Chuck Davidson - Chairman and CEO
Arun Jayaram - Credit Suisse
Noble Energy, Inc. (NBL) Credit Suisse Energy Summit Conference Call February 7, 2012 1:10 PM ET
We're very excited to have Chuck Davidson who has been one of the longest tenured CEOs to support this conference. Chuck, thank you for your continued support of Credit Suisse. When we did launch one of our top ideas in the group with Noble and our investment thesis regarding Noble is really at the core of the company is one of the best, what I call, franchise assets in domestic E&P. I think that's a real strength of the company in addition to all the exciting discoveries that Chuck has announced over the last several years.
With that, I'll turn it over to Chuck.
Great, thank you so much. It is a pleasure to be here at Credit Suisse. I've been here long time. That's not to imply I'm old, right? The hair is greyer, but a lot of exciting things to talk about. With me today also is David Larson, our VP of Investor Relations; and also Ted Brown, our Senior Vice President and heads up our Northern Region in Denver. And he will be helping me and David on a one-on-one on that long list of questions about Wattenberg and some of the things that we're doing there.
So let me just jump into our program, and I'll have a few slides here at the beginning. They'll talk about our strategies, a bit of an overview on where we're going. And then I want to get into the various core areas in our business and certainly leave plenty of time for questions.
We are in interesting times. It's interesting to see as the environment changes, the number of companies that are having to adjust strategies to reposition themselves to fit. But I guess what I would say here is I'm not here to talk about a changed strategy. We believe the strategy that we put in place a number of years ago at Noble Energy is one that is very appropriate for the current environment.
It was a strategy that came about after we closed on the acquisition of Patina Oil & Gas. And what we said at that time was we wanted to move to a diversified portfolio. We wanted to derisk our development program and we wanted to move the exploration program to something that was much more material. We wanted to get away from exploration which prior to that was basically trying to deliver near-term production. And in my view, that is not the intent of an exploration program.
The intent of an exploration program is to position the company for the future, put material legacy assets in the portfolio that will be with you for a long time. We wanted to be financially disciplined from every aspect and we wanted to build an organization that was capable of best-in-class execution. So that's been our strategy.
During a few years after that, we're willing to sacrifice near-term growth. Offsetting that was building the portfolio for long-term growth. But I would say that we felt this strategy played out very well. It worked for us. And we are not here to change it. So let's just talk about some of the results and how we see the company going forward in the future.
At our November meeting, we talked about our long-term growth plans, and this is a chart we showed then. It reflected debt-adjusted per share growth rates on production, cash flow and reserves, all double digits, all very strong. You can see the drivers on the right, you can see production going up over the five years by 2016, projecting production at just under 500,000 barrels a day equivalent, strong growth in proven reserves, free cash flow near the end of that period as well.
As I look at those metrics and I look at some of the reports that are put out in the space, I think I can confidently say that assuming we deliver on that, which is certainly our intent that is ought to make Noble Energy one of the more attractive, perhaps one of the most attractive E&Ps, especially when you can deliver debt-adjusted per share growth of 15% up to 20% on a cash flow basis.
Again, it is about diversification. Today, we're in five core areas. We added the Marcellus of course last year. But besides the Marcellus onshore, we've got the Rockies, primarily Wattenberg in the DJ Basin, the deepwater Gulf of Mexico, offshore West Africa, primarily Equatorial Guinea in the Eastern med and Israel and now Cyprus with the discovery we announced just before the end of the year.
A little over half of our reserves are international, and you can see production historically has been about 40% oil and some natural gas liquids, 30% U.S. gas and 30% international gas. Although I would say and we'll be putting out guidance here in a couple of days, we're seeing a shift more this year to liquids, and that's driven by the fact we've got two big oil projects coming in, Aseng which has already started up in West Africa, and Galapagos would be predominantly oil as well, as well as what we're driving in the Niobrara in terms of production.
And the percent of international gas will be down this year as a result of some work that's being done at the Alba field as well as we're managing the declining Mari-B field in Israel to bridge it over to when Tamar comes on in early 2013.
No secret that a big part of our success has been exploration. We look at it very carefully. We postmortem it every year. But the discovered resources continue to build. We'll update this again in a few days to show 2011, but it's no surprise with the big discovery we made in Cyprus that the numbers will be very strong again in 2011.
