This Oil Company Has More Room to Grow

Noble Energy (NYSE: NBL  ) has recently announced that its first exploration well in offshore Nicaragua did not encounter an accumulation of hydrocarbons. The company has a 2 million acre position in the country, and this initial test was clearly a disappointment. Noble Energy has been on the run this year, up almost 50%. Will this event prevent Noble from continuing this trend?

It's just the first well
Paraiso-1, the well that failed to find oil, was just the first Noble's well in offshore Nicaragua. Nicaragua is yet to become a meaningful oil and gas producer. The ongoing dispute on maritime borders between Nicaragua and Colombia does not make things easier for the country. However, tension is not expected to escalate in the region.

Noble managed to secure a large acreage position in the country. The company states that the Paraiso Prospect in Nicaragua is estimated to have from 210 million to more than 1.2 billion barrels of oil equivalent.

The company stated that it made several positive observations during the drilling. Noble will surely drill more wells in the future given the size of its position in the offshore Nicaragua. This first well provided valuable geological information for the company. Sure, the information cost dearly, but that's how it goes in this business. I cannot imagine that Noble will give up after just one failure.

DJ Basin production continues to grow
Noble's operations in DJ Basin continue to drive the company's results. The company has 750,000 net acres in this unconventional play. Noble has drilled 221 horizontal wells in this are so far this year, and expects to drill 79 wells in the fourth quarter.

Companies that focus on this liquids-rich area are handsomely rewarded by the market. For example, Bonanza Creek Energy (NYSE: BCEI  ) is up 86% this year, while PDC Energy (NASDAQ: PDCE  ) is up 78%. Bonanza Creek managed to increase its third-quarter sales volume by 32% in comparison with the second quarter of this year. Despite the huge increase in the stock price, Bonanza Creek still sells for less than 16 times its future earnings.

PDC Energy has a 98,000 net acres position in the area. The production from the Wattenberg field in the DJ Basin accounts for 75% of total estimated 2013 production. The company had a very successful secondary share offering back in August. However, PDC Energy's debt level is still relatively high, so another share offering is possible in the future.

You can expect Noble's expenditures in the area to drop after it completed the strategic acreage exchange with Anadarko Petroleum. Now the company has large contiguous blocks instead of scattered ones in the area. Noble states that it expects a short-term reduction in production due to this exchange, but still forecasts that its DJ Basin production will grow at least 20% in 2014.

Bottom line
I think that investors should not be worried about the results of the first well in Nicaragua. After all, empty wells are just part of the business. What's more important, Noble is the only company that holds a large acreage position in this interesting area.

Despite the active growth and the related capital expenditures, Noble managed to preserve a solid balance sheet with a reasonable debt level. With $993 million of cash on its balance sheet at the end of the third quarter and a healthy cash flow, the company is free to pursue its projects.

The market continues to reward liquids-rich producers, and Noble got 80% of its revenues from liquids in the third quarter. All in all, I think that the company has more room to grow. 

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