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10 from 10( K ): 10 Interesting Takeaways from the 2011 10-K; Revising Estimates

Our take: NBL shares have been under pressure given Middle East geopolitical concerns. While the near-term risk-reward is more balanced, we believe this is a compelling entry point for longer-term oriented investors. Analysis of NBL's 10-K provides validation that our bullish thesis is playing out faster than anticipated given strong early returns from its Wattenberg horizontal program and clear signs NBL will monetize a portion of its giant Mediterranean gas discoveries to unlock value (possibly in 6 to 9 months). The only 'fly in the ointment' is rapid declines at the legacy Mari-B field in Israel and a 10-K disclosure that NBL would be on the hook for financial penalties for the under-delivery of volume commitments. That said, production woes in Israel should prove temporary given the onset of Tamar volumes in Q213. Meanwhile, the current valuation embeds little or no value for two high-impact deepwater wells in progress at Leviathan Deep and Gunflint, which could significantly boost our NAV.

Raise NAV to $125 from $116. Following analysis of the company's updated reserve report, we raise our NAV estimate to $125 from $116 per share to reflect $5 of higher PDP value given stronger than expected drilling performance in the US (largely Wattenberg) and $7.40 of higher value associated with West Africa (Aseng and Alen), partially offset by a modest decrease in value ($3.50) associated with Aphrodite in Cyprus (we are now assuming 5 tcf recoverable vs. 7 tcf previously).

Estimate revision: We revise our 2012 and 2013 EPS estimates to $6.22/$10.85 from $6.45/$9.96 to reflect a more favorable production mix (US onshore, West Africa, and deepwater GoM) as well as reduced output from Mari-B. Our 2014 EPS estimate is raised to $14.29 from $12.91. Our estimate revision also incorporates higher cost guidance issued by the company post its Q411 earnings release.

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