A Little-Known Shale Upstart

05/17/2013 9:45 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

While investors' focus has been on the Bakken Shale, another region has gone largely unnoticed, and that's bullish for one forward-thinking producer, says Elliott Gue of Energy & Income Advisor.

Investors have blown hot and cold toward the Niobrara Shale over the past several years.

A lack of takeaway capacity, uneven well results, and elevated production costs have offset the promise of an oil-weighted resource base. The huge successes achieved in the Bakken Shale and Eagle Ford Shale also overshadowed developments in Colorado.

But upstream operators have stayed the course and honed their production techniques to the point that the play is ready to shift from the exploratory stage to commercial development. We highlight one of our favorite names that is leading the charge in this oft-overlooked unconventional basin.

On pace to more than double its hydrocarbon production over the next five years, Houston-based Noble Energy (NBL) is one of the world's fastest-growing and best-positioned independent oil and gas producers.

In 2012, the upstream operator lifted an average of 239,000 barrels of oil equivalent per day. Management forecasts that production will range between 270,000 and 282,000 barrels of oil equivalent per day in 2013 and climb to about 540,000 barrels of oil equivalent per day by the end of 2015.

To meet this ambitious target, Noble Energy will need to increase its hydrocarbon output at an average annual rate of about 17% over the next five years. Much of this production growth will come from five core regions: the Denver-Julesburg Basin, the Marcellus Shale, the Eastern Mediterranean, West Africa, and the deepwater Gulf of Mexico.

In addition to these established core areas, Noble Energy's management team has identified several promising areas for exploration, including a tight-oil play in northeast Nevada where the company has amassed 350,000 net acres and acquired reams of three-dimensional seismic data. The firm will sink between five and eight vertical wells this year, and should have drilling results within the next 12 months.

Noble Energy has also assembled 1.8 million net acres offshore Nicaragua that seismic data suggest are prospective for crude oil. Although early-stage exploration entails significant risk, positive well results from any of these plays could serve as an upside driver for the stock.

Although shares of Noble Energy have rallied by almost 16% over the past 12 months, the stock still trades about 15.2 times forward earnings estimates-compared to an average multiple of about 17 for its peers in the exploration and production space.

This valuation appears especially reasonable when you consider the nosebleed multiples commanded by Cabot Oil & Gas (COG) and Range Resources (RRC), names that operate primarily in the Marcellus Share and trade at 40 and 46 times projected earnings, respectively.

With a diversified production base and a solid pipeline of growth projects, Noble Energy joins our coverage universe as a buy. Were the stock to pull back to less than $100, we would consider adding the shares to our Focus List.

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