• KCL M&A Society

M&A in Energy: Chevron and Noble

By Aaryaman Dutt, Head of Energy at the KCL M&A Society

Deal Introduction

Acquirer: Chevron Corporation (CVX)

Target: Noble Energy (NBL)

Date of Announcement: 5th October 2020

Acquirer Financial Advisor: Credit Suisse

Acquirer Legal Advisor: Paul, Weiss

Target Financial Advisor: JP Morgan

Target Legal Advisor: Vinson & Elkins

As the world entered a pandemic, many industry sectors were hit hard, and the energy sector was no exception. The industry's largest names had their stock tank in March, and transactional activity ground to a halt. According to Deloitte's quarterly Energy and Resources Update, as of the second quarter of 2020, only 163 deals had been conducted[1], down from 484 by the second quarter of 2019[2]. The first major M&A deal to go through since the beginning of the pandemic was between Chevron Corporation ("Chevron") and Noble Energy Inc ("Noble"). This deal's significance lies in its low cost and how it will allow Chevron to continue to expand despite facing the downturn caused by Covid-19. In 2019, Chevron looked to acquire Anadarko Petroleum for over US$30 billion but was outbid by Occidental, at which point Chevron was offered US$1 billion to walk away from the deal[3]. A year later, this seems like a blessing in disguise, as Chevron has successfully acquired Noble for a fraction of the price.

Chevron made an initial US$5 billion bid to acquire Noble. The proposition was an all-stock swap, and Chevron also looked to assume all US$8 billion of Noble's debt, valuing the deal at US$13 billion[4]. This means that Chevron did not take on any debt whatsoever to fund this acquisition. Chevron's first bid valued Noble's stock at US$10.38 per share, which is well below Noble's trading price of US$27 per share in April 2019[5]. On October 5th, 2020, Chevron announced in a press release that the acquisition had been completed at US$12.1 billion, and Noble became a part of Chevron[6].

Chevron Profile

Founded: 1879

CEO: Michael Wirth

Headquarters: San Ramon, California, United States

Share Price at Time of Writing: $80.67

Chevron is the world's fourth-largest energy company by market capitalisation[7]. Their market cap as of October 2020 is US$139.7 billion[8], and Chevron's revenue in 2019 was US$146.5 billion[9].

Chevron is one of the many successful successor companies of Standard Oil, the others being companies such as ExxonMobil and Marathon Petroleum. Having set up operations worldwide, and now adding Noble's asset portfolio into their fold has Chevron well set up for the future.

(Chevron 6 month stock price performance. Source: https://finance.yahoo.com/quote/CVX/)

Noble Profile

Founded: 1932

CEO: David Stover

Headquarters: Houston, Texas, United States

Share Price Prior to Acquisition: $8.46

Noble was a much smaller player in the energy sector, with a market cap of only US$4.1 billion. Still, they did establish a notable presence in the Permian Basin, which is an oil field in West Texas that has, as of 2018, produced over 33 billion barrels of oil[10]. Noble's acquisition of Rosetta Resources and Clayton Williams Energy gave them such a significant presence in this major oil field[11]. Noble produced revenue of US$4.4 billion in 2019, and as previously stated, had US$8 billion in outstanding debt. This debt includes $750 million of unsecured notes due within five years with $100 million due in 2023 and $650 million due in 2024[12].

Deal Motivations

Chevron's acquisition of Noble has been incredibly fruitful for Chevron, as it has managed to snatch Noble at a significantly discounted price. Chevron's primary motivation in this transaction was to boost its overall asset portfolio, specifically its US shale holdings, as with this acquisition, Chevron has become the #2 US shale oil producer[13]. The deal has also given Chevron almost 1 billion additional cubic feet of gas reserves[14]. Of course, the consolidation of Chevron's Permian Basin acreage is a significant factor in this deal's motivation, as Noble's assets in the Permian Basin, specifically the Delaware Basin, are substantial.

