Noble Energy Inc. Q4 2007 Earnings Call Transcript

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 |  About: Noble Energy, Inc. (NBL)
by: SA Transcripts

Operator

Good morning. Welcome to Noble Energy's fourth quarter and full year 2007 earnings call. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. David Larson. Please go ahead, sir.

David Larson

Thanks, Angela. Good morning everyone. Welcome to Noble Energy's fourth quarter and year end Earnings Call and webcast. We appreciate your interest in Noble Energy. I would like to start out with a few introductions this morning. On the call today we have Chuck Davidson, our Chairman and CEO; Chris Tong, CFO; Dave Stover, Chief Operating Officer.

The agenda for the call includes some overview comments on our record 2007, and our outlook for 2008 that Chuck will talk about, Chris will then provide a little more detail on items that affected results for the quarter, and our 2008 guidance. Dave will finish up the call with a discussion of year end reserves, operating highlights for the quarter and mix in a few comments on the program for 2008. We'll leave time for Q&A at the end, but try to wrap up the call in about an hour.

We hope everyone has seen both news releases we issued this morning, one announcing the fourth quarter and full year results, and the other covering our 2008 plans. Attached to the second release is our full year guidance projects, and it also includes our current commodity hedge positions. Later today, we expect to be filing 10-K with the SEC and it should be available on our website at www.nobleenergyinc.com.

Now before we get started, I need to remind everyone that this conference call contains projections and forward-looking statements based on our current views and most reasonable expectations. We provide no assurances on the statements as the number of factors and uncertainties could cause actual results in the future to differ materially from what we discuss here today. You should read our full disclosure on forward-looking statements in our latest news release and SEC filings for discussion of the risk factors that influence our business.

On the call, we're going to reference certain non-GAAP financial measures such as discretionary cash flow. We use these terms because, we believe they are good metrics for us and our stakeholders to use, to evaluate the performance of the company. Be sure, to see the reconciliation in our earnings release.

With that, let me turn the call over to Chuck.

Chuck Davidson

Thanks, David. And let me start by saying that the fourth quarter really ramped up what was an outstanding year for Noble Energy. We executed the plan that we laid out earlier in the year, and have certainly delivered outstanding results for us.

Net income for the year was 39% higher than our previous record, which was in 2006. It came in for the full year at $944 million or $5.45 per diluted share. Discretionary cash flow for the year totaled over $2.1 billion, resulting of course in significant free cash flow over and above our 2007 capital expenditures, which ended the year at about $1.7 billion.

We reported record sales volumes for the year which averaged approximately 199,000 barrels of oil equivalent per today. That's a 13% increase over the prior year after adjusting for the Gulf of Mexico shelf sale in 2006. Our production for the year averaged 200,000 barrels of oil equivalent per today, with of course the difference between production and sales being primarily the timing of international listings.

Our proven reserves at year end also reached a record 880 million barrels of oil equivalent that's up 5% from the prior year. Successful exploration and development activities allowed us to replace over a 166% of our volumes at $14.71 per barrel of oil equivalent, or if you think in terms of gas equivalent that was $2.45 per thousand cubic feet equivalent.

It’s important to note that we did not book any reserves associated with our very successful West Africa exploration program. Those very substantial bookings will come in future years as we sanction those projects for development. However our F&D cost for this year do of course include all costs associated with that exploration program, which totaled approximately $180 million. So if you look at that the West Africa exploration program and the cost associated with it added about $1.50 per barrel of oil equivalent to our F&D this year, and I would add that's an investment I would like to make over and over again.

On that note, 2007 was perhaps the most significant year on our history regarding our exploration programs. In West Africa we drilled seven wells during the year, and had six successes. The estimated gross pre-drill resource range for these discoveries was $325 million to $700 million barrels equivalent, and today we believe we found gross resources that are approaching the upper end of this range.

When we take into account the pre-drill risk factors this program far exceeded our expectations and we are not finished with it by any means, we still have work to do in appraising these discoveries as well as testing numerous other prospects that remain. We supplemented our West Africa exploration success with the Isabela discovery in deepwater Gulf of Mexico, and we have added several more to deepwater prospects to our inventory during the year, including a couple of prospects on adjacent blocks to the Isabela discovery.

From a cost perspective we were able to keep our unit cash costs in the best quartile among our peers. That’s certainly a reflection of the quality of the assets in our portfolio, as well as our continued focus on managing our costs which are so important to our business.

As for the balance sheet, it's no surprise that it continues to strengthen. Our cash balance increased $500 million through the year and our year end debt-to-cap ratio, and this is net-of-cash is down to 20%.

