The US Oil Major Chevron made a smart move, announcing the acquisition of Nobel Energy in an all-stock deal valued at US$5 billion. Under the terms of the agreement, Noble Energy shareholders will receive one share of Chevron against eight shares of Noble Energy. The transaction price of $10.38 per share represents a premium of about 7.5% to Noble’s market close price on the previous day of the deal announcement. The total Noble value, including its long-term debts of US$8 billion, was estimated at an amount of US$ 13 billion. Following closing of the transaction, Noble Energy shareholders will own approximately 3% of the combined company.
This deal has big advantages and is a real bargain for Chevron. Buying Noble Energy in an all-stock deal without any cash payment shows Chevron strong position towards Noble and the grim growth expectations of Noble in getting out safe from the world economic and Covid 19 crisis. On July 20, 2018, Noble shares closed at $34.68 compared to the takeout price of $10.38.
The main reasons behind Chevron’s move are related to Noble business in USA and less to its international operations in the East Mediterranean and West Africa. More than 70% of Noble turn-over is made in USA, where the average sales volume is 32 thousand barrels of oil equivalent (BOE) per day.
Chevron Chief Financial Officer, Pierre Breber, announced that Chevron can bring more technology and scale to Noble projects that might otherwise be less profitable. He said Noble’s acreage in the Permian Basin, the most productive shale-drilling area in the U.S., is “very good but sort of subscale.” Pairing it with Chevron’s acreage will change that. “When you put it in with Chevron’s Permian position you get all the benefits of scale,” including technology and more lateral drilling methods, he said.
The acquisition is expected to unlock value for shareholders, generating $300 million in annual run-rate cost synergies, while also adding to free cash flow one year after closing.
Chevron said the acquisition provides the company with proved reserves for under $5 per BOE and almost 7 billion barrels of risked resource for less than $1.50/BOE. That would never happen if the oil prices were not depressed and Noble losses in the first quarter of 2020 reaching $US 4 billion.
The East Mediterranean
Chevron through this move will be able to enter the East Med hydrocarbons sector from its wide gate at a rather discounted price. Noble Energy is partner in producing offshore assets in Israel (Tamar and Leviathan gas fields) and in Aphrodite gas field (not producing yet) in Cyprus. Noble was pushing to extend its operation in Egypt by bidding on several offshore blocks there.
In Israel, this move will result in having the first oil major working there after several years of lobbying and hopeless attempts by the Israeli Government to attract big Industry players. It is expected that Chevron continues Noble’s production strategy there, due to the decent cash-flow that is generated from the sales of gas to the local Israeli market, Jordan and Egypt. However, Chevron operation in Israel could jeopardize its long-years business in Arab countries like Iraq, Kuwait and Saudi Arabia. Chevron is active in the Arabian Gulf since more than 60 years.
The implication of this acquisition on Chevron potential involvement in the Lebanese oil and gas sector after being pre-qualified as operator in 2013 for the first licensing round is clear at this stage. Lebanon will not accept a company deeply involved in Israel to have any activity in its hydrocarbon sector.
As for Cyprus, Noble is the operator of Block 12 where 4.5 TCF of gas was discovered in 2008. Named Aphrodite, the field is jointly owned by Shell (35%), Delek Drilling (30%) and Noble Energy (35%). Many attempts to develop the field were not successful for several reasons among which the small size of the local Cypriot market, the financial weakness of the partners, before Shell farmed-in. It is foreseen that Chevron would sell its acquired share of Aphrodite even at a discounted price as it will be the most lucrative solution and would avoid long term investment in the East Med. This farm-out will avoid as well potential complications with Israel where the Cypriot Government has hopelessly tried since several years to agree on an unitization agreement, as Aphrodite extends in a very small percentage into the Israeli waters.
Furthermore, any oil and gas activities of Chevron in Cyprus will raise the Turkish red flag and affect its activities there.
This deal is once again proof that the big guys with access to capital — like Chevron and its US$ 8 billion of cash on its balance sheet– will make mince meat of the little guys in any kind of economic downturn. That is how value is created in cyclical industries and Chevron CEO Mike Wirth knows that better than anyone.
Author: Abboud Zahr – Oil & Gas Specialist