1. Oil and Gas Company Valuation
Noble EnergyTeam 4
2. EXECUTIVE SUMMARY (1 Page)
Valuation is the price that a reasonable person would pay to own the future cash flows of a business less
any debt owed plus all cash on hand.
However good our futures research may be, we shall never be able to escape from the ultimate dilemma
that all our knowledge is about the past, and all our decisions are about the future -Ian Wilson, American
scenario planning expert and strategy consultant. Every single business owner should know how much
their business is worth, because it’s the only measure that takes into consideration where your company
has been, where it is today and, most importantly, where it’s going in the future. At the end of the day,
each of us are in business to create value, whether it’s joining one, starting our own with a blank slate or
even acquiring one. The company’s value explains to you or investors nearly everything about your
business in one easy-to-understand number.
Earnings can be pliable as putty when a charlatan heads the company reporting them
Warren Buffett 1930American Investment Entrepreneur
There are many important reasons why a valuation is required. First, a business or company sale. Two,
Business planning and the making of future decisions. Three, determining tax obligations. Four, access
external sources of funding. Making any business decisions without a valuation report can be devastating
and can hurt the company terribly.
It is very important for companies of any size, industry or even their position to to be valuated and know
where they stand.
A valuation report is prepared for Noble Energy Company that operates in the oil and gas exploration and
production industry. Oil and gas industry is one of the fastest growing sectors in the United States and as
well all over the world. As world’s population continues to grow, energy demand will only increase.
Because of the fast pacing growth, capital spending, measures, and risk an accurate and reliable valuation
report is prepared for all oil and gas companies
This report on valuation for Noble Energy provides the following information:
1. A description of Noble Energy
2. An industry description including divisions of oil and gas businesses, growth developments,
pricing and risks in the industry
3. Drivers that causes of growth/expansion that impact the value of the industry and as well as the
hardships and risks that affect it
4. Financial data and performance measures of Noble Energy’s and its top competitors. Competitors
are identified: Devon Energy Corporation (DVN), Hess Corporation (HES), Marathon Oil Corp.
(MRO). Which are all under the Basic Materials Sector in the Independent Oil and Gas Industry.
These firms have the standard Industrial classification (SIC) code of 1311.
5. A core model integrating income statement, balance sheet, and cash flow statement, both
historical and projected
With providing you this information, this will provide the understanding of valuation for Noble Energy
and the oil and gas industry in whole.
3. DESCRIPTION OF COMPANY (1-2 Pages)
Noble Energy is a global independent oil and natural gas exploration and production company
with total proved reserves of 1.7 billion barrels of oil equivalent at year-end 2014 (pro forma for the
acquisition of Rosetta Resources). Exploration success includes offshore organic exploration leading to
major development projects; US and international projects; and production mix among crude oil, natural
gas, and NGLs. The company’s diverse resource base includes positions in four premier unconventional
U.S. onshore plays – the DJ Basin, Marcellus Shale, Eagle Ford Shale and Permian Basin – and offshore
in the U.S. Gulf of Mexico, Eastern Mediterranean and West Africa. With a highly transparent path
forward for delivering a decade of double-digit growth annually, Noble Energy has an outstanding record
among U.S. based energy independents.
Latest Developments and Accomplishments:
● Rio Grande Project - Three field discoveries planned for development in the Gulf of Mexico. (Big
Bend - 2012, Troubadour - 2013, Dantzler - 2013). Which are expected to deliver more than
25,000 Boe per day of new production when they come on stream in late 2015 and 2016.
● $4.9 billion capital investment program yielded strong results including delivery of record sales
volumes of 298,000 barrels of oil equivalent (Boe) per day, a 9 percent increase over 2013
● In the Marcellus Shale, due to increased drilling activity, total 2014 daily production doubled as
compared with 2013. We and our partner brought 129 new wells online.
Outlook for 2015:
The Company’s total capital program is estimated at $2.9 billion with 60 percent of total investment
planned for core U.S. Onshore assets, 35 percent for Global Offshore development activities and
approximately 5 percent for Global Offshore exploration. Which includes volumes of between 295 and
315 thousand barrels of oil equivalent (MBoe/d). This represents an approximate 40 percent reduction in
capital from 2014 and volume growth of 5 percent at the midpoint of the range, after adjusting for assets
divested in 2014.
