Noble Energy (NBL) recently announced a reservoir discovery of 991 billion cubic meters of natural gas off the coasts of Greek Cyprus and Israel, the equivalent of 34.9 tcf. As the reservoir greatly exceeds the domestic requirements of both of these countries, Noble will be able to export natural gas from this reservoir to other surrounding countries once production is in place. In fact, the Israeli government is indicating that it would be open to exports of up to 50% of total reserves, giving Noble a great opportunity for increased revenues in the coming years through exports to the European Union and Asia. There are twelve further blocks up for auction by Greek Cyprus in the same area, and with this recent discovery I expect that Noble will put in a bid to expand its reserves in this area.
Mediterranean Discoveries Steadily Increasing
The field where the discovery was made, known as Aphrodite, is in an area of the Mediterranean contested by several sovereign nations; following the discovery, Turkish Energy Minister Taner Yildiz indicated that a portion of Noble's discovery may rightly belong to Northern Cyprus, with which Turkey has separate exploration and production sharing agreements.
The Aphrodite discovery also follows a similar discovery made last year in the field known as the Leviathan, which is in the Levant Basin, and which Noble believes has natural gas reserves approaching 20 tcf. This discovery saw escalating tensions between the countries which control the sovereign and international waters under which the gas field lies, and as more reserves are located in this politically charged area, conflict does seem unavoidable. These contentions may effect Noble's ability to perform further exploration and economical extraction, as disputes brought to international courts by any of the countries involved in these disagreements could force a halt to any drilling activities.
Noble's job in the Mediterranean is also complicated by the technicalities of deep water extraction. Noble suspended drilling on the Leviathan several times, most recently on May 8, due to "technical constraints". At depths exceeding 21,000 feet below sea level, the highest pay in the Leviathan is not easy to extract. Noble is taking a cautious approach, performing production testing during these suspension intervals to determine more exactly the composition and flow in the reservoir.
Noble has a goal to reach 2.7 bboe of reserves, with 490 mboe per day production, by 2016. As of the close of 2011, Noble had reserves of 1.2 bboe and production volumes ranging between 244 and 256 mboe per day, split nearly equally between international natural gas, U.S. natural gas, and liquids. If Noble were to meet its goals, it would represent a doubling of its reserves and production in just four years. This would require double digit growth each year for Noble.
Noble has uncovered 2.3 boe over the past five years, showing that Noble could deliver on its targets - if it can marshal the resources to do so. Currently, Noble has 3.8 bboe of discovered unbooked resources, the appraisals of which could contribute to some or all of the gap between current reserves and the reserves goaled for 2016. I think the issue here for Noble will be finding the equipment and manpower to complete appraisals and begin preliminary drilling.
Almost half of these discovered unbooked resources are in the Eastern Mediterranean, which as noted is complex deepwater drilling that requires experience and equipment to exploit. This will not be easy for Noble considering that while the Mediterranean is hardly remote, the equipment and experienced personnel needed for deepwater activities are not clustered in this area. Noble will need to compete for these resources with other drilling "hot spots" such as the Gulf of Mexico and the eastern shores of Africa, which will drive up Noble's costs. The next challenge for Noble will be to begin production on its promising wells, which with a timeline of only four years will be all the more difficult.
With $1.5 billion cash on hand and $3.0 billion available through unused revolving credit, Noble is financially able to incentivize accelerated drilling for willing partners. It's also worth noting that in the Aseng Field of East Africa Noble went from sanction to production in under three years, which is almost unheard of for U.S.-based companies operating overseas. Noble is now producing 60 mbbl per day from the field, showing that while its goals may appear audacious at first glance, the company has a past performance to back them up.
One of Noble's primary competitors in the Mediterranean is ATP Oil & Gas (ATPG), through its wholly owned subsidiary ATP East Med B.V. ATP East Med began drilling in the Levant Basin off the shores of Israel at the end of April, believing its probability of success at its chosen location to be 20%. Royal Dutch Shell (RDS.A) is also beginning exploration activities in the Mediterranean off the shores of southern Turkey through its partnership with state-owned Turkish Petroleum Corporation. BP (BP) is also drilling in this area of the world, with production online in the Gulf of Suez. Other players interested in Mediterranean exploration include Total (TOT), Chevron (CVX) and ConocoPhillips (COP).
Noble is trading around $92 per share, giving it a forward price to earnings of 10.5 and a price to book of 2.1. Chevron is trading around $103 with a forward price to earnings of 7.5 and a price to book of 1.6. Shell is trading around $69 with a forward price to earnings of 6.7 and a price to book of 1.2. BP is trading around $40 with a forward price to earnings of 5.2 and a price to book of 1.1. ConocoPhillips is trading around $54 with a forward price to earnings of 6.9 and a price to book of 1.1.
Compared to its competitors on Mediterranean plays, Noble looks overpriced. However, given its better prospects for growth, its intentions to double its reserves and daily production in the next four years, and its history of being able to pull off such impressive gains, it currently looks like a good buy in the oil and gas sector.