Noble Energy Set To Develop Natural Gas Fields In Israel

Noble Energy (NBL: NYSE) shareholders breathed a sigh of relief recently as wind of a big deal with the Israeli government spread. Jefferies Group views the stock as a hold and they have it at a price objective of $38 – marginally lower than the $40 level it was at previously. The company’s stock was 0.83% lower midday Friday (August 14, 2015) when it traded at $35.70 and over 1.551 million shares traded hands. At current prices Noble Energy has a market cap of $15.06 billion, a price/earnings ratio of 19.63 and Earnings per Share (EPS) of 1.80.

The oil and gas development stock is trading just above the company’s 52-week low of $35.19 at $35.44. Analysts have rated this stock at 2.2, with 1.0 being a strong buy and 5 being a sell. The 1-year price target is $51.44 and the past three recommendations for the year have flitted between Reduce (April 22, Nomura), to Buy (May 19, Global Hunter Securities) to Neutral (June 9, Nomura). Two of the last three actions have been upgrades.

Oil Price Futures

During Friday’s trading session, oil prices bounced after falling to their lowest level in over 6 years. WTI was trading at $42.50 on the Nymex, while Brent Crude Oil for September delivery was trading at $49.03 – down $0.19. In coming weeks, the supply of crude oil on the markets is expected to increase, as OPEC countries press ahead with production. The number of U.S. oil rigs in production increased by 2 to end at 672 on Friday August 14.

The oil supply glut will continue, despite historically low prices. This is going to add further downward pressure on the price of this commodity. Lower prices translate into lower revenues and this will become a major disincentive for processing crude oil. This will increase oil inventories over the medium-term. But ultimately, we’re looking at a decreased rig count, decreased global supply and a higher price for crude oil.

Noble Energy, Inc. has gained some traction with buyers recently, and the share price crept as high as $37.10 for the day’s high on Friday 14 August. Meanwhile, the agreement with the Israeli government to develop its natural gas fields is expected to reel in investors. Among others, the government is expecting the following:

• Expedited shipping of natural gas to Egypt and Jordan
• A cash injection of billions of shekels (NIS) into government coffers via royalties and tax revenues

Already news of the impending development sent the Tel Aviv Oil and Gas Index to its highest level in almost 2 months (+5.9%). Noble Energy, Inc (NBL) will be reducing its ownership interest in the Tamar gas field and the Delek Group Ltd will sell off all of its ownership in the gas field at Tamar. According to the terms of the deal, a price ceiling will be fixed and full regulation of gas prices will be established. This is likely to draw the ire of many in Israel who oppose price-fixing in the country’s vast gas and oil industry. As an example of this, the country’s antitrust head, Mr Gilo resigned his post to protest the framework agreement.

Tamar Rig

But there are valid concerns about the profitability of the new partnership. The drilling companies that initially discovered the oil and gas fields are hard-pressed to profit over and above their exploratory costs. Unless they can turn a profit, it remains to be seen whether Delek Group Ltd. (DGRLY) will be in the red or the black after the ink has dried. The problem is that agreements were struck between the Israeli companies and other European and Middle Eastern countries – but these are now uncertain against the backdrop of new arrangements.  Egypt raised the gas price to $5.88 per Btu, and Israel wants to lower the price to $5.20 per Btu.

My forecast for the deal is more optimistic for the Delek Group than it is for Noble Energy, Inc. (NBL). Three sticking points remain:

• The Leviathan reservoir
• The price of the natural gas
• The stability clause which prevents major Israeli government regulation changes vis-à-vis natural gas through 2025

Noble Energy, Inc. stock prices remain depressed by the current oversupply in the natural gas and crude oil market. With the supply glut expected to continue, the deal with Israel is unlikely to boost prospects for the stock very much. Hold the stock, but wait for the markets to calm. Commodities have a ways to fall before the reversal.