Investor Information:
Noble Energy, Inc. NBL 2.57% shares are down 27 percent year-to-date, having declining
steadily since mid-April. Total sales volumes for the quarter climbed 25% to 379,000 barrels of oil
equivalent per day. For the latest quarter, Noble Energy reported a loss of $283 million, or a loss of 67
cents a share, down from earnings of $419 million, or $1.12 a share, a year earlier. Noble Energy’s high-
quality and diverse portfolio positions them to extend growth into 2016 at even lower capital levels than
4. this year.
INDUSTRY DESCRIPTION (1-2 Pages)
Petroleum is a naturally occurring liquid found in rock formations. Oil was formed from the
remains of animals and plants that lived millions of years ago in water environments, over the years these
remains were covered by layers of rock and mud. Oil and gas provide the world's 7 billion people with 60
percent of their daily energy needs. They keep us warm in cold weather and cool in hot weather; they
cook our food and heat our water; they generate our electricity and power our appliances; and they are our
means of transportation either by car, bus, train, ship or plane to places near and distant.
The main objective of the oil and gas sector is to deliver sources of energy. Activities divide into two
areas: exploration and production, and refining and marketing. Exploration and production includes
searching for new oil or gas fields, assessing whether they are viable for development and extraction.
Refining and marketing focuses on processing the raw product into a saleable form.
There are two types of oil and Gas Company, which include fully-integrated companies and independent
firms. Independent oil and gas producers are those companies that only explore and/or produce crude oil
and natural gas and fully-integrated companies are engaged in all aspects of the oil and gas industry from
exploration to marketing. Noble Energy which happens to be an independent firm searches for crude oil
and natural gas properties onshore and offshore, and seek to acquire exploration rights, conduct
exploration, and development drilling activities in numerous areas of interest. Fully-integrated firms tend
to include the more major oil companies such as ConocoPhillips, ExxonMobil, Shell and BP.
As a first step, companies in the oil and gas industry start by using technology to explore areas where
there’s possibilities of oil, acquire that area/land, and then drill and complete wells to extract them from
the reservoir to the surface using natural and artificial methods. This activity is usually referred to as
upstream oil and gas activity. Two which is referred to as the midstream activity, would involve
transportation. Which the oil would be transported to refineries by methods including tankers, trucks and
pipelines. Lastly which is referred to in the oil and gas industry is downstream which focuses mainly on
refining and distribution. The crude oil would be transported to refineries by methods including tankers,
trucks and pipelines. Refining creates economic value so at the refineries, the crude oil is converted into
finished products that are safe for consumers to use that include such as gasoline and heating oil.
Marketing services help move the finished products from energy companies to retailers or end users.
World energy markets are
continually expanding, and
companies spend billions of
dollars annually to maintain and
increase their oil and gas
production. Over 200 countries
have invited companies to negotiate for the right to explore their lands or territorial waters, hoping that
they will find and produce oil and gas, create local jobs and provide billions of dollars in national
revenues.
5. According to http://www.petrostrategies.org/Learning_Center/oil_and_gas_value_chains.htm ,
most profits are generated in the exploration and production stages. With high profits like that, there are
high risks involving them.
As of early 2015, the IEA Oil Market Report forecast average demand for the year of more than 93
million barrels of oil and liquid fuels per day worldwide – that works out to more than 34 billion barrels a
year – with January 2015 production totaling just over 94 million barrels per day.
NOBLE ENERGY, INC. SEGMENTS
Oil 66.16 % of total Revenue
Gas 29.45 % of total Revenue
Exploration & Production 98.9
%
of total Revenue
Other 1.1 % of total Revenue
Natural gas liquids 3.29 % of total Revenue
http://csimarket.com/stocks/segments.php?code=NBL
There is no guarantee that expenditures made on future exploration in the oil and gas industry will
result in new discoveries of oil or natural gas in commercial quantities. It is difficult to project the costs of
exploration drilling programs due uncertainties including: drilling in unknown formations and the impact
of changing drilling plans and locations. Future oil and natural gas exploration may involve unprofitable
efforts, not only from dry wells but possibly from wells that are productive but do not produce sufficient
net revenues to provide a reasonable rate of return on capital invested, after drilling, operating and other
costs are considered. Even Completion of a well does not always assure a profit on the investment or
recovery of drilling, completion and operating costs. Rapidly changing oil prices make it difficult to
examine the present value of assets for investment decisions on capital allocation, an acquisition or for
accounting impairment purposes. At times of high oil prices, refinancing existing debt either through bank
borrowings or issuing new bonds tends to be relatively straightforward. Oil and gas prices can be affected
by events that have the potential to disrupt the flow of oil and products to market, including political and
weather-related developments. Weather can also play a significant role in oil supply. For example,
Hurricanes in 2005 shut down oil and natural gas production as well as refinery.