2007 was also an extremely good year for our shareholders. They were able to participate in our successes as the share price climbed over 60% for the year. Earlier in the year as you may recall we completed our share repurchase program. We've repurchased a total of 10.4 million shares of stock at an average price of $48.17 and we also raised the common stock dividend over 50% this past year.

All of this was accomplished in the year we celebrated our 75th anniversary as a company, so what's next? We are really planning more of the same for 2008. Dave and Chris will get more into our programs, but I wanted to mention a couple of things here on the opening.

The business model that we put in place a few years ago continues to perform very well. We've built our company on a solid foundation of very high quality assets, many of which have been brought into our portfolio in recent years. The expansions in Wattenberg, in Piceance, in Niobrara and also in many international areas are good examples of where we have been able to add projects and increase the portfolio for future investment.

The lower risk development inventory particularly in the Rocky Mountains is producing consistent near term growth and excellent returns. We'll continue to enhance the portfolio with tactical acquisitions of producing properties as well as perspective acreage.

For Noble Energy, exploration has been and will continue to be an important component of our growth strategy. We continue to evolve and improve this program into one that today is almost entirely focused on high impact opportunities. So, results really speak for themselves, with the new prospect generation which led us to West Africa, the better resource predictability, and several years of really outstanding resource discoveries.

This has given us the confidence to stay the course, and to make substantial investment into this important growth vehicle for the company. We have also built a new ventures program to leverage our exploration expertise by identifying new leads, sometimes in areas virtually unexplored.

Overlaying all this is our disciplined approach to investing while still growing our company in these times the strong commodity prices, the model also allows us to generate free cash flow and provides us substantial capacity to fund unanticipated opportunities as they come about.

As we noted in our release, the capital budget for 2008 is set at approximately $1.6 billion, and it will continue to focus on our core areas and competencies that have been yielding our successes to-date. Consistent with last year about three quarters of the capital will be going into our lower risk development projects, and a quarter towards material and significant worldwide exploration opportunities.

This year's exploration activity is a bit more diversified than 2007. We'll be returning to Israel with a significant possibility at our Tamar prospect, which will be our first exploratory well there since 2003. We'll be testing a large oil prospect in an unproven area offshore Suriname, which will be our first well in that country. And in West Africa, we plan to drill a more exploration and appraisal wells while moving forward with development plans for our current discoveries.

Finally in the deepwater Gulf of Mexico, we'll be testing two to four prospects included will be a follow-up to Isabela. Overall, our exploration program for 2008 is a bit more risky than 2007, but we do believe we have the risk properly assessed and balanced against the upside resource potential. As you might be able to tell, there is certainly a lot of excitement, as well as a lot of momentum surrounding our 2008 exploration program.

Our 2008 volume growth and guidance for volume growth is consistent with the five-year outlook we announced last May. For 2008, based on the mid-point of our guidance range, we would expect to increase volumes about 7% over pro forma 2007, that pro forma is based on adjusting 2007 for the sale of our Argentina assets. This growth will be largely driven by active drilling programs in our core areas in the Rocky Mountains, of course a full year gas sales are also through the LNG plant in Equatorial Guinea.

I want to note though, it's important that we have some near term growth projects that we have assumed will not be part of this years plan. Probably the most noticeable is Israel, which certainly has the capacity to produce much more. But we have chosen to assume in our guidance, that the 2008 market growth that's recurring in Israel will be absorbed by gas imports from Egypt.

We might have been a bit overly conservative with that assumption, but that's how we view it today. Also reserved for future years are expansion projects at Dumbarton and China, as well as the deepwater start up of Isabella and of course longer term we can look forward to the development production of our West Africa discoveries.

In summary, we're certainly pleased with where we have Noble Energy positioned. We're truly excited about what the future holds for the company. Without question, we are starting 2008 with tremendous wins in our bag, as Dave will illustrate later. We're pretty much starting the year with our 2008 production growth already realized. The first quarter has started out extremely strong and our organic program should help maintain this production level throughout the year.

In addition today we have virtually every major commodity we sell. Oil, natural gas and methanol are price levels, above those that yielded record results that we've just recorded for the fourth quarter. We all understand these commodities have a lot of volatility in them but there are certainly some solid fundamentals as well.

North American gas has been the latest to make its move driven by good demand this winter and very high global natural gas prices that have kept L&G away from our market. For Noble Energy, which was already generating free cash flow, this environment just continues to enhance our financial flexibility pursue incremental opportunities that they serve us.

That’s an overview where we are, we are clearly excited about the position that we have the company and now I want to turn the call over to Chris. He is going provide some more detail on the quarter’s financial results as well as our guidance for 2008.

Chris Tong

Thank you Chuck and good morning everyone. As Chuck mentioned we had a very successful fourth quarter and full year. Following that income and discretionary cash flow, we had all time records. Net income from the quarter was $300 million, and for the year it was nearly $944 million. Discretionary cash flow was $625 million in the quarter and $2.1 billion for the year.

