Thursday, December 30, 2010

Barron's Does Some Hatin' on Noble Energy (NBL)

Following up on yesterday's "Noble Energy Has More Upside on Huge Gas Find (NBL)", here's the other side of the story. A Barron's Take:

Do Well By Avoiding Noble Energy Shares
Upside from the firm's Israel gas reserve is already priced into the stock.
Shares of Noble Energy are leading an energy sector rally today, following positive news about the company's Leviathan gas reserve, 80 miles off Israel's shore.

Noble (ticker: NBL) said this morning that the gas reserve contains about 16 trillion cubic feet of natural gas, in line with the company's estimates. The gas is located in about 5,400 feet of water, and is the largest energy discovery in the country to date, with the potential to turn Israel into a gas-exporting nation.

Noble and its partners in the project, including units of Israel's Delek Group Ltd., have been exploring the site since October.

Noble's stock jumped $2.92, or 3.44%, to $87.90 in midmorning trading on the news. However, we think that investors who jump in now would be paying a high price for success.

At this point, there is no doubt that high expectations are already baked into the stock, which hit a fresh 52-week intraday high in today's trading, and the shares are richly valued. Noble trades at 22.7 times earnings, well ahead of its five-year historical average of 14.6 times. Even on a forward-earnings basis, at 20.3 times, it's no bargain.

When Sterne, Agee & Leach analyst Michael McAllister initiated coverage of the stock, he noted that the fact that "successful execution of large-scale international projects [is] currently priced into the stock" as one of the main reasons for his Hold recommendation.

Nor can such a premium valuation seem justified when Noble's long-term growth rate is 7%, compared to the industry average of 13.3%. Analysts project earnings per share will grow just 5.7% next year from 2010, and the stock is already bumping up against the Street's average target price of $88.
Before today's news, Morgan Stanley analyst Stephen Richardson wrote in a research note that while confirmation of Leviathan's contents would likely offer a pop, ultimately "valuation and broader fiscal questions surrounding oil and gas in Israel are likely to act as an overhang for performance," hence his Equal Weight rating....MORE
This Point-Counterpoint is worth a couple minutes: