Noble Energy Inc. (NYSE: NBL) is set to enter the Eagle Ford and Permian plays when it acquires Rosetta Resources (NASDAQ: ROSE) later this year. The two oil and gas companies signed a definitive merger agreement whereby Noble Energy will acquire all of the common stock of Rosetta in an all-stock transaction valued at $2.1 billion, plus the assumption of Rosetta's net debt of $1.8 billion as of March 31, 2015.
For Noble, whose current domestic oil operations in the DJ Basin have seen natural gas gathering, processing, and compression issues coupled with regulatory uncertainty in Colorado, the deal offers a fair price into substantial high-quality oil inventory. Since the end of 2013, Noble shares have declined 28%, in part, noted Sterne Agee analysts following the announcement, from “lack of investor enthusiasm” for the slower growth of the company’s Colorado assets.
Included in the oil inventory offered up by Houston-based Rosetta are approximately 50,000 net acres in the Eagle Ford Shale and 56,000 net acres in the Permian (46,000 acres in the Delaware Basin and 10,000 acres in the Midland Basin).
Rosetta's assets produced 66 thousand barrels of oil equivalent per day in the first quarter of 2015, and year-end 2014 proved reserves were 282 MMboe. More than 60% of Rosetta's current production and proved reserves are liquids.
For Noble, the $26.62/share offer appears fair, said Stifel analyst Daniel Guffey. The per share price represents a 6% premium to Stifel’s $25 target price, and a 7% discount to its risked NAV using $65/bbl crude and $3.00/MMbtu natural gas prices.
“Assuming flat commodity prices $65/bbl and $3.00/MMbtu, our NAV assumes NBL is paying $26/share for the net proved reserves plus the unproved Eagle Ford acreage and is receiving $3/share for the unproved Permian acreage as upside. Based on the offer price, ROSE shares are valued at a 5% discount to our small-cap peer group based on 2016E EV/EBITDA and price/NAV multiples,” Guffey said.
The implied deal price is a five-month high for shares of Rosetta, but well below the $30-$60 per share range in which shares of the company traded from November 2010 to November 2014, said Sterne Agee analysts Tim Rezvan and Truman Hobbs. That being said, valuing Rosetta’s current production at $50,000/boe (excluding the 10,000 non-core acres in the Midland Basin), the deal “values residual blended core acreage across both plays at an attractive $6.2K/acre.” On a reserves basis, the analysts continued, the deal values Rosetta at $13.83/boe of proved reserve, based on its 282 MMboe of proved reserves at year-end 2014.
Core positions/clean balance sheet
Overall, multiple analysts view the deal as positive for both parties. Rosetta holds core positions in the Eagle Ford and Permian plays, arguably two of the best US oil shale plays, but funding development has proven difficult.
Pairing with Noble and its clean balance sheet ($1.7B of cash and <2x net debt/FY15E EBITDA) makes sense for Rosetta, said Mike Kelly with Global Hunter Securities. The company's 2015 capital program of $350 million represents a 71% cut year over year and, despite a recent equity raise, Global Hunter analysts calculate Rosetta's leverage > 5x net debt/FY16E EBITDA.
Noble Energy has identified more than 1,800 gross horizontal drilling locations for development from the assets, anticipating a compounded annual production growth rate of approximately 15% over the next several years. Additionally, the company is expected to increase spending in the Gates Ranch Eagle Ford assets. And it could be just the beginning.
The deal offers Noble Energy “substantial high-quality oil inventory, albeit in a somewhat scattered fashion,” noted Sterne Agee analysts Tim Rezvan and Truman. The fact that Noble is acquiring a 47,000 block in the Delaware Basin and a 50,000 net acre block in the Eagle Ford, the deal may prove to be just the beginning of a Texas pivot for the company, they continued.
“We believe Noble would have interest in additional bolt-ons in both plays,” they said. And given only a small increase in estimated pro forma net debt/TTM EBITDA for the combined entity (2.1x, versus 1.9x for stand-alone Noble), the analysts believe additional deals would be “easily absorbed”.
Petrie Partners Securities LLC acted as exclusive financial advisor to Noble Energy. Skadden, Arps, Slate, Meagher & Flom, LLP acted as legal advisor to Noble Energy. Morgan Stanley & Co. LLC acted as exclusive financial advisor to Rosetta. Latham & Watkins LLP acted as legal advisor to Rosetta.
Following the transaction, shareholders of Rosetta are expected to own 9.6% of the outstanding shares of Noble Energy.
Completion of the transaction is subject to the approval of the Rosetta shareholders and certain regulatory approvals and customary conditions. The transaction is expected to close in the third quarter of 2015.