Noble Energy, Inc. (NYSE:NBL)
Wells Fargo Energy Symposium
December 9, 2015 9:30 AM ET
Executives
Ken Fisher - Executive Vice President & CFO
Brad Whitmarsh - Investor Relations
Megan Repine - Investor Relations
Analysts
Unidentified Analyst -
Operator
Good morning. Next up in stage we have Noble Energy. From management we got Ken Fisher, CFO. Brad Whitmarsh and Megan Repine, both from Investor Relations. Thank you very much.
Ken Fisher - Executive Vice President & CFO |
| December 8-9, 2015 for the Wells Fargo Securities 14th Annual Energy Symposium at the Waldorf Astoria in New York City |
Thank you, Joy. And it is pleasure to be here. Good morning, everyone. It is hard to believe that it is only three weeks left in 2015. It has been quite interesting year for the industry and by sense is 2016 will prove also interesting and challenging as we move forward. But the Noble team had the opportunity for a Board meeting yesterday and we did a recap of 2015. And I think we feel very good about where the company sits as we wrap 2015 and move into what will be challenging 2016. We clearly we made the call early this year that it was probably lower for longer and we've taken all the right actions. So both in terms of setting up the business plan for 2015 and activity levels in terms of the balance sheet and in terms of strengthening the portfolio. So as we look back on this year we've had the opportunity to add the Texas assets both the Eagle Ford and the Permian to the mix. I'll talk about those in a little bit. Definitely have reset the capital structure in terms of one of the cost structure in terms of capital cost and operating cost and took advantage of the Rosetta acquisition even on the G&A front to drive synergies there. We've enhanced our onshore business with the addition of the new assets and then we delivered as of early fourth quarter two new Gulf of Mexico oil projects that effectively doubled our production in the Gulf of Mexico as we enter 2016.
And then today we just earlier this morning we had announcement out in terms of updating our fourth quarter guidance strongly on the production momentum coming out of essentially all the assets across the portfolio and also some highlights of the value that Noble is bringing to the Texas assets in this case IP rate and completion technology improvement in the Eagle Ford as we promised with the addition of Rosetta. So it has been I think a very strong year. The other thing we've taken advantage of the opportunity with support from the Prime Minister in Israel to get a comprehensive gas framework that we expect to be in place here and operational within the next few weeks, and that sets us up to progress development in Eastern Mediterranean. And so we leave this year, last year the company was about 300,000 barrels a day per day production, this year we will end, exit well over 400,000 barrels a day. And that initial scale is a part of the cost of efficiency story. So how do we do this? Over the last 10 years we built an exceptional portfolio. The assets in each case are very well positioned on the industry supply curve. They are essentially all held by production and they offer significant investment flexibility which we saw both in play this year and you will see in play next year as we can have a lot of flexibility to deploy capital and control our activity levels and deliver nice returns in a challenging environment.
Diversity is a key; about 70% of our capital over the last few years has gone to the US onshore business offering even in current price attractive returns and the flexibility and low risk nature of that type of program. The dollars are going to DJ and our Texas assets. In terms of medium term type assets the Gulf of Mexico remains the focus and very attractive. The prolific natures of the wells and the oil content are providing a very nice addition to the mix as we move into 2016. And then I would also highlight the diversity of our long live west African and Eastern Mediterranean assets that enjoy in case of West Africa barn pricing in terms of Eastern Med long term gas pricing that's contractually set and not really provides more or less a natural hedge to oil prices. So the diversity in a portfolio serves us well. Also financial strength, we continue to maintain a strong balance sheet and liquidity and then I think the organizational effectiveness you will see really in play as we run one onshore business in the US, we are quickly able to integrate the Texas assets and then use the learnings from both the DJ and Marcellus to bring value those -- to those new additions to the portfolio.
This is a pretty impressive slide. As I said we call lower for log or earlier and the plan this year was to bring capital down through the year to be able to operate then in a cash flow natural basis with no more debt by late in the year. You can see clearly we've demonstrated we can do that and our discretionary cash flow now exceeding the capital spent in third quarter and that trend we expect to continue. In fact, capital was down on legacy basis about 45% this year and with recent announcement of capital guidance is tiding up capital guidance for the year. Essentially we have absorbed the Texas assets for half of the year and still deliver slightly less capital for the year. So again showing that I think the flexibility and the ability to respond to the portfolio. And then from an operating expense standpoint, at level we haven't seen since 2015 --excuse me prior to 2010 and 2015. So very good momentum on the resetting the cost structure and we view most of these is really very sustainable. Clearly we have taken opportunity for some pricing changes but a lot about this has been efficiency. The way we do work, our completion, application and completion technology and then leveraging the additional scale in terms of G&A type of efficiencies.
