Oil price slide leaves Noble Energy vulnerable

Tamar

If one of the energy giants snaps up Noble, Israeli regulators will face a much stronger negotiator.

A leading Israeli businessman, with extensive experience in the American stock market, recently remarked to close associates that Noble Energy would soon lose its independence. In his analysis, the collapse of global crude oil prices since June 2014 which led to a sharp drop in the share value of oil and gas exploration companies, burdening some of them with severe financial difficulties will lead in the near future to a consolidation in the American drilling industry.

The same businessman who does not work within the energy sector believes that if and when consolidates starts, the giants, like Chevron and ExxonMobil, willsnap up companies the size of Noble, which are heavily discounted because of the current crisis.

Such acquisitions will enhance the energy giants with quality assets, specialists, and of course the opportunity to reduce competition in certain geographic areas. On the other hand, Nobles operations in Israel could deter buyers with business interests in Arab countries.

Noble Energy, which peaked at a marketcap of $29 billion only a year and a half ago, has seen its share price drop 67% and itsmarket capsink to $11 billion. The figure would have been even lower had the company not raised $1.1 billion in a share offering last February at a price 73% higher than the price at which it was tradedlast week in New York.

Noble is the primary partner and sole professional operator of Israeli gas reservoirs in the Mediterranean Sea. The company currently holds 36% of the Tamar reservoir (which supplies natural gas to Israel) and 39.7% of the Leviathan reservoir (which remains undeveloped); its main partner in both reservoirs is Yitzhak Tshuvas Delek Group.

For now, it is impossible to know whether the aforementioned businessmans forecast for Noble will come true, but if it does, Israeli regulators will face off in the not-so-distant future against business interests with much more influence and power than those wielded by Nobles executives, and any negotiation (or legal battle) will become much more complicated.

Into the red

In less than a month, on February 17, Noble Energy will release its financial results both for the fourth quarter of 2015 and the year alongside a presentation with key notes on its operations. The collapse of the crude oil price since summer 2014 caused the company to show a 43% decrease in revenue in the first nine months of 2015 down to $2.3 billion with a loss of $413 million.

Yet in the first nine months of 2014, Noble earned $811 million.

Meanwhile,cash flow from its operations shrunk in the first nine months of 2015 by 56% to $1.5 billion comparedwith thecorresponding period in the previous year, while the deficit in free cash flow almost doubled to -$900 million.

We should note analysts believe Noble will finish 2015 with revenue of $3.36 billion, a 34% decrease in comparison with2014.

The averageestimate for 2016 predictsgrowth of 21% in revenue, up to $4.05 billion, but it should be taken with a grain of salt given the sharp volatility in oil prices in recent months.

Noble, founded in 1932, holds 1.17 billion barrelsof proven reserves of oil and gas (as of the end of 2014) and specializes in search, discovery, and production of oil and natural gas. The company operates onshore drills in the US and offshore drills in deep water mainly in the Gulf of Mexico, the Atlantic Ocean off the shores of West Africa, and the Mediterranean Sea off the shores of Israel.

In the past year, the company has undertaken a number of major financial moves that attest to its attempt to maintain its independence: it raised the aforementioned $1.1 billion share offering; it acquired Rosetta Resources for $2.1 billion in shares and assumed the companys outstanding debt of $1.8 billion as part of the transaction; and, at the beginning of January, Noble said it received a three-year $1.4 billion loan for the purchase of Rosetta bonds of a similar valuecarryinginterest of 5.6%-5.9%.

Noble said the loan would increase its financial flexibility.

Meanwhile, the company is working to reduce its stock holdings as part of its effort to streamline its operations given the low energy prices. In the third quarter, such investments were reduced by 20% comparedwith the previous quarter, and chairman and CEO David Stover believes the moves will help the company show a balanced (or even positive) free cash flow in 2016.

The company currently employs some 2,700 workers.

The website Market Realist recently analyzed Nobles third quarter results to compare the economic value generated by its operations withits current market valuation. According to their analysis, the average price per barrel that Noble sold in the third quarter of 2015 stood at $43.3 a 55% decrease from thecorresponding quarter in 2014. Today, the price per barrel in the US stands at $28.

Furthermore, the price of natural gas produced and sold by Noble in the US dropped 41% in the third quarter compared to the respective period the year before, while the unit price for liquefied natural gas dropped even more significantly 75%.

However, it should be emphasized that early hedging of a sizeable portion of the production created a profit of $284 million in the third quarter, accounting for 36% of its operating revenue.

On the other hand, gas sales in Israel for the third quarter registered a light 4% drop in unit price compared withthe correspodningquarterof the previous year,Market Realist noted. In the conference call hosted by Stover after the third quarter results, the Noble chief said the company was committed to developing the Tamar reservoir in Israel, which provides it with relative stability in comparison withits revenue in other parts of the world.

The Rosetta Effect

The same analysis reveals that alongside the dropping energy prices hurting its profitability, the company must also deal with debts which have ballooned significantly after the Rosetta purchase as well as the increase in its financial leverage. Noble ended the third quarter with $1 billion on hand and long-term financial debt of $8 billion.

Therefore, as of the end of the third quarter, its net financial debt ($7 billion) is 4.4 times largerthan the annual EBITDA generated.

This ratio, which provides an insight into the number of years the company could service its debts at the current level of profitability, is significantly greater today than the historical average for Noble (1.5x) because of the increase in its liabilities and its lowered profitability.

The financialcommitments amount to65% of Nobles shareholders' equity,which stood at $12.5 billion at the end of September. According to the analysts at Market Realist, Nobles leverage is high compared with that ofsimilar companies in the industry, which they say is onereason thatthe company's share price lookscheaprelative to its competitors.

However, for giant investors not discouraged by Nobles current leverage, the acquisition could present a significant opportunity especially when oil prices stop sliding.

Delek shares drop 70% off peak

It is not only energy companies abroad which are suffering sharp drops. It hasbeen a rough period for shareholders of Delek Group, the largest and most successful exploration company in Israel. Delek shares have lost 30% of their value in the last year a drop of close to 60% fromthe peak in May 2014. The group currently has a market cap ofNIS 7.3 billion.

One reason for its decreasing share price is the heavy losses from its investment in securities, which stood at NIS 1.1 billion at the end of June 2015. The main component of the portfolio wasshares of international energy firms (as afr as is known, shares ofNoble Energy and Australian firm Woodside Energy).

Three months later, Delek was forced to announce athird quarter loss of NIS 336 million on thevalue of itssecurities.

For the first time, the decline in value wasrecognized in the profit and loss accountbecause of the significant, ongoing losses in the portfolio. Those positions yielded in the first nine months of 2015 dividends of NIS 45 million, meaning the economic loss was only NIS 291 million.

As of the end of September, the value of its sharesin foreign firms, mainly energy companies, stood at NIS 830 million. During the fourth quarter, the price of Noble Energy shares rose 8% in dollar terms, but the shares have since declined in value, by 15% since the end of September.

Woodside Energy shares are also traded today at 14% less (in Australian dollar terms) than their price at the end of September 2015, although the price was stablein the fourth quarter.

If the energy stocks do not turn around in the coming months, Delek may continue to write-down the value of its securities holdingsin the next few quarters, partly because of those investments.

Published by Globes [online], Israel business news - www.globes-online.com - on January 24, 2016

Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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