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by Laura McPherson

Noble Energy (NBL) recently disclosed terms of the deal to sell certain assets in the Granite Wash and Marmaton fields to Unit (UNT). The divestiture to Unit is part of Noble's strategy to streamline its portfolio into attractive, high value assets, which in turn should allow it better flexibility with its capital expenditures. The strategy will eventually drive revenues higher with more rigs drilling on the plays that are most likely to return value to Noble.

Sale to Unit is First Step in New Strategy

Under the terms of the deal, Unit will receive Noble's 900 oil and gas wells across 84,000 acres of the Granite Wash and Marmaton, which are currently producing 60 mcf of natural gas per day, in a mix of 65% dry natural gas, 27% natural gas liquids, and 8% crude oil. Unit will pay Noble $617 million, which it plans to fund through the acquisition of long term debt, in part in the form of privately offered senior subordinated notes. According to Noble President and COO David L. Stover, "the sale is part of our previously announced non-core divestiture plan which will allow us to allocate capital and people to high-value and high-growth areas."

Though the sale does reduce Noble's participation in horizontal drilling, it will plan, under terms of the deal, to use at least part of its freed resources on its holdings in the DJ Basin. It will also be able to use part of its new flexibility on the Marcellus, where it plans to drill 99 wet wells with its joint venture partner Consol Energy (CNX) this year. Noble anticipates 126% annual growth in production on the Marcellus, far ahead of its next highest annual growth prediction for a single play, which is 32% for the Gulf of Mexico.

I do think that in order to maximize its play on the Marcellus, Noble needs to move further into the wet gas window, as most of its current acreage is in dry gas. As it happens, Chesapeake Energy (CHK) holds significant acreage in the Marcellus wet gas window, and is facing a funding shortfall that could bring the company to bankruptcy. Chesapeake is attempting to hold its Marcellus acreage despite an inability to meaningfully fund operations, so while a sale might not be on the table as it is on the Utica and elsewhere, it is possible that Chesapeake and its Marcellus partner Statoil ASA (STO) would be open to a third partner.

Mixed News for Noble's Deepwater Developments

Noble is experiencing a disappointment with its Gulf of Mexico Deep Blue project, for which it will cease appraisal work a $118 million expense in the second quarter. Noble recently decided to cease appraisal work on Deep Blue after worse than expected results. Its Galapagos project, also in the Gulf, is taking some of the edge off the disappointment, since several Galapagos wells are actually performing better than expected, with production coming in 30% above initial forecasts, at 13,000 barrels of oil and 8 million cubic feet of natural gas per day. The Galapagos project is now fully online, with all wells producing as of earlier this week.

Noble is facing an interesting challenge in its Cypriot explorations in the Mediterranean Sea. The government of Turkey denies Greek Cyprus' sovereignty, and the two nations consistently clash over oil and gas rights in the area. In the latest escalation, the Turkish Navy is practicing war games within Greek Cyprus' exclusive economic zone, in areas which happen to include an exploration license block issued to Noble. Adding to the confusion, the British and the Israeli navies are also carrying out war games in a show of counter force, though these are not taking place within Cyprus' economic zone. It is unknown whether these "games" are having a serious impact on Noble's exploration, but I am sure that Noble executives are not happy about the risk - nor can be Noble's insurers, which could escalate into another major issue.

Noble is considering the Eastern Mediterranean as one of its five core operating areas, along with the DJ Basin, the Marcellus, and the Gulf of Mexico in the U.S. and its offshore exploration in West Africa. This indicates that though there is risk, it will probably take more than the current cold war between Cyprus and Turkey to make Noble consider pulling out - especially since Noble has over 12 tcf net resources in these natural gas basins, from which it can economically process and export liquid natural gas to areas of the world that pay a high premium for the commodity. Noble also believes that it has a further 3.7 bboe unrisked resources in deep oil in the Mediterranean.

However, the place where it has the most exposure happens to be where the conflict is strongest, within the borders of Cyprus' exclusive economic zone with the Cyprus discovery. For most of its holdings in the Eastern Mediterranean Noble maintains between 36 and 47% working interests, but it has a 70% working interest on the Cyprus field. This means higher revenues, but it also means a higher burden of costs should the project need to be halted. I would not be surprised if Noble begins to look for other partners for its project here to share the risks and costs associated with doing business in a conflict area.

Outlook

Noble is currently trading around $84.11, with a price to book of 2.0 and a forward price to earnings of 11.5. This compares favorably to Noble's top competitor, Anadarko Petroleum (APC), which is currently trading around $68.53 with a price to book of 1.7 and a forward price to earnings of 14.2. Both of these companies have substantially more ongoing deepwater activity than their peers, which I think is a net positive. Although exploration and drilling costs are higher in deep water, the finds tend to be commensurately larger - especially with Anadarko or Noble at the helm, since both companies discovered several unknown world class resources in the last 18 months.

Although Noble was battered by the Gulf moratorium, the company is returning to profitability more quickly than anticipated by most. It has a solid plan to develop its current assets without acquiring significant debt, which I believe is an indicator that Noble is coming back stronger than ever.

Noble will be one of the first E&Ps to release second quarter earnings this year, with its earnings call scheduled for July 26.

Source: Noble Energy: Now A Strong Stock On New Focus