It also highlights the strategic shift that we did make in 2006. You could see we moved exploration to more material areas. And if you look at the period from 2007 through '10 and '11, every year we've been finding multiples of our annual production through exploration alone. That's besides all the development programs that we do and everything like that. We've been finding multiples, while driving our finding cost down. In 2010, the finding cost for our exploration resources was around $1.
And exploration success shows up here as well. This is just an inventory of our resources. Again, as we showed this at the end of last year, 7.4 billion barrels equivalent, that was up 75% over 2010, and it's over six times our proven reserves. So we've got a lot of inventory.
I hate to say it on years of production, but I will anyway. It's 90 years of production. That just tells me our job is to accelerate, keep pushing on the major projects and move it forward. I've never been in a business in this space and have now approaching 40 years in the upstream business. I have never been associated with a business that's going to see 90 years of production. So our job is to move this out of the portfolio of resources in the proven reserves in production.
When you look at just proved and discovered unbooked, these are basically the projects that we've discovered but we haven't sanctioned the development. It's about 55 years of production. And we're well diversified, again a key part of our strategy.
This shows some of the major projects. We've chosen to display it in a little bit different format than what we've shown you in the past. The bubble size represents full cycle NPV. On the X-axis, you can see the timeframe. Things out to the right for instance are the gas explored projects. We're going to have to update this, either add a Cyprus bubble or probably just increase the Leviathan bubble and call it Eastern Med export. But those are export projects.
You move over to the left, you see the things that are coming on now, Aseng which came on stream seven months early. So it's already checked off; the Niobrara, which is ongoing; Marcellus; and of course this year Galapagos will come on. And the next year, we've got another West Africa project, Dalit and Tamar. So lots of things in the pipeline over the next coming years.
Again, this is based on November Analyst Day. The outlook we gave for production and it matches up with those debt-adjusted numbers that I showed earlier. You look at it over the five-year period, average annual production growth of about 17%. You can see the shape of the curve there. It starts out a little slower, although we accommodated early on for the fact that we plan to divest about 20,000 barrels a day of onshore production, and that is all factored into that curve.
What I like is on the right. Five core areas; all five core areas are growing at a double-digit rate over the next five years. This is not a matter of one area carrying the load. We have forced ourselves to be in core areas which are true core areas. They have the ability to grow. So it is not something that's lagging behind. So we've got strong growth rates in all five of the core areas.
When you look at our financial platform, I think it's very strong, and we continue to enhance it. We've taken advantage of a very good credit market that's available for investment-grade companies such as ourselves. So we've done a couple of offerings last year. We ended the year with about $4.5 billion in liquidity, $1.5 billion of cash on hand. That's probably more cash than that would normally like to carry.
But again, the debt markets were very opportune for us. We were able there at the end of the year to issue $1 billion of 10 year notes at just over 4%, and it was heavily subscribed. So again, I think we've got the balance sheet, very strong sheet to help support the execution of our program going forward.
We certainly look at our risk going forward. Our policy is to hedge up to 50% of our production out about two years. The Board can make exceptions to that if they think it's an unusual situation, but generally we stay close to that. Because of our diversified mix, we are not as exposed to a single commodity market as many others. We view our markets as four markets.
We've got a West Texas intermediate oil market. We've got a Brent market. We've got a U.S. gas market. And we've got an international gas market. And they are all different today. So I look at the spread between WTI and Brent. Brent barrels are doing very well. WTI is not doing bad at all, but Brent is approaching now a $20 spread premium. We're really taking advantage of that in our West Africa production. And of course, the international gas is typically sold on a longer-term basis. So it's almost hedged naturally because of the long-term contracts.
So if you look at it right now, about 20% of our total production this year is tied to unhedged U.S. gas, very manageable from our perspective. So let me jump in and talk about a few of the areas. I'll try to touch on these and leave time for questions. So I won't go into a great deal of depth in each one.
DJ Basin, no doubt, is a real gem in our portfolio. And I completely agree with the room that it was a real game changer for Noble Energy, because it was the vehicle that allowed us to change our strategy on exploration, exit the Gulf of Mexico shelf, exit a number of other areas and really get our portfolio and narrow down to this growth core areas.
