The two other E&P investments we have are Noble Energy (NBL, Financial) and SM Energy (SM). We chose to keep the NBL stock we received when NBL recently acquired Rosetta Resources. NBL has a diverse portfolio of low cost assets, balanced across commodities and regions. NBL management can grow production in 2016 with a greatly reduced capital budget should they choose to do so. They also have an opportunity to develop a massive gas resource off the coast of Israel where most of the production volumes would be at fixed prices under multi-year contracts, essentially creating a long duration and highly profitable stream of cash flow that would deserve a premium valuation multiple. Let us take a brief moment here to state that we voted against this deal as we had confidence that Rosetta Resource’s assets were of good quality and that the management team was selling them at very depressed levels. We pride ourselves on protecting our shareholders against permanent capital impairment but this was a takeunder17 so we were not successful. We congratulate the NBL management for a shrewd deal (one of the reasons we decided to keep the stock). Our third E&P company, SM, needs to do something to extend the depth of their future drilling inventory, whether organically or through an acquisition (opportunities do exist), but we believe they have the balance sheet and the CEO to do it. In the meantime, they have low cost assets and the stock is trading at a discounted multiple. Flexibility is a prized asset in this environment and they have it.
From FPA Capital Fund (Trades, Portfolio)'s third quarter 2015 letter to shareholders.