Our fourth quarter and year end financial results are pretty clearly spelled out in the morning's earnings release. So I'll only speak to some items that I think are especially noteworthy. Earnings and discretionary cash flow during the quarter were well above last years levels, due primarily to continued commodity price ramp and higher sales volumes.

Fuel prices for the quarter were 40% higher, while natural gas prices declined 4%. Overall sales volumes were up 8% quarter-over-quarter. At the time of our third quarter earnings release we provided updated guidance for '07, for volumes and certain costs and expenses.

Actual volumes exceeded our guidance principally due to the Equatorial Guinea LNG facility, coming back on line earlier than expected after some maintenance. It would have been even higher had it not been for severe winter weather and third party processing downtime that we experienced in the Rocky Mountain region.

On the cost side, oil and gas operating costs came in at the low end of our guidance and looked even better on a per unit basis, because of the higher volumes. G&A was above forecast, primarily because of increased accruals for incentive bonuses and DD&A was right in the middle of the guidance.

Exploration expense for the quarter was above our estimated range due to two deepwater Gulf of Mexico prospects, Robusto and Lost Ark South being unsuccessful. Despite that, we had an exceptional year in our exploration program with a significant deepwater Gulf of Mexico discovery earlier in the year and several new discoveries in West Africa. Overall, for the total year, exploration expense was well below our additional guidance for '07.

You also note that our fourth quarter and full year tax rate was 31%, consistent with the guidance that we presented at the end of the last quarter. On a full year tax liability, 69% was deferred in '07 which is above the range we gave. Primary reason for the increased deferred percentage is due to higher than anticipated income from equity method investments as well as greater than expected intangible growing cost.

Looking now for the year end balance sheet, we ended '07 with nearly $660 million in cash after paying $75 million in dividends and buying back the final $100 million of stock under our previously authorized $500 million share repurchase program. Substantially, all of this cash is located in our controlled foreign corporation subsidiaries. They would currently be subject to additional US taxes if we repatriated it.

As a reminder, this cash is denominated in US dollars, and is invested in highly liquid investment grade securities. Being very careful in regards to our plans with international cash, obviously we have some very significant capital expenditures upcoming in West Africa, and have an option to fund a substantial portion of those capital requirements while minimizing any increases in debt is very attractive.

Total debt on the balance sheet at the end of the year was just under $1.9 billion. So our debt-to-cap ratio stands at 28%. That net of our cash balance reduces the ratio to 20%.

During '08, we only had $25 million of current debt maturities, so there is no pressure to reduce debt. Actually commodity prices remain strong and we continue to generate free cash flow. We have expected our cash will grow and our leverage will remain modest for the foreseeable future.

I'd now like to discuss our '08 guidance, which we issued separately this morning. We have revised the layout, provided additional details; on volumes, price realizations and expenses. For those of you that model our business, we hope you find it beneficial. Since the press release contains many guidance details, I won't try and cover them all, but there are few items that I do want to highlight.

Overall, we anticipate pro forma volume growth of about 7%. When you take the midpoint of the range we provided in '08, and exclude Argentina volumes from our '07 results. As you may recall, we announced the sale of our Argentina assets, late in '07, volumes in the US anticipate increase about 5% largely driven by active drilling programs in the Rocky Mountains, in particular Wattenberg, Piceance and Niobrara.

Pro forma, international volumes are expected to be up about 9% primarily due to a full year natural gas sales from Alba Field to the LNG facility in EG.

We've also provided guidance on national gas liquids. Starting in '08 we'll report NGL separately, where we have the contractual right to take-in-kind the liquids recovered from third-party plants. Where take-in-kind rights do not exist, the processing uplift will continue to be included in natural gas revenues and realized prices. We'll also be splitting out the Equity investee liquids to show condensate NGLs, and kind of this change is to increase transparency and understanding the value these liquids provide the company.

As far as expenses are concerned, we estimate that our cost would be up modestly, as we continue to see some oil filed inflation, although at a slower pace than in the past, and we expect G&A will increase due to headcount additions as our operations expand. We've also begun to provide interest expense guidance. Given the decline in floating interest rates over the last few months, we'd expect our interest expense will be less in '08. Currently approximately 65% of our debt is LIBOR based, so recent Fed action will result in reduced interest expense.

Exploration expense is expected to be higher for couple of reasons. First, '07 was a great year for the company in terms of exploration success. We certainly don't want to project having the same degree of success in '08. Second, our most significant prospects in '08 include higher risk opportunities in the deepwater Gulf of Mexico, Israel and Suriname.