I look back at the acquisition, economics and the acquisition status back in the 2005 on Wattenberg, Wattenberg at the time in 2005 was 218,000 net acres. Its production was 33,000 barrels of oil equivalent of which about 30% were liquids. And the net resources, which we were very proud of at the time, were 272 million barrels equivalent. 152 of that was proved. So when I look at it today and what we have done with it, what the team has done with it, what Ted Browns' team with it which is amazing.
The acreage just in Wattenberg has basically doubled and in fact when you look across the basin, almost quadrupled to 850,000 net acres. Production has doubled to 66,000 barrels a day and we have grown the liquid side of it. So instead of the liquid percent being 30th now 60 which means we've quadrupled our liquid production out of the field. And today the net risked resources have grown from their 270 barrels to today we see 1.3 billion barrels, up net risk resources in the Wattenberg field.
That is a great asset. That has been a game changer for us. It allowed to do a lot of other things, is got a greater future ahead of us, a very exciting future. I just can't be happier about how that has turned out. And hats off to the team, I think it really shows that you would expect great results when you take a great organization, you apply leading technology to a quality asset.
Just to bid, we kind of break it down into several areas. I think the real message here is that with that horizontal program we have been pushing the extension areas of Wattenberg further and further to the north. So it's really grown. In fact, we'd say that economic area, the field has increased 65% as result of our development programs.
We basically de-risk the horizontal Niobrara over this entire area and we have five horizontal rigs running at the end of 2011 besides our vertical program. We expect to continue to add rigs into the horizontal program in 2012. And I'll tell you that as we look ourselves and how we deploy capital. We're moving some capital that were cutting from the Marcellus, we're moving it into this play to continue to accelerate it. So it's all about getting best value and again a diversified portfolio that allows you to do that.
The results just keep getting better. And we'll have even more updates on our call here later this week. This just kind of showed what the status was late last year. We're showing that the ultimate recoveries are going as their teams continue to optimize the completions, look at the drilling. The rates of return have continued to go up as we focus in these extension areas. You can see we're now seeing some very high rates of return and that's of course driven by the fact that it is a very high old percentage in the extension areas. And so that's driving up the returns as well.
We've now got 95 horizontal wells producing in the Niobrara. We believe we drilled over 80 last year so a lot of and wells. Some of those are jut now being brought on productions. So they're not in. production well count. But again, we're just seeing growing returns.
We continue to work in the northern areas as well. It's a very managed evaluation program, we'll probably have one rig this year moving back and forth between far northern Colorado and Wyoming. Again, as we continue to evaluate it, this is technically not any where near is mature as the Wattenberg area. We're sensitive to that and also we know that we've got all the infrastructure we need in Wattenberg and we can deliver a lot in near term production growth and value by staying in Wattenberg as much as we can. But we don't forget about this important position to the north. There will be good areas. We need to make sure that we focus on them.
Talk a little bit about the Marcellus, this is a transaction we announced last year with CONSOL Energy. I'm very excited about it. I think it does a couple of things, it adds this element of commodity into our portfolio, continues the diversification and we zeroed in this area because it is a low cost source of gas in United States and we're going to play gas United States you better play it in a low cost regions. I mean, that absolutely makes sense.
I think the real thing that jumps out is we put some very unique features into our transaction with CONSOL. We put in some circuit breakers, they have tripped. As a result, the carry for this year has been eliminated. It carries forward into got seven, eight years out in the future. The real point of that is it puts us in a period where has pipes are low. We're on same footing as CONSOL Energy as a result we're seeing the economics as a same way and as a result we came to logical conclusion that is reduced dry gas drilling in Marcellus.
So CONSOL has announced that they're dropping from the total program Noble and CONSOL about 40 wells. We'll continue our program which is in the wet gas area. They would take the reduction in the dry gas area and redeploy assets there as well.
So again the carrying costs are down. Our overall capital in the Marcellus would be down this year. What dry gas drilling remains will be focused in a very premium areas, in south western Pennsylvania and it's an area where CONSOL and now Noble has very high net revenues interest in some case. Some instances a 100% because the minimal fee acreage which enhances the returns as well.
