Source: Hydrocarbon Technology.
Investment Thesis
I have recently added Chevron Corp. (NYSE: CVX) to my long-term oil position because I considered the valuation to be attractive. I now own the big five oil companies long term. I also simultaneously trade my portfolio in the short term to clearly take advantage of the volatility in the oil sector that will undoubtedly continue for the rest of 2020 and possibly part of 2021.
Chevron has outperformed the sector so far in the past six months, with Shell (NYSE: RDS.A)(NYSE: RDS.B) lagging behind due to the company’s decision to cut the dividend by almost two-thirds.
Data by YCharts
Starting in March this year, the oil sector was severely affected, with two exceptional events called Black swans First came the COVID-19 pandemic, wreaking havoc on the world economy, and second, oil prices simply plummeted, thanks to Saudi Arabia’s decision to flood the market with cheap oil in April.
The market rebounded a bit from the big dip when OPEC + decided to reverse course and cut supply, but not enough to produce strong momentum to push the sector to a healthy level.
However, a new balance is slowly emerging that makes me confident in saying that oil has found a survival range Between $ 38 and $ 45 now. Therefore, even if it is not apparent and often daunting, it is the right time to accumulate proper names in the oil sector, and CVX could be considered as a first option.
Chevron acquired Noble Energy for a total of $ 13 billion, including the debt. Let’s look at it from a shareholder’s perspective for a change.
Chevron Corporation announced on July 20, 2020 that:
has signed a definitive agreement with Noble Energy, Inc. (NASDAQ: NBL) acquire all outstanding shares of Noble Energy in a transaction of all shares valued at $ 5 billion, or $ 10.38 per share. Based on Chevron’s closing price on July 17, 2020 and under the terms of the agreement, Noble Energy shareholders will receive 0.1191 Chevron shares for each Noble Energy share. The company’s total value, including debt, of the transaction is $ 13 billion.
Data by YCharts
I think this decision caught shareholders, myself included, by surprise and they are not happy. They wanted the company to retain cash, execute a low-risk profile while navigating a difficult period of low oil and gas prices, and, above all, avoid significant acquisitions that can increase debt.
Chevron’s previous failed attempt to acquire Anadarko Petroleum, thanks to Occidental Petroleum (NYSE: OXY)It should have been an excellent deterrent to what can go wrong in such a move. However, Chevron did it anyway, despite adding more than $ 7 billion in net debt to its balance sheet.
1 – Net debt is about to increase by more than $ 7 billion.
Net debt is based on Noble Energy’s first quarter of 2020 that I have previously covered here.
Net debt is $ 7.27 billion in 1Q’20 (consolidated with the MLP)
According to NBL, the total debt is $ 8,673 billion, including Noble Midstream debt.
Noble Energy’s financial liquidity was $ 4.4 billion, including $ 1,397 billion in cash and $ 3.0 billion of available capacity in the company’s uninsured revolver in the first quarter.
Let’s take a look at Chevron’s first quarter of 2020 that I covered here.
The net debt was $ 23.81 billion in 1Q’20.
Chevron’s net debt is now $ 23.81 billion. Net debt to EBITDA is 0.67x in 1Q’20. The company has a debt maturity of around $ 2.3 billion in 2020, which is quite modest and a source of liquidity of approximately $ 30 billion.
Chevron and Noble Energy’s total net debt will now be $ 31.08 billion including Noble MLP debt [Noble Energy formed Noble Midstream Partners in 2016 (Processing, storage, transportation, and wholesale marketing.)]
Increasing debt is not a good move for Chevron, and I can understand why shareholders who have a more conservative view based on the weak state of the economy are not happy with this development.
2 – Upstream production will be increased, but is it the right time?
Let’s look at oil and gas production for both companies. Chevron’s production will be driven by approximately 12.1% based on Q1 numbers.
- First, Noble Energy’s quarterly production in 1Q’20 was 390K Boepd, according to my previous article on Noble Energy. Most of the production comes from the United States on land, but the company is also present off the coast of Israel (natural gas) and Equatorial Guinea, as shown in the table below:
The acquisition expands Chevron’s energy assets and makes it the first major oil company to access Israel’s natural gas market.
