London — Chevron's $5 billion bid for Noble Energy July 20 moves the major into both the East Mediterranean gas sector and the US' Denver-Julesburg Basin at a time of uncertainty in the oil sector, when reliable, low-cost assets that can provide the security of free cash flow are highly prized.
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Several months into the coronavirus pandemic that continues to tamp down both oil demand and crude prices, Chevron is in good fiscal shape and in a position to pick up choice assets that will position it to grow.
The deal also stands in contrast to the bid Chevron walked away from more than a year earlier for Anadarko Petroleum, which rival Occidental Petroleum eventually won. Chevron believes the second time will be the charm and that it will add Noble assets to its portfolio -- which one analyst called a "mini-Anadarko" -- for a fraction of the $57 billion that Oxy paid for Anadarko.
"This deal ticks all the boxes we've articulated on the kind of [acquisition] we 'd be looking for," Chevron CEO Mike Wirth said during a conference call to explain the deal. "Getting bigger isn't necessarily the goal; getting better is. We believe it's a good thing for both companies."
Given Noble's sizable debt obligations, the "enterprise value" of the deal is $13 billion, Chevron said.
The purchase provides the major with low-cost, cash-generating offshore Israel assets and operatorship of the Leviathan gas field in that arena, and also moves it into the US' DJ Basin - an arena where Anadarko was the Number 1 producer to Noble's Number 2. It also provides 92,000 acres in the western Permian Basin, close to the major's existing assets, enhancing an already advantaged upstream portfolio, Wirth said.
BUYER OF QUALITY ASSETS IN CHALLENGING TIMES
Having played down any interest in acquisitions since abandoning the Anadarko deal, Wirth said July 20 his company's "strong balance sheet and financial discipline [now] gives us the flexibility to be a buyer of quality assets during these challenging times."
"This is a cost-effective opportunity for Chevron to acquire additional proved reserves and resources," he said.
Unlike the bid for Anadarko, Wirth said both boards have approved the deal and "we 're confident the deal [for Noble] will close."
"This is a cost-effective opportunity for Chevron to acquire additional proved reserves and resources," he said. "Noble Energy 's multi-asset, high-quality portfolio will enhance geographic diversity, increase capital flexibility and improve our ability to generate strong cash flow."
The 100% stock deal exchanges 0.1191 Chevron shares for each share of Noble. That amounts to $10.38/share, a 7% premium to Noble's July 17 share price or about a 12% premium based on its 10-day average. Closing is targeted for the fourth quarter.
Chevron said the deal would increase its oil and gas reserves by 18% compared with the 2019 at an average cost of under $5/boe. Chevron will also gain 7 billion barrels of "risked resources," a secondary measure of oil and gas holdings, for $1.50/boe.
Noble produced 350,000 boe/d in the second quarter of 2020, including 130,000 b/d of oil, of which 113,000 b/d derived from US onshore fields.
Analysts said the purchase price was lower than expected.
"[It's] a discount to our $13/share price target, and a small premium compared to other deals in the space historically," RBC Capital Markets analyst Scott Hanold said. "This transaction appears somewhat opportunistic for Chevron as the asset overlap is relatively small. We think the strategic target asset was Noble's Eastern Mediterranean asset[s]."
"On the call, Noble appeared to indicate it had run a strategic process and a deal with Chevron was the best outcome," Hanold added. But "most [investors we've talked to] ... are left wondering why the board sold at that valuation."
Jason Gammel, equity analyst at investment bank Jefferies, said: "Noble is somewhat of a mini-Anadarko with its DJ and Permian shale assets plus international exposure, and fit Chevron 's quality and return criteria. Integration should be fairly seamless."
Noble launched gas production from Israel's Leviathan field in 2019 and began exporting the gas to Egypt and Jordan in January, in a deal that broke new ground for the Middle East energy sector, with Israel exporting its energy for the first time. Egypt is an emerging exporter of East Mediterranean gas in the form of LNG, although the global market downturn due to the coronavirus pandemic has set back its ambitions.
POTENTIAL FOR MORE PIPED GAS EXPORTS
Wirth highlighted the international interest in supplying gas from Noble's East Mediterranean fields not only to Egypt, but to Europe via pipeline. Noble operates not only the Leviathan and Tamar fields in Israeli waters, but also Cyprus ' 4.1 Tcf Aphrodite gas discovery, which awaits a final investment decision.
Noble CEO Dave Stover underlined the prospects for increasing Israeli gas exports, despite a current reduction in Egyptian gas demand due to the pandemic, which has seen Egyptian LNG exports grind to a halt. Noble is currently completing work on a compressor station in Israel that would enable increased exports, Stover said.
"We'll start to have the ability to move more gas through the region and especially into Egypt. Everybody's gearing up and ready now to start to move more gas through there," Stover said.
Wirth acknowledged near-term gas market weakness, but also noted a high proportion of take-or-pay arrangements in Noble's contracts, and said the long-term rationale for Eastern Mediterranean gas, including LNG exports, remained sound. "We 'll work through the short-term issues," Wirth said.
In the US , Wirth said he sees the Denver-Julesburg Basin as a "more mature version" of other shale and tight positions where Chevron operates, such as Canada 's Duvernay Basin and Argentina 's Vaca Muerta Shale, both of which are in early-stage development. That area will be "prioritized for capital" going forward, as Chevron combines its strong understanding of unconventional plays with Noble's specific basin expertise, he said.
"[It's] just ... another piston in our unconventionals engine that's strong," he added.
Beyond operational synergies, the companies are also aligned in their commitment to climate change/sustainability, particularly in reducing Permian gas flaring and greenhouse gas emissions, Wirth said.
Bob Brackett, a researcher at Bernstein, said in a July 20 investor note that he wasn't "terribly surprised" by the deal.
Noble "resembled" Anadarko with a portfolio in the Permian, DJ Basin, with international oil and LNG, but at a smaller scale, he said. But unlike Oxy, which was lured by Anadarko's Permian assets, "We still don't embrace the Permian M&A ... as a money maker," Brackett said:
Leo Mariani, of KeyBanc, in a July 20 investor said about two-thirds of the $300 million in operational synergies Chevron expects should come from general and administrative savings such as reduced head count, office overlaps and IT.
"Ultimately, we think Chevron also believes this is a relatively low point in the cycle and the right time to buy energy assets," Mariani said.
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