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Despite Selloff, Noble Energy's Growth Story Is Intact

By Callum Turcan - Jul 29, 2014 at 9:34AM

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Noble Energy Inc posted mixed results, with problems in the DJ Basin clouding over Marcellus and Mediterranean upside

When Noble Energy Inc updated investors Thursday it provided a mixed bag of results for investors, but the negatives outweighed the positives pushing the stock down ~5% in two days. The biggest letdown was Noble Energy's DJ Basin operations, which under-performed its own guidance due to lack of infrastructure and downtime at third party processing facilities. 

Other factors holding Noble Energy back included the upgrading of facilities for 65 wells on 12 pads, and the longer drilling times associated with its extended reach program. This still didn't stop Noble from boosting its horizontal production from the DJ Basin by 33% to 70,000 barrels of oil equivalent a day, or BOE/d. Overall its DJ Basin output rose to 98,000 BOE/d, versus 90,000 BOE/d in the same quarter last year, which factors in the asset swap in 2013. The problem is that expectations weren't met, which resulted in Noble lowering guidance for the third and fourth quarter of this year. 

In an effort to alleviate some of the problems, Noble Energy and its partners are going to double the capacity of the White Cliffs oil pipeline to 150,000 barrels per day. The expansion will be completed sometime in August of this year, giving investors a short-term catalyst to look forward to. 

While lowered guidance paints a gloomy picture, there is light at the end of the tunnel. Noble Energy may have lowered its guidance for this year, but its long-term growth prospects remain the same. 

On a positive note
One of Noble's most promising assets is its stake in various gas fields off the coast of Israel, including the Tamar and Leviathan fields. The Tamar field is estimated to hold 10 trillion cubic feet of natural gas and is already operational. In the second quarter, Noble had total Israel sales of 220 million cubic feet a day, or MMcf/d, of natural gas, and management is guiding for that to grow to 250 MMcf/d next quarter. Keep in mind this is sales net to Noble, as the Tamar has been producing ~750 MMcf/d since inception.  

By mid-2015, Noble hopes to boost the overall capacity of the Tamar project by 200 MMcf/d, with future expansions eventually allowing the Tamar to produce 2 billion cubic feet a day, or Bcf/d. Justifying this boost is the recent letter of intent that Union Fenosa Gas of Eygpt signed last quarter to purchase 440 MMcf/d from the Tamar project, which it will convert to LNG. 

The Leviathan field holds an enormous 22 trillion cubic feet of natural gas, which was revised upwards by 3 trillion cubic feet this quarter. Production is supposed to start up in 2017 once the FPSO vessel is fully operational, which will be capable of pumping out 1.6 Bcf/d with future expansions already in the works. Last quarter Noble signed a letter of intent to export 700 MMcf/d from the Leviathan, showcasing the level of demand for natural gas from these two fields. Another positive for Noble Energy was the triple-digit production growth from its Marcellus joint venture, slightly compensating the DJ Basin miss. 

Another gassed up bright spot
In the Marcellus, Noble Energy teamed up with CONSOL Energy to develop the wet and dry portions of the play. Shareholders of CONSOL Energy cheered (if just for a moment) when Noble announced that production from the Marcellus increased 120% year over year. Leading the charge upwards was an improvement in well completion techniques, which boosted the estimated ultimate recovery for a 7,000 foot lateral well by 10%, to 10 billion cubic feet equivalent.

Another example of how better well completion techniques are aiding Noble and CONSOL can be found on the eight-well WFN6 pad in the Majorsville area. The WFN6 pad had two wells come online with enhanced well completion techniques, which boosted the production rate of those two wells by 15%-30% versus the other wells on the pad. In addition to that the pad is posting a production curve 50% above other wells in the region.

Horizontal production from the Marcellus and DJ Basin was up 56% year over year to 112,000 BOE/d this quarter, which points toward Noble's quarterly results not being a complete flop. Further upside from the Marcellus region will be provided when Noble creates a Marcellus midstream MLP, which could allow for its midstream assets to receive a much better valuation.

Foolish conclusion
Noble Energy's stock took a tumble after its earnings, and for good reason. The DJ Basin offers the strongest short term catalyst for investors, and as long as infrastructure is holding Noble back guidance will be scaled down. Farther out, the Noble Energy growth story remains solid. New deals in Israel will provide billions of dollars in long term revenue, justifying the current capacity expansions under way. Noble was able to beat estimates on the bottom line this quarter due to higher realized prices, but pricing upside isn't something that Noble can bank on forever.

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