CVX Chevron Corporation

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 deal.

Chevron's shares fell 1.2%, while Noble Energy gained 5.5% by midday.

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 jinjoo.lee@wsj.com

(END) Dow Jones Newswires

July 20, 2020 14:49 ET (18:49 GMT)

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