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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
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
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
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.
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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