but we don't really go beyond that.

Operator

We'll move next to Ken Caroll with Johnson Rice.

Kenneth Carroll - Johnson Rice & Company

Guys, actually my questions have been answered.

Operator

Dan McSpirit of BMO Capital market have our next question.

Dan McSpirit - BMO Capital Markets U.S.

We're observing the stretching of the boundaries of the Niobrara, at least through leasing activity as far south as Douglas [ph] and Elbert counties, Colorado and parts of western Nebraska. Any comments on that? And does that at all involve Noble?

Charles Davidson

Well, I think as you imply, it's ongoing leasing. So we don't disclose, for competitive reasons, where we might be acquiring acreage. I just sort of reiterate Dave's point is that activity right now is concentrated in the Wattenberg field area, and we have a very sizable position to the north. So I think we've got a lot of work in front of us and a lot of area to cover. And quite honestly, I think some of the seismic data we're getting will be helpful in trying to high grade it as well as some of the well work. But I would just still not comment on what we think are the boundaries of the play.

Dan McSpirit - BMO Capital Markets U.S.

Very good. And as a follow-up, on offshore France, is your one partner Melrose Resources. Is there another?

Charles Davidson

No, that's the only partner right now.

Operator

We have time for one final question. Our last question will come from Patrick Rigamer of Iberia Capital Markets.

Patrick Rigamer

I have a quick question on the Niobrara. You mentioned 2,000 locations in the Wattenberg, and I was just curious, do you have a rough break-out as far as core and non-core?

David Stover

Not specific. I don't have that with me. What I can say, Patrick, if you look at the acreage and if you look at the map, probably 2/3 to 70% is what would be classified in the core with the rest being in the net non-core area, just on an acreage on the map, and the way we've kind of drawn our lines around that.

Charles Davidson

There is an interesting thing, when it gets to the horizontal Niobrara, it's getting a little blurred as to calling it core versus non-core because as Dave pointed out, some of these fringe wells, when we drilled them on a horizontal basis, are coming in very well and they're coming in at a high percentage oil. So when you look at the returns, we're seeing a very consistent high return as we go across the field. So I think what we're seeing is there's probably less distinction when it hits the horizontal Niobrara of core and non-core.

Charles Davidson

And just looking good in Wattenberg.

Kenneth Fisher

That's probably more -- the core and non-core is probably more representative of the different GOR [ph] changes.

Patrick Rigamer

And then I guess the well cost, pretty consistent across the field?

Charles Davidson

Yes, within the field, fairly consistent. Dave mentioned the drilling times have come down a little bit. But of course, as you go to the north, it goes deeper. And so the well costs go up a little bit as you go the north outside of field. But within Wattenberg, with all of the infrastructure we've got, with everything else there, it's been fairly consistent.

David Larson

Jennifer, this is David. I think we're at our closing time here on the call. I just want to thank everybody for their participation and interest in the call today, and we will see you down the road.

Operator

And again, that does conclude our conference for today. Thank you all for your participation.

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