By: Anthony Borgese, Susan Xiao, Mariana Velasco (Wharton) and Zahra Malik, Devi Vanalia (University of Manchester)
Overview of the deal
Acquirer: Chevron Corporation.
Target: Noble Energy
Implied Equity Value: $5bn
Total Transaction Value: $13bn
Close Date: Estimated 4Q20
Target Advisor: Vinson & Elkins LLP
On July 20, 2020, Chevron announced its acquisition of Noble Energy for a total of $5 billion in an all stock transaction, implying a value of $10.38 per share. In the past few years, Noble has struggled with funding and with its debt load. The acquisition will give Chevron access to largely undeveloped resources mainly in Israel and the Southwestern United States, promising enhanced future cash flows and portfolio. This acquisition is widely considered to be an excellent deal for Chevron considering the low acquisition price and the potential to grow Chevron’s production potential.
Chevron’s acquisition of Noble was executed with a relatively low premium of 7.5% over Noble’s July 17th closing stock prices. This both reflects the hits that oil and natural gas assets have experienced in 2020 and a relatively dim outlook for oil and gas acquisitions in the near future. However, it is still the first major energy acquisition since the beginning of the pandemic.
Company Details: Chevron
Chevron is an American multinational energy corporation. As a successor company of Standard Oil, Chevron is now one of the world’s largest companies, ranking fifteenth in the Fortune 500 as of March 2020. Chevron is actively involved in every aspect of the oil, natural gas, and the geothermal energy industries. Aside from producing and transporting crude oil and natural gas, refining, marketing, and distributing fuel, the company is also involved in chemical and mining operations, power generation, and energy services.
Founded in 1879 and headquartered in San Ramon, California.
Chairman & CEO: Michael Wirth
Number of Employees: 48,200
Market Cap: $168.16bn
EV: $192.95bn
LTM Revenue: $142.817bn (as of March 31st, 2020)
LTM EBITDA: $35.871bn (as of March 31st, 2020) LTM EV/Revenue: 1.35x
LTM EV/EBITDA: 5.38x
Company Details: Noble
Noble Energy operates as an exploration and production company. The company is in charge of the acquisition, exploration, and development of crude oil and natural gas. Noble energy operates in the United States, Israel and Equatorial Guinea. The company also operates and acquires domestic midstream infrastructure in the DJ and Delaware Basins.
Founded in 1932 and headquartered in Houston, Texas.
Founder: Lloyd Noble
CEO: David L. Stover
Number of Employees: 2,330
Market Cap: $4.90bn
EV: $12.30bn
LTM Revenue: $4.406bn
LTM EBITDA: $2.814bn LTM EV/Revenue: 2.87x
LTM EV/EBITDA: 4.37x
Short-term consequences
Chevron is one of the world’s largest natural gas producers. The acquisition of Noble Energy provides Chevron with a cost-effective opportunity to acquire additional proved reserves and resources. Based on Noble Energy’s year-end 2019 proved reserves, it will add approximately 18% to Chevron’s year-end 2019 proved oil and gas reserves, with an average acquisition cost of less than $5 per barrel of oil equivalent (BOE).
The acquisition will also lead to attractive synergies for Chevron. The transaction is expected to achieve run-rate operating and other cost synergies of $300 million before-tax within a year of closing. It will also be accretive to return on capital employed (ROCE), free cash flow and earnings per share one year after closing, based on a Brent price of $40 per barrel.
As the COVID-19 pandemic continues to spread globally, the oil-and-gas industry has been severely impacted, causing prices to plummet and leading companies to shut in wells and postpone projects. Acquiring Noble allows Chevron to add 3 percentage points to its net debt-to-total capital figure, allowing Chevron to enter the crisis with a strong balance sheet.
On the other hand, the deal may lead to job losses. The deal is expected to yield at least $300 million in yearly price financial savings, partially head-count related synergies. In light of the pandemic, both companies have already been cutting jobs. Majority of the cost-cutting will come from home-office functions due to the “overlap” between Chevron’s and Noble’s field operations. Additionally, the deal has the potential to serve as a benchmark for future transactions in the space.
Long-term Upsides
Buying Noble Energy’s low-capital, cash-generating offshore assets will enhance Chevron’s portfolio both in the U.S. onshore and internationally. Chevron’s leading U.S. unconventional position is strengthened with de-risked acreage in the DJ Basin that can be further developed by leveraging Chevron’s proven factory-model approach. As well as this the Permian Basin provides 92, 000 largely contiguous and adjacent acres, expanding US Chevron’s shale position.
The new deal also significantly expands Chevron’s position internationally, such as in the Eastern Mediterranean, where several countries are racing to develop the region’s large gas reserves for export. It gives Israel’s energy sector the investor that its government has wanted since Noble began finding huge offshore gas reserves there more than 20 years ago. Chevron will now become the operator of the giant Leviathan field and take over Noble’s other Mediterranean assets, including in Cyprus. It is expected to generate strong returns and cash flow with low capital requirements.
Furthermore, the acquisition will offer further growth potential in West Africa, where Noble has a strong position in Equatorial Guinea following a final investment decision on the Alen gas monetization project in 2019, with start-up planned for 2021.
Risks and Uncertainties
Although the Noble Acquisition will be an all-equity deal, Chevron will still acquire $7 billion of Noble’s debt. In previous debt-laden oil acquisitions, such as Occidental Petroleum’s $55 billion acquisition of Anadarko Petroleum last year. In this acquisition, both it’s overpriced nature and the extra debt that Occidental took on have put the company into a compromising position as of late. With uncertainty in the future due to COVID-19, Chevron may face similar challenges, although its acquisition was at a much more reasonable price and Chevron’s $23 billion of net debt is relatively low for a company of its size.
The acquisition is expected to trigger a string of deals in the oil sector as deep-pocketed groups such as Chevron and ExxonMobil lead a wave of consolidation across the heavily indebted US shale patch. Smaller companies that are struggling could be acquired by larger players that are better equipped to weather the storm. For example, Vitol, the world’s largest independent oil trader announced on Monday it was establishing a US oil production business called Vencer Energy looking to acquire “mature, producing oil and gas assets”. This potentially increased consolidation (and therefore decreased competition) in the industry may allow for increased prices, which may further increase oil prices beyond the already predicted increases in later 2020 and 2021. However, with the ongoing pandemic still raising uncertainty around the profitability of oil and related industries, the acquisition of Noble and its high levels of debt may prove to be too large a burden in the coming months.