By Zaid Dudhniwala, BSc Economics @LSE
OVERVIEW OF THE ACQUISITION:
- Acquirer: Chevron Corporation (NYSE: CVX)
- Target: Noble Energy, Inc. (NASDAQ: NBL)
- Estimated value: $13B
- Financing: All-stock transaction
- Announcement Date: 20/07/2020
- Acquirer Financial Advisers: Credit Suisse Securities (USA) LLC
- Acquirer Legal Advisers : Paul, Weiss, Rifkind, Wharton & Garrison LLP
- Target Financial Advisers: Financial: J.P. Morgan Securities LLC
- Target Legal Advisers: Vinson & Elkins LLP
Chevron Corporation looks to boost their market share in the oil & gas industry through a $13B acquisition of American energy powerhouse, Noble Energy. The deal values the company’s equity at $5B, estimating their debt at approximately $8B. The all-stock transaction would involve Noble energy shareholders receiving 0.1191 shares for every NBL share they hold. The deal values Noble at $10.38 per share, which places an unimpressive 7.5% premium on the natural gas giant’s closing trading price on Friday, 17th of July. This is quite surprising for a company which was trading at $27 per share just 15 months ago.
Chevron looks to be the first mover in a sector that is very likely to see a lot of transactions through the Covid-19 economic recovery. The market crash earlier this year followed by the WTI crash in April has caused major financing issues for a lot of energy companies. As the larger players hold strong balance sheets which weathered the storm earlier this year, smaller players took a strong hit, indicating the likelihood for there to be many deals as such taking place as time goes on. Chevron chairman, Michael Wirth, further pushed this agenda on the day the deal was announced by proclaiming that “this is a cost-effective opportunity for Chevron to acquire additional proved reserves and resources”, as Chevron agreed to pay $5 a barrel for Noble’s proved reserves.
COMPANY DETAILS — Chevron Corporation (NYSE: CVX):
Chevron Corporation is a large American multinational energy corporation providing and assisting energy and chemical operations in over 180 countries worldwide. With a prominent presence in North America, Gulf Coast, Southeast Asia, South Korea and Australia, Chevron has diversified into different revenue streams, predominantly reliant on non-renewable energy sources. They provide impressive services in the administrative, financial management, and technology support for their Upstream & Downstream operations. This includes the exploration and collection of crude oil and natural gas, but also the refinery processes that follow on from this extraction, especially so for Crude Oil.
Despite this strong position in the global market and Chevron’s 140 year history, the company has experienced falling revenues since 2011, with a slight resurgence in the latter parts of the last decade. The company looks to increase their production going forward, as it tries to benefit from the economic recovery expected in 2021 and onwards.
- Founded in: 1879
- Headquartered in: San Ramon, California, United States
- CEO: Michael Wirth
- Number of Employees: 48,200
- Market Cap: $168.2B
- EV: $192.9B
- LTM Revenue: $135.4B
- LTM EBITDA: $28.6B
- EV/ LTM Revenue: 1.4x
- EV/ LTM EBITDA: 6.7x
COMPANY DETAILS — Noble Energy, Inc. (NASDAQ: NBL):
Noble Energy, Inc., an independent energy company, engages in the acquisition, exploration, development, and production of crude oil and natural gas worldwide. The company also owns, operates, develops, and acquires domestic midstream infrastructure assets in the DJ and Delaware Basins. Its assets are located in the US onshore unconventional basins and various global offshore conventional basins in the Eastern Mediterranean and off the west coast of Africa.
The company was never as large as the oil & gas powerhouses, the likes of ExxonMobil and Shell for example, were never competition for Noble. They have their own niche and had strong revenue growth over the past few years, slowly building up a respectable portion of the market. This is evident in their recent Q2 2020 earnings, highlighting strong operational performance and cost reductions, despite a struggling trend in share price.
- Founded in: 1932
- Headquartered in: Houston, Texas, United States
- CEO: David L. Stover
- Number of Employees: 2,282
- Market Cap: $5.1B
- EV: $13.4B
- LTM Revenue: $4.4B
- LTM EBITDA: $2.5B
- EV/ LTM Revenue: 3.0x
- EV/ LTM EBITDA: 5.4x
STRATEGIC RATIONALE:
Chevron is being applauded by industry experts for this transaction. Purchasing Noble at such a low premium, whilst valuing their reserves at a mere $5 per barrel, is a small dent in Chevron’s balance sheet for a transaction that will be highly accretive to free cash flow, earnings, and book returns, only just one year after close.
The acquisition provides a new outlook for Noble going forward, as it’s sizeable debt was looking to increase further in the current economic climate. This transaction can help in that respect, with there also being subsequent growth and usage of their current assets as well as a reasonable price for their reserves, which in current volatile market conditions, seems a good deal. In addition, the midstream services that Noble provides align well with Chevron’s upstream and downstream operations, indicating the benefits to both parties.
Not only that, but both companies have a relatively similar profile, which makes Noble a good investment for synergies, with international gas assets and rich US shale assets. Having left a possible $50B acquisition of Anadarko last year, which is now heavily loss-making, Chevron is much better off now, having waited, in acquiring Noble. In addition to ESG efforts, Noble’s emissions intensity (a measure of carbon pollution per unit of output) was less than Chevron’s, pushing Chevron “in the right direction”, according to Wirth.
RISKS AND UNCERTAINTIES:
Despite the positive outlook in terms of synergies and returns, there are still some negatives to the deal. Although there are some evident synergies, the substantially smaller size of Noble does not necessarily mean that Chevron will benefit from this transaction in all of their operations. Only specific geographies will be boosted, and some new avenues for exploration, such as in Israel, will be available. This may not be that much of a value-add for a company the size of Chevron.
With regards to Israel, Chevron will be entering choppy geopolitical waters in the Gulf region, especially in the Israeli offshore. With the rising conflict, both civil and political, there is a risk of such tensions leading to economic sanctions between nations. Any form of embargoes/quotas/tariffs will be detrimental to business in the region. Not only that, but this uncertainty can also have a large impact on oil prices, which could be another element of risk from this deal. The transaction is not completely sanitised from any negative effects.
OUR VIEW:
Despite the unstable economic and market climate earlier this year, there is likely to be a rebound in M&A activity in the energy sector. Chevron places itself very competitively in such a situation, being able to acquire Noble on the cheap, whilst adding significantly to their expansion in oil and natural gas services. As Chevron is sanitised from the ESG-related scrutiny from shareholders that a lot of European giants such as BP & Shell receive, this deal seems very positive overall for Chevron in their efforts to boost market share, making the wait from the Anadarko break-up worthwhile.
