The joint monthly web chat for subscribers of The Energy Strategist (TES) and MLP Profits (MLPP) took place two weeks ago. The chat is conducted by Igor Greenwald, who is managing editor for TES and chief investment strategist for MLPP, and myself on the second Tuesday of each month.  

We had quite a busy session, and had a few questions remaining at the end. Some required an extended answer, or a bit more research. Many of the remaining questions were MLP-focused, and were answered in this week’s MLP Investing Insider.

Q: Which companies besides Cheniere Energy have been granted a license to export natural gas?

This is one that I did answer during the chat, but it warrants some elaboration. Companies wishing to export liquefied natural gas (LNG) to countries that lack a free trade agreement (FTA) with the US require approval from both the Federal Energy Regulatory Commission (FERC) and the US Department of Energy (DOE). The non-FTA countries are in many of the most lucrative LNG markets, such as southeast Asia.

The licensing process and the cost of obtaining FERC approval are more onerous than is the DOE approval process, and for the past two years Cheniere Energy (NYSE: LNG) has been the only company to receive both approvals. That changed last month when Sempra Energy (NYSE: SRE) became the second company to win FERC approval. Sempra’s Cameron LNG facility is to based on the Gulf Coast in Louisiana.

The Cheniere facility is under construction, and is expected to start up in late 2015 or early 2016. The Cameron LNG export facility, with an estimated cost of $9 billion to $10 billion, is not yet under construction. The approval for Cheniere is for 2.76 billion cubic feet per day (Bcfd) of natural gas exports, and the one for Sempra is for 1.7 Bcfd.  

In 2013, the US produced 66.5 Bcfd of natural gas, up 11.4 Bcfd in just the past five years. Presently there are another 13 proposals awaiting FERC approval with a total proposed export capacity of 17.9 Bcfd:


LNG export proposals awaiting FERC approval. Source: FERC

With Cheniere’s head start, it’s likely to enjoy two to three years as the only major LNG export option in the US. Dominion Resources (NYSE: D) has stated that it expects to receive FERC approval shortly, but environmental activists are promising to fight its East Coast project.

Q: What are your thoughts on Noble Energy?

Noble Energy (NYSE: NBL) is a mid-tier (~$25 billion market capitalization) independent oil and gas producer. It’s very diversified geographically with operations in the Denver-Julesburg (DJ) Basin and the Marcellus Shale in the US, as well as in the deepwater Gulf of Mexico, offshore Eastern Mediterranean and offshore West Africa.

In 2013, Noble’s product mix was 54% gas, 38% oil, and 8% natural gas liquids (NGLs). At year end, the company had 1.4 billion barrels of oil equivalent (BOE) of proved reserves.

Noble’s largest operation is in the DJ Basin in Colorado, where it holds leases on 610,000 net acres. Development there is focused on horizontal drilling in the Niobrara and Codell formations. Noble produced 95,000 barrels of oil equivalent (BOE) per day in the DJ Basin in 2013 — over a third of the company-wide volume — and had 450 million BOE of proved reserves there at the end of 2013.

Noble has also been making major investments in the Marcellus in southwest Pennsylvania and northwest West Virginia, where it had 350,000 net acres under lease at year end. In 2013, production in the Marcellus averaged 144 million cubic feet of natural gas equivalent per day, and at year end the company had proved Marcellus reserves of 1.5 trillion cubic feet.

Noble plans to spend $4.8 billion on projects in 2014, $2 billion of which will be invested in the DJ Basin, with another $1 billion-plus allocated to the Marcellus. The company expects its aggressive investment strategy to pay off to the tune of an 18% compound annual growth rate (CAGR) in production through 2018, and to more than double its proved reserves by then to 2.9 billion BOE.

Noble has an Enterprise Value/EBITDA of 9.6 for the past 12 months, and its Total Debt/Equity for the most recent quarter is a bit high at 56. In comparison, EOG Resources (NYSE: EOG) has an Enterprise Value/EBITDA of 8.4 for the past 12 months, and its Total Debt/Equity for the most recent quarter is 36.9. But of course EOG is one of our long-time favorites, and perhaps an unfair comparison.

To conclude, Noble is a decent company with a solid outlook but we believe there are better options out there.  

Q: Any thoughts about Laredo Petroleum? They appear to have very good properties.

Laredo Petroleum (NYSE: LPI) is a smallish (~$4 billion market capitalization) oil and natural gas producer in the booming Permian Basin, where it holds leases on ~144,000 net acres.

The company focuses on multi-zone stacked-horizontal development, and has four identified shale zones targeted for horizontal drilling (Upper, Middle, and Lower Wolfcamp and Cline shales). Laredo has identified more than 3,500 horizontal locations suitable for development, with a resource potential of 1.6 billion BOE. Laredo has an approved capital budget of $1 billion for 2014, and $840 million will be used for drilling and completion.

The product mix of the company’s reserves is 55% oil and 45% natural gas, and 35% of its reserves is proved developed. Over the past two years Laredo has rapidly grown its Permian Basin reserves. The company has grown proved reserves from 101 million BOE at the end of 2011 to 204 million BOE by the end of last year. Laredo is forecasting a CAGR for production of 30-35% through 2016.

The company manages risk through hedging. In 2014, 70% of projected oil production is hedged at a floor price of $88 per barrel, and in 2015 65% is hedged at $79.50. For natural gas, 50% of expected 2014 production is hedged at $3.45 per million Btu (MMBtu) and in 2015 65% is hedged at a floor price of $3/MMBtu.

Laredo’s share price is up 38.4% over the past 12 months, and that’s after a pullback of 7% in the last week. Between late October 2013 and mid-January of this year, the share price dropped more than 30%, an indication of the kind of volatility an investor could expect from this stock. Notably, short interest in Laredo was reported to have spiked last month.

Laredo has a lot of potential, and is in one of the hottest oil plays in the country. But there are risks. The company has a relatively high level of debt, and if its projections for its undeveloped reserves (65% of the total) fall short, then the share price could fall sharply.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Whiting’s Friendly Wager   

As corporate marriages go, Whiting Petroleum’s (NYSE: WLL) friendly all-stock bid to merge with Bakken rival Kodiak Oil & Gas (NYSE: KOG) was the equivalent of Vegas quickie between longtime neighbors. Whiting and Kodiak are in fact neighbors in Denver, where both have their headquarters, and more crucially in the Williston Basin, where the combination of their intermingled leases promises to create powerful efficiencies and economies of scale for what would be the Bakken’s largest producer.

The $3.8 billion in stock offered by Whiting Monday (along with the assumption of $2.2 billion in Kodiak debt) provided a modest 5% premium over Kodiak’s volume-weighted average price over the past two months, but represented a 2% discount from Friday’s close. Both boards have approved the deal, and given Kodiak’s recent efforts to find a buyer it seems unlikely to garner a competing bid at this point.

This is good news for Whiting, as reflected in its shares’ 7.7% rally Monday. The combination will create a Williston leader with a combined 855,000 net leased acres in the play, reduced costs, stronger financials than Kodiak’s and a faster growth rate than Whiting would have managed on its own.

After previously recommending profit-taking in this Growth Portfolio outperformer, we’re calling WLL a Buy again below $90.

— Igor Greenwald