As Chuck, mentioned our '08 capital budget is set at $1.6 billion, which is fairly close to last year, and consistent with the five-year business plan that we discussed last May in our analyst meeting. We continue to allocate about 75% to development and about 25% to exploration opportunities. Dave, will provide a lot of more details looking at our programs here shortly.

I also want to draw your attention to a change with regard to our accounting for commodity derivative hedges. Effective the first of the year, we have voluntarily discontinued cash flow hedge accounting and we'll now be applying mark-to-market. We believe the switch is a very positive one, we believe it provides for greater flexibility in overall hedging program, allows us to be more transparent regarding the impact of our hedges, and is a lot simpler and less time consuming from a documentation of accounting perspective.

Resulting in more efficient staff and auditor time spent. As a result this change our open hedges that year in ’07 will mark-to-market which resulted in other comprehensive loss balance of $408 million. Going forward this OCL will reduce our oil and gas revenues according to the schedule that we provided in our guidance press release.

For those of you that model our business we would encourage you to adjust our oil and gas revenues according to the schedule and estimate our earnings. Future marks-to-market on our hedges will flow through a separate line item on the income statement and will not impact oil and gas revenues.

Another schedule attached to our guidance release list our current oil and natural gas hedges. Since September we have entered into additional fixed price oil swaps covering 2,000 barrels a day in ’08 at slightly over $88 and 10,000 barrels a day in ’09 at over $87. We have also executed some natural gas costless collars for ’09 for 50 million btus a day, and the weighted average core price of approximately $8.27 and a ceiling of about $10.8.

That’s concludes the financial review, now I would like to turn it over Dave.

Dave Stover

Thank you Chris. I would like to start off commenting on our year end 2007 reserves. We reported a very strong 166% reserve replacement and ended the year with a record 880 million barrels oil equivalent of reserves, 74% of which are proved developed. With a 58% to 42% US first international mix and an overall 37% liquid component, we believe we have a well balanced reserve portfolio.

Reserve additions totaled 120 million barrels of oil equivalent. In the US we replaced approximately 238% of our volumes with 70% of our US additions coming from our continued success in the Rocky Mountains, with the rest a result of the partial booking of the Isabella deepwater discovery and our other onshore development programs.

On the international side, the majority of the 24 million barrel additions came from the sanctioning of further Dumbarton development and the continued performance of the Alba field in Equatorial Guinea. Our total average cost for the reserve additions was $14.71 per barrel of oil equivalent, whereas Chuck mentioned earlier $2.45 per thousand cubic feet equivalent.

Also as Chuck had mentioned earlier, our cost incurred totaled about $180 million for the West Africa exploration program that discovered substantial resources, which have not been booked as proven. 2007 was an excellent year from both the reserve perspective as well as discovering new resources that will be converted to reserves and production in the future.

Now, I will review a few fourth quarter highlights as well as take a quick look at programs positioning us for 2008 and beyond. In the US, we will start with our operations in the Rocky Mountains. Wattenberg had record volumes during the fourth quarter of 251 million cubic feet equivalent per day, despite the impact of 8 million cubic feet equivalent per day for third party processing downtime and December's severe winter weather.

We had recovered quickly from the weather impact as volumes are currently around 257 million cubic feet equivalent per day. We are continuing with our coil tubing drilling in the field, have encouraged enough to bring a second unit into the field during the second quarter of 2008.

In total, we expect that to execute over 1,250 capital projects again this year, with seven operated drilling rigs, and 17 operated workover units currently active in the filed. As a side note, two of our operated rigs were number one and number two nationally for onshore footage drilled in 2007.

In addition to the primary J-Sand, Codell, and Niobrara targets we'll be contesting some secondary objectives during the year. In 2008, we anticipate continued volume growth of 5% or greater, and this continued success gives us confidence that we can grow the field's production reserves for many years to come.

In the Piceance basin, we now have four rigs operating. Two of which are fit for purpose rigs with the ability to drill up to 18 wells per pad, and provide simultaneous drilling and completion activities.

In 2007, we spud 75 development wells and we plan to increase that number to over 100 wells in 2008. Current net production from the area is over 30 million cubic feet equivalent per day and is expected to nearly double by the end of the year.

In the Niobrara trend, we recently increased our acreage position to nearly 600,000 net acres with an acquisition in Northwest portion of Kansas. In 2007, we spud 150 wells and we anticipate doubling the activity in this area to over 300 wells this year.

Continuing to increase, our use of 3D seismic in the area has improved our success rate to around 90% and also increased our productivity of the new wells. This area is expected to exit the year with an increase of about 10 million cubic feet equivalent per day over its current daily rate of around 25 million cubic feet using a 2 to 4 rig program. Overall the Rocky Mountains will be allocated approximately 46% of our 2008 capital budget.

