Noble Energy: New Falkland Venture Creates Upside Potential

| About: Noble Energy, (NBL)
This article is now exclusive for PRO subscribers.

It is well known that politicians use issues that evoke strong nationalist sentiments. Cristina Fernandez de Kirchner is often seen using the issue of the Falkland Islands to cover up her own problems in governance in Argentina. Of course, as with most issues that evoke a nationalist sentiment, her tactic is working well in Argentina. Falklanders are sitting on a virtual treasure trove of natural gas and oil, and when mining companies begin to explore and drill, the islanders will probably become some of the richest people in the world. Argentina on the other hand will not want to let go of the islands precisely for this reason. Argentina went to war with the U.K. over what it calls "Las Malvinas."

The problem is that the islanders do not speak Spanish, and they do not want to be a part of Argentina. Most islanders either want to remain autonomous, seek independence from Britain or continue as an overseas territory of Britain. In all circumstances, the Falklanders want British military support to exist alongside a hostile neighbor. To make matters more complex, American oil companies have begun to show interest in exploration projects leading to several rumors and hushed talks.

In August, Noble (NYSE:NBL) entered into an agreement with Falkland Oil & Gas Ltd. (FLKOF.PK) in August to carry out exploration in and around the Falkland Islands. On the 11th of October, Noble announced that it has even begun drilling at an exploration well a few weeks ago. The company has agreed to spend between $180 million and $230 million and has a 35% stake in the agreement. Noble expects that full scale production may take place by May 2018 and catapult it to becoming the most important oil company in the region.

Cristina Kirchner does not have a great relationship with America, and, considering her populist moves, she will not sit silent when an American company tries to sign oil exploration and drilling deals with the Falkland Islands government. Though she has no right whatsoever over the Falkland Islands, she will create a ruckus in order to grab international attention to her own Evita-like persona, and of course, to the populist sentiment that the Falkland Islands should belong to Argentina.

Unfortunately, neither the Falklanders nor the international community have paid heed to Argentinean claims that the islands belong to Argentina. Instead, Argentina lost a major war with the U.K. in the early 1980s and continues to experience economic and social agitations within the country because of failed economic policies. Argentina also has to deal with Brazil's increasing influence in the region, which is a traditional rival. With these issues in mind, we may expect Noble to be in the midst of an international dispute in the coming years. Certainly, Cristina Kirchner will object, howl, and rant about big American corporations drilling in her backyard. However, these ramblings and rants will go unheeded, if we take sentiments in the international community and in the Falklands, to account. By drilling and producing oil and gas in the Falkland Islands, Noble stands to effectively establish itself as the sole player in the Southern Atlantic region.

Back in 2010, Exxon Mobil (NYSE:XOM) had stated that they doubted the existence of large energy reserves in the Falkland Islands. Exxon's international chairman Brad Corson argued that oil reserves in the Falkland Islands Continental Shelf was not profitable enough. Certainly, Exxon executives will be wringing their hands when they read about the potential profits that Noble stands to make in the future. Anadarko Petroleum (NYSE:APC), which is one of the most favorable oil companies in the world at the moment to invest, had planned to invest and explore in the Falkland Islands too, in January. However, nothing has come out of those plans and that is probably because of Cristina Kirchner's rhetoric. If Anadarko ever enters the Falkland Islands, it now has Noble to compete with. Chevron (NYSE:CVX) has not ventured so far south in the Atlantic but has already burned its hands in Brazil, where it had to pay a fine because of environmental pollution caused during drilling. Chevron also paid fines in Ecuador and it failed to block the $18 billion judgment.

In 2010, Argentina had also chastised Royal Dutch Shell (NYSE:RDS.A) for causing a gasoline shortage in Argentina and clubbed the Dutch oil company with Brazilian Petrobas, and claimed that foreign companies had a hand in stifling oil movement within Argentina. Shell denied the charges but working in Argentina became difficult for foreign oil companies thenceforth. For now, only Noble seems to be taking the risk of playing with Cristina Kirchner's ire and that does seem like a very good decision, considering the vast oil reserves and a favorable international sentiment towards American companies drilling in the Falkland Islands.

Back in the early 90s, Argentina went through a major push toward privatization. The country had been run by mega state industries for decades, during which time everything ran behind closed doors. But several of these mega state run industries began losing upwards of $5 billion per year. Through a push toward privatization, Argentina ended up not only saving its economy, but also turning it around.

Noble trades at $93 at the moment and is one of the most stable oil corporations to invest in. With a market cap of $17 billion and an enterprise value of $20 billion, Noble continues to be a valuable oil enterprise. The company also has a very high profit margin at 17.5% and a higher operating margin of $25%. The company's income statement revealed that it had revenue of $4 billion and a gross profit of $3 billion. Noble has a total cash of $702 million and a total debt of $4.45 billion, which is a little worrying. However, it also has a large operating cash flow of $2 billion. The decision to drill in the Falkland Islands in spite of Cristina Kirchner's rhetoric and possible Argentinean action was a very clever one and will take Noble a long way. This venture will not have any short-term effects, but in the long-term, it will prove to be a cash cow.

Disclosure: I 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.