On Thursday, October 11th, analysts at Wells Fargo & Co. downgraded shares of Noble Energy (NBL). The firm lowered its rating on the stock from an Out Perform to a Market Perform and set a price target range of $100-$105/share. According to FlyontheWall.com, "Wells Fargo downgraded Noble Energy citing growth challenges at the DJ Basin. The firm lowered its price target range for shares to $100-$105 from $105-$110." Do I think that Wells Fargo was wrong in its call regarding Noble Energy? Yes I do. Why? Based on the company's most recent results at the DJ Basin, the growing concerns from Wells Fargo can easily be countered by examining the numbers a bit closer.
Overview: Noble Energy, Inc.
"Noble Energy, Inc. an independent energy company, engages in the acquisition, exploration, development, production, and marketing of crude oil, natural gas, and natural gas liquids in the DJ Basin, Marcellus Shale, deepwater Gulf of Mexico, offshore Eastern Mediterranean, and offshore West Africa. Its principal projects comprise onshore US projects located in the DJ Basin and Marcellus Shale; Galapagos project located in the deepwater Gulf of Mexico; Tamar project located in the offshore Israel; and Aseng and Alen projects located in the offshore Equatorial Guinea. The company was founded in 1932 and is headquartered in Houston, Texas."(Profile: Yahoo Finance).
Recent Developments at the DJ Basin
Considering the fact that Wells Fargo is concerned with the performance of Noble Energy, and more specifically the output of the DJ Basin, I think its best if we examine the property as well as the output of the property. According to the company's annual report, "In the DJ Basin, Noble Energy is taking an industry-leading role in developing the Niobrara formation. In 2011, we expanded the horizontal Niobrara program and drilled approximately 85 new horizontal wells. At the end of the year, net production from the horizontal Niobrara totaled approximately 17 thousand barrels of oil equivalent per day (MBoe/d), an almost fourfold increase over the 4.5 MBoe/d at the end of 2010. We are further accelerating the program in 2012 with plans to drill over 170 horizontal Niobrara wells and pushing the historical boundaries of the Wattenberg field, which were limited by the viability of vertical wells."
As per the company's press release concerning 2012 Second Quarter Earnings, "Noble Energy continued to report excellent results in the DJ Basin from its efforts to improve recoveries. Within the extension area of Wattenberg, 38 wells have been brought online this year. The average production from these wells is tracking a type curve that indicates an EUR of 340 MBoe, which is up from a 315 MBoe EUR in 2011." Based on these numbers the company now has a total of 123 horizontal wells on-line and should come right in-line with prior forecasts estimating a total of 170 horizontal Niobrara wells by year's end.
Should potential investors be concerned with Wells Fargo's call regarding "growth concerns" at the company's DJ Basin property? I personally wouldn't be, and even if the company misses estimates in terms of the number of operational horizontal wells being brought on-line by the end of year by 5%, I'm not that concerned. Why? It was also noted that "the company has increased its full-year 2012 volume guidance at midpoint by 2 MBoe/d on a pro forma basis, which reflects the U.S. property sales announced to date and North Sea discontinued operations."
Are there any positive catalysts for potential investors to consider in terms of Noble Energy? There are a few fundamental factors to keep in mind before establishing a position in NBL. In the last 12 months Noble Energy has trumped direct competitor Anadarko Petroleum (APC) in terms of Profit Margin (17.50% vs. -9.91%), Operating Margin (25.24% vs. 10.96%), Returns on Assets (4.04% vs. 1.75%) and Returns on Equity (9.92 vs. -5.75%). Given the strong fundamentals and positive outlook with regard to the company's DJ Basin property, I'd look to establish a small to medium sized position at current levels. I would also continue to keep an eye out for any news regarding the results of horizontal drilling operating at the DJ Basin.