Noble Energy (IL/A): Stock could benefit further from consistent Rockies growth, Gulf of Mexico exploration success - Goldman Sachs - May 03, 2006
We believe Noble Energy (IL/A) is moving in the right direction in boosting confidence in the two most important issues that can impact future share price performance: the ability to grow production and free cash flow in the Rockies; and becoming more successful in deepwater Gulf of Mexico exploration. Our recent meeting with Noble?s Rockies division gave us more confidence in future growth from the Wattenberg field that expertise can be applied successfully to the acquisition of US Exploration and in legacy exploratory opportunities in the Piceance Basin and Wind River Basin. Additionally, initial results are positive from the Red Rock deepwater Gulf of Mexico well, which could help to offset declines from existing GOM startups. Noble trades at 4.7x 2006 EV/DACF, in line with other mid-cap diversified E&Ps, though increasingly a slight premium multiple could be warranted.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Growth from the Rockies. We recently met with the head of Noble's Rockies division and came away with the positive view that the company is on track with developing the Patina oil and gas assets and pursuing exploration on Noble legacy acreage. We believe one of the main catalysts for Noble shares is Street confidence that there will not be any hiccups in meeting growth objectives from Patina assets or in having to revise downward reserves like Pioneer Natural Resources did following the Evergreen Resources acquisition. We believe that in general, the transition and consolidation have been smooth, and management seems fluent on both new and legacy opportunities. In the Wattenberg field, downspacing to 20 acres is on track, which is the backbone behind Patina asset growth and the company's recent acquisition of US Exploration. At legacy Noble properties, key catalysts include further drilling at the Iron Horse exploration prospect and development in the Bowdoin field.
(2) Deepwater Gulf of Mexico exploration. Given a volatile exploration track record, further deepwater success should be a positive catalyst for Noble shares. Noble shares have performed well since announcing initial success from the deepwater Red Rock prospect. While the ultimate size is unknown, the risk level for Raton, a neighboring deepwater prospect in which Noble also has a 50% interest, has decreased. Noble is seeing significant production growth in 2006 and 2007 from the Ticonderoga, Lorien and Swordfish startups, but like Pioneer there is a risk that that growth turns to declines in 2008 and/or 2009. Further success can not only flatten the company's offshore production profile but also boost confidence that the company's exploration strategy - unveiled three years ago - is showing success.
(3) International cash flow. We have increased confidence in the sustainability of international cash flows. Noble has been one of the most successful mid-cap E&Ps that has attempted to diversify in multiple international regions. Potential political disruptions from operating in Israel, Equatorial Guinea and Ecuador have generally not materialized, and in both Israel and Equatorial Guinea the company continues to see flat to higher cash flow. In the North Sea, the Dumbarton startup is expected to rampup in 2007 to 9,000 BOE/d net. While Noble's focus is more towards deepwater US exploration and developing recently-acquired US onshore fields, investors are generally skeptical on the ability to maintain international free cash flow. Noble's strong share price performance on May 2 is in part indicative that greater credit is beginning to be afforded for these ventures.
VALUATION
Noble trades at 4.0x 2007 EV/DACF, versus 3.7x for Newfield Exploration, 5.0x for Pioneer Natural Resources and 3.7x for Pogo Producing. We continue to prefer Newfield because we believe its improved production growth visibility is not being recognized. Increasingly, the same argument could be made for Noble, because of its sustainable international free cash flow and growth in production and cash flow from the US Rockies. Successful deepwater Gulf of Mexico exploration would add the final piece of the puzzle in our view.
ADJUSTED EPS HIGHER THAN OUR ESTIMATE ON METHANOL REVENUES, PRODUCTION
Noble reported adjusted 1Q 2006 EPS of $1.26, higher than our estimate of $1.09 and First Call consensus estimate of $1.17. Production was 1.07 Bcfe/d versus our estimate of 1.04 Bcfe/d. Realized commodity prices were in-line, while all-in costs were lower than expected at $3.24 per Mcfe versus our $3.53 per Mcfe. Methanol revenue were higher than expected at $63 million versus our $32 million.
UPDATED ESTIMATES
We are updating our 2Q, 3Q, 4Q, and full-year 2006-2007 EPS estimates on higher methanol revenues and minor other company adjustments. Our new estimates are $1.13 ($1.10 previously), $1.51 ($1.47 previously), $1.81 ($1.78 previously), $5.71 ($5.44 previously), and $7.88 ($7.01 previously) respectively. We are also updating our 2008-2010 (normalized) EPS estimate to $3.09 ($2.73 previously), $2.90 ($2.71 previously), and $3.06 ($2.99 previously) respectively.
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 |
