In this article, we quantitatively predict the evolution of Noble Energy (NBL) share price. As for other companies from Energy category of the S&P 500 list, one may assume that its share price is driven by the change in some energy-related prices. It might be a commonplace that oil companies depend on oil price as they have to depend on the price and amount of goods and services they produce/sell. When oil has a higher pricing power these companies are expected to show rising profits also reflected in their share prices.
NBL engages in the acquisition, exploration, development, production, and marketing of crude oil, natural gas, and natural gas liquids. We model the evolution of the NBL share price as a weighted sum of two individual producer price indices selected from a set of five producer price indices borrowed from the Bureau of Labor Statistics: the overall PPI, the PPI of electric power, EL, of natural gas, GAS, of coal, COAL, and the PPI of oil, OIL. All PPIs and the monthly closing price are available now through March 2012. Our model seeks for the best pair of PPIs which minimizes the error since 2003. We also allow both defining PPIs lead or lag behind the modeled share price. Additionally, we introduced a linear time trend and an intercept term. The best fit model is obtained with the pair GAS and PPI:
NBL(t)= -0.049GAS(t-3) + 1.367PPI(t-0) - 1.22(t-2000) - 158.53; sterr=$4.75
where NBL(t) is the (monthly closing) share price in U.S. dollars. We allowed both time leads to vary between 0 and 12 months. In the best model, the PPI of natural gas leads the share price by 3 months and the PPI lead is zero months. In other words, gas drives the NBL share with a three month delay.
Surprisingly, the slope of GAS is negative, i.e. falling gas prices drive the NBL price in opposite direction. The PPI slope is positive and the share price rises with the overall producer price. The model standard error for the period from July 2003 to March 2012 is $4.75. We report only on reliable models which do not change over eight to twelve months in a row. Thus, the above model is valid and reliable since the middle of 2011.
Figure 1 shows that the model based on the producer price index of natural gas and the PPI (domestic production) accurately predicts the current NBL price. As for many energy companies, there were two major fluctuations in the first half of 2010 and in the fourth quarter of 2011 (see Figure 2 for the model residual error). Both ended on the fundamental price curve. This behavior is illustrative - all deviations finally return to the predicted curve. In November 2011, we would estimate the NBL price as a highly undervalued one. Since the actual price gravitates to the predicted one we consider our prediction as the fundamental price level, which is fully defined by the PPI of natural gas and the PPI.
Figure 1. The observed and predicted monthly closing prices for NBL between July 2003 and March 2012.
Figure 2. The model residual error
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.