Noble Energy’s upside

Noble Energy (NBL) is a relatively small independent global oil and gas exploration and production producer with a market cap of $15 billion. Asset sales since 2010 generated proceeds of $6.8 billion.

Assuming a $60 per barrel WTI crude oil price in 2018, the stock has an upside target of $44 per share — a 43% increase over current levels — based on its six-year average 7.7x cash flow multiple on 2018 estimated cash flow/share of $5.75. 

Our bullish outlook is based on a higher overall production in 2019 and 2020 and a higher, 72%, 2018 production estimate from domestic sources. 

After declines in 2017 and 2018, production will increase about 14% in 2019 and 35% in 2020. Strong growth is expected to continue to 2023 with the development of the Leviathan Field off Israel.

In July 2015, NBL closed on the acquisition of Rosetta Resources, which added 50,000 net acres in the Eagle Ford Shale play and 56,000 net acres in the Permian’s Delaware Basin. Rosetta’s 2014 reserves were 282 million equivalent barrels, 35% as large as NBL, with more than 1,800 horizontal drilling locations and a resource potential of one billion barrels of oil equivalent. NBL issued 41 million shares with a value of $2.1 billion to acquire Rosetta and assumed $1.8 billion of net debt.

In April 2017, NBL closed on the $616 million acquisition of Clayton Williams Energy, which added 71,000 net contiguous acres in the core of the southern Delaware Basin and production of 10 thousand barrels of oil equivalent per day. In June 2017, it divested its assets in the Marcellus for proceeds of $1.8 billion. 

NBL reported 2017 reserves of 1965 MMEB: 23% oil, 12% natural gas liquids (NGLs) and 65% natural gas. The United States holds 40% of its reserves, of which 53% is oil, 28% is NGLs and 19% natural gas. Nearly 47% of its total reserves and 71% of its gas reserves are located offshore. 

It will close on the sale of its Gulf of Mexico assets, which are relatively small, in Q2 2018 with expected proceeds about $480 million. The book value is $750 million with 2017 production consisting of 83% oil.

NBL’s 2017 capital spending of $2.65 billion was up 72% from 2016; 2017 cash flow from operations of $1.95 billion was supplemented by $2.1 billion from asset sales. Capital expenditures in 2018 are expected to be $2.8 billion with 80% spent on U.S. operations. Cash flow from operations will be about $2.4 billion. It has a current debt ($6.7 billion)/ debt + equity ratio of 40%, in line with its peer group average, with $675 million additional cash on hand.

To protect the integrity of its capital program and dampen potential cash flow volatility, NBL has a policy of hedging half its current production on an ongoing basis. 

NBL was down 24% in 2017 compared to a 12% decline in the SPDR S&P Oil & Gas Exploration and Production exchange-traded fund (XOP), while the SPX increased 19%. NBL hit a low of $24 per share in Q2 2016. Its 2014 high was $80.

We expect continued decline in production in 2018 followed by rapid growth in 2019 and 2020. However, higher domestic production in 2018 should create efficiencies for NBL. After the impact of the Marcellus divestment and the Clayton Williams acquisition, 2017 production was down 9%; 2018 production is expected to decline another 9% with the sale of its Gulf of Mexico assets. NBL will then derive 72% of its production from U.S. onshore resource plays, the rest offshore in Israel and Equatorial Guinea.

It anticipates a 15% increase in overall production in 2019 accelerating to a 30% increase in 2020. 

U.S. operations are focused on the DJ Basin in Colorado, the Delaware Basin and the Eagle Ford. Estimated 2018 production will have a mix of 47% oil, 24% NGLs and 29% natural gas. U.S. production is expected to grow 19% in 2019 and 28% in 2020 as output oil grows even faster. 

Total production costs in 2017 were up 20% from 2016. Oil production is more costly than producing natural gas. Company guidance provided indicates a 7% decline in 2018. The productivity of its newest wells in its resource plays is substantially better. 

NBL’s 2018 U.S. earnings before interest, taxes, depreciation, and amortization (EBITDA) will approximate $26 per barrel of oil equivalents.

NBL’s most important U.S. asset and a focus of its capital expenditures is its 335,000 contiguous net acre position in the DJ Basin in Colorado, anchored by the long-lived Wattenburg Field. 

NBL anticipates annual production growth of more than 15% in the play to 2020, while generating $500 million free cash flow during the period, assuming a $50 oil price.

New wells in the liquids-rich Niobrara formation continue to exceed expectations. The Niobrara is a low-risk development that compares favorably with the Eagle Ford and Bakken shale plays. It benefits from relatively greater formation thickness and a greater quantity of original oil in place per section. NBL has net resources of 1.7 billion barrel equivalents in the play with a 79% interest in 2,350 gross horizontal drilling locations. 

During the next several years, NBL is expected to increase its oil production and the cost efficiency of that production, which makes it a solid growth stock.