Noble Energy: Key Takeaways From The Third Quarter 2018

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About: Noble Energy, Inc. (NBL), Includes: NBLX
by: Fun Trading
Summary

Noble Energy's total revenues increased by 32.6% year over year to $1,273 million in the third quarter and up 3.5% sequentially.

Proposition 112, which required greater oil and gas setbacks for new development projects, has been rejected by Colorado voters.

I believe NBL is offering an excellent buying opportunity even if further downsides are possible.

Image: Noble Rig in the DJ Basin, Colorado. Source: Noble Energy

Investment Thesis

Noble Energy (NBL) underwent a significant business transformation to become a company with a more in-depth focus on onshore oil and gas production in the U.S., which qualifies the company as a "shale player."

Recently, Noble Energy shifted from the Permian (Delaware Basin) to the DJ Basin in Colorado and the Eagle Ford shale to adjust for a severe lack of takeaway capacity called the Permian bottlenecks. Thanks to a well-diversified US shale portfolio, the company has been able to maximize its investment by directing CapEx where it generates the most cash flow.

Also, Noble Energy is an essential natural gas player with the Leviathan field offshore Israel.

Noble Energy's business model appeals to savvy investors primarily because of its diversified revenue streams and the ability to enhance total returns through a modest dividend ($0.44 per share and a yield of 1.90%). However, the dividend paid pales in comparison to the one paid by the main oil supermajors like Shell (RDS.A) (RDS.B) for example.

Thus, NBL is a conceivable long-term second choice, especially for an investor who desires to participate in every segment of the oil production segment, including midstream U.S. The company is well managed and focuses on strengthening its balance sheet.

David L. Stover, the CEO, said in the conference call:

For Noble Energy, we have evolved and deliberately transformed our portfolio to be competitive in any environment, and remain focused on delivering value for our shareholders. The diversification in our asset base provides multiple options to allocate capital to the highest margin, highest return opportunities, leveraging our high-quality onshore assets as well as global pricing exposure with Equatorial Guinea and Israel.

Noble Energy - Quick Presentation

One fundamental characteristic is that Noble Energy US Onshore output is the most significant production for the company with 249K Boep/d or 72.2% of the total production for 3Q'18. Please look at the graph below.

Note: NBL has sold its assets located in the Gulf of Mexico to Fieldwood Energy.

Source: NBL Q3 Presentation

1 - Midstream Activity - NBLX

On September 15, 2016, Noble Energy formed Noble Midstream Partners (NBLX). (Processing, storage, transportation, and wholesale marketing.)

NBLX is paying a dividend of $2.24 per share or a yield of 6.33%. NBLX can be considered as an excellent alternative. BoA/Merrill had a buy with $58 target on November 7, 2018.

Noble Energy participates in this business segment through its sponsorship of a new MLP.

Source: NBLX Presentation

2 - The DJ Basin In Colorado.

The company is mainly focusing on its Coloradan Shale play, which will get a boost with the recent rejection of the Denver Proposition 112.

Note: Noble Energy is also present in Eagle Ford and Delaware basin in the USA.

The failed initiative required greater oil and gas setbacks for new development projects and has been rejected by Colorado voters by a margin of 57 percent to 42 percent.

Source: NBL presentation

Noble Energy - 3Q'18 Financial Table. The Raw Numbers

Noble Energy 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18
Total Revenues in $ Million 859 724 847 910 1010 1036 1059 960 1201 1286 1230 1111
Net Income in $ Million -2028 -287 -315 -144 -252 36 -1498 -115 516 574 -23 227
EBITDA $ Million -859 243 202 427 140 674 -1735 403 874 1084 548 862
Profit margin % (0 if loss) 0 0 0 0 0 3.47% 0 0 42.96% 44.63% 0 19.98%
EPS diluted in $/share -5.02 -0.67 -0.73 -0.33 -0.59 0.08 -3.20 -0.28 1.09 1.14 -0.05 0.47
Operating cash flow in $ Million 576 251 189 614 297 536 341 541 533 583 496 697
CapEx in $ Million 460 496 316 352 377 587 628 741 693 787 995 807
Free Cash Flow in $ Million 116 -245 -127 262 -80 -51 -287 -200 -160 -204 -499 -110
Total Cash $ Million 1028 953 1300 1819 1180 787 540 564 675 992 621 885
Long-term Debt in $ Million 7976 7882 7868 7854 7011 6995 7133 7487 6746 6858 6555 6571
Dividend per share in $ 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.11 0.11 0.11
Shares outstanding (Basic) in Million 432 429 430 430 430 434 472 487 484 487 484 484

Source: Noble Energy filings and Morningstar

Trends, Charts, And Commentary: Revenues, Free Cash Flow, And Upstream Production

1 - Total Quarterly Revenues

Noble Energy's total revenues increased by 32.6% year over year to $1,273 million in the third quarter and up 3.5% sequentially. The company beat expectation on earnings and revenues this quarter. It was a strong quarter.

2 - Free Cash Flow

Noble Energy has an annual free cash flow negative of $973 million. It is the primary concern and shows that Noble Energy is running an oversized CapEx at the moment. It is not necessarily negative of course, and it will pay off in the future assuming that the actual spending turns into cash flow which may happen not before 2020 with the full effect of the Leviathan prospect.

NBL is failing the FCF test.

3 - Net Debt Is ~$5.7 billion

According to NBL (10-Q filing), the total debt is $6.676 billion with a debt-to-book capital ratio of 39%.

Note: The company extended that $4 billion credit facility to a 2023 maturity the first quarter 2018.

4 - Quarterly Production 3Q'18 In the third quarter, sales volume averaged 345K Boep/d or 31,714 Boe or down 0.6% sequentially.

Note: DJ basin production was 126K Boep/d and Delaware basin 58K Boep/d this quarter.

Source: NBL Presentation

The company forecasts full-year 2018 sales volumes to range between 337K Boep/d and 349K Boep/d.

5 - Recent acquisition

On September 27, 2018, Noble Energy announced pipeline agreements to deliver gas into Egypt. The company expects to flow at least 350 million cubic feet per day through the EMG Pipeline from Leviathan at start-up just over a year from now.

Noble Energy and certain partners are acquiring an effective 39 percent equity interest in Eastern Mediterranean Gas Company S.A.E., which owns the EMG Pipeline. The EMG Pipeline is an approximately 90-kilometer pipeline located primarily offshore, connecting the Israel pipeline network from Ashkelon to the Egyptian pipeline network near El Arish. Noble Energy will own an effective, indirect interest in the pipeline of approximately 10 percent.

From NBL Presentation

Conclusion And Technical Analysis

Noble Energy suffered recently from recent concerns over pipeline constraints in the Permian, potential negative measures in Colorado which have been defeated this week, and severe correction in oil prices. The stock is down a whopping 34% since August.

While most technical issues have been or will be resolved, the significant drag for the stock which is affecting the stock as I speak is future oil prices. We have entered a bearish cycle since October, and no matter what, it will have to run its course. It will take a couple of quarters in my opinion.

However, substantial production growth in the US and the start-up of its high-value Leviathan project in Israel will significantly boost operating cash flow by 2020. At current prices after tumbling since August, I believe the stock is offering an excellent buying opportunity even if further downsides are possible, depending on future oil prices.

Technical analysis

NBL is forming a descending channel pattern with line resistance at $30 (I recommend selling about 25% of your position at this level unless oil prices turn bullish) and line support at $22.40 (I recommend buying and accumulating at this level for the long term).

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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.