Noble Energy Got No Respect, So It Used Its Wallet

| About: Noble Energy, (NBL)
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Summary

This acquisition by Noble for $3 billion could have a lot of future benefits and turn out to be a very cheap deal. 100,000 Permian acres are not valued.

The major shareholder and management are voting in favor of the deal for Clayton Williams. This virtually assures success of the deal.

Clayton has made substantial operational improvements, but Noble believes there is room for more substantial operational improvements leading to mouth watering returns.

The previous Rosetta acquisition in the same area is exceeding expectations and helps make this larger acquisition a "bolt-on" acquisition.

Up until now, Noble's progress has been really ignored by the market, this acquisition could change that.

At the beginning of the year, some of us had high hopes for Noble Energy (NYSE:NBL). But despite some high hopes, some great operational progress, and increasing cash flow and production. The market left this company behind. The company has disposed of some non-core properties and raised some key guidance but the market remains unimpressed. Nobel is one of the better operators out there too. That is about to change.

Noble Energy Acquisition Of Clayton Williams Presentation, January 17, 2017

Noble announced the acquisition of one of the smaller Reeves County players with a lot of acreage in the right place.

"Clayton Williams Energy (NASDAQ:CWEI) shareholders will receive 2.7874 shares of Noble Energy common stock and $34.75 in cash for each share of common stock held. In the aggregate, this totals 55 million shares of Noble Energy stock and $665 million in cash. While the aggregate amount of cash and stock in the transaction will not change, on an individual basis shareholders will be able to elect to receive cash or stock, subject to proration. The value of the transaction, based on Noble Energy's closing stock price as of January 13, 2017, is approximately $139 per Clayton Williams Energy share, or $3.2 billion in the aggregate, including the assumption of approximately $500 million in net debt."

"Funds managed by Ares Management, L.P., which owned approximately 35% of the outstanding shares of Clayton Williams Energy as of December 31, 2016, have entered into a support agreement to vote in favor of the transaction. Following completion of the transaction, shareholders of Clayton Williams Energy are expected to own approximately 11% of the outstanding shares of Noble Energy."

With the major shareholder voting in favor of the transaction and management's assumed vote in favor of the deal, this deal is going to close. As noted in a previous article, Noble had already established a decent position in the area from a previous acquisition in 2015. This acquisition substantially expands that position very publicly. So while the stocks of many other companies have risen, this stock will be joining the Permian Party with one of the larger land holdings in one of the hottest areas of the country.

The price tag includes about one billion barrels in the various Wolfcamp levels, but there are still more intervals to be explored. Plus Clayton had another 100,000 acres in the Permian that Noble is not attaching any value to at the current moment. The acquisition is really being sold as a Reeves County acquisition, but down the road it could prove to provide much more currently unforeseen benefits.

Noble Energy Acquisition Of Clayton Williams Presentation, January 17, 2017

The Rosetta benefits are much better than planned. The top slide shows where the company is with the Rosetta acreage. Now, the bottom slide demonstrates the improvements that Clayton Williams has made over the last year or so of experimenting. The market was expecting big production increases, but Clayton has been slowly developing a superior well to take advantage of the geology. Nobel intends to take that success further. While no assurances can be given that the benefits will be realized, Nobel has had a far easier time keeping abreast of the latest completion techniques. So those fantastic ROR's that are shown for the Clayton acreage could very easily get obscenely better.

When ROR's get this high, then the production becomes fairly low cost. As Noble is one of the leanest operators in the industry, those costs could go lower as the ROR's get higher through more industry-wide operational improvements. Nobel appears to use some more current techniques than Clayton so there could be even more room for improvement. So even if oil prices drop some from current levels, this acquisition could still be a fantastic success. It would take a major sustained price drop for this merger to fail.

As noted in the presentation, a lot of the acreage in Reeves County for both companies has been derisked. With Noble adding two rigs after the merger (and before year end), the cash rolling in could be a lot of fun to count. In fact, this acreage is good enough to increase Noble's growth rate a few percentage points. It may add a few more percentage points as development and industry improvements continue. This acreage is going to be profitable at some very low commodity prices. That is just what Noble is looking for.

Noble Energy Acquisition Of Clayton Williams Presentation, January 17, 2017

The company has enough onshore and other properties to be geographically diversified. It has a key foothold in several low cost areas. Already in the third quarter, the company had reduced its lease operating expenses to $3.37 BOE. The company reported about $1.8 billion in cash and another $4 billion from an undrawn credit line for more than adequate liquidity. Even after this acquisition, there is plenty of room to purchase more bargains.

There are still more non-core sales that will be used to raise cash to pay down the debt incurred for this transaction. Further guidance will be given at the fourth quarter earnings report in February. But it is clear that this transaction will benefit Noble immensely. So this is one for the stockholders to celebrate. The stock should easily double over a five year period.

The nine month cash flow from operations figure was about $1 billion. That figure is going to be growing markedly next year. In fact by the fourth quarter of 2017 the cash flow from operations should exceed $500 million. Within the five year period I would expect this current portfolio of properties to generate about $1 billion of cash flow quarterly. The company now has a lot of low cost production with some attractive ROR's. Management has gotten all they wanted and maybe more, so now they will have to produce. This company now has the properties necessary to resume growth in all but the harshest of industry climates. Hopefully now the market will notice.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.