Noble Energy’s (NBL, Financial) business is diversified between US shale assets, Eastern Mediterranean gas and West African operations. The company demonstrated strong operational performance in the US and, prior to the oil price war, we believe was on the brink of a significant cash flow inflection point coming in 2020 as a large Middle Eastern gas asset, Leviathan, went into production. The company also has a substantial hedge position for 2020. While we believe the company’s goal of $500mm in 2020 FCF has been postponed, we believe the company has the ability to further reduce its capital expenditures in US Onshore operations, far more so than companies whose cash flows come purely from these assets. We think the prospects look much better for 2021 though. US onshore capital expenditures should be managed to a number that makes sense at the existing oil price. We believe Leviathan should be operating at full capacity with contracts with likely $5+/mmcf16 floors. Finally, the company is expected to finish its West African natural gas monetization project in early 2021 resulting in $200mm+ in FCF change vs 2020.17 Adding any recovery in oil prices and we think the risk/reward seems very favorable. The trick is to survive to that point, yet NBL has $4.4bn of liquidity,18 no substantial debt maturities until 2024 and 62% of its debt is not due until after 2041.19 We believe we will see this company on the other side of the oil price war and it will be in a much stronger position.
From FPA Capital Fund (Trades, Portfolio)'s first-quarter 2020 shareholder commentary.
