Noble Energy, the key player in the Israeli gas industry as operating partner in the Tamar and Leviathan natural gas fields, is facing a financial crunch just as it is about to embark on a multibillion-dollar investment to bring Leviathan into production.
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Developing Leviathan – by far Israel’s biggest gas reserve – will cost between $5 billion and $6 billion. Noble’s share amounts to $2.5 billon, with the rest coming from its Israeli partners, led by Yitzhak Tshuva’s Delek Group.
Raising its share of the capital costs would increase Noble’s debt load by more than a third. And with its bonds trading at yields of 7.5% at a time when the company is suffering diminished cash flow, will make any borrowing costly – if possible at all.
The Houston-based company, which is also the lead partner in Cyprus’ Aphrodite gas field, has been squeezed by plunging global oil prices and growing debt after it bought the U.S. company Rosetta Resources.
Noble’s problems have seen its share price tumble by two thirds in the last 18 months, tracking the steadily falling price of petroleum. The stock bottomed out last week at $25.82 when the price of oil dropped to a 13-year low, although it has clawed back some of the loses and yesterday afternoon local time in New York was trading at over $28.
Noble’s latest financials, which are from the third quarter (with full-year results due to be published February 17), showed it was selling its oil at an average of just $47.79 a barrel in the first nine months of last year, less than half the price it was getting the same time in 2014 – and all prices have fallen further since then.
That cut revenues by 51% in the first nine months to $1.35 billion and left Noble with an operating loss of $761 million. Cash flow was likewise almost halved to $1.4 billion while earnings before interest, taxes, depreciation and amortization plummeted to $479 million in the third quarter, compared with as much as $900 million a quarter in 2013 and 2014.
Noble’s leveraging is not terribly high by the standards of a medium-sized American energy company, which is reflected in the yields its bonds trade at. Those have jumped 200 basis points since the middle of 2014, but at 7.5% they signal that the market isn’t yet concerned about default.
But Noble’s debt increased sharply last May when it bought Rosetta for $2.1 billion, a move characterized by one analyst as Noble’s biggest mistake ever. The company made the acquisition when oil was $60 a barrel and took on $1.8 billion of extra debt in the process.
Rosetta was supposed to give Noble a foothold in the emerging fracking segment. The trouble is that fracking now sits at the epicenter of the global oil crisis because with oil trading at about $30 a barrel, it’s hard to make money.
The extent of Noble’s problems was delineated in a report on the oil companies issued by the credit rating agency Moody’s Investor’s Service last month, which listed the company’s Baa3 credit rating among those likely to be downgraded.
Oddly enough, Noble’s Tamar holding is the jewel in its crown, as Nomura analyst Lloyd Byrne noted in a report last week when he upgraded Noble shares to a Buy from Neutral, with a $36 price target
“Given NBL's asset quality and financial positioning, we believe the company sits squarely in the ‘survivor’ camp,” he said, noting that prices for Tamar gas contracts, unusually, are not linked to the global price of oil, but to the U.S. consumer price index.
Noble could finance Leviathan by selling assets. It sold 35% of Aphrodite to BG Group in November and later the rights to sell the tiny Israeli Tanin and Carish field to Delek. Under the gas framework agreement with the government it has to divest 11% of its Tamar holding and could dilute its stake in Leviathan, too.