Hindsight is 20/20, but sometimes it does pay to wait. That is one conclusion many will be drawing today as Chevron
For Chevron, the execution of this deal for one of the large producers and lease-holders in the Permian Basin serves as a bit of vindication. The company famously came in second in last year’s competition with Oxy to purchase Anadarko Petroleum
After Chevron had believed it had a deal for that buyout, Oxy swooped in and, in a bidding war during which Warren Buffet poured in $10 billion to assist Oxy’s cause, finally drove the price up to a level – $55 billion, including assumed debt – that Chevron CEO Mike Wirth and his team were not willing to try to beat. At the time his company declined to counter Oxy’s finall offer in early May of last year, Wirth said that “Winning in any environment doesn’t mean winning at any cost. Cost and capital discipline always matter, and we will not dilute our returns or erode value for our shareholders for the sake of doing a deal.”
During that Oxy and Chevron competition for Anadarko in April, 2019, Noble’s stock was selling at almost 3 times its closing level on Friday. Thus, offering a similar premium to Noble’s shareholders at that time would have likely cost Chevron roughly $10 billion more than it is planning to pay for the company today. So we see Wirth’s strategy of employing “cost and capital discipline” paying off in a big way.
As was the case with Anadarko, Chevron’s targeting of Noble for a buyout is not just about the Permian Basin. Like Anadarko, Noble is also a major player in the oil-rich DJ Basin of Colorado, as well as the oil-rich southwestern piece of the Eagle Ford Shale region. Noble also has international assets in the Eastern Mediterranean and West Africa that will be highly-additive to Chevron’s legacy holdings in those areas.
Update: Analysts are already weighing in to praise Chevron for this deal. At least one, Paul Sanky, lead analyst at Sanky Research, says he does not anticipate Chevron to be hit with another bidding war: “Noble’s takeover premium today – $10.38/share for a stock that closed at $9.66 on Friday, is less than the stock moved intraday on several days over the past month, and is one of the lowest premiums we have seen for a major deal. Will there be a counter? We doubt it. First, after the Oxy-Anadarko debacle in which Oxy flew in the face of “never do a hostile deal in oil”, the appetite for deal competition is zero. Second, ExxonMobil
“We don’t see any major problems with the numbers as presented by CVX, with Noble having a global footprint and a large Houston HQ, synergies will be considerable ($300m within a year), and Wirth gets his opportunity to finally move Chevron from California to Houston, at the bottom of the market.”
Noble’s stock price has suffered dramatically in recent years as it has struggled to raise the capital necessary to service its debt load and fund the development of its asset base. In that regard, the company is pretty typical of the large independent producers of shale oil and gas in the United States.
Thus, this major deal between Noble and Chevron will inevitably touch off new speculation regarding whether or not it represents the kick-off point for the long-predicted round of consolidation in the shale sector. As Enverus researchers detailed in early July, 2020 has thus far been a painfully slow year in terms of mergers and acquisitions (M&A) in the energy space. The first quarter saw the lowest level recorded in decades, and the second quarter saw just $2.6 billion in deals, with the largest being the $845 million merger between two Permian producers, Pure Acquisition Corp. and High Peak Energy.
The shale sector today is basically a target-rich environment filled with struggling companies who possess rich asset bases, both domestically and internationally. However, many of these companies have divested most or all of their non-shale assets in recent years. It is at least interesting and possibly telling that both Oxy and Chevron focused their initial M&A efforts on independents with large international holdings.
Oxy, of course, has since gone about divesting Anadarko’s international assets as a means of paying off its inherited debt. Given the dramatically lower cost per barrel equivalent that Chevron paid for Noble, it is unlikely to find itself under similar pressure to engage in a similar strategy.
Sometimes it really does pay to wait. But the time may have finally arrived for the consolidation of America’s shale sector to begin in earnest.
I will have a follow-up piece either later today or early tomorrow as more information related to this biggest deal of 2020 rolls in.