Is This Ambitious Energy Firm a Smart Buy?

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Noble Energy (NYSE: NBL) announced its 2013 capital program and guidance and provided updates for the fourth quarter of 2012.

2013 Highlights

Total capital expenditures are estimated at $3.9 billion for 2013. 60% of the program is allocated to onshore U.S., 6% to the deepwater Gulf of Mexico, 15% to West Africa and 10% to the Eastern Mediterranean. Global exploration and appraisal activity is earmarked to receive 15% of the capital expenditure. These investments should generate 2013 sales volumes from continuing operations at an average between 270 to 282 thousand barrels of oil equivalent per day (MBoe/d). The midpoint represents a 20% growth over 2012, after adjusting for domestic property sales closed in 2012. The projected sales volume reflects a 23% growth in crude oil and condensate and a 16% growth in natural gas.

In the U.S., Noble expects to invest $1.7 billion in the DJ Basin to accelerate the horizontal Niobrara drilling program to include 300 horizontal wells in 2013.  Approximately 90 wells are located in Northern Colorado and another 60 will be extended-reach lateral wells focused in the oil window of Wattenberg.  In the Marcellus Shale, $750 million is proposed to be spent to support the drilling of 140 joint venture wells, targeting 85 operated wells in the liquids-rich area of the play.  In the deepwater Gulf of Mexico, the company proposes to invest $250 million where a one-rig program is planned to conduct appraisal drilling at Gunflint and execute the exploration program.

Noble Energy's international programs in West Africa and the Eastern Mediterranean will be allocated $500 million and $400 million, respectively. 

Overall, liquid volumes are expected to represent 46% of total volume in 2013 while the remaining product split is estimated to be 28% U.S. natural gas and 26% international natural gas. U.S. volumes are anticipated to be up about 23% from 2012. Noble's onshore development programs in the DJ Basin and Marcellus Shale account for the majority of this growth. The international portfolio is expected to grow 20% from last year, largely due to the initiation of production at Tamar and Alen.

Updated Fourth Quarter 2012 Guidance

Noble Energy now expects fourth quarter 2012 sales volumes from continuing operations to be above the upper limit of the prior estimate of 248 to 252 MBoe/d.  Sales volumes for the quarter are estimated to average between 252 and 256 MBoe/d, an increase of approximately 4 MBoe/d from the prior estimate as a result of stronger production growth in the DJ Basin. Exploration expenses for the fourth quarter are now expected to average between $110 and $130 million, down from the prior estimate of between $160 and $200 million as a result of successful drilling at the Carla appraisal well in Equatorial Guinea and the Big Bend discovery in the deepwater Gulf of Mexico.

Production Growth - Next Five Years

In an interaction with the media, CEO Chuck Davidson said that he expects to see production grow by 17% year-over-year for the next five years and that Noble has high hopes for its investment in the Niobrara basin in Colorado. Noble is now estimating net recoverable resources at 2.1 billion barrels of oil equivalent (Boe), which is a 60% increase on what it estimated it could get out of its stake in the Niobrara a year ago. The Niobrara formation in northeastern Colorado was believed to hold about 2 BBoe.

Noble plans to ramp up drilling activity in Niobrara in the wake of its higher estimates and has identified 9,500 horizontal well locations and intends to drill more than 500 wells a year by 2017.The Niobrara “has evolved into a top-tier U.S. oil play,” Davidson said, and he expects it to yield net horizontal production of 175 million Boe a day by 2017

The Competition

Like Noble, there are several other energy producers who are concentrating on their assets in the US.

Anadarko Petroleum (NYSE: APC) has recently provided an operational update on its core assets - Wattenberg in Colorado, Eagleford Shale in Texas, Greater Natural Buttes in Utah and Marcellus Shale in Pennsylvania - with output from each surpassing the gross production mark of 100,000 barrels of oil equivalent per day (BOE/d) during November 2012.

Marathon Oil (NYSE: MRO) spun off one of its business units about a year ago. Marathon Petroleum focuses on downstream operations and petroleum assets, while Marathon Oil specifically targets U.S. shale oil. In 2013, approximately one third of Marathon Oil's $5.2 billion budget will be spent on Eagle Ford.

ConocoPhillips’ (NYSE: COP) budget for 2013 is over $15 billion, roughly the same as 2012. It has been selling underperforming assets and intends to raise as much as $20 billion in three years to concentrate on less risky and more lucrative North American projects, particularly unconventional shale.

Zacks has reiterated its "Neutral" recommendation on Plains Exploration & Production (NYSE: PXP) because of stringent regulations, volatile commodity prices and unfavorable drilling results. However, it expects that the company’s strong balance sheet and liquidity position, strong asset rebalancing strategy and liquid-rich profile, will to some extent offset the negatives.

Rating Changes

Sterne Agee equity analyst Tim Rezvan cut his rating for Noble to "Neutral." He noted that the five-year growth plan announced last week is "impressive," but it's already properly factored into the stock's price. He also removed his $109 price target for the stock by saying that the long-term prospects look good, but its profit predictions for the fourth quarter and 2013 were lower than he expected.  He is also wary of the large exposure to the Middle East among rising tensions in that region. Analyst Stephen Richardson at Deutsche Bank Securities has reiterated a "Buy" rating on the shares of Noble with a 12-month target price of $117.


Noble is currently trading at around $104.59, close to its 52-week high of $105.46. On the basis of its 2013 guidance, I believe that that the stock is fully and fairly valued and that there is a very limited upside to the price. Accordingly, I rate this stock as a "Hold."

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