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Chevron's bid for Noble Energy could trigger more Permian mergers, analysts say

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Chevron's bid for Noble Energy could trigger more Permian mergers, analysts say

Chevron Corp.'s $13 billion bid to buy independent producer Noble Energy Inc. could trigger a wave of consolidation activity in the Permian Basin if oil prices continue to rebound from historic lows, analysts said.

"We continue to expect more Permian consolidation as the basin remains very fragmented and the transition to full-field 'manufacturing style' development requires large, contiguous blocks of acreage to drill two-mile laterals and take advantage of economies of scale," CreditSights said in a July 20 research note to clients.

Analysts from Tudor Pickering Holt & Co. echoed the sentiment, pointing to smaller and "over-levered producers" with elevated costs of capital and cash flow burn in the wake of the oil price crash.

"As shale has matured, there is less need for multiple producers to express basin exposure from an equity perspective, as the areal extent and remaining core inventory is fairly well defined," Tudor Pickering Holt said in a July 21 research note to clients. "Ultimately, we suspect investors would like to see all of upstream shrink to 10-15 independents, which may come naturally through additional low-premium [mergers of equals] or names may be pressured once crude prices stabilize toward $50/bbl."

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Betting on a runway of oil production growth from the Permian region in the next 10 years, majors like Chevron have been leveraging their size, relying on scale and integration for growth, as they attempt to fill in checkerboard acreage positions to consolidate their footprints.

In the first quarter of 2020, Chevron's Permian output averaged 580,000 barrels of oil equivalent per day. The California-based major stated previously it plans to hike its Permian production to as much as 1.2 million boe/d by 2024.

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"We're already big in the Permian. Getting bigger isn't necessarily the goal. Getting better certainly is important," Chevron CEO Mike Wirth said during a July 20 conference call.

As Permian oil production quadrupled from under 1 million bbl/d to more than 4 million bbl/d in the last ten years, pipeline infrastructure expansions in the last few years have worked to alleviate transportation bottlenecks and boost sagging price differentials.

"Chevron holds a competitive advantage involving capital and technology in the Permian, and probably holds the best economic position among its peers," Doug Terreson wrote in a July 21 research note to clients. "While productivity peaked for most shale players in summer 2016 in our opinion; normalized returns are likely to rise further for Chevron in the Permian."

The proposed $5 billion all-stock deal to buy Noble came as no real surprise to most analysts, particularly after Chevron's failed attempt more than a year ago to scoop up Permian producer Anadarko Petroleum Corp. Using its financial discipline and strong balance sheet to take advantage of the recent price downturn, Chevron is apt to also absorb roughly $8 billion of mid-size competitor Noble's debt, analysts said.

"The asset fit makes strategic sense, and the price tag certainly makes financial sense," Edward Jones analyst Jennifer Rowland said in a July 21 email. "Like with Anadarko, I think Noble offers a unique combination of a quality shale position as well as international long-cycle assets."

However, Rowland is circumspect that Chevron's play for Noble will set off a wave of similar mergers across the sector. "Although it would be healthy for the industry, I don't expect rampant consolidation," she said.

Aside from the Permian holdings, the acquisition would expand Chevron's portfolio in Colorado's DJ Basin and in South Texas's Eagle Ford Shale, would add Noble's positions in West Africa and Israel and would include ownership of the company's midstream business Noble Midstream Partners LP.

"Noble's position in Israel is the company's crown jewel. Israel will provide Chevron with a new core international geography that will rebalance the portfolio towards gas and provide a springboard to capture further upside potential in the region," Wood Mackenzie upstream analyst Jean-Baptiste Bouzard said in a July 20 research note.

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