The $5 billion deal made by Chevron to acquire historic Noble Energy, the company that got its start in Ardmore, Oklahoma is still resounding among analysts and speculators.
Here are some considerations offered by Bloomberg.
Patience is a virtue in M&A, especially in the rocky oil market.
Chevron Corp. announced Monday that it was acquiring Noble Energy Inc. in an all-stock deal with an equity value of about $5 billion. The purchase is something of a consolation prize after Chevron lost out to Occidental Petroleum Corp. in the much larger takeover of Anadarko Petroleum Corp. last year.
One look at Occidental’s stock price, though, and it’s clear that company is in much greater need of consoling. Chevron’s bid for Anadarko was somewhat opportunistic, coming after a dip in the target’s stock price, but the company had the good sense to walk away when a bidding war risked making the deal less of an opportunity and more of an albatross.
“Winning in any environment doesn’t mean winning at any cost,” Chevron CEO Mike Wirth said at the time. With Occidental now sidelined and drowning in debt, Chevron is seizing on a deal at truly bargain prices.
Chevron is offering Noble shareholders 0.1191 of its own stock, or about $10.38 a share based on Friday’s closing prices. That’s a modest premium at current levels, but a discount to where Noble shares were trading as recently as early June and well below the price they commanded before the coronavirus pandemic tanked demand for oil.
Before Monday’s deal announcement, analysts were estimating Noble shares would recover to about $14 apiece on average over the next year. Chevron will add complementary shale assets in the Denver-Julesburg Basin of Colorado and the Permian Basin, as well as cash-generating assets off the coast of Israel in the Eastern Mediterranean. “These assets play to Chevron’s operational strengths, and the transaction underscores our commitment to capital discipline,” CEO Wirth said in a statement on Monday.
Cheap as it is, this is no small bet. The deal value swells to $13 billion once Noble’s nearly $8 billion in net debt is included. Opportunistic deals only make sense if you believe there’s an actual opportunity, something that’s been far from clear in an oil market that was already struggling before the pandemic hit. Seen in this light, Chevron’s willingness to put capital to work on M&A is a massive vote of confidence.
Maybe with good reason: Researchers said Monday that a coronavirus vaccine being developed by the University of Oxford and AstraZeneca Plc showed promising results in early human testing. But this is still a somewhat speculative bet and Chevron is one of the few oil and gas companies with the kind of balance sheet that affords it the ability to take such risks.
As such, this purchase is unlikely to kick off a wave of M&A in the energy sector, Johnson Rice analyst Charles Meade wrote in a note on Monday. “For all those hoping to ride off to glory in the M&A sunset, there is now one less horse to ride,” he wrote.
Source: Bloomberg Opinion