In what has been an extremely iffy year for the E&P sector, Noble Energy (NYSE:NBL) is an outlier in many respects. Not only has the stock done quite well over the past year, but that's even with a gas-heavy reserve base and exposure to the Gulf of Mexico – two things that the market has really soured on in general.
Clearly this is a situation where digging a little deeper is warranted. Noble Energy is doing so well in part because of its very successful drilling program in northern Colorado, it's large gas discoveries off the coast of Israel, and a very compelling outlook for debt-adjusted production growth over the next three to five years. Honestly, the question today doesn't seem to be so much about whether Noble is a top-notch emerging mid-tier energy company, but rather what to pay for all of that.

SEE: Oil And Gas Industry Primer
Oil And Gas, In The Right Places
Noble is still on the smaller side of the “large independent E&P” space, with its 1.2 billion (oil-equivalent) barrels of reserves putting it well behind the likes of Apache (NYSE:APA), Chesapeake (NYSE:CHK), Anadarko (NYSE:APC), and EOG (NYSE:EOG). What's more, it's a gassy company with a lot of development work still to do – about 70% of the booked reserves are natural gas and only about 40% are developed.
But I'm going to argue that this is a case where the numbers don't necessarily tell the full story, or at least not without more digging.
A large chunk of those reserves (nearly 30%) are in the Wattenberg part of the DJ Basin (Colorado), and this has already been shown to be a very high-quality oil formation. Not only has Noble seen good results here so far, it appears as though the resource potential for Noble's acreage could be six times the booked reserves figure (or 2.1B barrels BOE).
Noble has also made major discoveries off the coast of Israel, where it has nearly 400M barrels BOE (or 2.2Tcf) of natural gas reserves across multiple fields. Although U.S. natural gas is none too popular today because of its low price, these fields can send gas to the much higher-value markets of Europe and Asia, and a recent decision by the Israeli government will allow Noble and its partners to export up to 40% of the gas they produce from these fields.
SEE: A Guide To Investing In Oil Markets

Cash Flow Coming, And It Will Be Reinvested At Least In Part In Growth
Between the Wattenberg properties and the Israeli gas fields, Noble is looking at some major production and cash flow growth in the coming years. At least some of this is likely to be reinvested in the business. Noble has exploratory assets in areas like the Faulklands and Western Africa that are worth drilling and should further expand the company's reserve base. What's more, I believe further development and exploration around existing properties in Colorado and Israel is likely to significantly grow the reserve base over the coming years.
A Smart Player
It's not just Noble's reserves and debt-adjusted growth potential that appeal to me. I also like how management structures the company with respect to risk and return maximization.
The company's Wattenberg resources require more expensive drilling procedures (fracking and so on), but experience has generally shown that you get what you pay for – skimping on stages or proppant hurts overall returns. So here is a case where they need to spend money to make money.

On the other hand, the company has de-risked both its Israel and Marcellus assets. Through its Marcellus joint venture with CONSOL (NYSE:CNX), Noble's obligation to help pay for drilling (the “carry payments”) are suspended when natural gas prices are below $4. In Israel, Noble has sold part of its interest to Woodside to not only reduce its capital commitment and diversify risk, but also bring in a company with significant experience in the natural gas world.
The Bottom Line
The only hang-up for me with Noble is what the proper multiple to pay may be. Noble clearly trades at an EV/EBTIDA premium to its comp group, which seems reasonable given its above-average growth potential. Still, it's a question of degree – if Apache is trading below 4x its forward EBITDA and Anadarko and EOG around 5x, what's the right number for Noble? Based on the history of the sector, I'd say 6.5x is about as far as it should go (which suggests a $67 fair value), but then Noble is clearly on the very high end of “above average” in terms of its prospects.
In any case, I would point out that investors may also want to check out high-quality names like Apache, Anadarko, EOG, and Whiting (NYSE:WLL) alongside Noble (with the second and fourth names also exposed to the Wattenberg). I do like Noble and I suspect this could be a case where loosening up on price/value discipline could pay off, but perhaps the shares need to cool off a bit first.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Stock Analysis

    The Top 5 Oil and Gas Stocks for 2016 (XOM, BP)

    Read detailed analyses of the top five oil and gas stocks, and learn why they may be poised to rise in 2016 after a dismal 2015.
  8. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  9. Investing News

    5 Stocks to Buy Before Oil Rebounds

    Here are five oil related stocks that you might want to own before oil rebounds.
  10. Investing

    Credit Suisse Losses: Indicating Bigger Trouble? (CS)

    The banking sector's dependence on the energy sector is just one of many factors that have experts worried about the banking industry's performance.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center