Another reason this deal is advantageous is the global coverage it provides for Chevron, with the addition of eastern Mediterranean gas fields being at the forefront of Chevron's motivations. Andrew Dittmar, a senior M&A analyst at Enverus, has said, "Along with the Permian, the best fit and biggest draw in Noble's portfolio for Chevron may be the eastern Mediterranean gas projects at Leviathan and Tamar. These are premier, long-life fields providing gas to Israel, Egypt, and Jordan. Chevron, like its major peers, has targeted these types of international gas projects as key pieces of its portfolio, likely seeing long-term secular tailwinds to support gas demand over the next few decades."[15]

The rise to prominence of ESG standards has been an important narrative in the energy sector. With big investors looking for climate-friendly steps to be taken by companies, any acquisition made by a company, Chevron's size must have some ESG considerations. Mike Wirth, chairman of the board and CEO at Chevron stated that ESG was a factor in their acquisition of Noble. Noble's emissions intensity is lower than Chevron's[16], and therefore the acquisition is a step in the right direction for Chevron's ESG standards. Furthermore, the natural gas produced in the Leviathan and Tamar projects is relatively clean-burning. However, it is important to note that Wirth did say that ESG is only one metric of assessment as it is crucial to investors, but over-indexing on ESG could lead to financial troubles[17]. This could indicate Chevron's hesitance to prioritise ESG over financial synergies.

Other Potential Target Companies

Marathon Oil

· 2019 Revenue: US$5.902 billion[18]

· Share price at the time of writing: US$6.85[19]

· Marathon Oil does hold significant acreage in the Permian Basin, which is something that Chevron was clearly looking for in this particular acquisition. Perhaps the synergies that existed with Noble Energy, as well as the cost-efficiency of the transaction would not have existed if Chevron looked to acquire Marathon Oil.

Chesapeke Energy

· 2019 revenue: US$8.595 billion[20]

· Share price at the time of writing: US$2.39[21]

· Chesapeke Energy sold US$6.9 billion worth of assets in 2012, including a significant number of their Permian Basin assets. This means that Chevron's fit may not be ideal, as Chevron's primary motivation was to expand their Permian acreage.

· Chesapeke Energy also filed for bankruptcy earlier this year, meaning acquiring them would involve far more than just paying back debts. The company's restructuring means Chevron would have to wait a long time for the acquisition to be truly useful.

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References [1] https://www2.deloitte.com/xa/en/pages/corporate-finance/articles/energy-update.html [2] https://www2.deloitte.com/content/dam/Deloitte/xa/Documents/corporate-finance/us-dcf-energy-update-q2-2019.pdf [3] https://www.cnbc.com/2019/05/09/chevron-the-loser-in-battle-for-anadarko-is-actually-the-winner.html [4] https://www.chevron.com/stories/chevron-announces-agreement-to-acquire-noble-energy [5] https://www.fool.com/quote/nasdaq/noble-energy/nbl/ [6] https://uk.reuters.com/article/noble-energy-m-a-vote/noble-energy-shareholders-approve-4-1-billion-sale-to-chevron-idUSKBN26O02P [7] https://www.value.today/world-top-companies/energy [8] https://finance.yahoo.com/quote/CVX/ [9] https://www.macrotrends.net/stocks/charts/CVX/chevron/revenue [10] https://en.wikipedia.org/wiki/Permian_Basin_(North_America)#Current_production [11] https://www.nblenergy.com/operations/permian-basin [12] fitchratings.com/research/corporate-finance/fitch-places-noble-energy-inc-on-watch-positive-20-07-2020 [13] https://uk.reuters.com/article/noble-energy-m-a-vote/noble-energy-shareholders-approve-4-1-billion-sale-to-chevron-idUSKBN26O02P [14] Ibid. [15] https://www.forbes.com/sites/davidblackmon/2020/07/20/chevrons-deal-to-buy-noble-energy-attracts-positive-analyst-reviews/#103304c52459 [16] https://www.ft.com/content/c18bacdd-c2e0-4d78-ab34-28950dc66bcd [17] Ibid. [18] https://www.macrotrends.net/stocks/charts/MRO/marathon-oil/revenue [19] https://finance.yahoo.com/quote/MRO/ [20] https://www.macrotrends.net/stocks/charts/CHKAQ/chesapeake-energy/revenue [21] https://finance.yahoo.com/quote/CHKAQ/