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Chevron- Noble and the implications for upstream mergers and acquisition
29 July 2020IHS Markit Energy Expert
The recent announcement of a $5 billion all-stock deal between
Chevron and Noble Energy has some industry players wondering if
this is the signal of what's ahead for the upstream M&A market.
Our experts recently discuss on an episode of the EnergyCents
podcast. Here's an excerpt of their conversation:
Breanne Dougherty:
Let's be honest. It's a pretty interesting deal and a different
year. How drastically different indeed, right? So Chevron with
this, back on the Anadarko deal, was placing about a 39% premium on
those Anadarko shares, and that was just 15 months ago. Naturally,
when we look at what this deal came out the other day, we're
looking at more of an 8% premium on these Noble shares, so a
significant shift, I would say.
And I guess Chevron here has been rewarded for its patience
because, when we think about it, this deal, in many ways, does the
same thing Anadarko would have in the sense that it does increase
some exposure to new plays, and very importantly, it increases some
exposure to some new finds and some good monetization capabilities
from a global gas scenario. So there's a lot to be said about the
deal in general. Hassan, I'm going to go to you first. Before we
get into the nitty-gritty details of exactly what the deal
consisted of, what do you think that this signals for the upstream
M&A market going forward? Do you think it does signal anything,
or it's just a one-off?
Hassan Eltorie:
Yeah. So in our opinion, we've seen a lot of the media out there
say this is the beginning of a splurge in M&A activity across
the industry. We really don't think so. We have not seen any
material change in the governing dynamics in the market today that
makes us believe that M&A activity is going to start, and
here's why. There's still a lot of uncertainty in the markets,
especially when it comes to commodity prices. We still have a
global pandemic that makes it very difficult to go out there and do
due diligence on certain assets. More importantly, I think one
factor that everybody hasn't really focused on is the capital
markets remain relatively tepid. Whether it's the debt markets or
the equity markets out there, to go and raise capital is still
pretty difficult. So we don't see any of these factors actually
change materially to justify that we're going to see a lot of
M&A activity.
Over and above that, the potential acquirers out there, the
bigger companies, one thing that we're seeing is a lot of them have
a ton of debt on their books. And a lot of companies' balance
sheets aren't as strong as they are. And not only is the acquirer's
balance sheet usually not as strong, but even the targets. A lot of
companies out there have to justify when they buy a company,
assuming a lot of their debt. Again, with capital markets being
tight, refinancing that debt is going to be difficult. So none of
these factors have changed materially for us to get excited about
the M&A market.
Further, you've got to look a little deeper into the
Chevron-Noble deal. Chevron's enterprise value is somewhere around
$190, $200 billion, and they acquired Noble for about $14 billion.
So like, I think, Raoul said the other day, think about it more as
a bolt-on acquisition than a big company acquisition. I think that
that tells you something. Noble is not of the size of Anadarko.
Anadarko is a lot bigger, and they were able to reward themselves
by being patient and buy something a lot smaller for a lot
cheaper.
Breanne Dougherty:
So maybe not more corporate M&A, let's say. But do we think
asset-wise there could be a resurgence within the M&A market,
or we still think, in general, across both the asset and the
corporate deals, it's going to be a slow year?
Hassan Eltorie:
No, we think it's going to be a slow year. That's an interesting
question when you think about assets. I mean, the amount of assets
that are on the market, there are quite a bit, but the quality is
very varied, right? And I would argue that there are very few
opportunities out there with high-quality assets on the market to
be sold because basically if you have high-quality assets, you
probably want to hold on to them to make it through this commodity
downturn. You don't want to get rid of them. So we might see some
asset acquisitions done via bankruptcies. We think that might
happen a little bit. But by no means do we expect any significant
increase in activity there either.
Raoul LeBlanc:
I think you're right. Just to add to that, that makes sense to
me. Look, the bid ask has been pretty wide, okay? We know that
because of all the volatility in the price, right? In general,
volatility inhibits deals. So we've got that going on. At the same
time, the suffering, particularly as the oil prices bounce back to
40, the suffering has not been enough to drive people to a level of
desperation to do forced deals yet. That may be coming, but not.
Instead, now I can agree with Hassan that waiting through the
bankruptcy cycle to some degree, which will take a little time, but
it's happening. And it's tough to get deals done. One question I
had for the whole team: were you guys a little surprised about the
price?
Hassan Eltorie:
Well, I wasn't too much because it was exactly almost spot on to
our $11 valuation of Noble that we published a couple of months
ago. So we were right there on the price. I think Wall Street was a
lot more generous in its valuation of Noble. I think the median
consensus price target was $13. So we were a lot closer, I think,
to reality and to what Chevron paid. So I think it's pretty much
spot on.
Raoul LeBlanc:
Well, I know it's spot on, but did you think that Noble would go
for that? I mean, people, when they get bought out, they generally
are looking for a pretty big premium.
Hassan Eltorie:
Good question. Good question. So Noble is trading... Their
52-week high is about 24, 25 bucks, something like that, right? And
they've been taken out at a significantly lower price. The premium
on this deal to the Friday closing price is 7.5%, right? It's truly
low. So, we won't be too surprised if there's some rejection from
it, but think about this. This is an all-stock deal. You get access
to Chevron stock, which has a pretty decent dividend yield on it,
and you maintain all the upside to any share price appreciation
that comes with Chevron, which is a bigger, more diversified
company, a better balance sheet, better assets. So I think Noble
shareholders are likely to approve the deal and go forward.
Hill Vaden:
Justin, I mean, the all-stock deal, you and I were talking
earlier in the day. Even if there's not a wave of consolidation or
M&A on the back of this, does all-stock seem to be a way
forward at least in the immediate term with upstream transactions,
which are otherwise somewhat hard to get through?
Justin Jacobs:
Yeah. I think it's a pretty attractive option in this
environment for the reasons that Hassan just mentioned. And also,
on the buyer's side, capital markets are pretty much closed, and
it's tough for companies to go out and raise debt to do these kinds
of deals. So yeah, using stock is an attractive option. It's not
necessarily going to be an option for all companies because you
have Chevron issuing new shares to kind of finance it in a way. And
with equity markets closed to a lot of E&Ps, that's not
necessarily an option. But for a bigger company that can do it,
yeah, I think it's an attractive way to structure a deal like this
maybe.
Breanne Dougherty:
And what about for the Chevron shareholders? We've talked a
little bit what it means for Noble. What do we think? All signs
point to yes, that everybody thinks Chevron got itself a great
deal, and it's good to go? Or is there any other thinking from the
Chevron side?
Raoul LeBlanc:
Well, what interests me is, first of all, I don't think this
deal was necessarily a surprise. After Chevron went after Anadarko,
if you looked across Wall Street and said, "Oh, this is the type of
company they're looking for," everybody and their grandmother said,
"Hey, looks a lot like a smaller version of Anadarko." Right? A big
gas project internationally, assets in the Permian and the D-J
Basin, offshore presence. So I think it was a natural fit and not
surprising.
And from my understanding, it fills a niche in Chevron's
portfolio in terms of that international gas lot, which gives them
a near-term growth on the international gas side. They've gotten
very heavily into Australia. We know that. They've got several big
assets. Australia. Kazakhstan is, of course, a gigantic asset. The
Permian's a gigantic asset. It gives them a new area with some
near-term growth that's kind of already paid for, and its now just
kind of cash flow that they can harvest.
This article includes information from an audio conversation
and has been professionally transcribed as accurately as possible.
Some words or phrases may have been unintentionally
excluded.