Smaller Deals Are Smarter Deals in Today’s Energy Business

The smaller takeover is usually the smarter one, especially in the embattled oil and gas industry.

Chevron Corp. announced on July 20 that it was acquiring Noble Energy Inc. for about $5 billion. It was the first major takeover launched in the sector since the corona­virus pandemic triggered a severe erosion in demand and unprecedented volatility in crude prices. The deal value swells to about $13 billion once Noble’s $8 billion or so in net debt is included.

That’s a far cry from the $50 billion purchase of Anadarko Petroleum Corp. that Chevron pursued last year. Chevron ultimately walked away and ceded the takeover to Occidental Petroleum Corp. Noble is a more digestible version of Anadarko and brings Chevron complementary assets in the Permian Basin, a key U.S. shale patch. Chevron will also add acreage in the Denver-Julesburg Basin of Colorado and the Eastern Mediterranean.

Perhaps most important for investors, Chevron is buying Noble on the cheap. It’s offering 0.1191 shares for each share of Noble, which works out to about $10.38, based on trading values leading up to the deal’s announcement. That’s well below both Noble’s pre-pandemic valuation and the $14 analysts on average have been expecting the stock to reach over the next year.

All told, the purchase will make a fairly minor dent in Chevron’s robust balance sheet. Occidental, by contrast, had to rely on expensive financing from Warren Buffett to outbid Chevron. Buffett’s cash also allowed Occidental to keep the stock component of its Anadarko bid below the threshold that would have triggered a shareholder vote, much to the chagrin of investors who were hoping to derail a deal they saw as irresponsible. Occidental is now saddled with debt and under increasing pressure to prove the Anadarko takeover can still pay off in a depressed oil environment. The company’s shares are down about 60% this year, which is one of the worst performances on the S&P 500 Energy index. Chevron’s stock has declined a comparably moderate 25%.

On a call to discuss the Chevron deal, Noble Chief Executive Officer Dave Stover said the company had reviewed other merger possibilities. That Noble sold itself at such a bargain price suggests there wasn’t a lot of competition. Not many oil and gas companies have the financial wherewithal to even consider major acquisitions right now. Royal Dutch Shell Plc cut its dividend for the first time since World War II earlier this year, and analysts have speculated BP Plc may follow suit. Stover highlighted the appeal of Chevron’s stock as an “attractive currency” and the opportunity for Noble shareholders to benefit from its dividend, but other possible sellers may prefer to ride out the oil rout for as long as they can in the hopes of higher prices and more buyers.
Sutherland writes about mergers and industrial com­panies for Bloomberg Opinion
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