Again, when you look at the area, it's covers about 600,000 acres, you've seen the description or the joint vent in the past that wont get into our lot of daily on it. It's a very high net interest across it. Again, it's a 50-50 joint venture with Nobles' operation which we've just begun in the wet gas area. We'll try build up. Because we've got one rig, we'll probably build up to 3 rigs in wet gas area later this year.
And this is another area where the performance continues to improve. If you look at the tight curves today the performance is now exceeding industry averages in the area as well as it's far exceeding Noble's acquisition tight curve which I am really glad to see. So we're probably a little bit conservative on that. But that's okay. When it's come to acquisitions it's all right to be conservative.
Let me switch over and talk a little bit about the deepwater Gulf. It's an important component of our portfolio. We are really in a industry-leading position earlier last year. We obtained the first permit to go back to the drilling. That ended up in the discovery at San Diego which we rolled into Galapagos and we're planning a one-rig program this year as well, continuing on and we expect to see production contributions this year from both South Raton which is a smaller development as well as Galapagos.
Galapagos will be adding about 10,000 barrels a day net when it comes on stream, all the well and field works are done. We're just waiting for BP to finish up those loose sands on some top sites work Na Kika, and we'll be ready to go there. We're looking forward to that, mostly oil production by the way.
We've got our rig over on Gunflint drilling a very important appraisal well. Finally, we discovered it a couple of years ago, timeout because of the moratorium and a number of other things, but this is a very big discovery and it kind of gets lost because of the time factor. The range of resource is very large, 70 million barrels to over 500 million barrels. That's why the appraisal is so important. It should be narrowing that range down as the results which we expect to get in the second quarter.
In West Africa, our business is delivering great results there. We got existing low cost production at Alba, about 240 million a day net of gas and 20,000 barrels a day of liquids, which is the important part. We have had a string of discoveries here. The first one we developed at Aseng last November. It came on seven months early, came on at 13% under budget. Great results for our first project.
Aseng is at its targeted production. In fact, it moved up to its targeted production within seven days of getting on location. This FPSO was another great project. It arrived in Equatorial Guinea virtually a 100% complete. As a result, after hooking up the wells, we could immediately bring it on to production. And it's had about a 99% uptime since it started in November. So great results by the project team. And again, we'll continue to redeploy. In fact, we have taken those people from that team that delivered its outstanding performance and they have now moved on to some of our other major project teams to try to transfer the knowledge going forward.
This is one of them, Alen. It's a follow-up project in West Africa. We expect to start up in late 2013. The project work is going well. It's expected to deliver about 20,000 barrels a day net production. That would mean that between Aseng and Alen, we would have over 35,000 barrels of oil production net coming out of these two projects.
So I'll finish up and then open it up for couple of questions and talk about the Eastern Med. It's obviously a big part of our business. It's another solid core area. And our discoveries there have really dramatically changed the region. Tamar and Leviathan, which we announced in '09 and 2010 were among the top global deepwater discoveries in the world. We followed up. We just announced before the holiday and before Christmas Cyprus, which was another discovery. And then last night, we announced another discovery.
So if we add it all up now, we're six for six. We've discovered six new fields in this basin. Four of them are over 1 trillion cubic feet, and then total resources add up on a gross basis to 35 trillion. So we have plenty of gas. I am of a view that maybe we ought to cool off on the exploration work for now, because I am starting to read it. Until we get a path forward, I am not sure I am adding NPV as long as I hold the licenses. And we hold the licenses when we've got those assurances as well.
It's time to move these two developments. Tamar, we're already doing that, but it's time to get the teams in place. And we have got the teams in place for Leviathan, Cyprus and some of these others are really targeting for export to move them forward. So it's an exciting opportunity. It's rare that as an independent, you get to look at a resource base to develop, in this case, almost 6 billion barrels equivalent, 35 Tcf. It's a project that we will almost certainly bring in a large scale partner to help us on, because it makes all the sense in the world. This is going to have to reach out to global markets, international markets.
And that's something where I think there is a couple of other companies in the world that can help us a great deal, and several of them have already expressed an interest that they would like to join in on this. And I think it will add value and accelerate the development of this opportunity.
