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Rating Action:

MOODY'S AFFIRMS NOBLE ENERGY'S LONG-TERM RATINGS (SR. UNSECURED Baa2); CHANGES OUTLOOK TO NEGATIVE

16 Dec 2004
MOODY'S AFFIRMS NOBLE ENERGY'S LONG-TERM RATINGS (SR. UNSECURED Baa2); CHANGES OUTLOOK TO NEGATIVE

Approximately $800 Million of Debt Securities Affected

New York, December 16, 2004 -- Moody's Investors Service affirmed the long-term debt ratings of Noble Energy, Inc. (Noble, Baa2 senior unsecured) and changed the outlook to negative from stable. This action was taken in response to Noble's announcement that it has agreed to acquire Patina Oil & Gas (Patina) in a stock and cash transaction totaling $3.4 billion. Patina is a public independent oil and gas company with principal operations in the Denver-Julesburg (DJ) Basin in Colorado and various fields in Mid-continent Oklahoma and Texas.

The change in Noble's outlook reflects the cost of the merger and the associated impact on Noble's full-cycle cost structure and returns, Noble's increased leverage after the merger and uncertainty regarding Noble's de-leveraging plans, and the merger integration risk from combining the two companies. Noble is paying $2.9 billion for Patina's equity and assuming $0.5 billion of debt, including borrowings associated with unwinding Patina's existing commodity price hedges. Noble plans to fund the acquisition with a combination of 50% equity issued to Patina shareholders and 50% debt, including assumed debt. The total cash component of $1.67 billion will be funded with a new $1.3 billion 5-year revolving credit facility, with the remainder being drawn under existing Noble credit facilities. Post-merger, Noble's debt will be predominantly shorter term bank debt, which potentially raises refinancing risk in the future. Moody's also recognizes the potential value that this merger provides to Noble, including greater scale, additional geographic diversification with significantly more reserves onshore US, lower political risk and additional long-lived natural gas reserves.

Noble is paying $3.4 billion for an estimated 263 million barrels of oil equivalent (Boe) of proved reserves (74% proved developed), or $12.92 per Boe. Noble is also paying around $61,000 per Boe of current daily production. The price per Boe of reserves is considerably higher than Noble's three-year average finding and development (F&D) costs of $8.80 through 2003, and higher than its 2003 all-sources F&D of $12.26. In addition, we estimate that Noble's all-sources F&D for 2004 will be about $10 per Boe and its three-year average F&D through 2004 will increase to around $10.50. The $12.92 per Boe cost of the Patina merger will increase Noble's three-year F&D costs about $1 per Boe to $11.50, which exacerbates a multi-year trend of increasing F&D and full-cycle costs.

It is not yet clear what impact Patina will have on Noble's total cash costs, and Noble has not quantified its expected cost savings synergies; however, interest expense will clearly increase as a result of higher debt. Based on current information, Moody's expects that Noble's total full cycle costs will increase to around $20 per Boe as a result of this transaction, up from $17.76 in 2003. Therefore, the combination of likely lower cash margins and higher three-year F&D is expected to lead to a decline in Noble's leveraged full-cycle ratio, a measure of cash on cash returns. As of September 30, 2004, Noble's leveraged full-cycle ratio was 2.28x, up from 1.88x at the end of 2003. The Patina merger is expected to lower Noble's leveraged full-cycle ratio to well below 2x. In the current strong price environment, we would want to see this ratio move back above 2x, to return to a stable outlook.

The negative outlook also reflects Noble's increased leverage, as measured by adjusted debt to proved developed barrel of oil equivalent (debt/PD Boe), and there is risk around the magnitude and timing of Noble's ability to delever after the merger. Leverage will more than double from a quite low $2.17 per PD Boe at September 30 to around $4.50 at closing, which is high among its peers for the Baa2 rating. Noble will need to demonstrate consistent leverage reduction to substantially below $4 to regain a stable outlook. The company has announced its intention to hedge 75% of Patina's expected production over the next four years, which should provide some measure of cash flow certainty. Noble will also need to exhibit capital spending discipline to generate free cash flow in order to repay debt. Finally, we recognize that Noble historically has managed its E&P portfolio by selling non-core properties and we would expect the company to dispose of additional assets once the merger is complete, which would contribute to debt reduction.

Moody's acknowledges the positive aspects of this transaction that help mitigate the concerns about deteriorating credit metrics discussed above. Noble's year end 2004 total proved reserves, pro forma for the Patina merger, will be about 65% higher than its year end 2003 reserves. Noble's percentage of natural gas will remain in the low 60% range and the proved developed reserve life will be 9.5 years, about where Noble would have been without Patina. Importantly, Patina's assets are located entirely onshore US, with almost 90% of total proved reserves in the DJ Basin and the Mid-continent. Noble's reserves that are onshore US will increase from 14% of total proved currently to 44% after the merger. The percentage of reserves in Equatorial Guinea will drop from 47% to 31% and reserves offshore Israel will decline from 15% to 10%, thus lowering the company's overall political risk. Production should increase by at least 10% in 2005 compared to the two companies' combined 2004 production, in large part from identified lower risk projects such as development drilling, recompletions and refracs.

Noble's Baa2 rating reflects consistent reserves replacement with expected near-term growth in production, a relatively long proved developed reserve life, and a historically conservative balance sheet with modest leverage. The rating also considers Noble's relatively small size among investment grade E&P companies, its preponderance of international assets and commensurate political risk, the relative concentration of its proved reserves, and its higher risk exploration strategy. Noble's outlook could move back to stable over the near term through a combination of continued organic reserves and production growth at improving full-cycle costs, its leveraged full-cycle ratio moving back above 2x, reduced leverage to below $4 per PD Boe, and successful integration of Patina's assets and personnel. Full-cycle costs and leverage that remain at elevated levels, declining production and reserves, or poor merger integration could lead to a downgrade to Baa3.

Noble Energy, Inc., headquartered in Houston, Texas, is an independent oil and gas company with principal operations in West Africa, the US Gulf of Mexico and offshore Israel.

New York
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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