Overall, a number of drivers, both national and global, impact the value and growth of firms
operating in the oil and gas industry.
6. DRIVERS OF GROWTH (1-2 Pages)
In the oil and gas industry, there are many factors that drive the growth in these companies and
their stock market value. The balance of supply and demand, demographic factors, the condition of the
global financial market as a whole, and the dynamics of the US dollar exchange rate all play a role in the
world’s oil and gas industry. In particular, there will be five main reasons that will be focused on which
include the growth and expansion of population and transportation infrastructure in countries, research
and exploration of non-conventional gas resources, technological breakthroughs and advancements,
international oil crises, and industrial risks.
Urbanization and Population Growth
Oil consumption is growing faster than oil production. The growth of population and consumer
class in developing countries and fast developing first-world country like Asia have supported the growth
of the oil industry. Urbanization and growth of the consumer class in developing countries will promote
the demand for real estate, infrastructure, cars, new technologies that will demand for energy resources to
keep up. The high demand for oil and gas internationally along with growing resources has shifted the
focus to target new uncharted areas in order to keep up with the continuously growing demand. By
utilizing these new unexplored resources, production can increase which in turn will close the gap
between demand of the customers and the supply of oil and gas. The main increase in consumption will
come from transportation sectors in developing countries. Thus, the continual increase of drilling in North
American countries won’t hurt the oil and gas market. However, ongoing trends such as the decrease in
US gasoline imports and the commissioning of oil refineries in the Middle East and Asia will have a
negative impact of European producers.
Research of Non-Conventional Resources
The last decade was characterized by the immense growth of exploration and oil production costs.
Oil companies are forced to invest in geological exploration, development, and production, which are
costing them three times as much in costs since the last decade. Because conventional gas resources have
depleted, the search and use for unconventional gas resources have increased. With that, the increase of
cost is a direct result of this depletion of conventional oil resource base. This can lead to high risk when it
comes to the demand for natural gas. By targeting unconventional gas sources, the oil and gas industry is
not limited to just using conventional and carbon sources. Horizontal drilling is the key to taking
unconventional gas sources, they need different types of technology and equipment then they use for
extracting conventional gas. The growing need for deep-water production and for hydrocarbons as
onshore drilling procedures are no longer valid are forcing oil companies like Noble Energy to produce
oil from deep-water shelves which operates at high viscosity oil fields to extract oil from tight reservoirs.
International Events
The “Golden Age” of European oil refineries was the period between 2004-2008 was
characterized with the stable demand for oil production and conversion capacities that made oil refineries
highly profitable. However, the stock market crash of 2008 drastically affected the European oil industry,
which in turn affected every oil-producing and oil-consuming country. Imports were reduced from mainly
the United States, which was the largest gasoline consumer. In addition, the Russian oil fields are on a
steady annual decline rate in production from their diminishing reservoirs.
Technology
Furthermore, technological development has helped oil and gas companies increase the depth of
offshore fields. Currently, about 27% of shelf production is at an approximate depth of 300m or more.
However, significant advances are allowing producers to drill at 3000m or more. This significant increase
in technology has led to a spike in oilfield equipment use in the market. Moreover, horizontal and
7. directional drilling are products of the technological advancements towards extracting oil and gas. This
has inspired other types of drilling equipment to be produced and used. Oil companies are putting more
time, effort, and money into their research and development branches. Doing this will most likely cause a
chain effect, first increasing efficiency of the equipment and in turn improving the quality of oil and gas
resulting in less of an environmental impact. Growth is somewhat dependent on how fast technological
advancements occur, if the companies make great strides in their advancements, they should jump start
the growth of the market. Furthermore, producers and refiners have harnessed other technological
advances such as digitization, robotics and analytics to tackle oversupply and reduce costs
Risk
Risks are also a big part of the industry’s success and growth also. This industry takes major risks
to gain global opportunities that could be very valuable. However risks are still risks at the end of the day,
and companies must be aware of what they’re doing, otherwise risks they are taking for the growth of the
company and growth for the industry can actually have a negative affect instead of a positive one.
Regularly faced risks include but are not limited to:
1. Government Regulations
2. Environmental restrictions
3. Price
4. Cost
5. Supply and Demand
COMPETITOR OVERVIEW
This section explores the strengths/advantages, weaknesses/disadvantages, as well as
opportunities and threats to Noble Energy. Strengths include benefits derived from its diversified
portfolio of high-quality assets. Some weaknesses include the dependence on third party pipelines for
transportation and gathering facility. On the other hand, Noble Energy is working on a strategic capital
investment program, which can be seen as an opportunity for improvement while threats to the company
include high competition and price volatility.
