Noble’s Merger With Rosetta Opens Door To Opportunities, Questions

Noble Energy Inc.’s (NBL) $3.9 billion deal to merge with Rosetta Resources Inc. (ROSE) may augur in a new wave of mergers and acquisitions, but it’s also a way for Noble to address questions about its assets.

Noble has seen its fortunes falter after a CEO transition, continued outspend compared to cash flow and even skepticism about its portfolio, said Bob Brackett, senior analyst, Bernstein Research. The deal to buy Rosetta may also be a sign that the company’s confidence in the Denver-Julesburg (D-J) Basin is mellowing.

But the deal will also set a benchmark for U.S. industry consolidations, said Paul O’Donnell, analyst, IHS Energy.

“The Noble–Rosetta deal is an all-stock transaction that hits on many of the themes we at IHS Energy have been highlighting as catalysts for M&A activity in 2015, particularly corporate consolidation within the E&P sector,” O’Donnell wrote in a May 14 report.

Larger, well-capitalized companies such as Noble should take advantage of their equity pricing power to acquire smaller, financially distressed peers as a means of gaining entry or expansion within key unconventional plays.

The deal gives Noble entry to the Eagle Ford and Permian through the merger and access to Rosetta’s 282 million barrels of oil equivalent (MMboe) of proved reserves. That will increase Noble’s 1,404 MMboe of proved reserves by 20%.

Since the downcycle, Brackett said Noble has lost its “preferred status” and underperformed EOG Resources Inc. (EOG), Apache Corp. (APA) and Devon Energy Corp. (DVN). He speculated that underlying Noble’s deal is a tacit admission that its assets in the Niobrara aren’t the prime acreage the company has touted.

Noble also controls assets in the Marcellus and Israel, but progress in Israel is stalled.

Brackett asked Kenneth Fisher, Noble’s CFO, how an “individual Eagle Ford well or Permian well would compare to the before-tax rate of return of a D-J Basin long lateral?"

Fisher answered that the Lower Eagle Ford wells are comparable “to a lot of what we're doing in the D-J Basin."

Brackett’s assertion is that Rosetta is an average Eagle Ford operator and that Noble’s D-J Basin acreage wouldn’t compete with an operated well that was above average in the Eagle Ford.

He also noted the merger doesn’t focus on value creation. Noble said the deal will create some efficiency but wasn't driven by corporate costs.

However, O’Donnell noted that more than 65% of Rosetta’s 2015 production is hedged and could add $24.50 per barrel (bbl) of oil, $4.50/bbl of NGL, and $0.65 per million cubic feet of gas to its realized prices.

O’Donnell views Rosetta as a top performing operator in the Eagle Ford, where it has 50,000 net acres. However, about a third of its production is weighted toward lower-value NGL.

“Its recent performance in the Eagle Ford has been encouraging, particularly at Gates Ranch Field, where it recently begin production on a well using a new completion design,” he said. “Also impressive were three wells recently completed in the [Permian’s] Wolfcamp A bench in the Delaware Basin, signaling improvement in a play where Rosetta has been slow to impress.”

O’Donnell said Rosetta has been a prime acquisition candidate since March 2015 because of its high ratio of debt-to-appraised-worth of assets and attractive assets.

Outside of the Eagle Ford, Rosetta also has some of the best performing wells in the Delaware Basin. The company controls 46,000 net acres as well as 10,000 net Midland Basin acres.

David Stover, Noble’s president and COO, said that within the Rosetta assets, “we see the ability to grow over the next several years at about a 15% compound annual growth rate, and to do it within cash flow. And that's important, because we are not taking away from any of the other high-quality assets that we are developing in our existing portfolio.”

Brackett said that the Rosetta portfolio will sit within Noble but execute its own plan.

Ultimately, that means prior to the merger, “investors could choose to own NBL and/or ROSE and achieve the same result without a dilutive 30% premium,” he said.

“We remain on the sidelines for now despite the dip, going with the market in terms of skepticism over NBL's existing asset base and await more certainty,” Brackett said.

Noble’s enterprise value to EBITDA (EV/EBITDA) ratio has fallen while its price to 2016 consensus cash flow (P/cf) is now average among its peers, Brackett said.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.