“Keeping the Financial Firepower”
Noble Energy (ticker: NBL) is a large-cap exploration and production company with oil and gas operations worldwide, but the Houston-based company previously held no assets in Texas. Until now.
On May 11, 2015, Noble Energy announced the all-stock acquisition of Rosetta Resources (ticker: ROSE) for $3.9 billion, including ROSE’s $1.8 billion in debt. In turn, Noble gains 50,000 net acres in the Eagle Ford Shale and 56,000 net acres in the Permian Basin, which includes more than 1,800 gross horizontal drilling locations and net unrisked resource potential of 1 billion BOE. The metrics work out to $58,500/BOEPD of production and $13.65/BOE of proved reserves.
The deal represents a 28% premium to Rosetta shareholders in consideration to ROSE’s average stock price for the last 30 days and a 38% premium to its closing price on May 8, 2015. ROSE shareholders are in line to receive 0.542 shares of NBL stock (implied value of $26.62/share) in exchange and will own a total of 9.6% of NBL’s outstanding shares once the sale is finalized. Capital One Securities expects a welcoming response from ROSE shareholders, citing the purchase premium, ROSE’s declining production volumes on a cost-conscious development program and its leveraged balance sheet. The transaction is expected to close in Q3’15. Rosetta’s shares closed 27% the day of the announcement.
In a conference call following the announcement, NBL management said the combination of an all-stock and debt assumption transaction helped maintain the company’s credit ratings and investment grade focus. Dave Stover, Chairman and Chief Executive Officer of Noble, said it was a way for the company to “Keep the financial firepower.”
| Purchase Date | Buyer | Seller | Price (including debt) | Premium |
| May 11, 2015 | Noble Energy | Rosetta Resources | $3.9 billion | 28% |
| April 8, 2015 | Royal Dutch Shell | BG Group | $69.6 billion | 50% |
| December 16, 2014 | Repsol | Talisman Energy | $13.0 billion | 56% |
| July 13, 2014 | Whiting Petroleum | Kodiak Oil & Gas | $6.0 billion | 5% |
| February 6, 2014 | Baytex Energy | Aurora Oil & Gas | $2.4 billion | 52% |
| June 28, 2012 | Petronas | Progress Energy | $5.36 billion | 77% |
| October 28, 2011 | Statoil | Brigham Exploration | $4.4 billion | 36% |
| December 14, 2009 | ExxonMobil | XTO Energy | $41.0 billion | 25% |
Rosetta Snapshot: Pure Texas
Rosetta Resources exclusive operations in Texas’ two premier oil plays produced approximately 65.7 MBOEPD on 106,000 combined net acres in Q1’15. Its proved reserves of 282 MMBOE and current volumes are comprised of approximately 60% liquids.
Source: NBL May 2015 Presentation
“Within these 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,” said Stover. “That’s important because we’re not taking away from any other high-quality assets that we’re developing in our existing portfolio.”
Current volumes come predominantly from the Eagle Ford, where the company reported 58.4 MBOEPD in Q1’15. The Permian produced the remaining 7.3 MBOEPD and its drilling program was targeting the Wolfcamp A formation (550 MBOE type curve), and NBL management expects Eagle Ford production sales to fuel its further development of the Permian. Guidance outlined in its quarterly release called for a full year 2015 production range of 58 to 62 MBOEPD (63% liquids), of which 75% had hedges in place. A non-cash impairment charge of $798.1 million led to ROSE reporting a net loss of $539.7 million in the quarter. The company had just $9.1 million in cash on hand at the time of the release.
ROSE’s two-year plan, outlined in a February press release, was targeting cash flow neutrality in 2015 and 2016 on capital expenditures of $350 million per year. Plans in 2015 called for completing 28 gross wells, including 20 in the Eagle Ford. “We’ve chosen to defer production growth and focused instead on living within our means, maintaining our core acreage positions,” said Jim Craddock, President and Chief Executive Officer of Rosetta Resources, in the release. “Our project inventory is intact and we stand ready to increase capital spending when commodity prices warrant.”
KLR Group upgraded ROSE to HOLD on Friday based on results from its Gates Ranch venture in the Lower Eagle Ford. KLR estimated ROSE’s initial long lateral well should recover 2,500 MBOE at a cost of $8 million, leading to a 55% internal rate of return. Capital One Securities said the same well suggests a 20% capital productivity improvement compared to its previous Eagle Ford wells.
The Texas additions will increase NBL’s production and reserve volumes by 21% and 20%, respectively.
Who Got the Better Deal?
Rosetta’s liquids-focused portfolio has taken a hit from the near 50% commodity downturn. EnerCom’s Weekly Benchmarking Report notes that ROSE’s stock has been cut in half compared to six months ago. Its debt to market cap percentage of 126% is also double the median of 62% of 87 other companies listed in the report.
A handful of research firms focused on ROSE’s balance sheet in their respective notes, with Barclays saying they were “surprised” at the acquisition and suspect it “will appear dilutive on our typical multiples of unhedged cash flow.” Stifel projects that “ROSE’s leverage metrics will ramp to an uncomfortable 4.0x debt/TTM EBITDA by YE15 and 4.3x by YE16 (versus 2.9x at 1Q15),” which takes into account its $90/barrel oil hedges of 71% and 34% in 2015 and 2016, respectively.
The reaction from most other firms were generally positive, thanks to Noble’s strong financials and the assets themselves. Stifel mentioned ROSE’s Eagle Ford assets were generating among the highest returns in the region and the Permian economics are improving.
Noble is Well-Positioned for the Merger
Noble, a strong D-J and Marcellus shale producer, is well-positioned for the merger. Its balance sheet consists of just $6.1 million of long-term debt, amounting to a total debt to market cap percentage of 32%. The company exited Q1’15 with $5.7 billion in financial liquidity, including $1.7 billion in cash. A common stock offering in February raised more than $1.0 billion.
“The properties will be in good hands,” asserted Wunderlich Securities. Global Hunter Securities called the move a “win-win,” complimenting ROSE’s assets but adding that development funding was proving to be problematic considering its high debt levels. That won’t be nearly as much of an issue with Noble’s dry powder.
Stover was optimistic about Noble’s track moving forward. “We’re now in four of the leading U.S. onshore plays,” he said. “We have three offshore core areas providing substantial cash flow and significant future development and we still have a high-impact exploration program with several material prospects that we’ll be drilling yet this year.”
Source: NBL May 2015 Presentation
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