We no longer think rig count increases are realistic, and we put the new fair value estimate at $26.
By Dave Meats, CFA | 08-07-17 | 08:28 AM | Email Article

 Noble Energy delivered production of 408 thousand barrels of oil equivalent per day in the second quarter, which was 8% higher sequentially and within guidance. The growth was driven by record highs from several key assets, including the Eagle Ford, Wells Ranch and East Pony (DJ Basin), and the Tamar field (offshore Israel). The Delaware Basin asset, recently augmented by the April closure of the Clayton Williams acquisition, also performed well with total volumes of 23 mboe/d (only 9% of the onshore total currently, but 64% higher sequentially with further growth planned in the second half). Financial results exceeded expectations, due to improving crude realizations (particularly in the U.S. onshore area) and declining operating expenses. The latter was attributed to lower workover activity in the DJ Basin, although the sale of the lower-cost Marcellus asset at the end of the quarter will push up unit costs for the rest of the year. Capital expenditures are now expected to come in at the high end of prior guidance, owing to spending being pulled forward on Leviathan and midstream investments in the Permian.

David Meats, CFA, is a senior equity analyst for Morningstar.

Highlighted results from onshore drilling were generally positive, especially in the Delaware. The firm's average cumulative production (at 120 days in the Wolfcamp A zone) is higher than its 1.2 mmboe type curve, and selected Wolfcamp B and C wells support higher type curves as well. Enhanced completions are also driving outperformance in Wells Ranch and East Pony (in the DJ Basin). Unfortunately, these advances have been mirrored by numerous peers, driving down the marginal cost of supply. As the U.S. is the swing producer in our global supply and demand framework, that weighs on our oil forecasts and caps our midcycle estimate at $55/bbl (WTI). In that environment, the rig count increases that we previously assumed for Noble no longer look realistic, and tempering these forecasts weighs on our valuation. Our new fair value estimate is $26 per share.

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