Tamar is going well. We're finishing up the development wells. We expect to be setting the shallow-water platform that will take delivery from the deepwater wells later this year, start the commissioning process, and we're on track for first sales in early 2013 out of Tamar.
And I mentioned Leviathan. That's the big elephant in the mix. It's a great world class discovery. Again, the key is to move forward on the export side of it, because those resources when you combine it with Cyprus far exceed any local demand in this region. So it's all about export and that's what our teams are working on right now.
So it's pretty exciting. We're actually back, drilling a deep test underneath Leviathan. We had to stop there earlier on to do some repairs, but we're back to drilling that that to test a deeper section that's never been tested before in this basin. It's a very high risk, low chance of success.
But our view is you need to make these kind of tests in the earlier life, because this is a brand new basin to the world. And it's never been tested, the basement, you need to do that, because we know there are structures there and we need to see whether there is anything that's worth developing. We don't want to miss a thing. That's our job at Noble Energy is don't overlook anything.
Let's just talk a little bit about some of the things we're doing on the export side. We've actually retained a firm that's doing the precede work. They're evaluating a number of sites; obviously, Cyprus is in the mix; Israel; also a potential site in Jordan is being evaluated as well for potential exports sites.
So I think with that I'm going to wrap it up. I think Noble offers a great package. It's a diversified package. It's a package that's projected to grow, not just for one or two years, but for five years and beyond. I think we've got a combination of a great package of asset coupled with an organization that can deliver a lot going forward.
So with that, I will open it up for questions. I won't read the disclaimer, but it's their in your books if you'd like to read it.
Arun Jayaram - Credit Suisse
Chuck, let me kick things off. As you look for a partner in the Eastern Med, can you talk about what steps you're going to take and maybe a timeline of when you would seek partner approval?
Yes. In combination with our partners retained a couple of banks, and so they're going through actually a process right now. We are screening the potential partners. We have got actually a pretty good list. We're looking for companies that have global reach, have expertise in L&G, perhaps have a history of working in L&G and international markets. And clearly have the balance sheet to help on the midstream part of the project.
They may take a part of the upstream. But the real key is in the midstream business, which is very capital intensive, which I don't believe Noble wants to put anywhere near its proportionate share and that we've got in the upstream. That's the target and I think six to nine months, we are hopeful, we will have a partner on board.
Arun Jayaram - Credit Suisse
Chuck, in the commentary you mentioned about accelerating some of your activities in the Wattenberg. Can you perhaps just give us a sense of is this on a horizontal side, the vertical side and maybe some the magnitude there?
It's all about horizontal. And in fact, we'll look for everyway possible to replace vertical with horizontal as we go forward, because we're getting much better invest efficiency. We're obviously getting much better recoveries. I think at one point we were seeing, we had 7 to 10 times more recovery out of a horizontal well than a vertical well, but the key is capital efficiency. We're getting much better capital efficiency. We'll also be looking at some longer reach laterals going beyond the thing.
So that's the area that we're pressing. In fact, we will probably pull down a little bit on the vertical to accommodate an increase to horizontal program going forward. So it's matter of adding some rigs. We've got two new builds that are on order that should join us some time later this year. They will just add to the program. We may look at converting some others again. It's an area where we've redeployed some additional capital over and above the plan that we showed back in November.
Arun Jayaram - Credit Suisse
And one final question, Chuck. You mentioned, Gunflint, it's a pretty wide range of resource potential at Gunflint. Can you talk about the appraisal, while what you're looking to accomplish by this appraisal well?
Yes. You know, when you put out a range from 70 to 500, and somebody asks you know what in the world you're doing. But the reason is that we drilled on the top of a four-way and the geology would suggest that it's syncline and goes into a three-way, which greatly expands the resource size. We have no idea whether it spills over into that three-way.
So the appraisal well will go into that syncline and test the spillover effect. So if it spills over, then you're going towards the high side; if it goes down, then you're somewhere in the middle; if it's dry, then what you've drilled is a four-way and you got the lower end of the range. So it should help a lot, Arun, in narrowing the range.
Arun Jayaram - Credit Suisse
All right, thank you very much.
Thanks so much everybody.
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