NBL (IL/A): Moving on from Patina deal from position of strength; IL/A June 03, 2005
We believe Noble Energy is well positioned for strong free cash flow and above-average growth in the coming three years, with newly announced 2006 production guidance slightly above our estimate. Management has executed well in both restructuring its exploration strategy and diversifying the company?s production. With a balanced base of onshore, offshore, and international production, management is more willing to increase the exploration risk in the deepwater Gulf of Mexico and internationally. The ability to meet production objectives in 2006 and show success from higher- risk exploration is key for multiple expansion, though more conventional E&Ps could continue to trade at discounted valuations. We rate Noble In- Line relative to an Attractive coverage view only because we see even better risk/reward in our OP-rated favorites, but consider Noble one of our favorite IL-rated stocks.
NEW 2006 PRODUCTION GUIDANCE SLIGHTLY BETTER THAN EXPECTED
Noble's initial guidance range of 200-210 thousand barrels of equivalent per day (MBOE/d) is above our expectation of 198 MBOE/d. We had estimated about 11% growth from Patina and 14% growth from Noble properties. The midpoint of current guidance represents closer to 15% growth from Patina properties and 20% growth from Noble properties. We believe it is positive that the company has not backed down from either its Patina growth objectives or its legacy Noble objectives in contrast to some of its peers that appear to have made acquisitions to cover disappointments in their legacy production profiles. Capital expenditures for 2005 of $940 million were in line with our $950 million estimate.
GOOD EXECUTION ON EXPLORATION, PRODUCTION DIVERSIFICATION
We believe that Noble management should be credited for solid execution on its strategic goals during the last two years. While Noble has not increased its exploration budget over the last two years, it has switched its approach to a more probabilistic one with seemingly greater success versus expectations. By signaling the potential for an acquisition early on, it was not a surprise when Noble announced it planned to purchased Patina Oil and Gas. And management made the transaction during a period when its own production was rising, as opposed to waiting until its production growth had peaked like others have done. Even though Noble shares had underperformed until recently, the company has closed the Patina acquisition and is moving forward from a position of strength, versus some peers that have been in a longer and more defensive penalty box.
INCREASED RISK TOLERANCE FOR FUTURE EXPLORATION
We continue to believe that Noble management is disciplined in its spending. Management's willingness to increase the risk profile of its exploration program and increase exploration budgets generally is a natural part of being a larger company. Nevertheless, the extent of exploratory spending and the ultimate success in deepwater and international ventures should be monitored closely. We note that the company acquired 40% of its 60% interest in the Lorien development and 50% of its 60% interest in the Swordfish development. While the company has had good success in turning around its exploration program in the US (especially at Ticonderoga), we still believe that high-risk exploration is a work in progress.
VALUATION AT DISCOUNT, THOUGH SO ARE OTHER CONVENTIONAL E&Ps
Noble Energy shares trade at 4.5x 2006 EV/debt-adjusted cash flow, below the average multiple of 4.9x for other E&Ps, above the 3.8x multiple for Talisman Energy and generally in-line with Newfield Exploration and Pioneer Natural Resources. The more conventional E&P companies continue to trade at discounts to companies in which the public markets perceive greater production growth visibility. We believe greater shareholder activism is a potential catalyst for a general revaluation of conventional E&Ps, though in Noble's case we have a high degree of confidence in its management team and see the potential for it to gain a better valuation on its own. Noble differentiates itself with a high free cash flow yield, and how it deploys that cash will remain a key to potential outperformance.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
