Noble Energy (NBL), a past favorite of mine, has made news this morning by agreeing to buy Rosetta Resources (ROSE) for $2.1 billion of stock, a takeout price of $26.62 a share. This purchase continues the theme of consolidation among shale players that will continue for a long time and represents Noble's "big play" on the back of depressed oil prices. But is the Rosetta purchase a good move? And does it make Noble worth buying? The quick answer is: only at a price.
Noble is an oil company that I used to enjoy trading -- a great forward-thinking leader in former CEO Chuck Davidson combined with a generally conservative cash strategy had me finding value all the time in the stock and making good money off it for years. Davidson has retired, replaced by David Stover, but the change in leadership was only one problem that took Noble off of my "go-to" list.
The company's unique position in the Leviathan gas formation in the Mediterranean had me all excited when it was first being developed. Here was a natural gas gold mine under Israeli control, with a chance to change the geopolitics of oil around Israel and even stretching into Europe. A bolloxed partnership with Australian oil giant Woodside, which was looking for a bigger opportunity in Leviathan with LNG, followed. This, combined with continuing difficulties in signing long-term production contracts with Egypt and an unfathomably stupid anti-trust action on the part of the Israel judiciary with Noble, has left Leviathan a husk of the former opportunity I though it was destined to be.
Meanwhile, lower oil prices decimated the break-even economics in the DJ Basin, where Noble has the majority of its shale acreage. Noble has not been my choice recently when looking for value.
Enter Rosetta. First, let's look at the bright spots. With 50,000 prime acres in the Eagle Ford shale near proven EOG Resources (EOG) acres and another 53,000 equally superb acres in the Permian, Rosetta provides Noble with the diverse shale portfolio that the Wattenberg couldn't. And buying the company for a 50% discount to where the shares traded as recently as August 2014 looks like a decent value.
However, Rosetta represents one of the worst offenders of my recent "Shale Is a Ponzi Scheme" idea of dedicated shale oil producers. Rosetta's $1.8 billion in debt looms large in a company with a total market cap of less than that (at least before the 38% premium to Friday's closing price that Noble is paying).
Whether Noble's acquisition of Rosetta is "immediately accretive to our per share production, reserves, earnings, and cash flow," as CEO Stover states, is questionable at best. Frankly, it's a bunch of hooey. The purchase of Rosetta continues the theme in this depressed market of growing production through the checkbook, instead of searching it out the old-fashioned way, and relies on a serious future rally in the price of oil to make it worth what's been paid.
So, there's the question: Will Rosetta be worth what's been paid?
Throughout this "shale bust" period, I've been trying to find those survivor exploration and production (E&P) companies that will be in the best shape possible for the inevitable next boom in oil prices. And I do think that Noble is undoubtedly one that will survive. But the Rosetta anchor of debt is no help to Noble now, and I'd need to see significantly lower share prices to put Noble back on my 'go-to' list. While the announced acquisition should initially help to drop that share price, I want to see something closer to $45 again.
And that's what I'll wait for.