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Is RS Investment’s New Favorite Stock in Trouble?

April 30, 2014 | About:

The Economist, a British-based monthly publication, developed a new tool to attract new readers. Every day it publishes a chart to show highlight one aspect of the world we live in. The subjects are of the most varied types. In the latest one, new estimates preannounce the overtaking of the US economy by the Chinese at the year’s end. Whether estimates turn out to be right is yet to be known, but the growth opportunities offered by the economy during the last decade are obvious to all.

The oil and gas industry is of key importance for Chinese authorities, no less than it is for its US counterparts, taking both of them into a silent battle for resources. Most important, foreign investors have been guarded off against in an attempt to avoid the exportation of those resources. Hence, production of unconventional reserves in North America and politically unstable Africa turned more attractive. Noble Energy (NBL) is one company with activities in both areas, but performance has weaken during the first quarter of 2014.

Strong Performance Raises Questions

For fiscal year 2013, Noble Energy adjusted income from continuing operations of $1.05 billion, or $2.89 per diluted share, compared to $862 million, or $2.40 per diluted share, in 2012. Also, discretionary cash flow from continuing operations reached $3.44 billion for the year, up 19 percent from 2012, and net cash provided by operating activities for the year was $2.94 billion. “Noble Energy exited 2013 with record production volumes, annual cash flows, and proved reserves, all a result of continued project delivery and strong operational execution across our portfolio,” Charles D. Davidson, Noble Energy's Chairman and CEO said.

At the end of the first quarter for 2014, Noble Energy reported 23 percent decline on profitability. The slowdown is especially surprising since revenue rose 21 percent to nearly $1.4 billion, on the back of a strong performance by the gas segment reaching 80% year-over-year. “Following on our strong 2013, Noble Energy continues to deliver on its growth objectives, with the first quarter laying a good foundation from which to build on for the remainder of the year,” Charles Davidson affirmed.

That may be the last public announcement by Charles Davidson, as he plans to retire on May 1, 2015. As a replacement, the board has nominated David L. Stover as a Director at its April 22, 2014 organizational meeting following the Annual Meeting, and that it intends to appoint Mr. Stover as Chief Executive Officer in October 2014. “Under Chuck's leadership Noble Energy has been transformed into a highly successful global exploration and production company,” said Michael Cawley, Noble Energy's Lead Independent Director.

To Trip Does Not Mean Falling

Noble Energy currently trades at 30.4 times its trailing earnings, carrying a 4% premium to the industry average. On the other hand, revenue growth and net income for the last three years is well above the industry, as so is operating margin at 33%. Debt-to-cash ratio, however, stands at the average as it deteriorated during the last three years, due to a rise on debt and simultaneous cash flow reduction. With such an ambivalent performance, it comes as no surprise that Zacks and Deutsche Bank reiterated a “Neutral” rating. Nonetheless, both institutions boosted target price.

The strong points for Noble Energy are the current shale boom in the US and demand upswing from the natural gas hungry Middle East countries. Additionally, the company is good at what it does thanks to a successful exploration program, with both conventional and unconventional developments, onshore and offshore. Management has also created a well-balanced portfolio of high-quality oil and gas properties across the globe, reducing exposure to operational issues or political concerns.

Noble Energy continues to develop its domestic and international assets, while efficiently improving reserve replacement ratios. Most important, it entered the Eastern Mediterranean region first, signing long-term contacts with two Jordanian companies and Palestine Power Generation Company to provide natural gas. RS Investment Management (Trades, Portfolio) purchase responds to the last event, and you should think about following on its steps as growth prospects are strong and the stock is well priced.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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