Investment house UBS has downgraded its recommendation on Noble Energy (NYSE: NBL) from "Buy" to "Neutral". UBS maintains its $76 price target on Noble.
UBS said that its move is based on price, as it says that Noble's share price has greatly outperformed its peers over the past three months (by 1,820 basis points) and year to date (by 1,200 basis points), and right now the share price appears "rich".
One of the reasons for the outperformance has been investor enthusiasm over the Leviathan structure offshore Israel.
While the analysts see good growth over the next five years, they see slower returns over 2010-2011, and so they downgraded the share.
One of the risks of the downgrade, say the analysts, is a real exploration success at Leviathan. Noble plans to begin its first drill at the prospect in early October. However, UBS does not expect the results before the end of the year.
UBS believes success at Leviathan could add $4-5 per share to Noble's net asset value, "not enough to warrant a Buy rating".
They add, "Moreover, in the event of a success, it will likely be several years before a development plan is executed, and a find would not contribute meaningfully to production for 5+ years."
Based on Noble's 40% stake in Leviathan, and the prospect's estimated 50% chance of success, Leviathan’s “risked” net resource potential is about 3 trillion cubic feet, similar to Noble's net interest in Tamar.
Yet the analysts explain that "a success at Leviathan would likely require the resource to be monetized via an LNG project rather than selling directly into the Israeli market. As such, we do not believe Leviathan would carry the same $/Mcfe value as Tamar."
Published by Globes [online], Israel business news - www.globes-online.com - on September 19, 2010
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