Recent Key Developments
Oct 26, 2012: Ecuador to Increase Gas Output By 61% at Block 6 In Amistad Field In 2013
Oct 25, 2012: Noble Energy Reports Revenue Of $1 Billion In Q3 2012
Oct 18, 2012: Noble Energy Provides Update On Trema Exploration Well In Tilapia License Offshore
Cameroon
Sep 27, 2012: Atwood Oceanics Subsidiary Wins Contract From Noble Energy For New Build Drillship
Aug 29, 2012: Noble Energy Proposes Seismic Surveys On Public Land
Advantages and Opportunities
As an independent oil and gas exploration and independent company, Noble Energy faces stiff
competition from other companies such as Chevron Corporation, Cabot Oil and Gas Corporation, Murphy
Oil Corporation, Abraxas Petroleum Corporation, and Anadarko Corporation. Noble Energy has also
prided itself as a company with a strong base to concur the challenges of the oil and gas industry in the
21st
century. Their marketing side of the company has the strong capability to sell their products to the
8. end users. Furthermore, Noble Energy creates a niche in the market and notes itself as a low cost-based
company. This is used to their advantage to make sure they can put out any product and is in competition
and compared to as a whole. The organization also values team-work and recognizes that their employees
are the cornerstone of their success. Thus, the fostering of a family culture has encouraged respect for
everyone and the rewarding of consistent and cooperative efforts. Additionally, Noble Energy has a
diverse portfolio of high quality assets spread across several countries, which allows long-lived
production at not-so-large maintenance capital. Notably, the company has a strong presence in 5 countries
and has strong cash flow from its core-operating areas such as the DJ Basin, the Marcellus Shale, the Gulf
of Mexico, the offshores of West Africa and the offshores of Eastern Mediterranean has allowed Noble
Energy to make profit and reinvest in new opportunities and assets and fund new projects and increase
future revenues. The continual increase of liquid fuel consumption in America is coupled with Noble
Energy’s growing focus on producing more liquids. They have a divestiture of non-core assets such as the
onshore American properties of Kansas, Western Oklahoma, Western Texas, and the Texas Panhandle
that has allowed the company to generate organizational and operational efficiencies and cash flow for its
capital investment program. Lastly, Noble Energy has formed strategic partnerships with FOGL, Chevron
in Sierra Leone, and CONSOL to expand their operations, leverage partners’ infrastructure and expertise,
reducing costs, which thereby allows the company to focus on core competencies.
Disadvantages and Threats
On the other hand, Noble Energy depends highly on third party pipelines for transportation and
their gathering facilities. This can create situations where they become temporary unavailable or be too
cost-effective in the future. Also, their concentrated areas of operation could potentially expose the
company to huge unrecoverable losses if any political or economic instability erupts in these zones. While
intense competition with other companies in the market continues to rise, the question of their stock
market share or value can be unclear. Like any other oil exploration and production company, Noble
Energy can also face inevitable government rules and environmental regulations in domestic and
international countries that might harm procedures and profits of the company. The issue of foreign
currency and crises could also serve as a potential threat to the company. Additionally, the company has
recently suspended nearly all investment in Israel due to antitrust issues related to two of their natural gas
reservoirs. Lastly, Noble Energy’s revenue falls with lower oil prices. The company outlines a 40%
reduction in planned capital investment for 2015 to $2.9 billion preceding the dramatic drop of oil prices.
