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Onshore Costs Push Noble 4Q Profit Down as Production Increases

Heavy flooding in Colorado late last year did little to impact fourth quarter production for Noble Energy Inc.'s operations in the Denver-Julesberg (DJ) Basin, while volumes were driven higher by the Marcellus Shale during a quarter when the company spent heavily on onshore exploration and transportation costs.

Although sales volumes of 293,000 boe/d in the DJ Basin and Marcellus Shale set a record for the company, they still lagged production as it spent more to focus on developing its onshore unconventional assets. Costs climbed after an unsuccessful well was drilled offshore Nicaragua and the Houston-based company made a significant acquisition in the Falkland Islands.

Still, CEO Charles Davidson said all of the company's operational areas performed better than expected and allowed the company to exit 2013 above its fourth quarter guidance.

"The DJ Basin and Marcellus Shale are continuing to drive significant production growth, which is expected to accelerate even more in 2014," he said. "Financially, we ended the year with robust liquidity that will support our long-term plans."

Those plans call for a strong focus in the DJ and Marcellus (see Shale Daily, Dec. 19, 2013). Davidson told analysts on a conference call Thursday that the company will continue to divest noncore assets throughout 2014, with plans to close some of those sales as early as March, so it can keep up its onshore focus in Colorado and the Appalachian Basin.

"Our portfolio work continues in 2014 with our having also executed purchase and sale agreements to divest our natural gas assets in East Texas, the north Louisiana Haynesville play, and we continue to work on other additional noncore divestments as well," Davidson said.

Noble said its profit in 4Q2013 dropped by 47% to $134 million, or 37-cents/share, from $251 million, or 70-cents/share in 4Q2012. The company increased its revenues slightly to $1.3 billion from $1.1 billion in 4Q2012, but its operating expenses went from $806 million year/year to $980 million last quarter.

Operators in Colorado were forced to deal with heavy flooding last year (see Shale Daily, Sept. 20, 2013) and analysts were somewhat concerned about its affect on year-end production, but those worries were long-gone during Noble's conference call. Instead, some wondered about the recent spike in natural gas prices and varying differentials across the country.

Responding to a question about weak spot prices in the DJ Basin and some of the hedging losses the company incurred in the fourth quarter, Noble officials said the company is better positioned to move its product from the basin with the start-up of processing facilities and infrastructure there last quarter, including the Wells Ranch Central Processing facility and the Wattenberg Oil Trunkline.

"We're seeing in the first quarter what we saw in the fourth quarter," said COO Dave Stover. "One of the nice things about having that diverse supply and marketing strategy is that it really builds on the commitment we made to get these facilities and expansions under way. We're moving about 80% of our volumes out of the basin now."

Under a joint venture with Consol Energy Inc., Noble is required to fully fund its annual $400 million cap in the Marcellus Shale when gas prices are at or above $4/MMbtu for three consecutive months. As prices continue to trend upward, analysts wondered how that might impact the company's capital budget next year.

"The carry kicks in when Henry Hub prices average $4 or above. Certainly as we look ahead at the forward curve, we're headed down that path," Davidson said. "We have reached an agreement already with Consol on the program that we expect to execute this year, so I think it's safe to say we are not anticipating any change in that program, knowing the two companies, if they choose, could make adjustments down the road."

Stover added that any costs the company hadn't planned for would be offset with discretionary cash flows, which increased to $925 million in the fourth quarter, compared to $841 million at the same time the year before.

Noble's U.S. sales volumes totaled 166 million boe/d, while international volumes were 127 million boe/d. In the DJ Basin the company averaged 100 million boe/d in production, up 16%, and completed 87 wells. In the Marcellus, production volumes averaged 196 MMcfe/d, up 17%, and drilled 42 wells.

The company said it approved two major offshore development projects in the deepwater Gulf of Mexico and announced discoveries there as well. Its Big Bend and Gunflint projects in the Gulf of Mexico are expected to begin production between 2015-2016.

Noble also said its estimated reserves increased by 19% at year-end 2013, with 1.4 billion boe recorded. Its assets in the United States accounted for 55% of that total and the remainder was booked with its offshore international assets.

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