Financially remain strong. $5 million of liquidity at the end of third quarter, $1 billion in cash and then $4 billion undrawn credit facility. That facility was extended for two more years in a third quarter to 2020 at actually a lower borrowing rate and that sets us up so we have no near-term maturities. On the Rosetta acquisition we were reaffirmed on our rating and outlook. And then the hedge program has been a very successful program over the last decade. And provides about this year including what we acquired from Rosetta almost $1 billion of proceeds and then were set up for about just under $500 million in 2016 on the existing hedge book. So this has proven a very nice in a sense shock absorber and if you look back over a 10 years period, we've had really no year where we had any material or any actually even very few negative settlements in the good years. And in the cumulative bad years we've delivered almost $2 billion of hedge proceeds net. So it has been very successful program.
Moving to the assets now first the DJ which remains the lion share of our investment focus. We had the opportunity last week to do our quarterly look back and I would say very happy with performance. I'll show you the well cost data in a moment. But we continue to highlight this area from the capital standpoint. We are running now three rigs, this year we averaged 3.5 rigs which is down from 10 last year but we managed to drill with those 3.5 rigs 70% in the lateral feet we drilled last year. So significant improvement in terms of drilling efficiency, drilling days and then really leveraging the long lateral concept. Given our acreage position which is highly contiguous and the focus over the last year in Wells Ranch in East Pony, we managed to take the average lateral length per well up from to about 7,300 feet this year which is up over 2,000 feet from what it was in 2013. So very strong performance of the operations team. The concentration really being is again in Wells Ranch in East Pony which is high liquids content; Wells Ranch grew 15% in third quarter over 2Q and East Pony up 20%. And then additionally we brought on our infrastructure up in East Pony a new gas plant at Keota in the third quarter and that supporting the activity there and then Lucerne II plant started up in greater Wattenberg in the third quarter as well. So we are in good shape on infrastructure as we move into 2016 and 2017.
Well cost, you can see then capital efficiency coming through, well cost down substantially both in the Wells Ranch area and East Pony. When you look at it on an extended reach or normalized basis, you can see down essentially $3 million of well and this is prior to the application of slickwater fracs. Historically in these areas we have been with hybrid gel. So this year we did some work to look at slickwater primarily on a cost basis as originally thought and what we are seeing is the 10 plus percent cost reduction on top of the data I showed you on the prior page, but at the same time also then improvements in terms of production as well. So very good leverage in terms of continuing to enhance the completion technology.
So this data is from Wells Ranch and then we are also doing this now in the East Pony area. Moving to Texas, I think the acquisition closed on July 21 and we were very pleased to add these assets to the portfolio. This makes us one of only two companies with material positions in four of the top five US onshore basins. And for what we can see our acreage is in essentially the heart of these plays both in the Eagle Ford, Webb County and then in the Delaware Reeves County and this adds about 1,800 locations in a very conservative assessment of resource to the inventory. We are running one rig each now in the Eagle Ford and the Permian Delaware. And we are very pleased by the results including in the earnings announcement today, we had the initial results from the first three Noble completion designs in the Eagle Ford, very strong EURs up substantially on prior and then what we are also seeing is substantially lower drilling days both on our nine wells drilled to date in the Eagle Ford and then on our initial Permian well. And then as we move forward and Permian will be doing the first Noble completion and have results on that very shortly.
So we managed to integrate these assets very effectively. The integration effectively complete. They are part of our one US onshore business. Donnie Moore who spent over the last few years running the Marcellus very successfully is also picked up responsibility for the Texas assets and we managed to retain a lot of the operating team on the ground and so fully integrated and clearly delivering value from what Noble brings to the party.
Moving to Gulf of Mexico. As I mentioned then we brought on the Big Bend and Dantzler projects at the beginning of fourth quarter. They add about 20,000 barrels a day, 85% oil net to Noble and so that takes us up essentially doubles our production at the Gulf of Mexico as we move through 2016 and we will bring the gunflint project online in the middle of next year. And that adds at least 5,000 barrels a day net to Noble as well. And the nice thing about this is we are spending roughly $600 million this year in Gulf of Mexico so as that those projects complete and capital is essentially is non-recurring which help set us up very nicely for next year. We continue to like the Gulf of Mexico. Clearly it is an area where a lot of technology innovation comes into play. So it is also a very good calling card around the rest of world in terms of our expertise and success there. We have enjoyed a very good exploration success rate and given the focus on middle myosin prospects that are close to existing infrastructure, they can be brought on production very quickly. So this remains an area where we are very pleased to operate and you can see then on Big Bend, three years from discovery to production, Dantzler two years from discovery to production. So the ability to quickly deploy capital and really generate value quickly. And these are again oil projects very prolific reservoirs and come with a very nice cost structure.
Eastern Mediterranean. I would highlight number one today, till today we have 40 TCF of very high quality gas discovered, 25% of that gas is now on stream and producing. We have 1.2 Bcf a day a capacity at Tamar. It was fully dispatched in third quarter, for most of the quarter and had record production in August and near record in September. This is a very strong cash generating asset that has a 30 year life with essentially no follow on capital in terms of continue to produce up to 1.2 Bcf a day. So very nice asset and again is a bit of a hedge against oil price. Then over 50% of the gas in the region is that we discovered is upraised and flow tested. So essentially it is ready to contract. So 22 TCF at Leviathan. Then the regulatory framework, last Christmas we were not very pleased with the outcome from anti trust standpoint but what that's really catalyze then over this year is the ministries to get together for the first time ever on a coordinated basis and then some very strong support from the Prime Minister and the Energy Minister to get a gas framework in place. We expect that to be signed by the PM very shortly. And that really sets us up for the ability to move forward with development. And I'll talk about that in a minute. The other thing that we announced recently then was the BG team entering the Cyprus block. So we had held Cyprus at 70% and so they came in for half of our interest and we think that very much help set us up for future development in the basin.
The other message I think about Eastern Med is there is a lot more demand than there is supply right now. Existing latent demand is about 3 Bcf a day, that's currently unsatisfied as we look at the various projections and talk to people; we see that demand being as much as 6 Bcf a day by 2020 timeframe. So a substantial amount of demand. And what we've seen particularly now since the gas framework has been made public this summer, a big drive to continue from customers to contract gas. So clearly Egyptian industrial customers are not getting gas so there is strong drive there. Our partner Delek recently put some note about an industrial consortium warning gas and signing an LOI. Clearly we are continuing to work with the BG and union Fenosa teams on back filling, the three LNG trains that are currently not utilized and then also Jordanian customers in particular Nafco working with them on gas supply in the Jordan. So the plan forward as the gas framework is signed is to then contract gas, pick the development scenario, finalize the development scenario in terms of the facilities, do a re-bidding on the facilities and then also then close up project financing and then be able to take a sanction so I would expect probably by late 2016 that we are sanctioning projects for development. Then have anywhere from three to four year timeframe from sanction to production. So lot of progress there. Then we continue to remain very interested in exploration typically 10% to 15% of our capital each year goes to exploration. We see the current environment as an opportunity to add essentially low cost, low commitment exploration inventory which then provide optionality for the future. So we have both exploration and new venture team out looking very targeted at blocks around the world. And then in 2016 our exploration program will consist of the Rhea well in the Northern Falkland which will spuge shortly and this is a contentious target in the near Sea Lion discovery. So existing hydrocarbon system and we should have results on that in first quarter 2016. We are also about to move to another Gulf of Mexico exploration project at Silver Gate which again will probably be late first quarter early second quarter results in 2016. We will also appraise our Katmai discovery for development in the Gulf of Mexico kind of in the mid year timeframe and then probably another exploration well late in the year in 2016 in Gulf of Mexico.
So we remain committed to an active exploration program and actually see the current environment is probably a great opportunity to add to the long days of inventory.
So as we look forward in the 2016, we are existing 2015 with substantial momentum both in terms of cost structure, capital performance and production, gives us a lot of flexibility to manage in 2016 in a cash flow neutral basis. So that's clearly what since really the early fall we have been communicated will operate within our cash flow next year. We can do that at substantially lower capital than 2015 on pro forma basis and still have probably mid-single digit type of growth rate. We remain very flexible to move up if conditions and returns warrant. And I think we will prove very resilient regardless of the overall situation. And that we will continue to in a sense take advantage of the opportunities presented by the environment to drive the cost structure to really leverage the new assets that we picked up in Texas. And then also just keep the company strong as we move forward.