9. FINANCIAL STATEMENT SUMMARY
Below is a comprehensive income statement data to show performance and operation level over a
period of time for Noble Energy
(In Millions) 2012 2013 2014
Oil, NG, NGL revenue 4,037 4809 4,931
Income from Equity Method
Investees 186 206 170
Total revenue 4223 5015 5101
Production Expense 673 850 958
Dep, Dept, Amor, ARO 1370 1568 1759
Exploration 409 415 498
G&A 384 433 503
Asset Impairment 104 86 500
Gain on Divestitures -154 -36 -73
Other operating expenses 25 43 38
Total operating expenses 2811 3359 4183
Operating income (EBIT) 1412 1656 918
Net interest expense 56 312 -792
EBT 1356 1344 1710
Income Taxes 329 366 496
Net Income (loss) 1027 978 1214
Following, shows a projected statement for the corporation, with the data given below;
(In Millions) 2015 2016 2017 2018 2019
Total revenue 5570 6083 6643 7254 7922
Production Expense 959 1048 1144 1249 1364
Total operating expenses 4002 4371 4773 5212 5692
Operating income (EBIT) 609 665 726 793 866
Net interest expense -186 -204 -222 -243 -265
EBT 795 868 948 1036 1131
Income Taxes 239 261 284 311 339
Net Income (loss) 557 608 664 725 792
Add:
Dep, Dept, Amor, ARO 1823 1991 2174 2374 2593
Asset Impairment 260 283 310 338 369
Less: New investments in
NWC 197 216 235 257 281
Less: Investment in PPE 2132 2329 2543 2777 3032
Free Cash Flow (FCF)
Projections 310 338 369 403 440
10. With assumed projections and estimates based on past and historical data, as well as future
industry outlook, Noble Energy will continue to have increased earnings across the five years; as it peaks
792 million in 2019
DCF
The company’s terminal value was also computed;
Terminal Value
2019 FCF $440
Normal O&G Industry Growth 3.49%
Terminal Value $9,854
Based on the DCF method used, we were able to arrive at a stock price for our company. The
DCF method estimates the attractiveness of an investment opportunity. It uses future free cash flow
projections and discounts them to arrive at a present value estimate, which is used to evaluate the
potential for investment
Low end High end
WACC 7.96% 7.96%
MV of NBL (in million $) $8.19 $10.05
MV of NBL Debt (in million $) $2.16 $2.16
MV of Equity (in million $) $6.02 $7.89
Shares outstanding (in million) 0.367 0.367
Stock Price $16.42 $21.49
*High end MV is based on boom scenario growth rate of 4.46%
Comparable Method
This method considers the market value of publicly traded firms that have an equivalent business
model to the company being valued. With this valuation method, we were able to arrive with the
following assumptions based on the financial ratios used.
Compared to
Industry Leaders Similar Size Firms
Debt ratio Slightly risky Slightly higher
Size Very small Similar
Proved reserve Very low Average
Developed % Low Low
Production Very low Average
R/P ratio Average Smaller
Risk management Similar Similar
Capital spending to revenue Similar Very low
Beta Similar Very risky
Debt/Total Capital Slightly higher More risky
11. The following depicts The firm value (enterprise value, EV) and stock price of NBL are computed under
the comparable method using three pricing metrics (i.e., multiples). They are: EV/EBITDA, EV/proved
reserves, and EV/daily production. EBITDA is earnings before interest, taxes, depreciation, and
amortization expenses
Company EV/EBITDA
EV/Proved
Reserves (boe)
EV/Daily Production
(boe)
Devon Energy Corporation 4.74 $11.97 $49,001.49
Hess Corporation 4.03 $14.96 $65,069.91
Marathon Oil Corporation 3.90 $8.12 $38,776.09
The comparable values are used to arrive at the following:
NBL Low
Value
High
Value
MV of
Firm
Debt Shares Stock
Price
Low
Stock
Price
High
Value based on
EBITDA ($mil)
$3,182 3.90 4.74 $12,406 6,103
367,000,000.00
$17.17 $24.48
Value based on
Proved Reserves
($mil)
1404 8.12 14.96 $11,394 6,103
367,000,000.00
$14.42 $40.60
Value based on daily
production ($mil)
350000 $38,776 $65,070 $13,572 6,103
367,000,000.00
$36.98 $62.06
Precedent Transactions Method
This method shows an analysis of previous transactions which have taken place involving
companies of similar market cap, revenue, location, and industry to the company being valued. With this
method, we were able to come up with the following assumptions based on the ratios calculated;
• Noble Energy has a higher production and averages at a lower cost of production which can have
positive effect on valuation.
• NBL averages a 37% debt/total capital, which is lower than the acquired firms. This indicates that
it is less risky.
• NBL has mostly proved reserves, which shows immediate potential for increased production
growth
The following shows the values calculates along with low and high end stock price
Acquiring Firm Acquired Firm EV/EBITDA
EV/Proved
Reserves
(boe) EV/Daily Production (boe)
Breitburn Energy Partners
LP QR Energy LP 10.45 $11.31 $300,256.41
Encana Corporation
Athlon Energy
Inc. 34.65 $38.73 $321,811.79
Pertamina Murphy Oil -16.21 $42.62 $44,183.68
12. $- $50.00$100.00$150.00$200.00$250.00$300.00$350.00
DCF
Comp Value based on EBITDA ($mil)
Comp Value based on Proved Reserves ($mil)
Comp. Value based on daily production ($mil)
Prec. Value based on EBITDA ($mil)
Prec. Value based on Proved Reserves ($mil)
Prec. Value based on daily production ($mil)
Football Field Chart
