3 Reasons Noble Energy's Stock Could Fall

Noble Energy is a big player in both international offshore and domestic onshore oil and gas production. How do its prospects look?

Aug 27, 2014 at 12:38PM

It can be difficult to value independent oil and gas exploration and production (E&P) companies like Noble Energy. The reality is no two of them are built the same, or exposed to the exact same risks. While global demand for oil and natural gas is growing -- and this trend looks likely to continue for decades -- there are a number of potential roadblocks that could lead to Noble Energy's (NYSE:NBL) stock falling. Let's take a closer look at these reasons. 

1. Geopolitical risk 

Oil Fields Burning Kuwait Usaf
Kuwaiti oil fields burning in 1991. 
USAF image pubic domain.

While there is some regionality, oil prices are largely global in nature, and a major drop in prices in one part of the world will lead to falling prices everywhere. This is a fact that every oil company has to contend with, even a 100% domestic producer like Continental Resources (NYSE:CLR), which operates primarily in North Dakota. However, the stakes are much higher for Noble Energy, with a lot of its production in Africa, Israel, and China. For the first half of the the year, 41% of Noble Energy's total oil and gas production was international. 

The majority of Noble Energy's international production is natural gas, which carries a much higher premium outside of the U.S., and Noble Energy's management is willing to take on a higher level of risk in order to exploit the potential gains. If political or social unrest or even war were to happen in one of Noble Energy's areas of operations, it could have potential implications on global oil prices, but the direct harm to Noble Energy would be larger than the impact on producers in other areas. 

2. Weakening capital position

Management called out reducing its debt load in its analyst presentation in December 2013. However, debt has actually increased slightly since then, while cash and equivalents have declined:

HES Cash and Equivalents (Quarterly) Chart

HES Cash and Equivalents (Quarterly) data by YCharts.

Yes: It's still only a few months since that presentation, and the long-term trend is more important than just two quarters' worth of data. But E&P is very expensive, and having a solid financial position is the best hedge Noble Energy's management could have against poor production. If the trends (less cash, more debt) continue, this could increase the cost of capital, which in turn could be a detriment to funding enough exploration to replace current production. 

It's a tough balance between maximizing resources and growing reserves, while also maintaining a strong balance sheet. Noble Energy needs to reverse the current trend.  

Fool Gas Prices

3. Oil and gas prices

This is the greatest short-term risk to Noble Energy's stock price, because it's the one the company has essentially no control over. The best any E&P can do is to keep its cost of capital, exploration, and production as low as possible so that it can ride out volatility in the energy markets. Additionally, the company can hedge its production with a number of financial instruments, agreeing to sell future production at a fixed price that protects the downside, at the cost of some upside. 

However, Mister Market often ignores these hedges, sending a producer's stock lower in a blind sell-off if the price of oil or gas falls. 

Final thoughts: Understand the implications of risk 

Risk is best defined as the probability of permanent loss of capital. This is important because your investing goals and timeline will often determine whether a short-term price drop becomes a permanent loss for you. For example, if a producer is hedged against oil or gas price drops, its stock price falling will be short-term in nature because the company isn't really as affected as the market's reaction. However, if you don't understand the company's hedging measures, you could follow the herd and sell, when the market could be giving investors a buying opportunity. 

Lastly, none of these risks are guaranteed to lead Noble Energy's stock lower, but as an investor, it's essential to understand the risks even better than the opportunities, and position your portfolio based on those probabilities. 

Do you know this 100% legal energy tax "loophole"?

Resurgent oil and natural gas production is changing the lives of millions of Americans, and the IRS is actually encouraging investors to support our growing energy renaissance. Take advantage of this profitable opportunity to invest in some of the best energy companies -- with tax-boosted returns -- by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers