It can be difficult to value independent oil and gas
exploration and production (E&P) companies like Noble Energy.
The reality is no two of them are built the same, or exposed to
the exact same risks. While global demand for oil and natural gas
is growing -- and this trend looks likely to continue for decades
-- there are a number of potential roadblocks that could lead to
stock falling. Let's take a closer look at these
1. Geopolitical risk
Kuwaiti oil fields burning in 1991. USAF image pubic domain.
While there is some regionality,
are largely global in nature, and a major drop in prices in one
part of the world will lead to falling prices everywhere. This is
a fact that every oil company has to contend with, even a 100%
domestic producer like
, which operates primarily in North Dakota. However, the stakes
are much higher for Noble Energy, with a lot of its production in
Africa, Israel, and China . For the first half of the the year,
41% of Noble Energy's total oil and gas production was
The majority of Noble Energy's international production is
natural gas, which carries a much higher premium outside of the
U.S., and Noble Energy's management is willing to take on a
higher level of risk in order to exploit the potential gains. If
political or social unrest or even war were to happen in one of
Noble Energy's areas of operations, it could have potential
implications on global oil prices, but the direct harm to Noble
Energy would be larger than the impact on producers in other
2. Weakening capital position
Management called out reducing its debt load in its analyst
presentation in December 2013. However, debt has actually
increased slightly since then, while cash and equivalents have
HES Cash and Equivalents (Quarterly)
Yes: It's still only a few months since that presentation, and
the long-term trend is more important than just two quarters'
worth of data. But E&P is very expensive, and having a solid
financial position is the best hedge Noble Energy's management
could have against poor production. If the trends (less cash,
more debt) continue, this could increase the cost of capital,
which in turn could be a detriment to funding enough exploration
to replace current production.
It's a tough balance between maximizing resources and growing
reserves, while also maintaining a strong balance sheet. Noble
Energy needs to reverse the current trend.
3. Oil and gas prices
This is the greatest
risk to Noble Energy's stock price, because it's the one the
company has essentially no control over. The best any E&P can
do is to keep its cost of capital, exploration, and production as
low as possible so that it can ride out volatility in the energy
markets. Additionally, the company can hedge its production with
a number of financial instruments, agreeing to sell future
production at a fixed price that protects the downside, at the
cost of some upside.
However, Mister Market often ignores these hedges, sending a
producer's stock lower in a blind sell-off if the price of oil or
Final thoughts: Understand the implications of
Risk is best defined as the probability of permanent loss
of capital. This is important because your investing goals and
timeline will often determine whether a
price drop becomes a permanent loss for
. For example, if a producer is hedged against oil or gas price
drops, its stock price falling will be short-term in nature
because the company isn't really as affected as the market's
reaction. However, if you don't understand the company's hedging
measures, you could follow the herd and sell, when the market
could be giving investors a buying opportunity.
Lastly, none of these risks are guaranteed to lead Noble
Energy's stock lower, but as an investor, it's essential to
understand the risks even better than the opportunities, and
position your portfolio based on those probabilities.
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3 Reasons Noble Energy's Stock Could Fall
originally appeared on Fool.com.
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