Noble Energy (IL/A): Onshore growth, offshore exploration are key catalysts
Goldman Sachs August 03, 2005
Through improved deepwater Gulf of Mexico exploration, acquisition of additional stakes in GOM projects and the acquisition of Patina Oil and Gas, Noble Energy's US business is in a much improved position to both grow production over the next three years and generate meaningful free cash flow. Combined with strong free cash flow from international projects, Noble has the potential to lead E&Ps in free cash returns and free cash yield, without an overleveraged balance sheet. The ability for Noble to deliver the free cash as well as 10% annual growth from Patina, combined with continued confidence in management's use of that cash could drive Noble shares higher. Noble and Newfield Exploration both are companies that historically have not had visible growth that now do. We continue to prefer Newfield (OP/A) to Noble (IL/A), but believe that Noble exhibits similar characteristics.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Onshore production growth. Noble's onshore project portfolio has improved dramatically with the acquisition of Patina. While Noble is pursuing both exploratory and development opportunities in the Rockies, production from legacy fields in Texas and the Mid-Continent is expected to be flat. Patina adds an element of growth and free cash flow in our view. We expect 10% production growth from Patina from a combination of refracs in the Wattenberg field and new drilling in Texas' Buffalo Wallow and other Rockies areas. The number of wells needed to be drilled to reach 10% growth is vast, and will be a test of Noble's project management abilities. We believe Noble is on track thus far with its consolidation of Patina, though any exogenous delays due to rig availability could have a negative impact.
(2) Timing of offshore startups and further deepwater exploration. Noble has three key Gulf of Mexico projects set to come online in the next 18 months: Swordfish, which is about to initiate production; Lorien, which is currently set for 2Q 2006; and Ticonderoga, scheduled for mid 2006. These projects combined with Patina are the keys towards an estimated total company production growth of 29% in 2006 and 12% in 2007. We would note that Noble did add additional stakes in both Swordfish and Lorien following initial exploration success. On the exploration front, Noble plans to drill 3-4 deepwater prospects in the second half of 2005, including two - Little Burn and Conquest - that would likely be relatively quick (1-2 years) sub-sea tiebacks to existing infrastructure.
(3) International projects. We believe that Noble is looking actively at new international areas now that Israel, Ecuador and Equatorial Guinea are increasingly in steady state. Growth in Israel remains constrained by natural gas demand rather than recoverable resource, though we expect gas demand to steadily increase and see upside for Noble's production. Noble is pursuing opportunities in Africa's Joint Development Zone as well as exploration in Equatorial Guinea.
VALUATION
Noble trades at 5.0x 2006 EV/debt-adjusted cash flow versus 5.6x for other E&Ps. We believe that Noble's multiple can expand with further confidence in delivering 10% Patina growth and further exploration success in deepwater Gulf of Mexico and international exploration.
2Q 2005 RESULTS BETTER THAN OUR ESTIMATE AND CONSENSUS ESTIMATE
Noble Energy reported 2Q 2005 EPS of $1.87, higher than our estimate of $1.62 and First Call consensus estimate of $1.81. Both worldwide oil and gas production of 59.3 Mb/d and 482.8 MMcf/d were generally in-line with our estimates of 59.6 Mb/d and 481.2 MMcf/d, respectively. Worldwide realized oil and gas prices of $43.23 per bbl and $5.02 per MMcf were higher than our estimates of $42.07 per bbl and $4.91 per MMcf. The biggest delta between our estimates and Noble's reported numbers came from unit costs. All-in costs were $17.91 per BOE versus our $19.89 per BOE, primarily due to DD&A. DD&A for the quarter was $7.82 per BOE, favorable relative to peers and lower than our estimate of $9.27 per BOE. Operating cash flow was $301 million versus our estimate of $299 million. Net debt to tangible capital is at 62%.
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. |
