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Analysts like Chevron's price tag for Noble Energy, question asset fit

Chevron Corp. CEO Michael Wirth called the assets of Noble Energy Inc. "complementary to Chevron's global portfolio" when he announced Chevron's $13 billion takeover of the independent producer, but not all analysts agree that Noble's holdings are a good fit. The rather cheap price tag, on the other hand, could make the move more than worthwhile for Chevron.

During a call on July 20, Wirth touted the "complementary nature of Noble Energy's core assets in the U.S.," citing the Permian and DJ basins as two regions where Noble's holdings are especially valuable.

"The Permian is a targeted bolt-on to our premier existing position, adding 92,000 net acres in the core of the Delaware Basin," the CEO said. "In Colorado, the DJ adds a large, contiguous position with no leasehold drilling requirements where Noble Energy has been a very successful operator."

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While analysts agreed that Noble's Permian assets could hold value for Chevron, at least a couple questioned the rest of Wirth's assertion.

"This is one of the worst asset fits I've ever seen," KeyBanc analyst Leo Mariani said, pointing to Noble's assets in the DJ Basin and Eagle Ford Shale in particular. "They missed on [Anadarko Petroleum Corp.] and were buying this at the low point in the cycle. They're just going, 'If there's ever been a time to buy, it's now.'"

Morningstar analyst David Meats struck a similar tone, saying the price tag made more sense from Chevron's perspective than the asset mix.

"I don't think the assets are a particularly logical fit, but the deal price is very attractive — half of our prior $20 fair value estimate for Noble shares," Meats said. "So I think the motivation is just taking advantage of the opportunity to get incremental reserves at a very low price."

While the deal seems to make sense from Chevron's perspective, the motivation for Noble Energy to sell out raised a few more questions.

"I'm surprised they were willing to sell," Meats said. "They did have above-average leverage, but no imminent debt termouts or anything."

Mariani speculated that the combination of the oil price crash, debt concerns and a lack of liquidity were three likely reasons Noble put itself on the market. During the company's first-quarter earnings call, President and COO Brent Smolik said the company had reduced its onshore U.S. capital plan to $575 million for 2020 and spent 55% of that in the first quarter. The company suspended all completion activity and cut its drilling activity to a single rig in the DJ Basin.

"Noble is under-capitalized. They can't do what they want to do, so this is probably a better way to go," Mariani said.

The potential for future problems in the DJ Basin due to increasingly vocal environmental groups in Colorado could have helped push Noble over the edge.

"I'm guessing [Noble] management has a pessimistic outlook on commodity prices and/or fracking rights in Colorado," Meats said.

Both Chevron and Noble executives said the deal provided a value upgrade for Noble investors.

"The all-stock nature of the transaction gives our shareholders the opportunity to benefit from Chevron's attractive dividend and participate in the powerful upside potential of the combined company. Our board and management team are unanimous that this transaction is in the best interest of our company and all Noble Energy shareholders," Noble Chairman and CEO David Stover said in a news release announcing the deal.

That comment drew no objection from observers, who noted that independent producers find themselves in a painful situation.

"Nobody wants energy right now," Mariani said. "These stocks just don't work. Oil goes up, [and] these stocks don't do anything. It's a brutal investment environment."

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