HOUSTON – In the first big deal since oil prices plummeted four months ago, Chevron on Monday agreed to buy Noble Energy for roughly $ 5 billion in what many experts consider to be the beginning of consolidated consolidation in the US oil industry.
The coronavirus pandemic has caused a sharp decline in oil demand, putting intense pressure on oil companies with large debts. This includes Houston-based Noble with operations in Colorado, Texas, the Eastern Mediterranean and West Africa.
But it has also created an opportunity for the oil giants to gobble up smaller fish and spread their surface in places like the Permian Basin, which straddles Texas and New Mexico. Chevron, for example, already has a large presence in the basin and easy access to large pipeline networks, which should help the company take advantage of Noble’s assets.
“In a recession like this, the strong grow stronger and the weaker players try to survive as best they can, and some will be bought,” said Duane Dickson, Deloitte vice president and US leader for oil, gas and chemicals. “There will be some bankruptcies and mergers and acquisitions like the ones you saw today and I would expect them to continue and possibly accelerate.”
Like all oil companies, Noble has struggled to make a profit on oil prices at around $ 40 a barrel. The price has recovered somewhat in recent months, but the persistence of the pandemic and the recent increase in infections and hospitalizations in Texas and other states have led some executives to conclude that the price of oil may not rise much more in the short term.
Even before the pandemic, the boom in oil shale drilling helped produce so much oil that an increasing number of wells were not profitable. More than 20 North American producers have filed for bankruptcy this year, including Chesapeake Energy. Oil service giant Halliburton on Monday reported a loss of $ 1.7 billion for the second quarter and said it had amortized its assets by $ 2.1 billion.
Even large companies like Chevron have been forced to lay off workers. Oil companies have also cut their dividends and reduced share buybacks to preserve cash.
Although relatively small, the Chevron-Noble deal could signal a confidence measure by industry executives who are willing to buy smaller companies in anticipation of a recovery in the not-too-distant future.
“Our strong balance sheet and financial discipline gives us the flexibility to be a buyer of quality assets during these difficult times,” said Michael Wirth, chief executive officer of Chevron. “This is a profitable opportunity for Chevron to acquire additional proven resources and reserves.”
This is Chevron’s first major acquisition since Occidental Petroleum overtook the company for Anadarko Petroleum last year. That $ 38 billion deal has left Occidental heavily indebted, while Chevron left with a $ 1 billion termination fee.
Chevron and Noble placed the value of their deal at $ 13 billion, including debt. It is subject to the approval of Noble’s shareholders, who will own approximately 3 percent of the combined company. There is also the possibility that another oil company may bid for Noble.
If the deal goes through, Chevron would collect 92,000 acres of shale oil near or adjacent to its own fields. While that’s much less than what it would have gotten from Anadarko, Chevron is getting these fields at a much better price per acre. It will also acquire assets in the South Texas Eagle Ford field, DJ Basin in Colorado and Equatorial Guinea.
The deal will also give Chevron a presence in Israeli waters where Noble has discovered large deposits of natural gas in recent years. But those assets are unlikely to generate huge profits for Chevron for a few years because there is excess gas in nearby Europe.
However, the acquisition should help Chevron, which has placed a lot of emphasis on oil exploration, to delve into natural gas.
“Israel will provide Chevron with a new central international geography that will rebalance the portfolio to gas and provide a springboard to capture more upside potential in the region,” said Jean-Baptiste Bouzard, analyst at Wood Mackenzie, an energy consultancy.
Industry executives said Chevron’s move followed a historical pattern in which larger, more financially stable companies acquire smaller, less stable equipment during recessions.
“You should see even more of these types of acquisitions while the price of crude oil remains in this lower range,” said Kirk Edwards, president of Latigo Petroleum of Odessa, Texas. “As we have seen in the past during the oil price crises, stronger public companies with larger balance sheets have been able to make major acquisitions and this simply follows the same trend.”
But some analysts warned that high levels of corporate debt could hinder acquisitions.
“While equity prices can be attractive, no one wants the debt that will accompany any deal,” said David Winans, director and analyst at PGIM Fixed Income. “I wouldn’t wait for a wave of M&A until the industry can clean up the leverage it already has, and that will take a long time.”
Chevron’s shares closed more than 2 percent. Noble shares ended the day at more than 5 percent, after a decline of about 50 percent in the past six months.
