EUR 850.00 For Business Accounts Only

Morningstar | Noble Hits High End of Guidance in 3Q and Looks Ahead to Leviathan Startup. See Updated Analyst Note from 02 Nov 2018

Noble delivered production of 345 mboe/d in the third quarter, which was 2% higher sequentially and at the high end of prior guidance. Management expects fourth-quarter output to stay around that level, with growth in the DJ Basin and West Africa offsetting declines in the Eagle Ford and Israel (the latter is a seasonal effect, as overall demand is still growing). Full-year guidance was unchanged, although we note that the midpoint of fourth-quarter guidance implies full-year volumes will end up at the low end of the range. In any case, the firm’s financial results were generally consistent with Street expectations, with adjusted EBITDA and adjusted earnings per share coming in at $741 million and $0.27 respectively (consensus estimates were $739 million and $0.22). After incorporating these results we have nudged our fair value estimate to $27 per share from $26 (still slightly below the market price).

On the conference call, management gave further color on its marketing plan for gas from the Leviathan field, which is due online late 2019. The firm disclosed the indirect acquisition of a 10% stake in a pipeline from Ashkelon (Israel) to El Arish (Egypt), through the purchase by the Leviathan partnership of a stake in pipeline operator Eastern Mediterranean Gas (EMG). This will result in firm capacity of at least 350 bcf/d, which equates to 30% of the expected capacity of Leviathan. From Egypt, much of this gas will be exported globally using spare capacity on liquefaction facilities there. However, management noted that the EMG pipeline also enables the partnership to utilize the Aqaba-El Arish pipeline, providing marketing optionality (to Jordan, and potentially Turkey, though the necessary extension via Syria is far from a sure thing). The EMG pipeline has been targeted by terror attacks in the past, when carrying gas the other way (from Egypt to Israel).

Noble’s management team also expressed confidence that Proposition 112 will fail to pass in Colorado (the vote takes place on Nov. 6). Otherwise, the resulting legislation would prohibit fracking operations within 2,500 feet of most buildings, parks, and bodies of water and severely restrict oil activity throughout the state. If the measure does pass, the maximum impact would be $3/share, which is the combined value of the firm’s undrilled inventory there. However, the market is presumably pricing in some of that risk already, and Noble has been proactive permitting drilling locations ahead of the vote to protect as much of its inventory as possible (ensuring that activity won’t grind to an immediate halt). We suspect Noble’s claim that its acreage is concentrated in rural areas is overly optimistic, as the Colorado Oil & Gas Conservation Commission estimates that 94% of the land in oil-producing counties would be off-limits. However, some portion of its leasehold would probably remain drillable in the worst case.

For now, our valuation assumes the proposal is defeated.