Analysis: Why Has Cash Starved Noble Energy Sold Off Aphrodite and Kept Leviathan and Tamar?
BG Group's decision to enter into a farm-out agreement for 50% of Noble Energy's stake in Aphrodite gas field, offshore Cyprus, is an interesting development that may shed some light on Noble Energy's financial situation. Additionally, it has implications for both Delek Group and for the Israeli natural gas industry. Its implications on Cyprus might be less dramatic.
The deal appears to be a very clear signal of Noble Energy's increasing financial pressure from the mounting losses in its shale oil operations in the U.S. The once profitable U.S. shale oil enterprise has come crashing down dramatically in recent times; Noble Energy posted a $283-million (USD) loss in the third quarter of 2015. Those operations, which up to a year ago were the main profit centres for Noble, are not expected to return to the black any time soon.
Last week Noble also suffered a major embarrassment and financial setback when it decided to postpone indefinitely an IPO of its Noble Midstream business, which was set to raise $237.5 million. That sum will now be missing from the development budget of its assets, which in the medium term was supposed to improve Noble's performance in the U.S. market.
The harsh reality of the current market situation seems to be finally settling in for a lot of troubled U.S.-focused explorers. Now, those businessmen and businesswomen in Texas who were in a state of denial are beginning to comprehend and accept the fact that lower oil and gas prices are here to stay for longer. That changing market means executives in independent E&Ps, like Noble Energy, are finding themselves in desperate situations. The fact that energy companies have to maintain traditionally sacred dividends only adds to those independent E&Ps' aggravation.
Hence Noble's latest fire sales. Last week Noble Energy sold off its stake in Karish and Tanin, two small gas fields offshore Israel, to its partner in the project, Delek Group. (As an aside, Delek Group's net earnings increased dramatically this year, because natural gas prices are unchanged in Israel, and natural gas is Delek Group's main business). The price tag, $67.1 million, values the two gas fields at about $135 million dollars, about one eighth of its valuation a year ago. Now Noble has also sold 50% of its stake in Aphrodite, which amounts to a 35% stake in the entire project, for just $165 million to BG Group.
BG Group itself is in the process of a takeover. Royal Dutch Shell is scheduled to complete a $70-billion acquisition of BG in the first quarter of next year. The acquisition begs an interesting question about the Noble sale to BG: Why didn't Shell (whose executives have certainly approved the deal, though it was completed under the BG title) try to acquire Noble's stake in the Israeli Leviathan gas field? The Leviathan gas field is over five times bigger than Aphrodite and has huge potential for export into local Eastern-Mediterranean markets as well as for exports. If the Aphrodite sale is any indication, Shell could potentially have acquired Leviathan with a substantial discount. That acquisition would surely have presented a much better deal than the Aphrodite one.
Even more intriguing is the riddle of why Noble hasn't sold off, and Shell hasn't acquired, part of Noble's stake in Tamar. That gas field is already online and is one of the most profitable gas fields on earth. Currently, Tamar serves as a cash cow for Noble and Delek. However in light of its precarious financial situation, Noble might have been convinced to monetize it in order to survive.
If Noble could have sold off one of those assets, or maybe parts of both of them, either to Shell or another major, it would have earned it billions of vital dollars for survival, rather than the comparatively paltry sum it received for Aphrodite. In the case of a Tamar sale to Shell, Noble would still have been in compliance with the stipulations of the Israeli regulatory natural gas framework that requires it to reduce its stake in Tamar to 25%.
The short answer to why BG Group preferred the Cypriot option over the Israeli option could be due to the Arab League boycott of Israel, a phenomenon started almost seven decades ago. Though that practice has now mostly ended, the energy industry in general and the majors in particular largely continue to maintain that boycott in order to promote their business interests in other parts of the world.
Another explanation that some might adopt is that the regulatory chaos in Israel is frightening investors off, though that situation is set to end in a few weeks' time when the country's new regulatory framework is approved. There are also more innocent explanations one could consider: in particular that Noble Energy was never interested in selling parts of its Israeli lucrative assets. Cash flow from Tamar is guaranteed for the next three decades though cash flow from either Leviathan and the expansion of Tamar, which is still at least a few years, maybe even a decade, away.
So what might BG (and from next year Shell) do with its new acquisition? Anything it likes: It can delay development; it can sign export contracts with Egyptian customers; and it might use its Idku LNG plant to export LNG worldwide. No matter what it might decide and implement, the results will bear implications for the Israeli natural gas industry and the State of Israel.
Ya'acov Zalel