Turning to our other onshore operations, most of our Granite Wash drilling programs have been completed, and we are reallocating that capital to other areas with greater growth potential and more attractive returns. One of those areas is in our Oliver Creek Field in Shelby County, Texas, where in late 2007 we began a six-well program to develop the Travis Peak reservoir, as well as test the deeper Cotton Valley potential.

We've completed two Travis Peak wells, and are currently testing the deeper Cotton Valley horizons and two additional wells that are in various phases of drilling and completion operations. Two wells remain in the current six-well program with the additional drilling plan for later in 2008.

Our New Albany Shale assets in southwest Indiana continue to make great progress. We increased gas sales in January after completing the Noble operated gathering and treating facilities. Again it's still early, but the results we're seeing to-date are consistent with our initial expectations.

We drilled and completed 16 wells in 2007, nine of which are currently producing in total about three million cubic feet per day. In 2008, our objectives are to establish sustained production history in the nine mile area that we have drilled, continue drilling wells that will utilize our new facility, and test our acreage about 25 miles to the south. We plan to execute a similar size drilling program as in 2007.

In the deepwater Gulf of Mexico, production for the fourth quarter was virtually flat with the third quarter at 20,000 barrels of oil equivalent per day. Our deepwater personnel were extremely busy during the quarter working on several key development projects. Our Lost Ark, development came online at the end of 2007. At Swordfish, the sidetrack well started producing in the fourth quarter, and raised the field's net production approximately 4,500 barrels of oil equivalent per day in January. In addition, our partner just brought on two wells at Ticonderoga.

Overall, currently our net deepwater production is over 30,000 barrels of oil equivalent per day with the Raton gas development still on schedule to add another 3,000 barrels of oil equivalent per day net in the second quarter. These projects will help us maintain annual deepwater volumes flat to slightly increased over 2007.

We anticipate spending about 19% of our capital budget in the deepwater Gulf of Mexico. Approximately 60% will be allocated to high impact exploration where we intend to participate in two to four exploration wells. Depending on rig availability one of these targets is likely to be an offset to our 2007 Isabela discovery, which is of similar size and has a geologic chance of success of 50%. The second target is anticipated to be gunflint, or we currently have a 50 % working interest. Gunflint has a chance of success of 30% in the gross resource range of 45 million to 170 million barrels of oil equivalent.

Now let's move to international. This segment of our business represents about 24% of our 2008 capital budget, 40% of which is exploration. In West Africa net natural gas sales averaged 149 million cubic feet per day in the fourth quarter and exited the year closer to 225 million cubic feet a day as the third party L&G plant came back on line for maintenance. In 2008 we anticipate total net natural gas sales in West Africa, which includes natural gas sales to the LPG plant, methanol plant as well as the L&G plant to continue near that rate and average significantly over 2007 levels.

Operations in Equatorial Guinea are forecast to be steady during 2008, with some slight downtime plants for field maintenance in the third quarter. After a great fourth quarter and full year both in terms of volumes and prices the AMPCO methanol plant was down for about 20 days in January and February for some maintenance work. We plan for some downtime and have built that assumption into our guidance release that we issued earlier today.

As you heard from us through out the year and as Chuck mentioned our West Africa exploration program has been a tremendous success. In the fourth quarter we announced a nice gas condensate discovery at the Yolanda on Block I as well as success at the I Four well which is on trend with the Belinda discovery. Both of these wells came in as expected and continue to grow the resource base that we are defining.

Looking into 2008, we anticipate spending approximately 9% of our capital budget in West Africa. We plan on using a jack-up rig to spud a prospect named [Felicita], a tie back opportunity to our existing discoveries in the next couple of weeks. Felicita is another Miocene prospect on Block O with a potential resource range of between 20 million and 60 million barrels of oil equivalent and a geologic chance of a success of 50%.

Preparations also continued for the Benita downdip of oil appraisal on Block I, with the Sedco 700 drill ship. As soon as it completes its current third party operation, which should be at the early part of the second quarter. The results will help us determine the size of the oil commerce. You will remember we weren't able to flow test the Benita oil discovery due to rig test equipment limitations, but with this rig that should not be a problem. We expect to have the Sedco 700 for two consecutive slots and plan to drill another prospect immediately following the Benita oil appraisal. We will likely have another well or two in the second half of the year as well.

Here in Houston we have a very extensive conceptual field development study ongoing. As you look at what we have found so far, we have multiple gap condensate discoveries as well as an oil column in Benita. Right now we are focused on narrowing down the list of possible development scenarios in terms of timing, commercial and technical risk, costs and many other value drivers.

