A Promising Development for Noble Energy

This past weekend, Noble Energy signed a 20-year agreement to supply $1.2 billion worth of natural gas from Israel's offshore Leviathan gas field to the Palestine Power Generation Co. (PPGC).

Noble and its partners, Delek Drilling, Avner Oil Exploration, and Ratio Oil Exploration, will sell as much as 4.75 billion cubic meters (bcm) of natural gas from Leviathan to a plant that PPGC will build in the city of Jenin, located in the Palestinian-controlled northern West Bank.

Leviathan, which Noble discovered in 2010, is estimated to hold as much as 19 trillion cubic feet of natural gas and is one of the largest deepwater gas discoveries of the past decade. Production from the field is expected to commence in late 2017. Noble will serve as the field's operator, with a 39.66% stake, while Delek Drilling and Avner Oil Exploration each hold a 22.67% interest, with Ratio Oil Exploration accounting for the remaining 15%.

A big step for Noble
Analysts looked favorably on the deal, which marks the first long-term agreement to export gas from Leviathan to surrounding markets. According to Oppenheimer's Fadel Gheit, Noble will generate stronger returns by selling gas to nearby Middle Eastern countries, as opposed to exporting it to more distant markets, because of the relatively lower capital investment involved.

Supplying areas like Palestine or Jordan would only require constructing "a few miles of pipeline," which would be significantly cheaper than building liquefied natural gas export facilities to ship the gas to Europe and other more distant regions, he said in a recent interview.

In addition, the metrics of the deal came in better than expected. A supply commitment of 4.75 BCM of natural gas at a price of $1.2 billion implies that Noble and its partners will receive roughly $7.15 per Mcf, or thousand cubic feet, of natural gas. That's markedly higher than the $6.25 per Mcf that analysts expected, according to a recent note by Tudor, Pickering, Holt.

Overall, Noble's opportunity in the eastern Mediterranean is truly phenomenal. In addition to Leviathan, the company boasts large stakes in the Tamar gas field off the Israeli coast and Cyprus' Aphrodite field, which represent a combined resource potential of roughly 40 trillion cubic feet. As these fields are developed over the next several years, they should generate strong returns and cash flow for the company, assuming cost overruns and delays can be avoided and Israeli export policies remain favorable.

Noble's other opportunities
But Noble's not just a one-trick pony. It's also got a sizable portfolio of onshore U.S. assets, primarily in Colorado's DJ Basin and Pennsylvania's Marcellus Shale, which provide a strong and stable production base. Roughly 70% of the company's 2014 capital budget will be allocated to onshore U.S. plays.

In the DJ Basin, the company should benefit from a recent acreage swap with Anadarko Petroleum that gives it a more contiguous land position in the play, as well as efficiencies resulting from centralization of field facilities and less sand work. With plans to drill roughly 320 operated horizontal wells in the basin, Noble expects production to grow by at least 20% this year.

In the Marcellus, the company should continue to benefit from drilling longer laterals in the wet gas region of the play, which resulted in 50% sequential production growth during the third quarter. It also reported solid production figures for wells drilled by partner CONSOL Energy in the dry gas region of the play, thanks in part to using shorter spacing between frac stages. The joint venture partners expect to drill 170 Marcellus wells this year.

Sitting pretty
Having secured its first long-term agreement to supply gas from Leviathan, and with more agreements to supply either Israel or other nearby markets likely to be announced this year, Noble is sitting pretty. With several years of inventory across the U.S. and the eastern Mediterranean, as well as exciting exploratory prospects in Equatorial Guinea and the Gulf of Mexico, Noble is poised to deliver peer-leading production growth over the next several years that should handsomely reward its shareholders.