Why This Energy Company Has One of the Best Asset Portfolios Around

Noble Energy’s assets in the Gulf of Mexico, offshore Israel, and onshore U.S. should drive several more years of profitable, double-digit growth.

Arjun Sreekumar
Arjun Sreekumar
Jul 10, 2014 at 3:20PM
Energy, Materials, and Utilities

When determining the value of an oil and gas exploration and production (E&P) company, asset quality is a key factor. In general, companies that focus on high-quality assets with large resource potentials, low production costs, and strong production growth prospects tend to be more valuable.

One company whose asset portfolio really stands out, in my view, is Noble Energy (NYSE:NBL). The company's core assets, located in the U.S., offshore Israel, and the Gulf of Mexico, feature strong economics, huge resource potential, and lots of upside potential from exploratory drilling, and they should support continued double-digit growth for years to come.

Onshore U.S. assets
Currently, Noble's key drivers of production growth are its onshore U.S. assets, located primarily in Pennsylvania's Marcellus shale and Colorado's Denver-Julesburg (DJ) basin. First-quarter production from these plays jumped 60% year over year to a record average of 100 MBoe/d and is expected to continue growing at double-digit rates for several years.

Beyond their strong production growth track record and prospects, these plays are also highly profitable. Production costs in the DJ Basin averaged just $4.71 per BOE last year, while Marcellus production costs were just $2.80 per BOE. Indeed, Noble says its DJ Basin operations are among the most profitable across its entire global portfolio, earning a triple-digit rate of return at current prices.

Eastern Mediterranean assets
Next up are Noble's assets in the Eastern Mediterranean, where it serves as the operator of the Tamar and Leviathan gas fields offshore Israel -- two of the largest deepwater gas discoveries of the past decade. Tamar, which Noble discovered in 2009, is estimated to contain 9 trillion cubic feet (Tcf) of gas, while Leviathan could hold some 19 Tcf.

Drilling at Tamar began last year and has ramped up steadily, with production averaging 219 MMcfe/d in the first quarter. The company is currently completing an onshore compression project that will greatly expand the deliverability of Tamar volumes by the middle of next year. It also recently signed a firm, long-term agreement to supply businesses in Jordan with gas from Tamar.

Meanwhile, Leviathan's first phase should be sanctioned by the end of this year, while production is expected to begin in late 2017. The first phase will involve a floating, production, storage, and offloading (FPSO) system, while the second phase will likely entail a floating, liquefied natural gas (FLNG) production system. Noble earlier this year inked a firm contract to supply gas from Leviathan to a Palestinian power plant over a 20-year period.

In addition, Noble has also made discoveries offshore Cyprus, including the Aphrodite gas field in Cyprus Block 12, as well as other discoveries offshore Israel including Dalit, Dolphin, Tanin, and Karish. Overall, the company estimates it has roughly 40 Tcf of gross discovered resources in the Eastern Mediterranean, giving it a massive opportunity to supply rapidly growing markets in the Middle East.

Gulf of Mexico assets
Last but not least are Noble's assets in the Gulf of Mexico, where it recently expanded its presence by acquiring a 50% interest in 17 deepwater exploration leases from BP (NYSE:BP). The deal gives Noble a 50% working interest in the highly promising Bright prospect, which could hold 90 to 350 million barrels of oil equivalent in total gross unrisked resources.

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In addition to exploratory prospects like Bright, Noble plans to bring online a number of high-impact projects over the next few years. These projects, which include Big Bend, Gunflint, and Dantzler, feature extremely strong margins because of heavily oil-weighed production. For instance, Big Bend will have a peak production rate of 22,000 boe/d, of which around 90% will be oil.

As Big Bend and other high-impact projects are brought online over the next few years, they should provide a big boost to Noble's oil production and cash flow. In fact, the company expects to more than double its production and cash flows in the Gulf of Mexico over the next five years. With a total of 3.8 billion barrels of gross unrisked resources in the Gulf, Noble's opportunity is massive.

Investor takeaway
As you can see, Noble has a large, diversified, and growing portfolio of high-quality assets that provide a highly visible runway for both near-term and long-term growth. The company's onshore U.S. assets will continue to provide a stable production base over the next couple of years, while Leviathan and the Gulf of Mexico will become major contributors to long-term production growth and cash flow. With such an exciting collection of both domestic and international assets, Noble's future looks bright.