On Monday, Chevron Corporation announced a $5 billion (excluding debt) agreement to acquire Noble Energy, Inc. in an all-stock transaction. The deal, which valued Noble stock at $10.38 per share would give its shareholders .1191 shares of Chevron stock per Noble share.
Noble’s $8 billion in debt makes the total value of the deal $13 billion. Despite its debt, Noble’s assets are a good fit for Chevron, and make it a logical choice for the company. As Andrew Dittmar, Senior M&A Analyst at Enverus puts it, “Noble makes perfect sense for Chevron to pursue as an acquisition target given complimentary positions in the Permian plus Noble’s international gas development in the Eastern Mediterranean.” This acquisition comes after Chevron walked away from its bidding war with Occidental Petroleum over Anadarko, which ultimately cost Occidental $57 billion. Walking away from that deal proved useful to Chevron during the sharp decline in the price of oil earlier this year, and has allowed them to emerge in a good position to buy.
Chevron estimates that the deal will allow them to generate $300 million in annual pre-tax cost synergies, and acquire Noble’s proved reserves at low cost, under $5 per oil-equivalent barrel (boe), as well as 7 billion barrels of risked resource for less than $1.50 per boe. The company also “anticipates the transaction to be accretive to ROCE, free cash flow and earnings per share one year after closing, at $40 Brent.” Meaning that if the price of oil stays at or above where it has recovered to, the new acquisitions will be profitable.
The deal is the largest M&A in the energy industry so far this year as the price of oil plunged in March with futures contracts even going negative briefly in April, amid the shutdowns caused by the COVID-19 pandemic. Although the price has partially recovered, it is still too low for many smaller players to avoid bankruptcy.
This deal foreshadows further activity in the industry as some smaller companies in the oil sector that were hard hit by the price crash may face investor pressure to accept acquisition deals.
According to Dittmar, “[t]his deal lays out the blueprint for what post-COVID consolidation will likely need to look like with all-stock consideration.” More deals like this one may not be far behind, although as Dittmer points out, “While potential targets may be more plentiful, there aren’t that many companies with Chevron’s balance sheet strength and investor support to make up a buyer base.”
So, although the door to more mergers and acquisitions is open, it is still to be seen whether a wave of consolidation will materialize.