In the North Sea, Dumbarton was a strong performer and averaged about 9,000 barrels per day in excess full year. Field performance has been very good with production from four directional wells to-date. We expect 2008 production to decline in this field somewhat to an average net rate of 7,500 barrels per day, but along with our partner we are planning to commence phase two drilling at Dumbarton in the second quarter of 2008 with significant volume impact coming in 2009 and 2010 from both the phase two and additional phase three development.

Turning to Israel, the first quarter production has started exceptionally strong with record daily volumes realized from the increased demand and partly to the cold weather this year. Net rate has averaged around 140 million cubic feet equivalent per day so far, which is a 35% increase over the first quarter of 2007 average and a 26% increase over the fourth quarter of 2007.

Pipeline construction continues that should allow the Gezer and Hagit power plants to begin consuming natural gas by mid year. We have been conservative in our 2008 projections for Israel due to a couple of external uncertainties. This clearly upsides our guidance, but it's hard to predict the timing of the startup of the two power plants I mentioned, as well as the timing and extenting impact of when Egyptian gas enters the market.

As Chuck mentioned, we have assumed in our guidance that virtually all of the natural gas market growth will be met by gas volumes from Egypt this year. As a reminder, we have secured a drillship for a large exploration prospect offshore Israel called Tamar in 5,500 feet of water. Nobel Energy will be the operator, with a 33% working interest, and expect this well to spud in the second half of 2008 based on the rig availability.

As we have previously mentioned the size of this prospect could be significant, as large as our current Mary "B" field and has a 35% geologic chance of success.

Turning to Suriname, we're proceeding with plans to spud the West Tapir exploration prospect by early second quarter. The gross resource range of this prospect is 70 million to 170 million barrels of oil equivalent with a 25% chance of geologic success.

Success from this well will most likely be oil, and with de-risk additional prospect on the block, similar to our recent exploration efforts in West Africa. Over the last year, we have increased our interest in this prospect to 60%, with several other companies have recently expressed interest in participating and we could decide to reduce our interest by the time this well is drilled.

That summarizes our current plans for our existing assets around the world in 2008, we're off to a strong start with volumes already up over 6% compared to the fourth quarter 2007 levels due to the deepwater developments, Israel demand and increased LNG sales in Equatorial Guinea.

As Chuck and Chris have mentioned, our 2008 programs are consistent with our five-year plan previously discussed. In addition, we continue to evaluate conventional and unconventional opportunities with running room in the US, and also search for the next international area that can be converted into a significant development. With our low-cost asset base and our financial strength, we're extremely excited about how we're positioned for 2008 and the years beyond.

I guess at this time, we'd like to go ahead and open the call for questions.

Question-and-Answer Session

Operator-

(Operator Instructions) And we'll take our first question coming from Ms. Ellen Hannan with Bear Stearns.

Ellen Hannan - Bear Stearns

Morning.

Chuck Davidson

Morning.

Chris Tong

Morning.

Ellen Hannan - Bear Stearns

First of all, thank you for your improved or revamped guidance that does make life a little easier here and the breakout that you see going forward. I had a couple of questions on, Chuck it looks like according to our estimates you're looking at some substantial free cash flow generation again in 2008 and based on your interest expense guidance it doesn't look like, you're doing any value on the debt side.

So can you talk about where you think you might deploy that? And also you mentioned that the potential for tactical leasehold acquisitions and maybe if you might mention some areas that you would be interested in?

Chuck Davidson

Sure, I think I'll start with the later half of your question, Ellen and then we'll work to the free cash flow. As we've said have talked some in the past really all of our core areas we look to see how we can build our positions there. And while in the past some of it has been acreage acquisition. Some of it had also has been some nice asset acquisitions such as what we did with US exploration. This past year a lot of it has been acreage acquisition, we built that. But we continue to look in those areas to see if there's opportunities where we can leverage our expertise to build those core areas and I would say that we are also open to building positions in one or two other areas. Most of these would be here in the US, we are open towards acquisitions in international but I think as you and many others know our primary growth vehicle in international has generally been through exploration.

On the free cash flow and I am going to ask Chris to comment on it in a little bit as well in terms of use. Right now we have been building cash. I would say that as we have built our financial model for 2008 we have been quite conservative, I think in terms of pricing, commodity pricing for the year and so certainly what we are seeing right now in January our prices that are probably well above what was in our financial plan as a result. They are likely even to generate free cash over and above with some of our interest cost assumptions we're as part of that. But time will tell on the commodities. Right now we are planning to hold the cash for incremental at least for immediate purposes. Opportunities, we see during the year and as our development program for West Africa further evolves, we will get a better idea of what are going to be some the cash investment needs for that program. I'll just ask Chris for any other final thoughts on use of cash.

