Noble Energy (NBL) announced that it plans to sell its stake in certain of its assets in the United Kingdom's North Sea to Maersk Oil North Sea Ltd. in a deal valued around $127 million. In the announcement, Noble indicated that it was possible for the company to divest further North Sea assets, as these interests are not a part of its core working strategy.
Noble is indicating that investors can look forward to double-digit growth rates from the company over the next ten years, which sounds ambitious, until Noble lays out how far ahead of its peer group and the supermajors it is, in both finding costs and resources discovered over the last five years. At the close of 2010, Noble was reporting finding costs of less than $1.35 per barrel of equivalent over 120% reserves growth since 2006, which is equal to 29 times Noble's annual production. To further this strategy, the majority of Noble's 2012 capital expenditures - over 75% - are earmarked for development.
Betting Heavy on the Marcellus
Noble anticipates 126% annual growth rates in the Marcellus Shale, compared to 32% in the deepwater Gulf of Mexico and 20% in the Eastern Mediterranean. The company is expecting to begin significant production on the Marcellus in 2012 into 2013. It currently estimates its risked reserves on the Marcellus at 7.4 tcfe, and is partnering with Consol Energy (CNX) to gain access to Consol's infrastructure and supply channels in a $3.4 billion partnership agreement. Consol is also able to obtain higher production yields than Noble working alone or the average of the two companies' peer group on the Marcellus, with Consol reporting a 21% higher production rate over 500 days.
Noble is using pad drilling to maximize cost efficiency on the shale as costs escalate due to close competition for equipment and manpower. To further reduce costs, Noble is planning to obtain fit-for-purpose rigs specific to fracking activities and is equipping these rigs to run on natural gas fuel. I think this foresightedness is wise given Noble's relatively late entry on the play. However, this late entry is also allowing Noble to learn from what did not work for competitors on the play, including Cabot Oil & Gas (COG) and Range Resources (RRC).
Success in Deep Water
Noble believes that in its various deepwater plays in the Eastern Mediterranean it has 3.7 bboe gross unrisked reserves, the result of its three major and three smaller recent field discoveries. It also has substantial assets in West Africa, with production from Aseng averaging 20 mbbl per day net to Noble at nearly 100% runtime. Despite this area's potential, Noble is only planning to spend 14% of its capital expenditures in the region in 2012. I think the civil unrest still plaguing the area is a factor in this decision. After the political turmoil and related violence of 2011, Libya's oil production is only slowly returning to normal. As of May 20, production was back up to nearly 1.6 mboe, but the disruption caused by the war will not be forgotten by the area's players anytime soon.
These disruptions had a substantial impact on Noble competitor Occidental Petroleum's (OXY) 2011 results, with Oxy's production in the Middle East declining by 5% in 2011. However, despite the risk in this region, Oxy still believes that this area presents it with attractive growth opportunities, particularly with its newest acquisitions in this area, such as the Al Hosn Gas Project in Abu Dhabi, a similar offsetting strategy to Noble's methanol and LPG plants on Bioko Island.
Noble's Leviathan Deep discovery continues to impress, with recent results indicating that the gas buried there could be of higher quality and greater quantity than previous estimates. However, Noble is not predicting significant production for this play until after 2016, due in part to its focus on U.S. onshore assets. Given that the Leviathan discovery is mostly natural gas, I believe Noble is making the right decision, especially considering its current focus on gas-rich Marcellus.
Earlier this month, analysts were puzzled over Noble's decision to decline to bid on further offshore licenses from Cypress. For its part, Noble called analysts' interpretations of its actions in Cypress "overblown". Shortly thereafter, Noble announced that its existing Cypriot block, Block 12, has between 8 and 9 tcf of natural gas, making the find far larger than previously anticipated and putting Noble's decision not to bid in context.
Niobrara Shale the Next Growth Driver
Noble is entering the Niobrara Shale in Weld County, Colorado in a big way. On May 22, its Northern Colorado Operations Center officially opened for business. Chuck Davidson, Noble's Chairman and CEO, indicated at the ribbon cutting ceremony that Noble plans to invest approximately $8 billion in the Weld County area over the next five years, where it will be competing head to head with Anadarko Petroleum (APC).
Noble currently holds about 880,000 acres on the Niobrara, on which it is beginning to use long-reach laterals at $8 million each for drilling and completion in order to best extract its estimated 1.4 bboe potential reserves from the Niobrara. Anadarko estimates it has similar reserves of up to 1.5 bboe, and is ahead of Noble on production as the largest producer on the play with 70,000 boe per day.
Chesapeake Energy (CHK) is marketing its 193,000 acres in the Wattenberg field as part of its 500,000 acre sale across Colorado and Wyoming. With $1.1 billion cash on hand and $3.0 billion of unused revolver, Noble is a potential buyer for Chesapeake's acreage if the price fits into Noble's planned expenditures. Anadarko is indicating that it is also considering Chesapeake's land sales, both on the Wattenberg and elsewhere. Chesapeake's assets could add to its purchaser's reserves base, but will likely be capital intensive as Chesapeake did not make much progress towards development here.
At the close of 2011, Noble had 1.2 bboe of reserves, nearly half of which were in the U.S. Its unrisked reserves are substantially larger, which gives Noble a strong base for development and production over the coming years. At the close of the first quarter Noble possessed one of the cleanest balance sheets of any of the U.S. based energy independents, which allowed it to report earnings per share of $1.47 on revenues of $11.6 million.
Noble's stock took a huge hit this month despite strong earnings as the energy industry as a whole took a beating; its stock is currently trading around $84, off 16% from the beginning of May. This spells nothing but opportunity, especially as Noble's three-year trend line indicates the stock is preparing to climb to another peak, where I think it could easily break $100 by the end of this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.