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Noble Energy Surprises to Upside, Lifted by Lower LOE in DJ Basin

Houston-based Noble Energy Inc. relied on the lowest operating costs in eight years and improved efficiencies to overcome the commodity price upheaval in the final three months of 2015, which resulted in unexpected profits on an adjusted basis for the quarter.

Unit operating costs, including lease operating expenses (LOE), fell year/year by 22% to average $6.93/boe.

"We have substantially improved capital efficiency across our business, evidenced by a continued reduction in well costs as well as completion enhancements in each of our core onshore assets," CEO Dave Stover said during a conference call on Wednesday.

Net losses in 4Q2015 totaled $2.03 billion (minus $4.73/share), which included a writedown of $1.27 billion, mostly for the value of its oil and gas reserves. Excluding the writedown, profits were 44 cents/share, versus Wall Street consensus of a loss of 4 cents. In 4Q2014, Noble earned $402 million (1.05/share). Revenue declined 21% to $846 million. Operating cash flow was $576 million, versus $803 million.

The super independent works onshore and offshore in the United States, as well as overseas on two continents. Total sales volumes year/year jumped 34% to average 422,000 boe/d. The average realized crude price in the quarter declined 44% year/year, while natural gas realized prices fell 27%. Considering the plethora of pessimistic news from the exploration sector, Stover was proud of Noble's ability to overcome pricing adversity.

"For the second straight quarter discretionary cash flow exceeded capital requirements and capital expenditures," he said. "This reflects our asset quality, our portfolio diversity and the ability of our organization to execute. It's also a testament to the swift, decisive actions we took to reduce spending and drive capital efficiency beginning more than a year ago."

Sales volumes for the quarter averaged a record 422,000 boe/d, above the high end of increased guidance, driven by accelerated startups in the Gulf of Mexico (GOM), overseas performance in Israel and Equatorial Guinea "and continued improvement in completion design and infrastructure capacity" in Colorado's Denver-Julesburg (DJ) Basin. U.S. volumes constituted 70% of total sales.

DJ production in 4Q2015 contributed more than one-quarter of total worldwide volumes in 4Q2015 at 121,000 boe/d, and "was once again a big contributor to the company's lower operating costs and production outperformance," said Gary Willingham, operations chief. "Essentially all of the growth in the DJ versus the fourth-quarter of 2014, and the third quarter of 2015, has come from liquids, with most of that oil...

"Our full-year 2015 average drilling cost per lateral foot was down 40% from 2014. And as well costs have been substantially reduced, we have also enhanced production performance with optimized completion designs."

In the DJ, Noble is relying on slickwater as the standard for its hydraulic fracture (frack) fluid design.

"The next step in completion innovation and capital efficiency is utilizing a completion design that will allow slickwater fracks to be pumped to the tow on long laterals and also with higher profit concentrations," Willingham said. "Actual results on both hybrid gel and slickwater wells with higher profit concentration are exhibiting better initial production and flatter declines compared to our historical jobs."

The DJ is set to receive about $600 million in capital, with two rigs planned through the year. The focus is to be on the Wells Ranch and East Pony areas, which have existing infrastructure.

"Seventy percent of the DJ Basin wells to be drilled in 2016 are planned to be extended reach, many of which will be 9,000-foot laterals in Wells Ranch," Willingham said. "We are targeting the drilling of 150 equivalent wells this year and expect to commence production on slightly more than 200 equivalents. While these lower activity levels suggest that DJ production will be down somewhat from last year, I'm optimistic that these new completion designs can help offset some of the potential declines."

Total capital spending in Texas is set at $250 million this year, with 60% directed to the Eagle Ford Shale, primarily to continue Gates Ranch development. The remaining 40% would be used to begin appraisal work in the Permian Basin's Delaware sub-basin. In the Marcellus Shale, total spending is set at $150 million, with no rigs planned and "limited number of completions in the nonoperated dry gas area," Willingham said. In the GOM, about $250 million is being set aside, with most of the budget directed to exploration and appraisal activities.

"Without question, we are achieving more while spending less," Stover said. In any case, "protecting the balance sheet is fundamental in this environment." Noble plans to manage "total cash outflow with total cash inflow..." Cash flow for 2016 should be positively impacted by hedging, which covers 35% of global oil and 25% of U.S. natural gas production.

Echoing comments by other U.S. operators, Stover said the outlook for commodity prices does not justify "prior activity levels. We are again pulling back capital aggressively in 2016 and focusing only in those areas where long-term value opportunities make sense."

Capital expenditures this year are set at about half of what Noble spent in 2015 at $1.5 billion. Two-thirds of the capital is to target the U.S. unconventional business, with one-third devoted to offshore exploration and development. Based on estimates, full year sales volumes are expected to increase by 10% year/year.

"From a quarterly standpoint, we expect the first and third quarters to be higher volume than the second and fourth, with a second half of the year generally equal to the first," Stover said. "We've had a strong start to the year and I'm optimistic that we can drive new capital and operating efficiencies to outperform our goals.

Most of the capital spending this year "will be discretionary. That’s how we're running the business in this environment." There may be opportunities to expand, but "the last thing we want to do is dilute the quality of our assets with something else...What we don't want to do is take on other persons' problems."

The company also may hold off indefinitely on plans to publicly launch the pipeline unit, Noble Midstream Partners LP. The plans initially were shelved in November because of the depressed market for midstream spinoffs.

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