Chris Tong

I think just as an enhancement to those comments, Ellen as I mentioned most of our cash build that we have in our balance sheet right now is from CSC's controlled foreign corporations. Because we don’t have a big need to bring the money back to the US and incur incremental taxes on it and knowing that we have a pretty big development in our project in West Africa, exactly how big the price stake is going to be we are not sure yet. As Dave mentioned, that's where we are really spending our time focusing on as how are we going to develop and all the possibilities. While we know there is going to be a large dollar amount to pay and so right now the most tax efficient thing to do is keep that money invested overseas and use it towards that development program and potentially how much it builds compared to the cost that we have, we may not have to borrow much to develop West Africa. We don’t know the numbers yet.

On the US side, the free cash flow, we have been paying dividends. If you look at last year's free cash flow, look at first quarter numbers and what our capital budget was, we accelerated several projects, we took on additional rigs, we bought acreage et cetera, we spent maybe another $300 million or so and things that had not been budgeted. And what we like to do is keep that flexibility so that if we find some assets or acreage or accelerated drilling we don’t have to worry about where we are getting the money from. So it is kind of much the same as we've done in '07 is the vision right now as we start off '08.

Ellen Hannan - Bear Stearns

Thanks, it's helpful. Just one last one from me, if talked about, what's the cost on the Tamar well, what are you budgeting for that?

Dave Stover

Yeah, we are looking right now at something that's probably $70 million or so gross.

Ellen Hannan - Bear Stearns

Great thanks very much.

Dave Stover

And remember, Ellen we have about a 33% interest in that.

Ellen Hannan - Bear Stearns

Great. Thank you.

Dave Stover

Thank you.

Chuck Davidson

Thanks Ellen.

Operator

And we'll move on to our next caller, Ms. Irene Haas with Canaccord.

Irene Haas - Canaccord Adams

Hi, guys. Okay, and really great format for reporting your numbers. I have quick question on your other business such as electric margin and Ecuador. For your guidance in '08, looks still light, has anything changed in terms of sizing and volume. And secondarily, is really the EG business methanol, Alba as such again any sort of change in '08 versus '07 either in rising volume or pricing. And if its volume, are there any concentration, say Q1 or later in the year?

Chuck Davidson

Well, I think on your first question on Ecuador, we really don't have any fundamental change in assumptions there. In the past, as we have, we're trying to provide a margin there. We've added some pluses and minuses that is an area where we have made some provisions for doubtful accounts and we try to forecast those in our business, hopefully we won't have any this year. But we have to include some sort of guidance as part of that. So, really no fundamental change in our business in Ecuador for 2008. I think on methanol, we are starting the year with very strong prices on methanol. And while we have taken some of that into account, with our margin outlook for methanol, it's still a very dynamic business like our other commodities, and I mentioned that on our previous comments we've really started out the year with methanol prices as well as oil and natural gas prices at very substantial levels and our guidance numbers are based on a lower price outlook. We'll have to see how the year turns out we've tried to make a call on this as part of the margins, but it's always good to start out the year ahead of the curve.

Operator

We'll move on now to our next question coming from Mr. Mark Smedley with Energy Intelligence.

Mark Smedley - Energy Intelligence

Hello gentlemen good morning from London. I have a question about Equatorial Guinea, you mentioned that up to 700 million barrels equivalent growth reserve have been found in the six recent discoveries. Are they all in Equatorial Guinea or including some in Cameroon in that number? That's my first question.

Can you indicate what prospects there are that such gas could be used as a feed supply to the plant Equatorial Guinea train to LNG project, which is now under discussion? I note in that context last week 10% of a new consortium was left open 8% was allocated to the existing partners in Train 1, and 10% a couple of European companies. Would you be interested in or are you in talks even for possible equity participation in Equatorial train too?

Dave Stover

Well, again on the discovered resources that we gave, that is West Africa. So that includes the discoveries we've made in both Equatorial Guinea that's in Blocks O and I, as well as in Cameroon which is Block PH-77. So, that's a combined resource estimate.

On the question on potential feedstock for the LNG business there on the island, which of course is right next to where we've been they are drilling most of our discoveries have been gas condensate discoveries. So in just repeating Belinda , Yo Yo and Yolanda are clearly gas condensate discoveries, and as a result both would be candidates to see either Train 2 or other downstream uses of natural gas in the areas.

So we certainly have discovered some resources that would be good candidates for LNG. We did note the announcements of the recent week where certain parties have talked about certain advances in the second train of the LNG plant of course Noble Energy and our partners produced the first train at the LNG plant there. And we have not reached any decisions as to what level of participation or if we would participate in downstream LNG.

Our focus right now is really on understanding the development plans of the field, how we would develop it, what resources would be available, what natural gas would be available and then how is the best way to monetize that. On Train 1, we were not a participant, we had said though for Train 2 that we are open to participation in investment in LNG. But primarily to make sure that we get as much of the value for our natural gas as possible and if that requires some certain downstream investments to improve the overall net value we will certainly consider that.

