Is the Woodside Petroleum Deal Good for Noble Energy?

Oil and gas producer Noble Energy (NYSE: NBL  ) announced on Thursday that it has signed a non-binding agreement to sell 25% of its stake in Leviathan, the massive offshore Israel gas project, to Australia's Woodside Petroleum (ASX: WPL  ) for $1.03 billion in cash and future revenues. Let's take a closer look at what impact the deal might have on Noble.

A new deal with Woodside
As part of the agreement, Noble will receive an initial cash payment of $390 million when the transaction closes later this year, as well as an additional $135 million when a final investment decision is made on an LNG facility or when regional export contracts exceed a threshold volume amount, whichever occurs earlier.

The new agreement supersedes a December 2012 accord in which Woodside agreed to purchase a 30% stake in Leviathan. Under the terms of the deal, Noble would remain the field's operator, while Woodside would operate an onshore or floating LNG facility with an expected annual capacity of about 3.5 million tonnes.

Leviathan, which Noble discovered in 2010, is one of the largest deepwater gas discoveries of the past decade, with an estimated resource potential of 19 trillion cubic feet of natural gas. Once the transaction with Woodside is completed, Noble will maintain a 30% interest in the project, with Delek Group and Avner Oil Exploration each holding 16.94% stakes, Woodside with a 25% interest, and Ratio Oil Exploration with an 11.12% stake.

A good deal for Noble?
As I understand it, the new agreement looks to be more favorable for Noble Energy than it does for Woodside. Not only is Noble receiving about $200 million more for its stake in the project than previously expected, but it is also gaining Woodside's tremendous expertise and strong working relationships with potential Asian LNG customers.

Woodside, meanwhile, is effectively paying more for its stake in the project, with its upfront payment rising from $696 million as envisaged in the 2012 accord to $850 million. According to Citigroup, the Australian oil and gas producer will now pay about $0.03 more per thousand cubic feet of resources.

This is mainly because of an increase in Leviathan's resource potential from 17 to 19 Tcf of gas and because of an increase in the expected price of the gas since December 2012, as more export options have opened up. Last month, for instance, Noble inked a 20-year agreement to supply $1.2 billion worth of natural gas from Leviathan to Palestine Power Generation.

What's next for Noble?
Noble has already seen great success at Tamar, another offshore gas field with a gross resource potential about half that of Leviathan's, achieving maximum output from the field just a few days after it commenced drilling in March of last year. Noble hopes to replicate that success at Leviathan, which is expected to commence production in late 2017.

As the company prepares to begin drilling at Leviathan, its onshore U.S. operations in Colorado's DJ Basin and Pennsylvania's Marcellus shale, as well as Tamar and other offshore projects in the Gulf of Mexico and West Africa, should continue to drive double-digit production growth. Indeed, Noble's fourth-quarter DJ Basin volumes jumped 16% year over year, while Marcellus volumes surged by 61%.

The bottom line
With such a robust pipeline of projects, Noble's production, reserves, and cash flow are all set to grow sharply over the next several years. In fact, the company's projected 18% annual growth rate over the next five years is virtually unmatched for a company of its size.

Still, with its shares trading at around 17.4 times forward earnings, I think this growth may be largely priced in. Further, given the numerous risk factors related to its long-term production forecast, including project delays and commodity price risk, I'm hesitant to jump in at current levels, despite the company's demonstrated operational excellence.

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