Chevron Goes for Quality Over Price
By Jinjoo Lee
Low oil prices meant consolidation was bound to happen in the
energy sector. Chevron Corp. made the first move Monday morning,
announcing a $5 billion bid for Noble Energy in an all-stock
Chevron's shares fell 1.2%, while Noble Energy gained 5.5% by
The acquisition, expected to close in the fourth quarter, values
Noble at a 7.6% premium over Friday's closing price. That pales in
comparison to the 39% premium of Chevron's bid for Anadarko
Petroleum last year, which -- fortunately, as it turns out -- was
snatched by Occidental Petroleum.
The deal values Noble at eight times its expected earnings
before interest, taxes, depreciation and amortization in 2021,
according to an estimate by Raymond James -- a reasonable discount
to Chevron's current 9.5 times multiple.
Although the premium is relatively modest, Chevron's
shareholders might wonder whether this was the best deal the
company could strike, given the wave of distress hitting the energy
sector. By some estimates, more than 200 shale companies may file
for bankruptcy over the next two years. It is reasonable to suspect
there would have been better bargains if Chevron had waited to
scrape the bottom of the barrel.
Chief Executive Officer Michael Wirth stressed Monday morning
that quality was important, too. "Getting bigger isn't necessarily
the goal; getting better certainly is important," he said on an
investor call. Though Noble's shares were down almost 60%
year-to-date by Friday, its debt remained investment grade.
Absorbing Noble means Chevron will get additional exposure to
the prolific Permian Basin in West Texas, where it had tried to
expand last year through Anadarko. The combination also will add
acreage in the Eagle Ford in the southern part of Texas and the DJ
Basin in Colorado, which Chevron's chief executive said was more
mature and therefore less risky compared with other so-called
"unconventional" assets Chevron owns. It also will diversify
Chevron's overseas holdings: Noble's eastern Mediterranean assets
began production last December and feature contracts priced well
above U.S. natural gas prices with a low production decline rate,
according to a May 18 report from Moody's.
The deal certainly offers immediate perks for Noble Energy
shareholders, who will benefit from Chevron's 6% dividend yield, a
much more generous number than Noble's 0.8%. Modest synergies
aside, the immediate benefit to Chevron's shareholders is less
clear, but at a $13 billion enterprise value -- representing 8% of
Chevron's market capitalization -- it seems to be a risk they can
afford to take.
Write to Jinjoo Lee at email@example.com
(END) Dow Jones Newswires
July 20, 2020 14:49 ET (18:49 GMT)
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