Noble Energy (NBL) is one of the leaders in the oil and gas exploration and production (E&P) sector. Like many of the other E&Ps, Noble Energy has had relatively sluggish share price lately. However, Noble Energy's shares have taken a particularly large hit in the recent slump, and given their ever-growing asset base, I think they represent a special opportunity to investors.
Noble Energy is a buy for a 5-year investor without question. There are caveats for the 12-month investor. Wait for the stock to bottom out a little-it hasn't yet and is still declining rather sharply. Commodity prices are at some of their lowest in the past 15 months, and I would wait for these to stabilize before initiating a position in Noble. That said, a bottom-out is imminent-and so is a breakout. Patience and vigilance are virtues for the 12-month investor, and Noble Energy shares are a strong buy at $85.
The price Noble Energy shares as of June 1 is about $81. Since May 1, when shares were trading for $100, the share price has plummeted to $82. In fact, the stock hit $100 twice after the October 2011 bottom-out. The 12-month range topped at $105 and bottomed at $66. As I note below, the company has strong long-term prospects, greater and more balanced than many of its peers.
Fundamental indicators are mixed regarding Noble's price momentum for the short-term investor. The price/sales (TTM) ratio is around 3.88 for Noble Energy, which is higher than the sector's upper quintile value of 0.60. This suggests overvaluation. However, shares are also trading below their 200-day moving average, which is steady at $92. Though shares are trading below the 50-day moving average as well, one can easily see that the price momentum is strongly downward. Though these are lagging indicators, I believe that commodity prices and the E&P subsector are in a genuine macro trend downward until commodity prices stabilize.
A Growth Stock
The WTI index for oil is about $84, down from its price earlier in January 2012 of $110. Additionally, Brent crude is trading at around $99, down from its January 2012 values of $125. In all, this macro slump in commodity prices makes an excellent entry point for investment in high-quality E&P stocks. The Energy Select Sector ETF (XLE) peaked in February 2012 at $76, but it is presently trading at $62, the lowest in its persistent slide since then.
Noble Energy has impressive promise. The Leviathan deep prospect is an enormous opportunity for Noble, and its depth of 21,400 feet is the deepest in history at the Lavant Basin. Noble Energy has about a 40% interest in this natural-gas heavy holding. Additionally, Charles Davidson, CEO of Noble Energy, recently noted that "35 trillion cubic meters (TCF) of natural gas have been discovered, in Cyprus' and Israel's EEZ." This is obviously far more natural gas than can meet domestic need in the United States, so this finding will allow significant sales to countries like Russia that require additional natural gas.
Management expects 2012 output to average 250 MBoe/d, an increase from around 220 MBoe/d in 2011. In the fourth quarter 2011, Noble Energy's sales volumes were about 40% liquids, 29% was international natural gas, and about 30% was domestic natural gas. Unlike Occidental Petroleum (OXY) and many of the super majors, Noble Energy is not particularly focused on liquids over gas. Anadarko's (APC) latest first quarter 2012 gas sales were about 43%, which are slightly higher than Noble Energy.
Noble Energy's significant natural gas holdings are not necessarily a bad thing. Henry Hub natural gas futures display the price of natural gas breaking $3 per MMBtu before the end of 2012. As we roll into 2014, prices ought to be greater than $3.50, and by 2015 we will likely have natural gas prices of greater than $4.00 per MMBtu. It is true that oil prices are likely to peak as well in 2014, with the analyst consensus placing Brent crude at a $135 price target.
Balance and Cash Flow
But investment in stocks whose values are subject to commodity fluctuations generally means that investors are wise to buy on balanced holdings. There is still significant risk in commodity prices pending a resolution to eurozone woes and a more steady job market in the United States. Amidst this, Noble Energy is promising long term results. Management indicated last year that it intended to sustain an annual production rate increase of 17%, with a 20% annually in total proved reserves. This puts Noble Energy's total output in 2016 at 490 MBoe/d.
Additionally, in projected a 22% annual increase in cash flow. Unfortunately, the company will not experience positive cash flow until 2016, which is cause for caution for the long-term investor. However, management is making a concerted effort to increase, year-by-year, cash flow. Even though we can expect a further decrease in cash flow for Noble Energy in 2012, available liquidity will meet this deficit. The company maintains investor-grade debt, with S&P rating it at BBB. At the end of 2010, the company maintained a debt ratio of 33%, which has risen to around 38% in 2012 (though it is down from 42% at the end of 2011).
Noble Energy does not quite have the strong financials of, say, Apache (APA). Apache finances very little of its ventures with debt, maintaining a preset debt/capitalization ratio of 19%. However, it seems that Noble Energy has a more competitive undervaluation than Apache, which presently is trading at fair price.
Noble Energy has a large number of liquids and natural gas plays that will create long-term growth. With liquids plays in the Marcellus shale and in Nevada, the company is ever-increasing its balanced portfolio. During this dip in commodity prices, there are other stocks that make good buys. Occidental Petroleum also has impressive potential to be a good buy in the present environment. Its price hovers around $77 with a 12-month target of $130 to 135. In all, the present commodities slump is a good time to buy companies with solid fundamentals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.