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Enhancing Both Parts: Noble Energy IPO Carve-Out Of Noble Midstream Partners LP

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  • Increased activity and performance improvements across all basins led to organic growth.
  • We are reiterating ‘Buy’ rating on NBL at $46.00 per share.
  • We are upgrading our rating on NBLX with ‘Buy’ at $55.00 per share.

Noble Energy, Inc. (NYSE: NBL) carved-out (IPO) midstream assets, Noble Midstream Partners LP (NBLX) on September 15, 2016.  At the beginning price range of $19.00 to $21.00 for the IPO, it represented NBL’s 39.3% ownership interest in the partnership.  It priced at $22.50.

NBL is currently one of the largest producers in the region of the DJ Basin. Formation of a Master Limited Partnership was the next logical move to streamline operations and gather focus on NBL’s E&P efforts. The IPO was timed for favorable market optimism. NBL received approximately $257 million from the proceeds of the IPO. Dedicated acreage granted to NBLX provided the partnership with sufficient organic growth opportunities.

Valuation

NBL achieved significant operational efficiencies in drilling during 2H16, which is bringing down both drill time, and drilling costs. At the DJ Basin, the average drill time has been reduced to less than six days. At Delaware, the average drilled footage per rig per day has been increased by 30% from levels at the beginning of the year. The enhanced completion techniques implemented in FY16 helped 19 wells in Wells Ranch reach peak production.

DJ, Delaware, and Eagle Ford are tremendously driving U.S. onshore oil production growth. NBL will be adding a third rig to DJ Basin in 2Q17, which is expected to add to FY17 volume growth. The Clayton Williams acquisition will enhance NBL’s Delaware position by bringing in 15 wells to the company’s acreage.

Robust production growth in NBL’s DJ Basin is fuelling NBLX’s oil and gas gathered volumes. NBL’s enhanced completion techniques are also driving NBLX fresh water delivery volumes. In FY17, NBLX will be constructing backbone infrastructure to support third party growth in the Greeley Crescent area. NBLX is also building similar infrastructure in the Mustang area to provide oil, gas, and produced water gathering for an upcoming NBL rig in the region. Most importantly, NBLX’s JV with Plains All American to purchase Advantage Pipeline will expand the MLP’s Delaware Basin exposure. We believe the concomitant third party potential from this deal will be a major driver of growth in FY17.

NBLX holds an undrawn $350 million revolving credit facility. We are assuming a $100 million drawdown for FY17. We believe that NBLX possess distinct growth opportunities owing to its synergistic relationship with NBL.

Company Description

Noble Energy, Inc. (Parent)

Noble Energy, Inc. (NBL) is a leading independent energy company engaged in worldwide crude oil, natural gas and natural gas liquids (NGLs) exploration and production. NBL operates in five core areas - the DJ Basin, the Marcellus Shale, the deepwater Gulf of Mexico, offshore West Africa and offshore Eastern Mediterranean.

Noble Midstream Partners LP (Carve-Out)

Noble Midstream Partners LP (NBLX) is a growth-oriented master limited partnership formed by NBL, to own, operate, develop and acquire domestic midstream infrastructure assets. NBLX provides crude oil, natural gas, and water-related midstream services for NBL through long-term, fixed-fee contracts. NBLX’s operating assets are currently focused in the Denver-Julesburg Basin in Colorado.

Upcoming Transactions

NBLX announced on February 13, 2017, its entry into a 50-50 joint venture with Plains All American Pipeline, LP (NYSE: PAA) to acquire Advantage Pipeline, LLC. Advantage possesses shipping capacity of 150,000 barrels/ day from Reeves County to Crane County (Texas), and also includes roughly 490,000 barrels of total crude storage. The JV will purchase Advantage Pipeline for $133 million, with NBLX’s 50% interest amounting to $66.5 million, which will be funded with cash on hand and its undrawn credit facility. The transaction will notably expand NBLX’s Delaware footprint.

On January 16, 2017, NBL announced that it will be acquiring all of the outstanding stock of Clayton Williams Energy for $2.7 billion, in NBL stock and cash. The deal will bolster NBL’s position in the Delaware basin, and brings along with it approximately 71,000 net acres with 2,400 drilling locations identified.

Reiterating ‘Buy’ on NBL

On February 13, 2017, Noble Energy, Inc. (NYSE: NBL; $37.65; Market Capitalization: $16.2 billion) and its master limited partnership, Noble Midstream Partners LP (NYSE: NBLX; $46.85; Market Capitalization: $1.5 billion) reported results for fourth quarter and full year results for FY16. NBL achieved full year sales volumes of 420 MBoe/d, up 18% YoY. For FY16, NBL reported net loss of $998 million, and adjusted EBITDAX of $2.5 billion.

Increased activity and performance improvements across all basins led to an organic replacement of 1.9 x FY16 production. NBLX reported net income of $28 million, and EBITDA of $31 million, for FY16. NBLX achieved record oil and gas gathering volumes for 4Q16 of 64,000 MBoe/d, driven by robust activity in the DJ Basin.

Valuation and Recommendation

We value NBL at $19.9 billion or $46.00 per share using sum-of-the-parts valuation methodology. We are reiterating ‘Buy’ rating on NBL. We value NBLX at $1.8 million or $55.00 per unit. We are upgrading our rating on NBLX with ‘Buy’.

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