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Anthony Citarrella

NBL AT A GLANCE

P/E ► 68.2 HIGH EV/EBITDA ► 14.2 AVG ROA ► 2.1% AVG ROE ► 2.7% AVG Debt to Equity ► 0.889 AVG Current Ratio ► 1.77 AVG Interest Coverage Ratio ► 2.72 AVG

 

 

 

 

 

 

Noble Energy Inc. is an internationally diverse player in the oil and natural gas industry. With operations throughout major basins in North America, West Africa, the Mediterranean Sea, Ecuador, the North Sea, China, Argentina, and Suriname, Noble Energy is geographically more diversified than many of its competitors.^[1] In addition to Noble Energy's vast geographical presence, their operations are also more broadly focused. The projects they take on range from low-risk onshore drilling sites to higher risk deepwater and unconventional natural gas deposits.

Strategic Overview

Simply put, Noble Energy's acquisition and drilling strategy is aggressive. Over the past several years, their strategy has enabled them to build a portfolio that is diversified in nearly every sense of the word. Their portfolio is geographically vast, strategically dynamic, and takes on a broad spectrum of risk.

Noble Energy began operating exclusively on onshore North America. Today, as a result of depleting domestic reserves, they have ventured overseas and into more risky offshore plays such as the Gulf of Mexico. Although the mature holdings, such as continental North America, have historically provided reliable production, reserves are diminishing and the company is shifting their focus towards new deepwater initiatives. So far, with 21% of 2006 domestic production coming from Deepwater Oil Exploration,^[2] management has been relatively successful in the higher risk, offshore arena.

Overseas, the majority of the companies production comes from Equatorial Guinea and Israel. With 51% and 24% of respective international production volume,^[3] the company also operates both on and offshore in these regions.

Financial and Operating Metrics

Below are relevant operating data for the company. Note that Noble Energy has benefited from increasing oil & gas prices, and as a result has demonstrated consistent growth in revenue and operating profit, with operating profit tripling over the past three years.

As shown below, the company has a geographically diversified portfolio. With nearly a one-to-one domestic to international proved-reserve ratio, they have recently been tackling more risky projects overseas in order to make up for depleting domestic reserves. At the beginning of 2007, 55% of proved reserves were located in the U.S. and 45% were overseas. ^[4]

Trends and Forces

• Rising Oil and Gas prices. The company is highly dependent on favorable market prices for oil & gas, which tend to fluctuate significantly over time. ^[5]Recently, rapidly increasing demand for energy coupled with constrained supply has led to high oil and gas prices, lifting the stock prices of oil & gas companies across the board. Countries like China, for instance, have (no pun intended) fueled much of this energy demand. The company's bottom line and margins generally benefit from increases in the prices of these commodities as operating expenses remain more or less fixed. Increases in the prices of oil and gas are not, however, without negative side effects. Because drilling for oil and gas becomes much more profitable when prices are on the rise, the company faces stiffer competition for the acquisition of land or mineral rights to oil- and gas-rich properties. These properties' market values rise in virtually direct proportion to the rise in the value of the commodities under them, which cuts into the company's possible return on investment. A similar phenomenon can occur in buying or leasing drilling equipment, as prices are driven by eager competitors bidding them up in order to drill for the commodities. Furthermore, the company usually hedges the prices at which it can sell oil & gas. By use of derivatives, the company attempts to lock in a price or a range of prices, which limits downside but also presents an opportunity cost if oil prices rise significantly over the lives of contracts. ^[6]

• Hybrid and Alternative Energy Technology - Rising oil prices have led both consumers and companies to seek out alternative sources of energy and to invest in renewable energy such as nuclear, solar, wind, biofuels, and ethanol technologies. As global consumer demand shifts toward renewable energy sources and incentives to develop long-term solutions to the world's dependence on oil and gas become stronger due to recent environmental concerns over climate change, consumer consciousness and the entrepreneurial profit motive may adversely affect the oil and gas industry. With the advent of hybrid and fuel cell vehicles and the cost of gasoline becoming quite high, consumers have become less inclined to purchase gas guzzling SUVs as opposed to more fuel-efficient cars. As a result, the company stands to face long-term materially adverse effects if the oil and gas industry encounters a decrease in demand.

• Deepwater Oil Exploration. Traditional oil producing basins have matured, particularly on land, and oil exploration and production companies have started to look for new reserves in more challenging, deep-water environments. The recent increases of oil and gas costs have enabled offshore drillers to engage in deepwater oil exploration that was once too expensive to pursue. Moreover, as oil and gas prices continue to rise, the economic incentive to develop new technologies increases as well. The prospect of oil exploration and production is more economically feasible than ever due to substantial returns companies are enjoying because of higher energy costs. Off-coast drilling also involves much more physical risk. Noble Energy's strategy has clearly been affected by this trend as many of their recent overseas acquisitions involve higher than usual risks. Although this can help ease the blow from depleting domestic reserves, Noble Energy is a relatively small player in the international arena. As a result, they have a greater emphasis on their resources and must be able to effectively and economically allocate administrative responsibilities and expertise across the variety of operating segments.

• OPEC. The Organization of the Petroleum Exporting Countries, (OPEC) plays a key role in promoting profits for the oil industry. The countries in OPEC limit oil production, artificially creating shortages and raising prices. Artificially high oil and gas prices are important to the company's profitability because these resources are commodity goods, making their markets subject to volatile price cycles and harsh price competition. With artificially low production, prices remain volatile but also high, thus creating larger profit margins for all oil and gas companies.

• Regulatory Risks. In 2006, the government of Equatorial Guinea passed a law that empowers the agency to renegotiate any existing petroleum contracts. ^[7] As a result, the economic impact on their primary international site remains unclear.

Competition

As a seller of a commodity product, the company operates in a highly competitive environment in which all firms are price-takers, selling their oil and gas production at given market prices. Firms generally compete on their ability to drill efficiently and earn high returns on investment through intelligent property acquisition and operational prowess. Scale does matter some, as companies with greater production levels and revenue can generally cover many administrative expenses over a wider base of properties, which again, is becoming more of a challenge as Noble Energy expands through acquiring new sites and exploring new technologies.

Footnotes

1. ↑ NBL 2006 10-K "Business" pg 1
2. ↑ NBL 2006 10-K "Business" pg 8
3. ↑ NBL 2006 10-K "Business" pg 10
4. ↑ NBL 2006 10-K "Business" pg 1
5. ↑ NBL 2006 10-K "Risk Factors" pg 19
6. ↑ NBL 2006 10-K "Business" pg 16
7. ↑ NBL 2006 10-K "Business" pg 10
8. ↑ MMcfe/day, or millions of natural gas cubic feet equivalent, is a measure of the level of production per day that converts oil into the energy-yielding natural gas equivalent using a ratio of 6 to 1 (natural gas to oil)