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Leviathan startup heralds free cash flow era for Noble Energy


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Leviathan startup heralds free cash flow era for Noble Energy

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The Leviathan gas field offshore Israel in the Eastern Mediterranean began production Dec. 31, 2019.
Source: AP Photo

Noble Energy Inc. will immediately reap the financial benefits from gas production at the Leviathan field offshore Israel after a long and winding road to development, industry experts said.

A joint venture between Noble and Israeli drillers Delek Drilling LP and Ratio Oil Exploration LP, the field's first phase of development came online Dec. 31, 2019, with a capacity of 1.2 Bcf/d. The biggest natural gas field in the Eastern Mediterranean, Leviathan is estimated to have 22 Tcf of recoverable gas.

For Noble, the guaranteed revenue from long-term, take-or-pay midstream contracts is a windfall amid pressure from investors for U.S. independent drillers to prioritize returns over production and operate with limited production growth and reduced budgets.

"With the startup of Leviathan, [Noble] will quickly transition from a company that was outspending cash flow to one that will generate a 2020 free cash flow yield of ~6%, better than our bellwether peer group average," Stifel Nicolaus & Co. upstream analyst Michael Scialla said in an email. "Steady volumes from Leviathan lower [Noble's] base production decline rate to roughly 22%, the lowest in our bellwether group, and underpin management's three-year plan to generate $1.5 billion of free cash flow based on a $50 [West Texas Intermediate] oil price."

Analysts at energy investment bank Tudor Pickering Holt & Co. wrote in a Jan. 2 note to clients that they expect Noble to use that free cash flow for debt reduction "given relatively elevated leverage metrics," while analysts at Bank of America Securities told clients on Dec. 31, 2019, that the ability to incrementally increase production at both Leviathan and neighboring offshore gas field Tamar is a "low cost option embedded in [Noble's] share price not available to any other U.S. [exploration and production]."

Getting from Leviathan's discovery at the end of 2010 to first production, however, involved substantial political, economic and environmental opposition. In Israel, creating a regulatory framework for determining export quotas and antitrust rules took years to resolve, while the final hurdle toward the end of December was a court-ordered injunction barring commissioning activities due to environmental concerns over emissions from the project.

Regionally, the developers also faced political hurdles once they decided that the project's first phase would involve exports via regional pipelines as opposed to LNG shipments or a much larger cross-border pipeline. Noble, Delek and Ratio secured a 15-year, 1.6 Tcf contract with Jordan's state-owned National Electric Power Company but not without public opposition from Jordanians against expanding economic ties with Israel.

Still, the companies forged ahead with a 2017 final investment decision.

"I guess what most surprised me is that the partners were willing to take FID with only about half the gas pre-contracted, albeit at a good price," Nikos Tsafos, a senior fellow with the energy and national security program at the Center for Strategic and International Studies, said in an email. "I think there was always this idea that Leviathan would need some massive off-take to move forward, and at FID the partners had just 525 [million cubic feet per day] in firm sales agreements."

Even more extensive negotiations were required to facilitate the flow of gas to Egypt after the partners in 2018 agreed to supply 1.15 Tcf of gas for 10 years to Dolphinus Holdings Ltd. They wanted to use a defunct pipeline that had previously shipped Egyptian gas to Israel, owned by Eastern Mediterranean Gas Co. S.A.E., until those exports collapsed in 2012. Customer Israel Electric Corp. sued for compensation.

In protest of a 2015 International Chamber of Commerce ruling that ordered Egypt's state-owned energy companies and Eastern Mediterranean Gas to pay Israel Electric $1.8 billion, the pipeline owner refused to sell a stake to Noble and its partners unless that payment was significantly reduced. It was not until the Egyptian parties and Israel Electric signed a $500 million settlement in June 2019 that the Leviathan consortium could complete a $518 million deal to acquire a 39% stake in Eastern Mediterranean Gas.

With exports to Jordan up and running and gas shipments to Egypt on the horizon, potential off-take solutions for Leviathan's further development are slowly taking shape. Since existing supplies from Tamar already provide approximately 50% of Israel's electricity, according to Delek, and Leviathan has contracts in place with several Israeli providers, that strategy will likely focus on exports. Noble, Delek and Ratio are studying the feasibility of a floating LNG terminal in Israel, and Exxon Mobil Corp. was reportedly in initial talks to build the facility earlier in 2019.

The governments of Italy, Greece, Cyprus and Israel, meanwhile, are talking about building a pipeline to transport Israeli and Cypriot gas to Europe, but Tsafos said that it "is the option of last resort — the plan that companies will turn to if their other evacuation routes stumble on difficulties" because it cannot necessarily garner sufficient commercial support.

In the meantime, Lebanon-based political risk consultant and Middle East Strategic Perspectives co-founder Mona Sukkarieh said in an email that while remaining opposition in Jordan and Egypt to the Leviathan contracts can likely be contained without affecting gas flows, "popular mobilization" against Israeli imports will hold firm in Jordan. The Jerusalem Post reported on Dec. 29, 2019, that "transformers servicing a gas transfer station" that is part of the exports supply chain were torched in northern Jordan the previous day.