So we appreciate everybody's interest and time. I am happy to take any questions if you have any.
Question-and-Answer Session
Operator
[Operator Instructions]
Unidentified Analyst -
The hedging position in the slide was noted in 2015. How is that shape out for 2016? I know there is some in place but what's the kind of percentage -- [Multiple Speakers]
Ken Fisher - Executive Vice President & CFO
We are roughly 25% to 30% hedged at what are today very attractive prices so if the script would stay where it is, you would realize in the range of $450 million type proceeds next year. So provides again as I said not very nice shock absorber in a sense as commodity price have changed. And then we have -- as I said the Israel and the West African gas is contractually priced gas so that's another element and the portfolio is not exposed really directly to oil prices in the regard.
Unidentified Analyst -
And 25% to 30% is total production.
Ken Fisher - Executive Vice President & CFO
Total
Unidentified Analyst -
Okay. And then living in cash flow neutrality. That's true operating cash flow.
Ken Fisher - Executive Vice President & CFO
Yes. I mean what we would think of it is delivering the -- paying the bills, paying the dividend and not getting any more debt right.
Unidentified Analyst -
With regard to your cash flow neutrality and having underlined growth at $50 assuming if we are in $40 to $45 regime over the next two years say how is 2016 shaping up with your --
Ken Fisher - Executive Vice President & CFO
Yes. 2016-- that's what -- when I say that we can operate at lower capital than 2015 in 2016 materially lower capital and then grow mid single digits that 2016, i.e. 2016 and what we communicated earlier this fall was that we can bring our capital down into the range of 1.6, 1.7 from what essentially $3 billion this year and still deliver kind of mid single digit growth. And that's driven by very good momentum which is part of the message of the announcement this morning. And then the Gulf of Mexico project as I mentioned that is a significant addition to the oil mix for the company at the same time as the capital does not reoccur in that. And we feel good, we are very -- we don't have many capital commitments for next year. You know as I said most of our acreage is held by production. So we have full flexibility and we don't have big commitments that tie us down. So our flexibility is strong and that allows us to deploy capital in the best areas. So that's where the bulk of the dollars right now will go to the DJ, in the Wells Ranch and East Pony area. And then in Eagle Ford and really getting starting to development in the Permian.
Unidentified Analyst -
Decision making framework with regard to your capital outlay, could you just talk us through that.
Ken Fisher - Executive Vice President & CFO
Yes. That's a good question. I think the way we think about is first of all we want to have the gas contracts in place so you have volume underpin for the projects. That will allow us to select the concept, the design and given the quality of the reservoir, we can anywhere on the volume curve, it is a very economic project. So you can do a smaller project then they can be expanded or you can do a large project. So if you recognize Tamar supplying 1.2 -- up to 1.2 Bcf a day with five producing wells. So the quality of the reservoir is such that it makes it a very economic program and the Leviathan reservoir is an analog. So we have a lot of flexibility on what's the design size and then we will do a project finance so that will allow us essentially we call it a ring fence and we won't need new equity essentially in the Eastern Med, between the cash flows that exist there and a project financing we can fund the development. And we like the idea of leveraging perhaps export credit agencies and organizations like that to help underpin essentially the quality of the project. And then as I mentioned we hold those assets. We just in the process of divesting Tanin and Karish which is small fields that was related to the anti trust approval. So adds a little bit of proceeds to BG, entering the Cyprus now we bring this to an appropriate level of ownership at 35% but also generating some proceeds and clearly brings a lot of future value. If you look at our Tamar interest is 36% today. And then we operate, we've agreed over six years to be able to sell down 11% commitments there. If you look through the value of that in terms of our partner, our publicly traded partner, it is a very attractive asset in terms of valuation given it is long life, cash flow and non no further capital requirement to maintain existing capacity for essentially 30 years. So that's a potential source or proceeds and then Leviathan we hold 39.66% and so clearly we demonstrated in the past that we would be willing to reduce the interest there while maintaining operatorship. So I think we have a tremendous amount of financing flexibility and we then are able to develop what makes sense economically and what make sense to continue then to support this gas demand in the region. So well thanks everyone. Appreciate the interest in Noble and have a good end to the 2015 year.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!