Below is a historical picture of Noble Energy’s oil equivalent production.
Or a production by Boe for 1Q’20 of 35,462 Boe.
America’s Business Ground Delivered 269K Boepd for Q1’20.
Rose production on US soil 6.3% in the first quarter compared to the same quarter a year ago and down 5.6% sequentially NBL is an active participant in the Permian Basin with 67K Boepd in 1Q’20 (Delaware Basin).
Source: NBL Presentation
The main driver was the DJ Basin, Colorado, which delivered the production of 156K Boepd in 1Q’20 (shale).
Crude oil and condensate prices obtained onshore in the United States in the first quarter of 2020 were $ 46.10 per barrel from the level of the previous year’s quarter $ 53.46.
Meanwhile, US natural gas prices on land were $ 1.27 per thousand cubic feet, down 49% from the same quarter last year.
- Second, Chevron’s oil equivalent production details as of the first quarter of 2020. (from my article on Chevron’s first quarter results.
Chevron registered good production results in the ascending segment during the first quarter with a production of 3,235K Boepd, up 6.1% from the same quarter a year ago, and up 5.1% sequentially
The US upstream hit a record 1064k Boepdor 33.1% of total production, which grows quarter after quarter. Another record production led by the Permian arriving 586K Boepd (estimated).
Discussion by segment
A – Permian production is estimated at 580K Boepd, from 514K Boepd, produced the preceding quarter. The goal was to reach 650K Boepd by 2020, but after what happened, the company may have to cut production by 40% from Q2’20.
The prices of liquids and natural gas made per barrel do not reflect the real situation, and it is essential to see what will happen to revenues and free cash flow if CVX achieves a price cut of 40%.
According to the press release:
The average sale price of crude oil and natural gas liquids in the first quarter of 2020 was $ 43 per barrel, down from $ 58 a year earlier. The average sale price of natural gas was $ 5.66 per thousand cubic feet in the quarter, compared to $ 6.57 in the first quarter of last year.
Based on 1,966K Bopd for Liquid and 1,269 Boepd for Natural Gas, I averaged ~$ 39.45 by Boe in the first quarter.
- The new company’s first-quarter oil equivalent production (in K Boepd)
| Business |
United States ashore (not including Permian) |
Permian | Israel | Equatorial Guinea | Chevron international | Total |
| Chevron Corp. | 484 | 580 | 0 0 | 0 0 | 2,171 | 3,235 |
| Noble energy | 202 | 67 | 66 | 55 | 0 0 | 390 |
| Total | 686 | 647 | 66 | 55 | 2,171 | 3,625 |
Note: I am presenting only the ascending segment and do not discuss the descending part here.
conclusion
If we look at the company’s perspective, this acquisition makes strategic sense.
Acquiring an exploration and production company like Noble Energy in this challenging market makes sense, especially for Chevron, which wanted to switch to higher natural gas production pressured by the need to decrease its carbon footprint. The price paid, $ 5 billion excluding debt, is much less than the $ 33 billion proposed for Anadarko Petroleum.
Noble’s assets will also expand Chevron’s shale presence in Colorado and the Permian Basin. Chevron will slightly exceed Occidental Petroleum’s production in the Permian with this acquisition. If we look at the production of OXY in the Permian below:
Chevron / Noble Permian’s Q1 production was 647K Boepd versus Occidental Petroleum with 625K Boepd.
Chevron President and CEO Michael Wirth said in the press release:
This combination is expected to unlock shareholder value, generating anticipated annual execution rate cost synergies of approximately $ 300 million before tax, and is expected to increase free cash flow, profits, and book returns a year after closing,
However, many shareholders will consider all of those bright numbers with slight indifference.
The most critical element when it comes to investors is whether all of these stocks can create positive momentum for the stock, and rarely does, unfortunately. So while analysts and bloggers are excited about this new acquisition and why it is so relevant, we people see it as yet another “opportunity” to average, in the hope that we will make a profit in the future.
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Divulge: I am / we are long CLC. I wrote this article myself and express my own opinions. I receive no compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
Additional disclosure: I also change CLC in the short term.
