New Life For Rosetta Resources With Noble Energy Takeover

| About: Noble Energy, (NBL)
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Summary

New frac design utilized in the Eagle Ford.

Flat production expected going into Q2'15.

What value will Rosetta Resources bring Noble Energy?

The focus this week has been around the ice breaking transaction between Rosetta Resources (NASDAQ: ROSE) and Noble Energy (NYSE: NBL), with Noble acquiring Rosetta in an all-stock transaction valued at $2.1 billion. The current conditions have created uncertainty within operators that are leveraged for a much higher commodity price environment. In Rosetta's case the deal was based off of net debt of $1.8 billion. Some analyst are expressing that this could be the deal to open the door to more consolidation in upstream activity following the M&A standstill this year.

Rosetta Resources 2015 Capital Plan

Rosetta is expecting capital expenditures of about $350 million for the year, which was originally announced at $950 million in November of last year. Full year production in 2015 is believed to be in the range of 58 - 62 MBoe per day. They expect to drill 8-10 gross operated wells, while completing 18-20 gross operated wells from Q2'15 to Q4'15. They will spending about $200 million on drilling and completion activities in the Eagle Ford and Permian basins during 2015. Rosetta has about 75% of its forecast production hedged with a value of about $188 million for 2015. The hedge book of ROSE will not bring much value beyond 2015 and with the size of NBL will not have much of an impact.

Source: Rosetta Resources

Source: Rosetta Resources

Eagle Ford Activity

The plan for Rosetta has been to operate an average of 2 rigs while having 49% of the capital allotted to this Basin. In the first quarter 3 wells were drilled and 14 wells were completed with 11 of which that were brought on line. Rosetta had ended 2014 with 55 drilled wells awaiting completion, now down to 44 wells awaiting completion in the Eagle Ford according to their Q1'15 results.

During the quarter they had employed a new frac design to three Gates Ranch wells with higher volumes of proppant and tighter cluster spacing, having an average of 40 stages and a lateral length of around 8,000 feet. Continued improvement with well design will bring further value for NBL in the future. They have also been testing several opportunities for infill wells and re-fracking. Within the Eagle Ford Rosetta is using Halliburton for 100% of their frac jobs in 2015.

Source: Rosetta Resources

Permian Activity

In the Permian, rig activity will be 2-3 rigs on average for the year with 29% of the budget. During the first quarter they drilled 6 gross operated wells along with completing three gross wells, which were brought onto production. The three completed wells were in Reeves County focused in the Wolfcamp "A" bench. They are planning to drill two and complete four more gross operated wells during the remainder of the year. Also they have acquired two horizontal drilling permits in Reeves County with permitted depths of 13,000 feet in January of this year.

Typical completion design for Rosetta Resources consists of around 6.5 million gallons of water accompanied by about 4,500 tons of proppant using a raw sand and resin mix, utilizing 20/40 and 100 mesh sizes. They are also using the gelling agent WG-63 and the cross linker CL-22 UC. The two Billy Miner wells shown below used 13 3/8, 9 5/8 and 5 ½ casing sizes when drilling the well to total depths of about 10,550 ft (Energent Group).

Source: Energent Group

2015 Second Quarter Outlook

Production range of 57-60 MBoe/d in Q2'15 having production remain flat quarter over quarter from the 58.4 MBoe/d in the first quarter of 2015, which is at the low end of their production guidance for the year. This represents a ~17% growth in production over Q4'14, Rosetta expects to spend ~$55 million in capital investments in the second quarter as well.

Source: Rosetta Resources

How Noble and Rosetta Line-Up for the future

Besides the obvious fact of the NBL acquisition of ROSE to enter the Permian and Eagle Ford, expanding from NBL focused areas of the DJ Basin and the Marcellus, what makes this deal valuable for NBL? How will the they line up?

Many have said that with NBL adding to their already diverse portfolio, they will lose operational focus and that it is not clear at this time what the value will be. With that being said, ROSE produces just a fraction of what NBL does but this will put NBL in a position to take advantage of the low cost basins in the future. The acquisition will also increase production for NBL, with ROSE most recently announcing a 21% increase in daily production from the first quarter of 2014 to an average of 66 MBoe/d. This was a decline compared to Q4'14 production of 73 MBoe/d, due to ROSE slowing down completion activity to hold back production to retain future value.

Source: Noble Energy

Conclusion:

With the bolt-on of the ROSE asset base and the strong backing of NBL this deal will create a respected presence within the Eagle Ford and Permian basins. Allowing NBL to increase production in lower cost basins, thus providing value to NBL in the future, especially if oil prices continue to recover.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.