Mark Smedley with Energy Intelligence

Just a follow up, I saw it on the sheets that you are giving $0.25 per million btus on gas sales into the methanol plant. Is that also the price of the sales into LNG Train 1?

Chuck Davidson

The $0.25 is a stipulated price that was tied to the Alba field, it does not tie to anything that we have been discovering in Blocks O and I or Cameroon it’s a historical price. It was actually set at the time we made the decision to build the methanol plant. So basically, Noble, as we sell gas to Train 1 that is a price we have a small gross revenue interest in the project itself, which has a small enhancement on the price. But that's a historical price and doesn't tie at all to what would be the expectation or potential realizations of gas prices going forward for these recent discoveries.

Mark Smedley with Energy Intelligence

You want a better price than you are getting at the moment for LNG.

Chuck Davidson

I think the world global prices for natural gas are really well above what has been a historic price there in the Alba field, a price that was probably set almost a decade ago.

Mark Smedley with Energy Intelligence

Okay. Thank you very much.

Chuck Davidson

Thank you.

Operator

And we move on now to our next caller Brian Kuzma with JPMorgan.

Brian Kuzma - JPMorgan

Hi, good morning guys.

Chuck Davidson

Good morning.

Chris Tong

Good morning.

Brian Kuzma - JPMorgan

Have you ever drilled any of the shallow prospects in the Wattenberg field yet and any kind of color you can give us as to what you are seeing there.

Dave Stover

Yeah, what we are really looking at this year is going in where we have some of these prospects and existing well bores. Probably what we will start with this year is doing some recompletion and testing and really try to analyze some completion and fracing techniques. So I don't think we'll really be drilling any specifically for the shallow horizons but in some of our existing well bores we'll use those to test some of the concepts. Again there is four or five different potential zones and we are just going to see if we can break one of those loose into a new play.

Brian Kuzma - JPMorgan

Okay. And those are all conventional type plays or…

Dave Stover

They are type some of them are actually Shale type plays, but question is can we establish commercial production and then have some running room with.

Brian Kuzma - JPMorgan

And do you have any idea in terms of like gas in plays in those untapped?

Dave Stover

Now I probably wouldn't venture into that right now.

Brian Kuzma - JPMorgan

Okay.

Dave Stover

We'll see what kind of results we get from some initial production and then go from there.

Brian Kuzma - JPMorgan

Okay, that's good. And then on the …

Dave Stover

Do you have a follow up on that Brian?

Brian Kuzma - JPMorgan

Excuse me?

Dave Stover

I think you had a follow-up question in there, the speaker cut out, could you repeat it?

Brian Kuzma - JPMorgan

Okay. My follow up with regards to the New Albany Shale.

Dave Stover

Right.

Brian Kuzma - JPMorgan

And I think you had said, you had three million a day from nine wells, was it both gross numbers?

Dave Stover

Right, that's a gross number, but again, we have close to 100% in those.

Brian Kuzma - JPMorgan

Okay. And are those vertical wells or horizontal well?

Dave Stover

No, they are lateral extent up to about 4,000 feet or so.

Brian Kuzma - JPMorgan

Okay.

Dave Stover

I still remember that these are complete open hole fracture systems.

Brian Kuzma - JPMorgan

Okay. And so where would you guys expect that you guys could do with similar acreage in that area?

Chuck Davidson

Well, we've put out kind of a unrisk resource potential in New Albany of about 200.

Dave Stover

Around 250 Bcf, and again we're still being pretty conservative on this as far as recoveries and so forth until we can really establish some six months to a year-type production, and really see how the decline rates level out on these wells. I mean everything has got going and according to plan right now, but the real test will be some extended production time.

Brian Kuzma - JPMorgan

Okay. And then going forward, do you guys put a frac on these wells, what's the plan …

Dave Stover

No. There is no plan to right now, but as we continue to understand the reservoir a little better, we'll continue to look at are there other ways to optimize this if there are additional ways to accelerate recovery and improve economies. So those will just be the things that we continue to look at as we get a larger base to play with.

Brian Kuzma - JPMorgan

Okay. That's great. Thanks, guys.

Chuck Davidson

Thank you.

Operator

(Operator Instructions)

Chuck Davidson

Angela, if there aren't any more questions, I guess, we'll end the call here then.

Operator

It appears there are no further questions.

Chuck Davidson

Alright well, we appreciate everybody's interest in Noble Energy. And, should other questions come up later today, please feel free to call us. And everybody have a good day. Thank you.

David Larson

Thank you.

Operator

That does conclude today's program. We appreciate your participation. Have a wonderful day.

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