What Is Noble Energy’s Outlook for 2017 and Beyond?
Noble Energy’s long-term outlook
On November 16, 2016, Noble Energy (NBL) provided its long-term outlook from 2016–2020. It also provided an update on its US onshore operations.
The company’s November 16 press release noted that the outlook “includes a forward base plan utilizing $50 per barrel WTI and Brent and $3 per thousand cubic feet Henry Hub natural gas for 2017, with modest oil price acceleration through 2020. An upside plan is also provided which adds $10 per barrel in commodity price to all periods.”
Key 2016–2020 forecasts
Noble Energy (NBL) expects its US onshore oil (USO) volumes to increase at a CAGR1 of 23% in its “base plan” and 29% in the “upside plan” between 2016–2020. Onshore oil volumes in 2017 are expected to grow 15% compared to 2016.
Total US onshore production is expected to grow at a CAGR of 13% in the base plan and 16% CAGR in the upside plan through 2020. The combined Delaware and Eagle Ford production volumes are expected to increase 160% to 200% by 2020, compared to their 2016 volumes.
Noble Energy’s total production is expected to grow at a CAGR of 8% and 12% until 2020 in the base and upside plans, respectively, adjusted for divestitures. The 2020 production volumes include a “full year of volumes” from the Leviathan Gas Field. We’ll explore that in greater detail later in this series.
Management comments
David L. Stover, Noble Energy’s CEO, noted in the press release, “The high-margin growth we are outlining, led by our DJ Basin, Delaware and Eastern Mediterranean assets, is driving cash flows to increase at a rate of three to four times our volume growth. “
Top players in the DJ Basin include Anadarko Petroleum (APC) and PDC Energy (PDCE). The Delaware Basin’s top players include Cimarex Energy (XEC) and EP Energy (EPE).
Noble Energy’s return on average capital employed is expected to range between 8%–14% in 2020. Total operating cash flow is seen growing at a CAGR of 23% in the base plan and 35% in the upside plan between 2016–2020.
The Leviathan Gas Field: Noble Energy’s Key Discovery
Leviathan gas field
In December 2010, Noble Energy (NBL) announced a major natural gas discovery at Leviathan, off the shore of Israel. NBL considers the Leviathan gas field to be its “largest exploration discovery” and estimates that it holds 22 Tcf (trillion cubic feet) of recoverable natural gas resources. The company believes this massive discovery positions Israel as a “natural gas exporting nation.”
Noble Energy is the operator of the Leviathan field, with an ~39.7% working interest. Delek Drilling and Avner Oil Exploration, subsidiaries of the Delek Group, are the other partners in the project and hold a working interest of ~22.7% each. Ratio Oil Exploration holds the remaining 15%.
However, the field has yet to commence production, owing largely to bureaucratic obstructions. One of the major concerns held by Israel’s antitrust regulators was that Noble Energy and the other partners could potentially have a monopoly over Israel’s natural gas (UNL) resources.
Tamar field
Noble Energy (NBL) also has significant operations in Tamar, a separate Israeli offshore field. NBL recently sold a 3% stake in the Tamar gas field for $369 million. We’ll discuss the Tamar gas field in more detail in the next part of this series.
However, good news came in the form of Israel’s prime minister, Benjamin Netanyahu, finally approving development in the Leviathan field on May 22, 2016.
Following this news, Noble Energy and its partners plan to start pumping gas between 2019–2020. They also plan to export natural gas to Jordan, Turkey, and Egypt.
Why Did Noble Energy Sell Interest in the Tamar Field?
Tamar gas field
On July 5, 2016, Noble Energy (NBL) announced the sale of 3% working interest in the Tamar field to Harel Group—a leading insurance company in Israel—for $369 million.
The sale was in accordance with Israel’s approved Natural Gas Regulatory Framework, which requires NBL to sell 11% of its interest in the Tamar field. Prior to the sale, NBL’s working interest in the Tamar oil field stood at 36%.
Noble Energy (NBL) plans to carry out the sale of the remaining 8% over the next three years, bringing its working interest in the Tamar field down to 25%.
Noble Energy’s management noted in a press release that the proceeds from the sale would help fund capital investments in Israel, including its Leviathan project.
The Tamar sale fits Noble Energy’s strategy to monetize assets to improve its balance sheet position. On November 1, David Stover, NBL’s CEO, noted in the company’s 3Q16 earnings release, “Year to date, we have operated our business within organic cash flows while also monetizing nearly $1.5 billion in assets. Improving our balance sheet has positioned our business for activity acceleration and allowed us to pay down debt.”
New well plans
In its July 5, 2016, press release Noble Energy noted that it plans to drill and complete an additional development well at the Tamar field “in response to the continued increasing demand and outlook for natural gas usage within Israel, as Israel displaces coal for clean-burning natural gas.” Drilling is expected to commence in 4Q16.
Noble Energy (NBL) sold net volumes of 252 million cubic feet per day of natural gas in 2015, generating net pretax income of $318 million in 2015.
How Is Noble Energy Progressing on the Leviathan Project?
Noble executes gas sales contract with NEPCO
On September 26, 2016, Noble Energy (NBL) announced that it had executed a gas sales and purchase agreement (or GSPA) with Jordan’s National Electric Power Company (or NEPCO). Under the GSPA, NBL and its partners in the Leviathan field would supply ~1.6 Tcf (trillion cubic feet), or 300 MMcfepd (million cubic feet equivalent per day), of natural gas (UGAZ) from the Leviathan field over a 15-year term.
Noble Energy’s September 26, 2016, press release noted, “Natural gas supplied under this agreement will include industry-typical take-or-pay commitments, with pricing linked to Brent oil and a firm floor price. Gross contract revenues are estimated to be approximately $10 billion.”
Gas delivery
Noble Energy (NBL) expects to make its first gas delivery after the construction and field development in the three years following the sanctions.
The markets could view this as a significant step toward making a final investment decision (or FID) on Noble Energy’s Leviathan gas project. NBL expects to make a FID on the project by the end of 2016, even as the company continues negotiations with its local and domestic customers.
Noble Energy noted in its November 1, 2016, 3Q16 earnings conference, “Over the coming months we expect to finalize remaining key milestones for sanction. This includes additional sales contracts, both in Israel and for the export market and financing plans, as well as completion of the engineering work and project cost estimates.”
Financing
Noble Energy still needs to secure financing for the project. Delek Group, which includes Delek Drilling and Avner Oil Exploration, has already secured ~$1.8 billion in funding to finance the Leviathan gas project. Ratio Oil Exploration, which owns a 15% stake in the project, has also been raising funds by issuing debt and equity this year.
To help lower costs, Noble Energy has indicated that it is willing to “farm down,” or reduce, about 10% of its share in the Leviathan project.
At the end of 3Q16, Noble Energy had $1.8 billion cash in hand and an undrawn credit facility of $4 billion. This translates into liquidity of $5.8 billion. This means that NBL has considerable financial flexibility and may not need to resort to debt markets.
What Analysts Recommend for Noble Energy
Consensus ratings for Noble Energy
Approximately 63% of analysts rate Noble Energy (NBL) a “buy” and 37% rate it a “hold.” The average broker target price of $44.81 implies a return of ~17.4% in the next 12 months.
Analysts’ target prices
The high and low analyst target prices for Noble Energy are $67 and $35, respectively. NBL is a component of the SPDR S&P North American Natural Resources ETF (NANR), which invests 0.75% of its portfolio in Noble Energy.
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